THE CASE FOR GLOBAL EQUITY

Drop in on any chief investment officer in the western world: while the accents change, the refrain doesn't. Money managers enthuse about a fundamental shift under way, a transfer of power from developed to emerging economies.

Investors seem to be buying it. First-quarter net inflows into emerging markets-focused funds were $3.2bn, versus net outflows in developed markets of $59bn, according to EPFR, which tracks about $11,000bn in total assets. The FTSE All-World Emerging Equity index is up 8 per cent this year, versus a 7 per cent fall in the Developed index.

Decoupling, in short, is back. But does this kind of geographic diversification actually work, as an investment strategy? Historically, no. The relationship between the Emerging and Developed indices has steadily strengthened since the early 90s.

For the five years before the Asian crisis, the average correlation was roughly 0.4. Since April 2004, it has been 0.85. Continuing that trajectory, the markets will be in perfect synch by the end of next year.

To talk of a new epoch, therefore, is to assume that investors are about to abandon the habits of a lifetime. That is possible, given the trauma of the past couple of years. The ground has been patiently laid: according to Greenwich Associates, the US consultant, domestic-only mandates from pension funds are in long-term structural decline, while initial commitments to global equity funds have soared since a decade ago.

But going the extra mile is expensive, requiring a research platform that can synthesise industry, country and stock-specific analysis. And as value investor Seth Klarman points out, it is hard to take a long-term view when, faced with the penalties for poor short-term performance, that view may well be from the unemployment line.

This year's inflows into emerging-markets funds are about one-sixth of the money that flowed out of the same funds in the same period last year. While stress levels in the US, the world's most important financial system – as measured by the HSBC Financial Clog index – are still double pre-Lehman levels, the urge to hug familiar local benchmarks will be as strong as ever.