Research · Portfolio construction
Low correlation between Indian and Chinese equities
Over five years, Indian and Chinese equities moved almost independently, with a correlation of 0.07 in US-dollar terms. Holding both broadens the sources of growth in a portfolio.
India and China, Asia's two largest equity markets, have shown low correlation over the past decade. Our analysis of monthly US-dollar returns from October 2016 to September 2026, based on index-fund prices, highlights the divergence in their patterns and the implications for global portfolios.
Correlations between Indian and Chinese equities have remained low
Over the ten-year period, the correlation between Indian and Chinese equities stood at 0.22, falling to 0.07 in the most recent five years. This contrasts with the correlation between Indian and European equities, which was 0.60 over the same period. These figures indicate that Indian and Chinese markets have not moved closely together, reflecting their distinct economic drivers and market structures.
Diversification benefit of a combined allocation
An equal-weighted allocation to Indian, Chinese and European equities exhibited annualised volatility of 15.2%, about a fifth less than the average single market's volatility of 19.5%. This reduction in volatility demonstrates the diversification benefit of combining markets that are influenced by different factors.
We observe that Indian equities have been shaped by domestic consumption, the growth of services and the expansion of capital markets, while Chinese equities have been more sensitive to the country's industrial upgrade and policy cycle. In our view, the low correlation between the two markets indicates that exposure to both broadens the sources of growth in a portfolio and reduces its overall volatility. We note that correlations can shift over time, and this remains a risk to the diversification thesis.