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Original research
THE DIVERGENCE OF EQUITY MARKETS IN DEVELOPED AND EMERGING ECONOMIES IN AN ERA OF UNCERTAINTYPages 129-138
Abstract
Since 2022, equity returns in developed and emerging markets have diverged sharply, breaking with the post-2010 regime of synchrony. This study quantifies the divergence over 2022-2025 and explains it through a two-layer framework, consisting of cyclical U.S. dollar liquidity conditions driven by Federal Reserve policy and structural forces including geopolitical fragmentation and accelerating technological divergence. Using MSCI indices and broad macro-financial data, we introduce the Divergence Early-Warning Model Index (DEMI), a two-stage forecasting model that combines an OLS spread regression with a regime-switching logit signal. In rigorous out-of-sample tests covering 2019-2025, DEMI achieves an AUC-ROC of 0.73 and successfully anticipates major turning points, including the notable 2025 EM rebound. The model's application to recent data illustrates its capacity to signal meaningful shifts in the probability of near-term EM outperformance. The paper concludes with actionable portfolio implications and detailed scenario analysis for 2026-2027, demonstrating how DEMI can effectively guide tactical allocation amid persistent structural fragmentation and rapidly shifting monetary cycles.
Keywords: Emerging markets, Developed markets,
Equity-market divergence, U.S. dollar, Monetary policy, Forecasting model.
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Larisa A. Aguzarova, 
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