Abstract
The standard classification of emerging markets (EMs) does not correspond well to stage of development, wealth, culture, or industrial mix. The authors propose using unsupervised learning to group country stock markets across countries based on similarity of returns. The authors find that EMs contain two distinct groups reflecting Asian manufacturing and commodity exposure. This heterogeneity provides diversification to index investors and allocation opportunities to active investors. China is on the edge between the two groups, consistent with it being a key manufacturer and a major driver of commodities. The authors argue for retaining the existing EM classification and treating China as a separate entity.
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