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This piece was authored by Melanie Rijkenberg, CFA, Associate Director, Pacific Alternative Asset Management Company Europe LLP.

Since the start of the year we have seen a clear de-correlation in global markets and most notably within European equity markets despite several potentially contagion causing events occurring over the last few months. In short order: the Cyprus saga and Italian elections surprise in February, rising Slovenia liquidity issues in March, and worrying economic data out of the "strong man of Europe" (Germany) early in the year.

But, contagion is no longer in vogue. The primary reason that contagion has been limited and correlations have dropped is in my view due to three "game changers" that occurred during 2012 that have taken the tail risk of an EU currency bloc break up off the table in many investors’ minds. These game changers are the announcement of a backstop in the form of the OMT, the decision by the European Council to establish a single bank supervisor and pave the way for a banking union, and the actions to keep Greece in the euro. Simply put, politicians "came through" when they needed to.

The game changers described above in combination with under-exposure to European equities in global institutional investors’ portfolios, improving global economic data and QE in the US and Japan, and relatively attractive European valuations had caused flows ......................

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