Fears that globalisation will make it harder for investors to achieve diversification are overdone, according to a new report by Goldman Sachs.The Globology Revolution* argues that there are several ways in which investors can benefit from low correlation between assets. Peter Oppenheimer, managing director, portfolio strategy, at Goldman Sachs and author of the report, says: “Although the world has become more integrated, it does not mean it is more difficult to diversify risk in financial markets.” The report finds that although equity markets have become more correlated in recent years, the level is not extreme by historical standards. In addition, the correlation between American equities and bonds is modestly negative. In other respects, too, correlation is not as high as assumed. For example, the correlation between total returns on American equities and energy prices is “unusually low”, despite the fact that commodity prices have risen with equity prices in recent years. The correlation between four key cyclical groups in Europe – industrials, consumer-related, metals & mining and basic materials – has fallen in the past few years to about 25%. The report says: “Arguably, the impact of greater global integration and technology has heightened differences in sector returns as the market tries to distinguish between winners and losers.” The Globology Revolution looks at the impact of the combination of globalisation, technology and the rise of the Brics (Brazil, Russia, India and China) on the world economy. The effect is proving to be a benign mixture of strong growth with relatively low inflation. “Our economists believe that the trend rate of global growth has probably risen, while the trend rate of inflation has fallen,” says the report. Several factors have combined to bring this happy situation about. These include technology deflation, with technological development leading to falling prices. The rise of the Brics has also reduced product prices – for example, audiovisual products in Britain are about 60% cheaper than a decade ago. Finally, the increased global labour supply from the addition of previously marginal countries to the global economy has played a role. * Goldman Sachs ‘The Globology Revolution: Globalization, technology and the Brics’, May 12, 2006.