Opinion – From Grain to Grain: Has the Ibovespa detached itself from the S&P500?

After suffering two consecutive years of results much lower than those of the American stock exchange, Ibovespa finally wins this year. With a better result than the S&P500, many investors claim that the Ibovespa’s correlation with its American pair would now be lower. I explain what the average correlation is, how important it is and how it is now.

Correlation is a statistical measure that measures the relationship between the price variation of two assets. It is a number between -1 and +1

A perfectly positive correlation, i.e. +1, means that whenever one asset rises (falls), the other also rises (falls).

A perfectly negative correlation, that is, -1, means that whenever one asset goes up (falls), the other goes down (rises).
A natural failure of investors is to attribute the intensity characteristic to the correlation. It is not about intensity, but only about direction.

Thus, if when asset A rises, asset B rises more, but when A falls, B also falls, but to a lesser extent, B may have a positive result in the year, but A will present a very negative result. Which is what happens with the Ibovespa and the American stock exchange.

So you have to be very careful when we analyze only the return in a period to judge the correlation between assets.

But why is measuring correlation important?

Tracking correlation is important for building a well-diversified portfolio. Optimal diversification is achieved by properly balancing uncorrelated assets.

I will now explain the Ibovespa’s correlation with the S&P500.

The chart above shows, since 2001, the correlation between the Ibovespa and the S&P500 on the orange line, the Ibovespa and the global stock exchange on the blue line and, in grey, the correlation between the global stock exchange and the S&P500.

Note that the correlation fluctuates over time. Usually, in times of stress, the correlation goes up, because at these times, the bags all fall together.

Currently, the Ibovespa and S&P500 correlation is at 0.63. This statistic is higher than the long-term average of correlation between the two indices, which was 0.55%.

Therefore, it is not true that the Ibovespa is de-correlated from the American market. He’s actually in a different beta. But I will explain about the beta in a future article.

Michael Viriato is an investment advisor and founding partner of Investor’s House

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