As 2013 begins, we find that important changes are occurring in the correlation structure of markets that should shape investment strategy.
The first important shift is a decline in the elevated correlations across all kinds of equities, which has been a hallmark of recent years. We measured elevated correlations across sectors, across country markets, and even across individual securities, facilitating risk-on/risk-off trading strategies. However, during the second half of 2012 we saw all of these correlations easing.
For investors, there are two implications. First, expect a greater diversification benefit from holding equity investments spread across different sectors and regions. Second, active decisions at the micro level are likely to make a greater difference than in recent years.