Basic statistics should tell us this. Since January 2000, the correlation between monthly changes in emerging markets (in sterling) and the FTSE mining sector has been 0.73, implying that it's very likely that the two will rise and fall together. For example, during this period there have been 29 calendar months in which emerging markets have lost UK-based investors 5 per cent or more. Miners fell in 26 of these 29 months, and by an average of 8.2 per cent. On average, since January 2000 a one percentage point monthly move in emerging markets has been accompanied by a 1.05 percentage point move in miners.
What compounds this problem is that both assets are more volatile than shares generally, so big losses on either are more likely than losses on most other UK shares. Since January 2000 - a period of good average returns on emerging markets and miners - we've had 42 calendar months in which miners have lost more than 5 per cent, 29 such months for emerging markets and just 23 for the All-Share index.
There are at least three reasons why miners and emerging markets rise and fall together.
One is simply that most bundles of shares tend to be correlated, because shares generally are driven by global investors' appetite for risk. This has an unpleasant implication - that we cannot avoid the risk of emerging markets and miners falling together by holding other stocks. Since January 2000, the All-Share index has fallen in 27 of the calendar months in which emerging markets have fallen - although they have fallen by less on average than miners have in these months (by 5.5 per cent against 8.2 per cent).
A second reason is that resource stocks and emerging markets both depend in part upon expectations of economic growth in developing economies; pessimism about growth prospects depresses both emerging markets share prices and expected future commodity prices. (This point is quite consistent with the fact that there's no correlation between actual long-run economic growth in emerging markets and share returns, but that's another story.)
Third, both emerging markets and commodity stocks are bets upon global monetary policy. Tighter monetary policy (or expectations thereof) reduces capital flows to emerging markets - hence the recent drop in the Indian rupee - and also reduces commodity price expectations.
I say all this as a counterweight to a common cognitive bias to which stockpickers are prone. It's the representative heuristic - the belief that effects must somehow resemble causes. So, for example, we think that good management or strategy must lead to rising prices for good resource stocks, or that decent economic growth must lead to good returns in emerging markets. What this view overlooks is that markets are also driven by powerful common factors that aren't so neatly related to local, idiosyncratic 'fundamentals'. The investor who forms his portfolio piecemeal - buying a good stock here and a good fund there - is apt to underestimate these causes of correlated moves and so end up with a portfolio that doesn't spread risk very well.
This poses the question: how can we diversify the common risk of falls in miners and emerging markets?
The answer is - with difficulty. Although non-mining stocks have risen this year, this is unusual. It's much more common for shares generally to fall as mining and emerging markets do so - especially if the latter fall a long way.
Nor even can we rely upon government bonds to help. The fact that gilt yields have risen recently in part because of expectations of the Fed reducing its quantitative easing reminds us that correlations between government bonds and shares needn't remain as negative as they were for most of the post-2000 period.
It might simply be that diversification opportunities have diminished recently, so that it's more likely that assets - bonds, equities, commodities - will move together. If this is the case, then there's a place for cash in investors' portfolios, despite negative real interest rates.
