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The long-term closeness of the relationship between the S&P/TSX composite index and emerging markets equities is not only astounding, it may also be bad news for domestic investors.

Once the U.S.-dollar denominated MSCI emerging markets index is converted to Canadian dollars, it's clear that domestic equities have been moving in tandem with emerging markets equities for a long time. The accompanying chart below shows the 15-year history of the relationship using weekly data. For the vast majority of the time frame, they might as well be the same line – and this is backed up by correlation calculations.

There are two reasons why this relationship may be problematic for Canadian investors in the coming weeks and months. First, a recent performance divergence in the chart suggests domestic equities may have gotten ahead of themselves. Since April 8, 2016, Canadian equities have jumped 4.8 per cent while the emerging markets index has declined slightly in Canadian dollar terms.

If this divergence corrects with a sharp rally in emerging markets equities, then domestic investors will be fine. If, however, the lines on the chart rejoin by domestic equities falling, this could be more painful for domestic portfolios.

The second reason for concern is that experts are highly skeptical on the outlook for developing world investments. On June 8, Goldman Sachs analyst Caesar Maasry published a report entitled "A narrow path for EM upside." Mr. Maasry argues that the early-year rally in emerging markets was caused by economic stability in China, which he believes will not last. "... [W]e see China risks as being the bigger concern for the EM complex going into [the second half of] 2016 and the larger issue at stake is Chinese policy-makers' ability to stimulate growth when it slows."

Mr. Maasra goes on to note that monetary stimulus in China is at the most aggressive levels since the financial crisis and yet "growth has only 'stabilized' at just under 5 per cent, not accelerated by a meaningful margin." Chinese economic data released Monday that showed the lowest levels of investment in 15 years will do little to assuage Goldman Sachs's fears.

China, of course, is not the only equity market within the emerging markets benchmark but there numerous countries with struggling economies elsewhere in the sector. The South Korean central bank just implemented a surprise interest rate cut after 17 consecutive monthly declines in exports. In Latin America, Venezuela is among the planet's biggest economic basket cases and Brazil continues to struggle with both political issues and a deep recession. Nigeria, Africa's largest economy, is on the verge of civil war.

The best-case scenario for domestic investors is that the Goldman Sachs view is wrong and emerging-markets equities stage a recovery. (A recent Bloomberg report highlighted renewed investor interest in Thailand, Indonesia and the Philippines.) Otherwise, to be bullish on Canadian equities, investors will have to resort to "it's different this time" arguments to explain the recent performance divergence between the S&P/TSX and emerging markets equities – even though the trend is 15 years old and firmly entrenched.

Editor's note: An earlier version of the chart below incorrectly stated the MSCI EM index was indexed to 1,000 in May, 2011. The correct date is May, 2001.