US Equities look as though they are due a 5-10% correction, so US investors have a chance to look at other opportunities. One option is a Northern Europe group of fiscally responsible countries in and out of the Eurozone. Our preferred option is a diverse group of EMs, including India, Korea, Mexico, South Africa and Turkey, which offer equivalent risk-adjusted returns, but much lower correlation with US Equities.

The rotation into US defensives has broadened over the last two weeks. There is a potential contradiction with the high exposure to equities recommended by our asset allocation model. We look at the maths underlying our asset allocation decision, historical precedents for US equities being overbought and international equity comparisons. A 5-10% correction followed by renewed strength, just about fits all the evidence.

Our US Equity sector model is changing its mind on defensive sectors. The bottom came in early February, but the first material increase was only three weeks ago and was mostly down to Healthcare. Since then, the theme has broadened and it is no longer just a reaction to weakness in the commodity-related sectors.

The new ultra-low volatility regime throws up some curious implications for equity sectors. Who knew that US Technology and EU Industrials are now attractive to risk-averse investors? What about Healthcare, which could deliver significant returns if investors were just prepared to give it the benefit of the new paradigm.

It’s time to look at EM Equities again. Our view is that international investors should be selective and go for countries which are capable of self-help, like India, but not Russia. That means working with the preferences and opinions of local investors, not against them.

Our global volatility index has just hit a two-year low, but US equities are no longer leading this and are now in a counter-trend, whose strength is disguised by a breakdown in sector correlations. The period of ultra-low volatility is not over yet, but it may not last much longer.

Sector recommendations can be stock recommendations in disguise, if performance depends narrowly on one or two large companies. Our overweight recommendations on Financials in the US, the UK and the Eurozone all enjoy broad-based support, as do US and Eurozone Industrials and UK Materials. The overweight calls on US Technology and Eurozone Materials depend heavily on one stock and are therefore lower quality.

With every passing week Eurozone and UK equities become a little bit more attractive and Japanese equities little less so. The headlines scream political risk in Europe, but that is a reason to sell government bonds in the affected countries, not international companies, which happen to be quoted there. By contrast, Japan has a bucket load of political risk in the form of President Trump and the dollar-yen exchange rate.

Nothing has happened to move the dial on any of our major themes; so this a time for housekeeping and some small ideas. The three we have chosen are: reducing exposure to the Energy sector, using Spanish government bonds as the safe-haven against election shocks in Europe, and increasing exposure to UK and Eurozone Small Caps.