Can Emerging Markets offer diversification benefits to Canadian investors during credit crisis?

This paper examines whether emerging markets offer benefits to a Canadian portfolio when it is needed most during a credit crisis. The study considers the relationship of the monthly data of ten emerging market indices (EM) and its weighted index with Toronto Stock Exchange Composite Index (TSX) through out 1998 to August 2007. We add S&P500 and MSCI EAFE to represent a diversified developed market portfolio. While the findings indicate most individual emerging market and its weighted index do not add values to a Canadian portfolio when credit risk is tight, China stands out differently. China adds significant diversification benefits to the developed market portfolio when credit risk is tight. When examining the subprime credit crunch in summer 2007, the results are consistent with the sample period, that is, Canadian investors benefit from diversifying in China during credit crisis.