Geographic Regions in the GFD Indices

Geographic Regions in the GFD Indices, Part 1

Bryan Taylor, Chief Economist, Global Financial Data


One of the goals of investing is to find assets which are not correlated with one another in order to diversify your investment portfolio and reduce risk. You can diversify by asset type, by market cap, by sector or by geographic location. Each index service chooses different geographic groups to track.

The goal is to create regional indices that do not correlate with other regional indices.  While other index companies, such as MSCI, FTSE Russell or S&P Dow Jones focus on current countries and the countries that make up those indices, GFD takes a long-term perspective to understand the interrelationships between countries over a period of two centuries, not two decades. Cultural factors that affect the behavior of different countries are considered in grouping the countries together. GFD has divided its indices into ten geographic sectors that maximize the diversification of its groups.

MSCI places a country into one of four categories: developed, emerging, frontier and standalone. S&P Dow Jones has three categories: developed, emerging and frontier.  FTSE Russell divides countries into four categories: developed, advanced emerging, secondary emerging and frontier. Countries are placed in each category according to the level of economic development, the size and liquidity requirements of individual securities, and market accessibility (which includes openness to foreign ownership, ease of capital inflows and outflows, efficiency of the operational framework, availability of investment instruments and stability of the institutional framework).  The equal treatment of investors, the free flow of capital and the cost of investment are key factors in determining which category a country falls into.

               Currently, index creators differentiate between developed and emerging markets because there is a low correlation between the performance of the two groups. Developed countries have a long history of activity on stock exchanges and a high level of per capita GDP. Emerging markets have shorter histories of stock exchange activity and a lower per capita GDP. It should be recognized that “emerging markets” are a recent creation that resulted from the global growth of markets in the 1980s. 

Before World War II, many larger companies in “emerging markets” listed their shares in London, Paris, Berlin or New York.  More capital and liquidity was available on the major exchanges than in local markets. Small companies with limited needs for capital would list on the local stock exchange while larger companies listed in London or Paris. Local exchanges often dealt more in debt than in equity. Before World War II, there were developed markets and colonial markets, there were European markets and American markets, but it was primarily because of the decolonization after World War II and the desire to take advantage of the growth opportunities in “emerging” markets that this differentiation occurred.

               By creating different geographic groups, the implication is that these regions have similar histories and their financial markets will behavior similarly.  For example, neither Canada nor the United States was attacked during World War II and both have a British heritage, so putting them together in a geographic group and differentiating them from Latin American countries makes sense.  Countries occupied by the Japanese before World War II (Taiwan and Korea) have both emerged from one-party rule and become vibrant democracies that successfully export goods to the rest of the world.  Each group of countries must share common histories.

               We have divided the world into ten groups, six of which include developed countries and four of which include emerging markets, that have some common themes with each other in terms of geography, history and similarities in their development over time.  These ten geographic regions are British Asia, Japanese Asia, Emerging Asia, Africa and the Middle East, Northern Europe, Continental Europe, Southern Europe, Central Europe, North America and Latin America.  Emerging Asia, Africa and the Middle East, Eastern Europe and Latin America all include emerging markets.  Because they lack long-term histories, no frontier markets are included. Some of these groups, such as Emerging Asia, simply includes countries in Asia that have not reached developed status yet, but others show a greater similarity in their history and culture.  While there is usually a correlation between the performance of the stocks in the geographical regions that include developed countries, there is usually little correlation between the behavior of emerging market countries.


Asia has risen in size, in terms of market cap, relative to the rest of the world since the 1960s.  Its population is much greater than Europe or the Americas and its GDP is growing more rapidly than the rest of the world; however, its population growth is slowing down.  The population of Japan and Korea and soon China are decreasing, not increasing. The Middle East, which includes countries west of the Indian subcontinent is treated as being separate from Asia.

We have divided Asia into three groups: British Asia, Japanese Asia and Emerging Asia.  The performance of the three groups is compared in Figure 1.  The steep decline in Japanese Asia occurred because of Japan’s defeat in World War II and the inflation that followed the war in the 1940s, but Japan’s market bounced back strongly from 1949 until 1989.  It has stagnated since then.  Of the three, British Asia has provided the best performance, since it did not suffer from any major declines during the past 150 years.


Figure 1. Stock Exchanges for British Asia, Japanese Asia and Emerging Asia, 1875-2022

British Asia

               Four countries are included in British Asia: Australia, New Zealand, Hong Kong and Singapore.  Each of these countries were British colonies at some point in the past.  Consequently, British common law is used as a basis for legal decisions within each of those countries.  The native populations in both Australia and New Zealand were relatively small and those two countries are now dominated by British and European immigrants. 

               Australia has had numerous stock exchanges in the past.  Stock exchanges were set up in Melbourne (1861), Sydney (1871), Hobart (1882), Brisbane (1884), Adelaide (1887) and Perth (1889). In the past, the stock exchanges in Melbourne and Sydney were the largest in Australia. All the stock exchanges merged into the Australian Stock Exchange (ASX) on April 1, 1987. A similar pattern occurred in New Zealand which had exchanges in Dunedin (1867), Otago (1868), Auckland (1872), Wellington (1882) and Christchurch (1900).  The regional stock exchanges were amalgamated into the New Zealand Stock Exchange in 1983.

Singapore and Hong Kong were both colonies that became export and financial centers. The Association of Stock Brokers in Hong Kong was set up in 1891 and renamed the Hong Kong Stock Exchange in 1914.  The four stock exchanges of Hong Kong formed a unified stock exchange in 1980 and began trading together on April 2, 1986.  Hong Kong was an independent crown colony until 1999 when control over the territory reverted to China.  Hong Kong is now more and more coming under the control of China making it less attractive to foreign investors since it is becoming more like China and less like Britain. China controls the political situation within Hong Kong. Singapore was once part of Malaysia, but became independent from Malaysia in 1965.  All four countries are considered developed.

The performance of the four countries that are part of British Asia is illustrated in Figure 2. Hong Kong performed the best of the four since 1965, but it has stabilized since the 2008 financial crisis.  The Australian Stock Market has risen in price steadily since 1965, but the New Zealand stock market has shown little growth since it peaked in 1987.


Figure 2. Australia, New Zealand, Hong Kong and Singapore Price Indices, 1965 to 2022

Japanese Asia

               Before World War II, both Taiwan and Korea were part of the Japanese Empire. Taiwan was annexed in 1895 and Korea in 1910.  All three countries share not only a common history, but a successful transition to democracy.  Each country has relied upon exports as a catalyst for growth.  Moreover, there has been a similarity in the performance of their stock markets over the years.  All three countries have successfully increased their per capita income to levels similar to some countries in Western Europe.  All three should be considered developed economies.

However, this is not true of North Korea and China. North Korea has clearly rejected free markets and trade. Although China has greatly expanded its equity and bond markets since 1990, the markets remain tightly controlled by the Communist government. 

The Tokyo Stock Exchange is the largest stock exchange in Japan.  It was founded in 1878 and reestablished after the war on May 16, 1949.  There is also a major stock exchange in Osaka with secondary exchanges in Nagoya, Fukuoka and Sapporo.  The Osaka exchange was established in June 1878 and was reestablished after the war in April 1949. The Taiwan Stock Exchange began operating on February 9, 1962 and the Korean Stock Exchange in 1956.

As Figure 3 shows, all three stock exchanges performed very well between 1967 and 1989.  By 1989, Japan had the largest stock market by capitalization in the world, but all three stock exchanges have stagnated since then. Today, Japan’s stock market is about one-tenth the size of the U.S. stock market while Korea and Taiwan are about one-fourth the size of Japan.