Proxy Battle: Emerging Markets Are Not a Substitute for Commodities

Abstract

In recent years, many investors have considered adding an allocation to the commodity asset class in order to tap its known portfolio diversification and inflation-fighting properties. In many cases, investors have been advised by market pundits to consider emerging markets equity as a “proxy” for commodities, with some going as far as to claim that emerging markets equity gives investors all the commodity exposure they need. We examine the relationships between emerging market equity returns and commodity returns, and use import/export data to better understand the potential impact of commodity prices on emerging market economies. We also investigate the commodity and equity price relationship for particular emerging market economies that would seem to provide a clean exposure to a single commodity. With so little evidence in support of the proxy argument, we find emerging market equities indeed are a poor proxy for commodities futures in an investor’s portfolio.