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.

Equity sector and market correlations declines in 2012

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.