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Morgan Stanley called theirs The Turning Point. One Bank of America Merrill Lynch note went with The Big Low. Another from JPMorgan opted for Countering the bears.

The titles of Wall Street’s 2019 investment outlooks say it all: The world’s largest banks and money managers are gearing up for the last hurrah of one of the longest bull markets in history.

This is the reader’s digest of research notes for the year ahead. What follows is a compendium of more than 200 market themes, bets and threats from many of the biggest financial institutions in the world. Bloomberg has sifted dozens of notes and collated the top-line takeaways in one place, presented by macro theme, asset class or institution.

Macro View
Most major economies are likely to see decelerating activity, with real GDP growth of 1.4 percent in both Europe and Japan, and 4.6 percent growth in aggregate among the emerging markets. Chinese growth is likely to further weaken. A steady stream of monetary and fiscal stimulus measures to turn the economy around is expected.
Macro View
One event risk for next year is that Washington gridlock may not be the market’s friend when the debt ceiling needs to be raised in March – brinkmanship is a risk as it was in 2011.
Macro View
Concerns over the pace of Fed tightening could cause periods of volatility in both the bond and equity markets.
Macro View
Global monetary policy is expected to become less friendly in 2019. A divided government means that additional fiscal stimulus in the U.S. seems unlikely. Europe is largely frozen in place by its budget rules, and Japan appears ready to implement yet another ill-timed consumption tax hike, in our view.
Macro View
BAML’s top 10 macro calls imply a backdrop of rising rates and falling earnings in 2019; the “Baby Bear” market on Wall Street that began in the first quarter of 2018 is not yet over; we believe asset prices will find their low once rate expectations peak and EPS expectations trough.
Macro View
Real U.S. GDP growth to slow in the second half of the year as the effects of fiscal stimulus begin to fade. Unemployment rate could reach a 65-year low by year-end, pushing wage growth. Consequently, core price inflation should gradually rise. Housing sales have peaked and home price appreciation is forecast to slow.
Multi Asset
Global profit growth declines. Earnings growth is expected to decline sharply next year, from more than 15 percent to less than 5 percent on a year-over-year basis. The team is bearish stocks, bonds, and the U.S. dollar; bullish cash and commodities; and long on volatility. We expect to turn tactically risk-on in late spring, but to start 2019 with a bearish asset allocation of 50 percent stocks, 25 percent bonds and 25 percent cash.
Multi Asset
For 2019, risk-off for stocks and bonds—cash is king.
Stocks
The U.S. equity strategists’ view is to be overweight health care, technology, utilities, financials and industrials, and underweight consumer discretionary, communication services and real estate.
Stocks
S&P 500 Index to peak. Earnings growth is also likely to slow in the U.S., though the near-term outlook remains somewhat positive. The S&P 500 Index is expected to peak at or slightly above 3,000 before settling in at a year-end target of 2,900.
Credit
Credit cycle continues, despite widening spreads and flattening curves. Globally, the credit markets face high levels of episodic volatility with shrinking supply and quantitative tightening putting upward pressure on investment grade and high yield bond spreads. In the U.S., total returns of 1.42 percent are forecast for high grade corporate bonds and 2.4 percent for high yield. The U.S.-leveraged loan market remains a bright spot, with total returns of between 4 and 5 percent.
Currencies
Cash gets competitive. With cash yields higher than dividend yields for 60 percent of the S&P 500 already, cash becomes even more competitive in 2019. This year boils down to a strategy of buying sources of cash and selling users of cash.
Currencies
A weaker dollar is expected in 2019, against a stronger euro and Japanese yen. The strength of the dollar will depend heavily on evolution of the trade relationship between China and the U.S., which in the short term may mean selling the dollar against an insulated currency such as the British pound or Swiss franc.
Emerging Markets
Emerging markets are a gamble. Assets are cheap and under-owned and could be a big winner in 2019 as the dollar weakens, yet EM remains highly vulnerable to spillover effects of U.S.-China trade tensions. Bullish Brazil and Russia, bearish Mexico.
Commodities
The commodities outlook is modestly positive. We forecast Brent and WTI crude oil prices to average $70 and $59 per barrel. Weather-induced volatility is expected in the near term for U.S. natural gas, yet we remain bearish longer term on strong supply growth. In metals, we remain cautious about copper because of Chinese downside risk. We forecast gold prices will rise to an average of $1,296 per ounce, but could rally to as high as $1,400, driven by U.S. twin deficits and Chinese stimulus.
Macro View
Expect a near-term risk rally into the start of 2019, driven by dovish Fed-speak, the recent U.S.-China trade detente, and very strong seasonal factors. But 2019 should be a year of low single-digit total returns in most large financial assets and higher volatility.
Macro View
One significant macro theme is that while Europe slowed sharply this year from a strong second half in 2017, the euro-zone economy will stabilize near current levels, and not weaken further.
Multi Asset
Investment grade and agency mortgage-backed securities over global equities, given our forecast of single-digit equity earnings growth and the view that longer yields will stay close to current levels.
Stocks
Can European equity indexes close the gap with the U.S., after American shares massively outperformed European stocks in 2018? Such a reversal is unlikely, given growth differentials, European political risk, and the high beta of European equities to U.S. weakness.
Credit
The credit cycle will not end in 2019 and the chances remain low even for early 2020. Expect spreads to move wider in the second half of 2019, since higher-quality credit spreads typically increase four to five quarters ahead of a recession. Modest spread widening is expected across most credit markets and therefore total returns to be firmly in the black. In excess return terms, expect Europe to be just above the U.S., but if the rate moves play out, dollar total returns will likely be superior.
Emerging Markets
Recommend caution on emerging markets. While developing-nation dollar debt looks attractive, currency-sensitive assets such as equities and local debt are likely to struggle, given our forecast that emerging-market currencies have more downside against the U.S. dollar.
Emerging Markets
For hard currency emerging-market corporates, expect widening across the board. China has become by far the biggest portion of the EM corporate universe; expect heightened volatility, as well as high issuance to address a large maturity wall. LatAm is also likely to come under pressure.
Macro View
We see a slowdown in global growth and corporate earnings in 2019, with the U.S. economy entering a late-cycle phase. We expect the Federal Reserve’s policy to become more data-dependent as it nears a neutral stance, making the possibility of a pause in rate hikes a key source of uncertainty.
Macro View
Markets are vulnerable to fears that a downturn is near, even as we see the actual risk of a U.S. recession as low in 2019. Trade frictions and a U.S.-China battle for supremacy in the tech sector loom over markets. We see trade risks more fully reflected in asset prices than a year ago, but expect twists and turns to cause bouts of anxiety.
Macro View
We worry about European political risks in the medium term against a weak growth backdrop. We believe country specific risks may ebb in the emerging world, and see China easing policy to stabilize its economy.
Multi Asset
Rising risks call for carefully balancing risk and reward. Exposures to government debt as a portfolio buffer, twinned with high-conviction allocations to assets that offer attractive risk/return prospects.
Multi Asset
We prefer stocks over bonds, but our conviction is tempered. In equities, we like quality: cash flow, sustainable growth and clean balance sheets. The U.S. is a favored region, and we see emerging-market equities offering improved compensation for risk.
Stocks
We steer away from areas with limited upside but hefty downside risk, such as European stocks.
Bonds
In fixed income, we have upgraded U.S. government debt as ballast against any late-cycle risk-off events. We prefer short- to medium-term maturities, and are turning more positive on duration. We favor up-in-quality credit.
Emerging Markets | Currencies
Dollar strength to fade: Higher short-term real yields in the U.S. and an ongoing growth differential between the U.S. and the rest of world are likely to continue to support the dollar near term. This strength will continue to weigh on emerging markets, especially in light of the ongoing slowdown in China. In the medium term, however, we expect the dollar to weaken as focus returns to the trade deficit and the Fed shifts to a neutral bias.This should bring some much needed relief to EM.
Macro View
Risky asset duration should continue to be a headwind as we expect spreads to widen further and earnings margins to fall, negatively impacting total returns. This is in spite of our view that long-term yields will not rise by much in 2019. Rising risk premia, rather than rising yields, will become the key driver of weaker returns.
Macro View
Exceptions to this sobering picture include the U.K.—assuming our base case of a Brexit deal with the EU materialises—where some fiscal loosening should support domestic demand. We also pencil in an acceleration in GDP growth in Brazil, due to reduced political uncertainty and looser monetary policy, and India, where structural reforms should benefit private-sector investment.
Macro View
Slower growth and tighter monetary policy, coupled with a significant drop-off in central bank bond purchases, point to a shift to risk-off sentiment and a period of recalibration in global markets as investors move away from the QE driven carry trade. While we see room for further outflows from risky assets, we are not of the view that we are entering a bear market in 2019.
Macro View
We expect dispersion to increase across credit, sectors and regions as investors focus more on fundamentals and risk mitigation due to the waning beta effect of QE. That said, the stock effect of the size of G-4 central bank balance sheets remains a significant dampening influence on interest rate volatility and will likely keep global bond yields contained. This in turn should be a moderating influence on broad-based market volatility.
Macro View
After the synchronised upswing in 2017 and the mixed picture that has prevailed for most of 2018, the main story for 2019, in our view, will be a concerted slowdown in GDP growth across major economies.
Multi Asset
Trade war uncertainty to weigh on equities and emerging markets. With the U.S. trade deficit growing, we expect continued uncertainty regarding China–U.S. trade relations. This will likely add to the drag on global growth and drive up risk premia in global equity markets, particularly the technology sector. Europe and EM are bearing the indirect consequences of this dispute.
Stocks
In equity markets, we expect the focus to shift from higher rate concerns to slower growth, diminishing margins and weaker earnings. We think expensive market valuations will be challenged. With equity markets no longer in a bullish trend, we may finally see better performances in Europe, where valuations are less stretched.
Bonds
While capacity constraints are emerging in many countries, the key risk is slower growth, which we expect to limit the pace of monetary tightening globally. We think the 10-year Treasury yield is unlikely to rise much beyond 3.5 percent, thereby keeping the rate curve fairly flat for most of 2019. While we expect Bund yields to rise in 2019 with the end of the ECB’s public-sector purchase program, we think this rise in the 10-year will be capped at 1 percent at the end of 2019.
Credit
The one well-flagged risk is the U.S. corporate sector’s leverage level and the fact that corporate America will face a large refinancing burden, starting in 2019 and worsening in 2020, 2021 and 2022. This will take place in a world of higher yields and weaker margins. We expect defaults to pick up in 2019 and accelerate in 2020, leading to a more marked economic slowdown in that year.
Commodities
Oil to rebound, headline inflation to rise. In spite of the recent correction in oil prices, we expect prices to rise over the next six months, with Brent reaching $82 per barrel in the second quarter.
Multi Asset
Given our macroeconomic view, the sector-specific headwinds facing bond markets and relative asset-class valuations, we retain our preference for equities over fixed income.
Stocks
Within equities, we continue to prefer growth assets, particularly those linked to our favored technology and healthcare themes, over value.
Bonds
We expect fixed income markets to be weighed by slowly tightening global monetary policy. Furthermore, the Treasury market faces the headwind of rising U.S. government debt issuance in the second half of 2019 and this could have negative ramifications for bond markets globally.
Credit
Within fixed income we are most cautious on credit markets. There has been a significant increase in corporate leverage over the last few years, particularly among smaller-capitalisation companies, as businesses have sought to take advantage of the low interest rate environment to take on debt. Meanwhile, there has been a simultaneous deterioration in the quality of bond issuance throughout credit markets. Both of these factors add risk to the sector, in which valuations are already high.
Alternative Assets
Given the many risks to the outlook, we continue to endorse a balanced approach to portfolio construction incorporating alternative income-producing assets, such as structured investments, to increase portfolio diversification.
Stocks | Emerging Markets
In Equities, upgrade neutral EM allocation to +1, but reduce Japanese equities to neutral, leaving overall equity weight at +1.
Credit | Currencies
In credit overall, remain underweight, with no changes to allocations. Cash remains at neutral.
Macro View
This year’s poor market returns are a reset to weaker economic growth and earnings expectations globally as markets expect U.S. fiscal fade in late 2019 and lagged monetary tightening evident in a flat yield curve to slow activity. Events still feel more mid- to late-cycle reset than end-cycle bear market.
Multi Asset
In a stagnation phase (lower real growth, stable/low-flation) there are lower expected equity market returns, and bonds are the asset class outperformers. Volatility stays high. But after a correction it makes sense to be overweight both.
Bonds
In the government bond space, Treasuries are downgraded modestly to +1 after the rally in the market, but the bank still thinks the cycle favors fixed-income returns. We raise periphery euro-area sovereigns a notch to -1 as Italy risks are more contained and political change in 2019 could generate a pullback in spreads.
Commodities
Restore energy to neutral from underweight after the sharp fall in oil prices. Push precious metals to +1.
Macro View
European politics will be calmer. The exit of Britain from the European Union should not do much harm to either side if handled wisely. In Germany, the ongoing political realignment is unlikely to cause instability, as the influence of the extreme parties remains limited.
Macro View
Trade pressures may persist but if Chinese policymakers proceed cautiously, as in 2018, risks of instability should be limited and the expansion can be extended. Aggressive currency policy, credit easing or foreign policy, would be destabilizing, however.
Multi Asset
Keeping inflation under control is a key driver or risk. The important question is whether inflation will remain benign. If not, the Fed will be seen as behind the curve—bond yields would increase significantly while equities and other risk assets decline substantially. Wage growth will likely be the key driver.
Multi Asset
Our base case for 2019 foresees only a moderate further increase in U.S. yields. This suggests that U.S. fixed income investors should prepare to lengthen duration. In core bond markets outside America where yields are far lower, duration should remain short. In credit, the risk-return trade-off looks better for high-yield than for investment-grade bonds. Equities should continue to outperform on the back of robust earnings growth. Emerging-market assets should regain ground as long as the risk of U.S. rate hikes and dollar strength abates.
Bonds
As we look to 2019, our base scenario suggests that equities should remain at overweight. In line with late cycle patterns, growth stocks should generally continue to outperform. In Europe, depressed financial stocks should benefit from rising yields, while in the U.S., the flattening yield curve will likely weigh on the sector.
Commodities
Tech and healthcare are key market drivers or risks. An important question for investors is whether growth in the tech sector will remain strong, with the emergence of new areas of focus such as virtual reality and artificial intelligence. A second key sector that is likely to influence the fate of equity markets is healthcare, with investors keeping an eye on gene therapy and other innovative treatments.
Bonds
The key implication of an expected flattening of the U.S. yield curve is that dollar-based investors should prepare to extend duration in 2019. For bonds in other hard currency regions such as Japan, the Eurozone and Switzerland: As yields in most markets remain extremely low, returns are likely to be weak or even negative in 2019.
Credit
As long as the global economy avoids a contraction in 2019, as we assume, our analysis suggests that credit should outperform Treasuries. U.S. investment grade bonds seem less attractive; although cash positions of U.S. corporations remain quite high, leverage has increased substantially since 2014 due to stock buybacks and higher investment spending. Senior loans still seem attractive in Europe as bank asset quality should continue to improve. However, a specific tail risk for European credit is a loss of fiscal discipline in Italy and rising concerns regarding a possible Italian exit from the euro.
Currencies
Stable dollar. With Federal Reserve tightening well advanced, and the European Central Bank as well as the Bank of Japan gradually catching up, chances are good that the dollar will be stable. That should ease the strain on economies depending on cheap dollar funding, and help stabilize financial markets.
Emerging Markets
At the end of 2018, there were indications that the internal and external balance sheets of EM nations was being restored, in part with the support of the International Monetary Fund. If that process continues in 2019, emerging markets can recover and global investors would benefit.
Credit
As long as China’s all-important demand for commodities holds up, cyclical commodities should remain supported.
Macro View
Investors will reduce portfolio risk in 2019. A flattening yield curve, modest equity market outperformance versus bonds and cash, and low current cash balances should continue to support risk-averse asset rotations next year.
Stocks
Corporations will once again be the largest buyer of equities in 2019. Corporate demand for stocks will rise by 17 percent next year driven by share buybacks and M&A but offset somewhat by a potential record-breaking year in share issuance. Foreign investors will likely also be net buyers of U.S. stocks given a modestly weakening dollar, and equity purchases through ETFs should persist.
Stocks
Mutual funds, pensions, and households will remain net sellers of stocks. Investor outflows from active mutual funds will continue to weigh on mutual fund equity demand. Pension funds and households generally sell equities during periods of rising interest rates and decelerating economic growth, respectively.
Outlier Scenarios
A euro-zone crisis is sparked by the need for stimulus and a backlash by populists: The euro would get close to parity with the dollar. The pound would face great uncertainty as post-Brexit trade negotiations get complicated.
Outlier Scenarios
In a trade truce scenario, RMB would likely retrace some of the depreciation seen in 2018, emerging markets and cyclical commodities would gain with China, Korea and Taiwan benefiting disproportionately.
Outlier Scenarios
Emerging-market economies introduce reforms to address imbalances, boost productivity: Strong rally in EM “carry” currencies; stocks and bonds climb.
Outlier Scenarios
Fed extends the hiking cycle: Were policy makers to deliver more than implied by the dots, the dollar would strengthen to the detriment of emerging markets. Tighter rates to address inflation (rather than growth) would hurt U.S. equities
Outlier Scenarios
Volatility spikes in fixed-income as bonds lose central bank backstop: Volatility spreads to other asset classes that depend on low and stable long-end real rates; the correlation between bonds and equity returns would probably change.
Outlier Scenarios
A liquidity run in corporate bonds in a sharp risk-asset selloff: As mutual funds and ETFs sell liquid holdings, their holdings get more illiquid—subjecting remaining investors to time subordination.
Multi Asset
The multi-asset team’s base case for 2019 “is neither significant retracement nor rebound for global risk assets,” with equity volatility curves “still subdued and expectations for a more dovish Fed mounting.”
Bonds
The longer-term risks still look biased to lower rates. We expect the Fed to end its tightening cycle after two more hikes in 2019 and to then ease its policy in 2020. We continue to forecast a 15 basis-point rise in the ECB’s deposit rate in September 2019 as the central bank remains confident inflation is rising towards its target and has brushed aside growth concerns. We are bearish on core rates around the second quarter and forecast the 10-year German yield to rise towards 50 basis points by end-2019.
Credit
We downgrade our view to mildly bearish on both investment-grade and high-yield dollar-denominated credit from neutral and forecast reduced corporate bond issuance in 2019.
Emerging Markets
The outlook for emerging-market currencies looks less negative in 2019 as contagion pressures have moderated amid rising defenses. We favor quality over quantity, particularly when it comes to the high-yielding currencies. Weakening growth and some idiosyncratic risks prevent us from liking a broader range of currencies. We prefer CNY, IDR, PHP, SGD and THB in Asia; CZK and ILS in CEEMEA; and BRL, CLP and PEN in LatAm.
Emerging Markets
We recommend an overall short-duration stance on emerging-market local rates for 2019, capturing sizable carry at the front-end of the yield curves in Indonesia, India and Mexico. Strongest conviction in local bonds is in Brazil, Russia, Indonesia and India among high-yielders, while China and Korea are top picks within low-yielders. We like external debt in Brazil, Egypt and Qatar, and we expect emerging-market external debt to outperform local debt in 2019.
Commodities
We see upside for gold in 2019, but lower forecast average to $1,292 per ounce and expect emerging-market buyers to put a floor on prices.
Multi Asset
Jefferies does not expect a recession in 2019 but the U.S. yield curve is close to inverting just as earnings growth moderates, forcing a trade-off between equity and bond valuations. The Fed’s balance sheet normalization implies an increasing competition for capital favoring quality. Equally, widening credit spreads will mean higher equity volatility. Our 2019 strategy reflects a mature, not end of, cycle.
Multi Asset
The bottom line in Europe is that most bourses have their “investment temperature” or monetary conditions set to loosen and while earnings have been revised down this has already been captured in valuations meaning equities look very cheap versus government bonds.
Stocks
As the Fed’s balance sheet normalization continues it will mean further de-risking as excess liquidity is mopped up. However, don’t short the S&P 500. We expect buybacks will continue to squeeze EPS through 2019. FCF generation is still strong across a range of sectors. We expect the S&P 500 to reach 2,900—slightly lower than our 2018 target of 2,950.
Stocks
An upside risk to our earnings forecast would come from a decline in the dollar, a suspension of balance sheet normalization and a slower pace of rate hikes in 2019.
Stocks
A downside risk to our numbers would come from the U.S. yield curve shifting upwards on higher inflation pressures.
Stocks
The bottom line is that a strong dollar and rising cash rates are creating competition for dollar capital. Equities offering high FCF yield and a “cheap growth multiple” ought to do reasonably well. Equities are long duration assets and convertible bonds are the best equity instrument in a rising interest rate environment.
Credit
Don’t fear an inversion. Our analysis shows that it is not a perfect timing tool and the Fed’s QE program has distorted the conclusions. Credit spreads have been too tight and any widening must be seen in the context of “normalization.” That said, higher spreads = higher volatility.
Macro View
JPM’s baseline assumes further tariffs after the trade truce expires on March 1, but that the impact on China growth will be trivial due to further monetary and fiscal stimulus plus yuan depreciation.
Multi Asset
The end is not near, but markets will behave like the end of the cycle is at hand. Fed to continue with normalization and Treasury curve to bearishly flatten. Credit is somewhat concerning, but likely to outperform rates. Cash and short-duration should provide strong risk-adjusted returns.
Multi Asset
We still think it’s too early for the great rotations from equities into bonds, from cyclical into defensive stocks and from growth into value and quanlity. Peak EPS growth and the JPM recession risk model are two tools for timing these switches at some point in 2019.
Multi Asset
2019 return projections show improvement on 2018 but are still below average. Given better starting valuations, and a no-recession assumption, the best performers in fixed income could be U.S. high-yield and leveraged loans, U.S. cash and gold. Worst could be bunds, euro high-0grade credit and commodities. Equities could return from 2 percent (japan) to 15 percent (U.S.).
Multi Asset
End game should be priced progressively rather than simultaneously across asset classes, unless investors fear a market liquidity crisis.
Stocks
U.S./global recession is not inevitable over the next one to two years, nor is there only downside left for equities. Before this cycle is finished, equities can still deliver a period of significant outperformance versus fixed income.
Bonds
Rates curve to continue to bearishly flatten and eventually invert in the second half. Look for two- and 10-year yields to reach 3.7% and 3.6%, respectively, in the fourth quarter. FRA/OIS should be biased narrower; overweight Treasuries versus OIS. TIPS breakevens should widen modestly.
Bonds
Look for net issuance across U.S. fixed income to rise to $2.06 trillion in 2019, but ex-Treasury supply should decline to $941 billion. Institutional investor demand for U.S. debt securities was weak in 2018 and will likely remain weak in 2019.
Credit
Investors’ fears about credit are somewhat overblown, but we don’t expect returns to be particularly compelling in 2019 either. Look for spread widening across sectors. MBS spreads have widened 20 basis points in 2018 and valuations appear attractive. Overweight MBS versus Treasuries.
Emerging Markets
We think one should be buying into emerging markets now, and believe that the peaking in U.S.-rest-of-world growth differential might constrain the dollar. Specifically, emerging-market equities are currently trading even cheaper than at the low point in 2015-2016, when China appeared even worse than currently.
Commodities
Commodities: Brent in the $55 to $75 per barrel range, gold trending higher to $1,400 per ounce, base metals higher in the first half and lower in the second.
Macro View
Significant U.S. economic outperformance is unlikely to persist through 2019 as the sugar rush of the fiscal stimulus wanes. Growth in the major developed economies looks set to reconverge over the course of 2019 to a more lackluster pace by recent standards, thanks in large part to Washington’s more hostile approach to trade. Companies globally are deferring investment and becoming more hesitant about hiring.
Macro View
The Fed may become more data dependent and rates are unlikely to rise much beyond the middle of the year. More sluggish growth may hinder the ECB’s attempts to normalize policy. Global monetary conditions will remain relatively loose, providing some solace for investors who had been concerned about the Fed hitting the brake.
Multi Asset
U.K. investors face the greatest conundrum. A resolution to the current Brexit impasse will be good for the economy, but is likely to challenge Gilts and internationally focused stocks in 2019.
Stocks
Corporate earnings growth should also converge toward a slower, yet still positive rate of growth. Equity investors may wish to seek more regionally diversified portfolios and to reduce risk by focusing on quality, larger cap stocks in historically defensive sectors.
Macro View
Volatility is here to stay, but the New Year will begin with more favorable valuations and still sound fundamentals.
Multi Asset
While the U.S. dollar looks as though it has peaked, equity valuations still look promising, despite the inevitable volatility ahead and the risk of a U.S. recession is not on the horizon so far. There are opportunities for the prudent investor to take advantage of an environment that overall remains relatively supportive.
Multi Asset
We continue to favor equities over high beta fixed income segments, which are more sensitive to rates as well as potentially suffering from illiquidity. Equity fundamentals are still solid and euro zone, Japanese and emerging markets still look cheap.
Stocks
Despite strong earnings, tech valuations have fallen significantly. Recent profit warnings from Apple’s supply chain provide interesting entry points to a much less crowded trade and investors will return to a sector that offers both growth and defensive characteristics.
Bonds
We are getting closer to the peak in real rates. We still expect relatively low returns for bonds but begin opportunistically reducing our long-held underweight in sovereign bonds while maintaining a short duration for now.
Multi Asset
We remain underweight credit and hold no high-yield bonds.
Currencies
We expect 2019 to bring broad-based dollar depreciation due to the declining effect of 2018’s expansionary fiscal policy, followed by fading U.S. growth.
Currencies
We believe the U.K. will avoid a hard or no deal Brexit, because Theresa May eventually gets a withdrawal agreement through Parliament, or because the country halts the process unilaterally. Both scenarios would be pound positive.
Emerging Markets
As we move into 2019, we expect emerging currencies to stabilize and prefer currencies with strong external balances, with reforms underway and low dependence on the dollar.
Emerging Markets
Emerging markets are priced for very negative growth, yet enjoy broadly sound account balances, adequate foreign exchange reserves and still-young economic cycles. Fiscal stimulus in China, a dollar that has peaked and a temporary trade truce should all support investor confidence.
Commodities
A diversified exposure to commodities is appropriate in this environment. Current prices don’t indicate tight supply-demand balances, with potantial upside in oil and base metals. Escalation of the trade war or Middle East tension would provide upside to gold and/or oil. A solution to the trade war would see base metals outperform.
Outlier Scenarios
While we do not expect the trade war to significantly slow growth in the near term—it is already five months since the first significant tariffs were introduced—we do not expect a quick resolution, with the risk that President Trump continues to increase the stakes as the year progresses.
Outlier Scenarios
While we expect a near-term resolution to Brexit sometime in the first quarter , this is unlikely to stem the internal conflict in the not so “United” Kingdom. While the U.K.’s share of the global economy is relatively small, if the large recession that the Bank of England predicts under a hard Brexit scenario were to occur, it would have a material impact on markets and global growth.
Macro View
The market is once again focused on the dark clouds on the horizon, with many investors convinced that global growth is in the process of slowing sharply. While we agree that risks are building—known unknowns include the impact of the trade war, European politics, the fallout from higher U.S. interest rates, as well as ongoing concerns about China—we continue to feel that the market is too pessimistic, with global growth actually strengthening.
Macro View
Our relatively optimistic forecast for global growth does not mean that 2019 won’t be another challenging year for investors, with the volatility seen in recent months continuing. However, for those brave enough to “live dangerously,” we expect risk assets to bounce back from their current oversold levels, with still good economic growth once again underpinning gains.
Stocks
Global equity prices are likely to remain choppy for much of the year, but to end 2019 modestly higher.
Bonds
Long rates in the U.S. and Europe are likely to drift higher over the course of the year, with the U.S. 10-year approaching 3.75 percent by year end, and the German 10-year to 1.25 percent. Japanese long rates will remain under the control of the BOJ.
Currencies
The dollar should remain supported in the first half, but we expect it to peak and then decline a little in the second half as U.S. growth catches down to the rest of the world and the market begins to focus on the end of Fed tightening and a possible ECB hike.
Commodities
Metals and bulk commodity prices to remain mixed, with base metals outperforming the bulks.
Credit | Emerging Markets
In credit, we prefer emerging-market sovereign credit to developed-market and securitized credit.
Stocks | Emerging Markets
In equities, emerging markets and Japan are our most preferred regions, and U.S. remains our least-favored region.
Macro View
A rolling bear market across assets defined 2018: We think the bear market is mostly complete for emerging markets, has further to go in U.S. credit and is about to begin for the dollar. We remain neutral equities, underweight credit, neutral government bonds and overweight cash. Within this defensive posture, we are taking larger relative positions and adding to EM.
Macro View
2019 will see the turning point in macro... The world still faces slower growth, higher inflation and tighter policy. But 2019 should see a turning point in this narrative, specifically in U.S. growth, inflation and policy relative to the rest of the world.
Multi Asset
Our trade portfolio is modestly long stocks, and benefits materially from a weaker dollar and lower rates. We like long rest-of-world versus U.S. stocks, global value versus growth and Stoxx miners. We are short USDSEK. We like Treasuries versus gilts and short German Schatz (two year). We are long emerging-market risk via a basket of local bonds (FX-unhedged) and long EM credit versus U.S. high yield.
Multi Asset
Strategically, we remain defensively positioned: Equal-weight equities and government bonds, underweight credit and overweight cash.
Multi Asset
We double upgrade emerging markets from underweight to overweight and downgrade U.S. stocks to underweight. We like value over growth and see materials as a top sector. We target the S&P 500 at 2,750 by end-2019.
Bonds
Narrowing growth and policy differentials should drive convergence in U.S. versus European rates. Curves should flatten across the G-4. We see the U.S. 10-year falling to 2.75 percent by end-2019.
Bonds
In rates, we prefer U.S. Treasuries and emerging-market local rates over bunds, gilts and JGBs.
Credit
Be defensive on securitized credit. We forecast wider spreads across securitized credit and sharp underperformance in BBs. Agency MBS spreads widen, but outperform investment grade credit.
Currencies
We forecast a major peak in the dollar and outperformance by European currencies (SEK, GBP, EUR). In emerging markets, CEEMEA outperforms, while MXN and low-yielding Asia lag.
Emerging Markets
Emerging market fixed income is a preferred source of carry. An improved currency outlook means we now prefer local currency over hard currency.
Commodities
A tight oil balance should push Brent to $80 per barrel by end-2019. Forecasts for a weak dollar and lower yields mean we remain bullish on gold.
Currencies | Emerging Markets
Twin deficits will weigh on the U.S. dollar in 2019. Emerging-market currencies have pockets of value.
Macro View
Late but not end cycle. Steeper curves, lower dollar and higher volatility top the headlines for 2019.
Macro View
The U.S. expansion remains intact. The Fed hiking cycle will pause after two 2019 hikes. The ECB will not hike in 2019; nor will the BOJ. RBA, Riksbank join the policy normalisers club. Expect low inflation with material upside risks.
Macro View
Italian pressures intensify and spread to other markets. Brexit risks will ease, and the BOE will hike in May 2019, February 2020.
Macro View
China will stabilize the economy, but not much more. U.S./China tensions will escalate further in early 2019.
Multi Asset
Any Italy contagion most likely to be felt in credit, currencies.
Multi Asset
Brexit: Keep calm and buy sterling, sell pound-denominated fixed income.
Bonds
Market volatility still too low; rates volatility should rise. Steeper curves are our highest conviction fixed-income view in 2019. Front-ends should offer good tactical and strategic trades.
Bonds
Buy some upside inflation, just in case.
Commodities
Oil prices will bounce modestly in 2019.
Macro View
The global expansion continues but the U.S. slows. Effects of U.S. stimulus will fade and monetary policy tightening will also ease. Chinese growth is likely to stabilize by mid- 2019, supporting the emerging markets and Europe. Returns will be more modest across most asset classes.
Macro View
International assets are cheap but require a catalyst to unlock the value.
Multi Asset
Stocks will outperform bonds, again. International and emerging-market stocks will do well. U.S. growth stocks will outperform U.S. value stocks, again.
Multi Asset
Emerging-market local bonds will offer a better risk and return profile than U.S. corporate bonds.
Credit
The best-case scenario for most U.S. fixed income sectors will be coupon-like returns.
Currencies
The U.S. dollar will be stable or weaker.
Macro View
Global growth is ‘synching lower’ as the end of U.S. economic exceptionalism looms. We see a synchronized global slowdown in 2019. We position cautiously but anticipate opportunities ahead.
Macro View
Quantitative models indicate that the probability of a U.S. recession over the next 12 months has risen to about 30 percent recently and is thus higher than at any point in this nine-year-old expansion. The models are so far flashing orange rather than red over our cyclical six- to 12-month horizon.
Macro View
While judging by macroeconomic considerations we are still some distance from the next recession, the current market environment makes amply clear that a recession is no pre-equisite for turmoil in financial markets. Moreover, rather than traditional macro overheating, it may be the derating of financial assets that leads to the next recession.
Stocks
We believe equity markets will remain volatile, favoring cautious positioning overall and a focus on high quality defensive growth and minimal exposure to cyclical equity beta. We continue to favor more profitable U.S. equity markets to the rest of the world and prefer high quality large-cap equities at this stage in the cycle, while we wait for select opportunities to present themselves over the cyclical horizon.
Bonds
Modestly underweight duration, overweight TIPS. Curve, long the belly, short the long end. Underweight European peripheral risk.
Credit
We continue to be concerned about crowded credit positioning in the market and credit market structure/illiquidity, which could lead to significant overshooting in the event of a more generalized bout of credit market weakness. Cautious on generic corporate credit, but see relative value in financials and mortgages.
Emerging Markets
Opportunities in emerging-market currencies and bonds.
Commodities
We are broadly neutral overall on commodity beta risk, combined with a modestly positive view on crude oil. We continue to see gold as a long-duration asset and prefer other long-duration assets, such as U.S. TIPS at current valuations.
Alternative Assets | Commodities
We like real assets. Real Estate Investment Trusts (REITs) are slightly cheap, while Global Listed Infrastructure (GLI) and commodities are around fair value. Commodities typically benefit from late-cycle support as inflation pressures build. We expect GLI will benefit from its European focus as the region rebounds. Rising Treasury yields, however, are a headwind for REITs.
Macro View
U.S. Federal Reserve tightening, trade wars, China uncertainty, Italy and Brexit imply 2018’s volatility should continue into 2019. The U.S. recession danger zone is 2020, which gives equity markets some upside. But late-cycle risks are rising.
Stocks
We’re more positive on non-U.S. developed equities. Valuations in Japan and Europe are reasonable, and the cycle should be a modest tailwind given that we believe industry consensus expectations are too pessimistic.
Stocks
Our cycle, value and sentiment investment process results in an overall neutral view on global equities.
Stocks
We have an underweight preference for U.S. equities, mostly driven by expensive valuation. The cycle is broadly neutral but is likely to be under downward pressure later in 2019. The sell-off in late 2018 has triggered some contrarian oversold signals, so there is scope for a tactical bounce.
Stocks
Volatile equity markets that deliver mid-single-digit returns; better potential in Europe and Japan than the U.S.
Bonds
For government bonds, we like the value offered by Treasuries. Our models give a fair-value yield of 2.7 percent for the U.S. 10-year bond. German, Japanese and U.K. bonds are very expensive, with yields well below fair value. The cycle is headwind for all bond markets as inflation pressures build and central banks tighten further—such as the Fed and Bank of England—or move away from extreme stimulus—such as the ECB and Bank of Japan.
Credit
High-yield credit is expensive and losing cycle support, as is typical this late in the cycle, when profit growth slows and there are concerns about defaults.
Currencies
U.S. dollar to have modest upside potential; Japanese yen to be the strongest major currency.
Currencies
The yen is our preferred currency. It’s significantly undervalued, getting cycle support as the BOJ becomes less dovish, and it has contrarian sentiment support from extreme short positions in the market. The euro and British sterling appear undervalued as we move into 2019. The recovery in European economic indicators should support the euro. Sterling will be volatile around the Brexit negotiations but should rebound if a deal is agreed with Europe. It has more upside potential than the euro.
Emerging Markets
We like the value offered by emerging-markets equities, but the threat of trade wars, China slowing, and further U.S. dollar strength keeps us at a neutral allocation. A stronger contrarian signal that investors are turning negative on emerging markets would be a reason to increase allocations.
Macro View
Synchronisation is back, diversify out of the dollar. We see no reason to upgrade global risk now, and believe the best time to position for the next U.S. recession should become more apparent in the latter part of 2019.
Macro View
We see limited potential for capital gains again in 2019, due to a combination of headwinds: most financial assets remain rather expensive, with the exception of the Treasury and inflation markets, and some emerging-market assets (especially China); the Fed will continue to up the price of money and draw liquidity off the global economy while debt has never been higher; and this time, with President Trump having lost his majority in the House of Representatives, the probability of another fiscal boost is extremely low.
Multi Asset
Market conditions should, nevertheless, differ somewhat to those of 2018 in several aspects. 2019 is set to be a year of economic re-convergence and no longer a G1-only story. The symmetry of the Fed’s profile should lead market anticipations to swing from fear of more tightening and flattening to fear of less tightening and bull steepening. Meanwhile, the expensive dollar should return to its structural downward trajectory initiated in early 2017 and growth stocks should continue to de-rate. We continue to recommend heavy exposure to 10-year Treasuries.
Multi Asset
Going forward, our strategists expect the U.S. dollar rally to fade as the market’s attention turns to the end of the economic cycle in America, as well as the looming fiscal and trade deficit. If markets indeed follow this script, commodity prices could find themselves relatively better supported, even going into the end of the cycle.
Stocks
We see downside potential to global equity indexes for the next 12 months, with poor performances likely to be concentrated in the second half as investors discount the next U.S. recession.
Stocks
A short-term rebound in the eurozone economy after several disappointing quarters could be a support for the eurozone indexes. However, we see limited equity upside potential as we expect earnings expectations to continue to be revised down. In the second half, eurozone investors are likely to turn their attention to ECB rate hikes (we anticipate a September hike) in addition to cyclical concerns in the U.S.
Stocks
It will be necessary to adapt portfolios and prepare for central banks in Europe and later Japan starting to unwind QE, while both economies recover—we reweight the euro (+7.5 points to 38.5 percent) and the yen (+5 points to 15.5 percent), mainly through equities. Exposure to the value style is a good way to benefit from the central banks’ exit in both regions.
Commodities
The fundamentals for metals remain constructive and are centered on broadly balanced supply/demand, falling inventories, smelting bottlenecks and moderate demand. Macro sentiment remains negative amid slowing global/China growth and rising protectionism/trade wars. Were it not for the negative macro headwinds prices would be a good deal higher. We are bullish on aluminium prices. Copper prices remain under pressure from negative macro sentiment, but the fundamental supply/demand situation points to a decidedly bullish price outlook. Despite the 30% price decline since the peak in February, we remain neutral on the outlook for zinc prices. Nickel remains our preferred base metal.
Commodities
While recent price action is likely overdone on many markets, prices for most industrial commodities are unlikely to rise back above this year’s peak. Price volatility should continue to normalize at higher levels for many commodities.
Commodities
We are moderately bullish on crude oil prices, premised on the fact that the recent sell-off is likely to be partially reversed as Saudi Arabia and OPEC seek to balance the market in 2019. Gold prices could decouple from U.S. monetary policy in 2019 and be buoyed by speculative inflows.
Stocks | Emerging Markets
Small-cap international firms with a greater percentage of domestic sales stand to benefit both from an uptick in local demand for their products and services and cost reductions. Smaller companies are also less likely than large caps to be caught in the crossfire of protectionism. The recent downturn has created potential value opportunities. Emerging-market small caps are trading at a larger discount to U.S. small caps than historically, while international developed small caps are trading right at their 10-year median.
Macro View
Slower global economic growth, higher volatility, less accommodative monetary policies and falling earnings likely mean lower returns. However, the risk of a recession, particularly inhe U.S., remains quite low. This should provide a backstop for market multiples. Discerning investors may be able to uncover a greater number of high quality investment opportunities.
Multi Asset
Target quality over quantity of growth. Get defensive in bonds. Focus on fiscal policy beneficiaries.
Stocks
Adding more quality companies with high profit margins and healthy balance sheets at a reasonable price may provide more resilience and cushion some downside risks.
Bonds
With rates rising and record high duration risk, we favor short-duration corporate exposures and floating rates structures to lower interest rate sensitivity and deliver a more optimal yield and duration profile. This may lead to improved risk-adjusted performance and less drawdown than the broader fixed-income market.
Credit
Investors interested in boosting yield without taking too much credit risk or duration induced downside risks may be better served by a one- to three-year corporate bond exposure than one- to five-year corporate (compensation for the four- to five-year corporate bucket provides little pickup in yield for the extended duration). An active short-duration strategy may also be ideal to balance yield, duration and credit risks across many different bonds.
Emerging Markets
Chinese equity valuations are attractive, as on a relative basis they are trading in the bottom 10th decile below their historical discount to U.S. stocks. They seem to ben a supportive position to rebound if the Chinese government takes the fiscal policy sugar-rush path in this downhill climb.
Commodities
Adding gold exposure to a portfolio may help moderate the impact of market volatility and reduce portfolio drawdown. Gold can increase portfolio diversification, mitigate tail risk and enhance long-term returns.
Outlier Scenarios
Japan’s huge and mounting government debt burden could finally lead to a crisis that some commentators have expected for 15 years or more.
Macro View
The UK continues to be politically convulsed by Brexit, but our view of the likely outcome should leave growth relatively unaffected once the uncertainty is reduced in a few months’ time.
Macro View
Recent relief has been provided to China by some de-escalation of the trade war, but only modest policy stimulus is expected, and together with the benefit of a much cheaper yuan this should revive growth in the second half of 2019 after a slow first half.
Macro View
Beijing will tolerate slower growth in 2019. Recent macro data confirms our view that market expectation of China relying on old-style credit easing and tried-and-tested fiscal measures to prop up the economy is misplaced.
Macro View
The euro area cycle is not over. The sharp loss of momentum in the eurozone this year has raised concerns that the EA cycle is fast-approaching an end. Having contracted in the third quarter, the risk of a technical recession is high in Germany and Italy. But we think the while the cycle is maturing, there is ample room to expand further.
Macro View
A more severe escalation of trade war with China would significantly raise the chances of a 2020 recession in the U.S., driven by an overvalued dollar.
Multi Asset
The risks are biased to the downside, though trade war resolution would be a big plus. On the other hand, the trade war could easily move from luke-warm to hot, and this would hurt stock prices and aggravate the negative aspects of the world economy
Multi Asset
U.S. markets remain volatile because the rising political cacophony, in the U.S. and globally, will leave few openings for investors to separate signal from noise.
Credit
CLOs have been an important source of non-bank financing for firms. The rise of money market yields and apprehension about the future together should force a repricing of these vehicles to ensure a sufficient supply of investment capital. Firms dependent on this financing will face a meaningfully positive cost of capital for the first time in 10 years.
Currencies
More debt needs to be financed with the Fed buying less of it. The needed pull of foreign capital will keep the dollar on the strong side and raise real term yields.
Emerging Markets
We have become modestly bullish on EM prospects – they could be bottoming out, following the severity of their downswing and the oil price slump. But their current-account deficits have been huge for a dozen years now, so debts are large as well as deficits, meaning some normalization of dollar interest rates is also a problem. While their FX rates may have adjusted, the associated cutbacks of domestic demand will continue to affect world trade into 2019.
Outlier Scenarios
In a scenario where U.S. inflation rises rapidly, the Fed is forced to hike rates at each FOMC meeting. This leads to a flat or inverted Treasury yield curve by mid-2019, and an equity market selloff: U.S. recession starts in early 2020. U.S. stocks lose 10 percent to 15 percent. U.S. high yield loses 6 to 9 percent. EURUSD to 1.10 or below.
Macro View
Political and individual corporate risks will inevitably surface. Most, however, will prove idiosyncratic to individual countries and sectors, and can be avoided through diversification across a broad range of market drivers.
Macro View
Volatility has increased and drawdowns are becoming more commonplace. Investors should expect more of the same in 2019, as markets begin to try and anticipate an end to the cycle.
Multi Asset
Our view is that, on balance, overweight equity exposure, combined with relative value trades, and portfolio hedges, is the right positioning for the start of 2019. We expect continued volatility: economic growth is slowing, central banks are tightening policy, and political risks all pose challenges, making hedging prudent.
Multi Asset
In a scenario where global economic growth slows but remains solid, while ongoing trade tensions, monetary tightening, and uncertainty about growth keep volatility high: U.S. and European equities gain up to 5 percent, EURUSD 1.15-1.20.
Multi Asset
In a scenario where U.S.-China trade disputes induce a slowdown in China, considerable uncertainty, and a rerouting of global trade, more countries will start to feel pain via disrupted supply chains: U.S. equities lose from 5 to 10 percent, Chinese equities drop 20 to 25 percent. EURUSD around 1.10.
Multi Asset
In a scenario where negotiations between the U.S. and China result in actual progress and a reduction of trade barriers. Although tensions remain high, both countries agree on a trade truce: U.S stocks climb 10 to 15 percent. Chinese shares add 10 to 15 percent. EURUSD to 1.20-1.25.
Multi Asset
In a scenario where Chinese GDP growth returns to a 6.6 to 6.8 percent range, and the current account balance goes back above $100 billion: Chinese equities rally 15 to 20 percent. Emerging-market bonds return 6 to 7 percent. USDCNY to 6.50.
Multi Asset
Look for value and quality. We expect U.S. and emerging-market value to outperform growth, reversing their 2018 underperformance. Quality companies, meanwhile, with higher profitability, lower financial leverage, and less earnings variability than average, should withstand volatility better than the overall market.
Multi Asset
A maturing cycle can be perilous for bond investors as labor markets tighten, corporate leverage increases, and central banks restrict policy. That said, bonds can provide returns and help stabilize portfolios. We see particular opportunities in long-duration U.S. government bonds and Asian high yield. We also favor euro “synthetic credit exposure,” a strategy that offers exposure to corporate credit by selling credit default swaps instead of buying cash bonds. Various investment vehicles, such as notes, can provide access to this market.
Stocks
Consider neglected sectors. Financials could be set to outperform in the U.S. and China, thanks to rate rises and favorable changes in regulations in the former, and to economic stimulus in the latter. The U.S. and European energy sectors also offer value. And we think oil prices will recover in early 2019.
Stocks
Be selective. Amid fading earnings growth investors should focus on companies exposed to secular growth trends, those already pricing in adverse scenarios, or those with a track record of weathering downturns.
Stocks
Euro zone profits are being pressured by higher input costs and exposure to a slowing China. The best opportunities we see are centered in the energy and utilities sectors, in quality and sustainable dividend stocks, and in Swiss real estate funds.
Stocks
Diversify globally. No single region offers a uniquely compelling case. We favor global diversification within equity holdings, which should also help mitigate volatility.
Bonds
Central bank policy is generally well priced by government bonds, but risks remain. At 45 percent of GDP, debt held by non-financial U.S. firms is at its highest on record. We do not expect credit conditions to deteriorate significantly, but fundamentals are likely to continue to worsen. Within developed markets we like long-duration U.S. government bonds and euroynthetic credit exposure.
Currencies
Higher U.S. rates in a maturing cycle have pushed rate differentials to record levels, supporting the dollar. While we expect the greenback to retain its strength in the near term, we think the dollar is likely to depreciate over time as policy normalization gets underway in Europe and Japan.
Emerging Markets
Concerns about rising interest rates, slower Chinese growth, and the U.S.-China trade dispute drove a selloff in emerging markets in 2018. Headwinds and volatility will continue, but opportunities exist. EM value stocks could be poised for a catch-up, while in APAC we see specific opportunities in South Korea, Vietnam, and Chinese “old economy” stocks.
Emerging Markets
With yields now higher and Fed hikes better priced in, we see value in emerging-market dollar sovereign bonds and Asian high yield, and anticipate opportunities in countries enacting investor-friendly reforms, like Brazil.
Commodities
We believe the oil market’s cautious turn is overdone. U.S. sanctions cut a million barrels of Iranian oil from the market at the end of October, a number that will increase. Saudi Arabia has vowed to maintain an equilibrium, but this will push global spare capacity to a 10-year low. And U.S. shale production will be tempered by distribution constraints, with new pipelines only expected to come online in the second half of 2019. On balance, we keep a positive view on crude. Provided OPEC maintains production discipline, we see Brent oil prices at $75 to $80 per barrel.
Commodities
As 2019 proceeds, a weaker dollar, higher equity market volatility, and signs that the Fed is nearing the end of its hiking cycle should act as tailwinds for gold, which we see climbing to $1,300 per ounce in 12 months. As the cycle advances and volatility picks up, some investors may consider buying more gold for its insurance qualities. We think any dip below $1,200 would offer a particularly attractive entry point.
Alternative Assets
The case for holding alternative assets in strategic asset allocations is strong. We seek exposure to low beta and diversified hedge fund strategies, segments of the private market space with reduced leverage and attractive valuations, and select opportunities in impact investing.
Alternative Assets
The advanced stage of the cycle means low rental yields and falling transaction volumes for real estate. Total returns now rely on income rather than capital growth. E-commerce distribution and co-working have supported demand for commercial real estate, but slower growth and/or higher rates could push values lower.
Bonds | Credit
U.K. fixed income returns are likely to be in the 1 percent to 2.5 percent range, annualized over the next decade, marginally higher than last year, driven by rising policy rates and higher yields across maturities as policy normalizes. The outlook for global fixed income returns (excluding sterling assets) is centred around 1 percent to 3 percent, annualized, much lower than the historical average of around 7 percent.
Macro View
Investment outlook: No pain, no gain. With slowing growth, disparate rates of inflation, and continued policy normalisation, periodic bouts of volatility in equity and fixed income markets are likely to persist.
Multi Asset
Vanguard’s outlook for the returns on global stocks and bonds is subdued due to stretched equity valuations and low interest rates. Downside risks are particularly elevated in the equity market. Although we are hardpressed to find compelling evidence of financial bubbles, risk premia for many asset classes appear slim.
Multi Asset
As was the case last year, the risk of a correction for equities and other high-beta assets is projected to be considerably higher than for high-quality fixed income portfolios, whose expected returns over the next five years are positive only in nominal terms.
Stocks
Our near-term outlook for global equity markets remains guarded, but a bear market would not appear imminent given that we do not anticipate a global recession in 2019. Risk-adjusted returns over the next several years are anticipated to be modest at best, given the backdrop of modest growth and the gradual unwinding of accommodative policy.
Stocks
Returns in global equity markets are likely to be about 3 percent to 5 percent for sterling-based investors, slightly down on expected returns this time last year. This also remains significantly lower than the experience of previous decades and of the post-crisis years, when global equities have risen over 10 percent a year since the trough of the market downturn. We do, however, foresee improving return prospects building on slightly more attractive valuations (a key driver of the equity risk premia) combined with higher expected risk-free rates.
Bank of America Merrill Lynch
For 2019, risk-off for stocks and bonds—cash is king.
Bank of America Merrill Lynch
Global profit growth declines. Earnings growth is expected to decline sharply next year, from more than 15 percent to less than 5 percent on a year-over-year basis. The team is bearish stocks, bonds, and the U.S. dollar; bullish cash and commodities; and long on volatility. We expect to turn tactically risk-on in late spring, but to start 2019 with a bearish asset allocation of 50 percent stocks, 25 percent bonds and 25 percent cash.
Barclays
Investment grade and agency mortgage-backed securities over global equities, given our forecast of single-digit equity earnings growth and the view that longer yields will stay close to current levels.
BlackRock
Rising risks call for carefully balancing risk and reward. Exposures to government debt as a portfolio buffer, twinned with high-conviction allocations to assets that offer attractive risk/return prospects.
BlackRock
We prefer stocks over bonds, but our conviction is tempered. In equities, we like quality: cash flow, sustainable growth and clean balance sheets. The U.S. is a favored region, and we see emerging-market equities offering improved compensation for risk.
BNP Paribas
Trade war uncertainty to weigh on equities and emerging markets. With the U.S. trade deficit growing, we expect continued uncertainty regarding China–U.S. trade relations. This will likely add to the drag on global growth and drive up risk premia in global equity markets, particularly the technology sector. Europe and EM are bearing the indirect consequences of this dispute.
Brooks Macdonald
Given our macroeconomic view, the sector-specific headwinds facing bond markets and relative asset-class valuations, we retain our preference for equities over fixed income.
Citigroup
In a stagnation phase (lower real growth, stable/low-flation) there are lower expected equity market returns, and bonds are the asset class outperformers. Volatility stays high. But after a correction it makes sense to be overweight both.
Credit Suisse
Our base case for 2019 foresees only a moderate further increase in U.S. yields. This suggests that U.S. fixed income investors should prepare to lengthen duration. In core bond markets outside America where yields are far lower, duration should remain short. In credit, the risk-return trade-off looks better for high-yield than for investment-grade bonds. Equities should continue to outperform on the back of robust earnings growth. Emerging-market assets should regain ground as long as the risk of U.S. rate hikes and dollar strength abates.
Credit Suisse
Keeping inflation under control is a key driver or risk. The important question is whether inflation will remain benign. If not, the Fed will be seen as behind the curve—bond yields would increase significantly while equities and other risk assets decline substantially. Wage growth will likely be the key driver.
HSBC
The multi-asset team’s base case for 2019 “is neither significant retracement nor rebound for global risk assets,” with equity volatility curves “still subdued and expectations for a more dovish Fed mounting.”
Jefferies
Jefferies does not expect a recession in 2019 but the U.S. yield curve is close to inverting just as earnings growth moderates, forcing a trade-off between equity and bond valuations. The Fed’s balance sheet normalization implies an increasing competition for capital favoring quality. Equally, widening credit spreads will mean higher equity volatility. Our 2019 strategy reflects a mature, not end of, cycle.
Jefferies
The bottom line in Europe is that most bourses have their “investment temperature” or monetary conditions set to loosen and while earnings have been revised down this has already been captured in valuations meaning equities look very cheap versus government bonds.
JPMorgan
The end is not near, but markets will behave like the end of the cycle is at hand. Fed to continue with normalization and Treasury curve to bearishly flatten. Credit is somewhat concerning, but likely to outperform rates. Cash and short-duration should provide strong risk-adjusted returns.
JPMorgan
End game should be priced progressively rather than simultaneously across asset classes, unless investors fear a market liquidity crisis.
JPMorgan
2019 return projections show improvement on 2018 but are still below average. Given better starting valuations, and a no-recession assumption, the best performers in fixed income could be U.S. high-yield and leveraged loans, U.S. cash and gold. Worst could be bunds, euro high-0grade credit and commodities. Equities could return from 2 percent (japan) to 15 percent (U.S.).
JPMorgan
We still think it’s too early for the great rotations from equities into bonds, from cyclical into defensive stocks and from growth into value and quanlity. Peak EPS growth and the JPM recession risk model are two tools for timing these switches at some point in 2019.
JPMorgan Asset Management
U.K. investors face the greatest conundrum. A resolution to the current Brexit impasse will be good for the economy, but is likely to challenge Gilts and internationally focused stocks in 2019.
Lombard Odier
While the U.S. dollar looks as though it has peaked, equity valuations still look promising, despite the inevitable volatility ahead and the risk of a U.S. recession is not on the horizon so far. There are opportunities for the prudent investor to take advantage of an environment that overall remains relatively supportive.
Lombard Odier
We continue to favor equities over high beta fixed income segments, which are more sensitive to rates as well as potentially suffering from illiquidity. Equity fundamentals are still solid and euro zone, Japanese and emerging markets still look cheap.
Morgan Stanley
We double upgrade emerging markets from underweight to overweight and downgrade U.S. stocks to underweight. We like value over growth and see materials as a top sector. We target the S&P 500 at 2,750 by end-2019.
Morgan Stanley
Our trade portfolio is modestly long stocks, and benefits materially from a weaker dollar and lower rates. We like long rest-of-world versus U.S. stocks, global value versus growth and Stoxx miners. We are short USDSEK. We like Treasuries versus gilts and short German Schatz (two year). We are long emerging-market risk via a basket of local bonds (FX-unhedged) and long EM credit versus U.S. high yield.
Morgan Stanley
Strategically, we remain defensively positioned: Equal-weight equities and government bonds, underweight credit and overweight cash.
Natwest
Any Italy contagion most likely to be felt in credit, currencies.
Natwest
Brexit: Keep calm and buy sterling, sell pound-denominated fixed income.
Oppenheimer Funds
Stocks will outperform bonds, again. International and emerging-market stocks will do well. U.S. growth stocks will outperform U.S. value stocks, again.
Oppenheimer Funds
Emerging-market local bonds will offer a better risk and return profile than U.S. corporate bonds.
Societe Generale
Market conditions should, nevertheless, differ somewhat to those of 2018 in several aspects. 2019 is set to be a year of economic re-convergence and no longer a G1-only story. The symmetry of the Fed’s profile should lead market anticipations to swing from fear of more tightening and flattening to fear of less tightening and bull steepening. Meanwhile, the expensive dollar should return to its structural downward trajectory initiated in early 2017 and growth stocks should continue to de-rate. We continue to recommend heavy exposure to 10-year Treasuries.
Societe Generale
Going forward, our strategists expect the U.S. dollar rally to fade as the market’s attention turns to the end of the economic cycle in America, as well as the looming fiscal and trade deficit. If markets indeed follow this script, commodity prices could find themselves relatively better supported, even going into the end of the cycle.
State Street
Target quality over quantity of growth. Get defensive in bonds. Focus on fiscal policy beneficiaries.
TS Lombard
The risks are biased to the downside, though trade war resolution would be a big plus. On the other hand, the trade war could easily move from luke-warm to hot, and this would hurt stock prices and aggravate the negative aspects of the world economy
TS Lombard
U.S. markets remain volatile because the rising political cacophony, in the U.S. and globally, will leave few openings for investors to separate signal from noise.
UBS
Our view is that, on balance, overweight equity exposure, combined with relative value trades, and portfolio hedges, is the right positioning for the start of 2019. We expect continued volatility: economic growth is slowing, central banks are tightening policy, and political risks all pose challenges, making hedging prudent.
UBS
In a scenario where global economic growth slows but remains solid, while ongoing trade tensions, monetary tightening, and uncertainty about growth keep volatility high: U.S. and European equities gain up to 5 percent, EURUSD 1.15-1.20.
UBS
In a scenario where U.S.-China trade disputes induce a slowdown in China, considerable uncertainty, and a rerouting of global trade, more countries will start to feel pain via disrupted supply chains: U.S. equities lose from 5 to 10 percent, Chinese equities drop 20 to 25 percent. EURUSD around 1.10.
UBS
In a scenario where negotiations between the U.S. and China result in actual progress and a reduction of trade barriers. Although tensions remain high, both countries agree on a trade truce: U.S stocks climb 10 to 15 percent. Chinese shares add 10 to 15 percent. EURUSD to 1.20-1.25.
UBS
In a scenario where Chinese GDP growth returns to a 6.6 to 6.8 percent range, and the current account balance goes back above $100 billion: Chinese equities rally 15 to 20 percent. Emerging-market bonds return 6 to 7 percent. USDCNY to 6.50.
UBS
Look for value and quality. We expect U.S. and emerging-market value to outperform growth, reversing their 2018 underperformance. Quality companies, meanwhile, with higher profitability, lower financial leverage, and less earnings variability than average, should withstand volatility better than the overall market.
UBS
A maturing cycle can be perilous for bond investors as labor markets tighten, corporate leverage increases, and central banks restrict policy. That said, bonds can provide returns and help stabilize portfolios. We see particular opportunities in long-duration U.S. government bonds and Asian high yield. We also favor euro “synthetic credit exposure,” a strategy that offers exposure to corporate credit by selling credit default swaps instead of buying cash bonds. Various investment vehicles, such as notes, can provide access to this market.
Vanguard
Vanguard’s outlook for the returns on global stocks and bonds is subdued due to stretched equity valuations and low interest rates. Downside risks are particularly elevated in the equity market. Although we are hardpressed to find compelling evidence of financial bubbles, risk premia for many asset classes appear slim.
Vanguard
As was the case last year, the risk of a correction for equities and other high-beta assets is projected to be considerably higher than for high-quality fixed income portfolios, whose expected returns over the next five years are positive only in nominal terms.
Bank of America Merrill Lynch
S&P 500 Index to peak. Earnings growth is also likely to slow in the U.S., though the near-term outlook remains somewhat positive. The S&P 500 Index is expected to peak at or slightly above 3,000 before settling in at a year-end target of 2,900.
Bank of America Merrill Lynch
The U.S. equity strategists’ view is to be overweight health care, technology, utilities, financials and industrials, and underweight consumer discretionary, communication services and real estate.
Barclays
Can European equity indexes close the gap with the U.S., after American shares massively outperformed European stocks in 2018? Such a reversal is unlikely, given growth differentials, European political risk, and the high beta of European equities to U.S. weakness.
BlackRock
We steer away from areas with limited upside but hefty downside risk, such as European stocks.
BNP Paribas
In equity markets, we expect the focus to shift from higher rate concerns to slower growth, diminishing margins and weaker earnings. We think expensive market valuations will be challenged. With equity markets no longer in a bullish trend, we may finally see better performances in Europe, where valuations are less stretched.
Brooks Macdonald
Within equities, we continue to prefer growth assets, particularly those linked to our favored technology and healthcare themes, over value.
Citigroup
In Equities, upgrade neutral EM allocation to +1, but reduce Japanese equities to neutral, leaving overall equity weight at +1.
Credit Suisse
As we look to 2019, our base scenario suggests that equities should remain at overweight. In line with late cycle patterns, growth stocks should generally continue to outperform. In Europe, depressed financial stocks should benefit from rising yields, while in the U.S., the flattening yield curve will likely weigh on the sector.
Credit Suisse
Tech and healthcare are key market drivers or risks. An important question for investors is whether growth in the tech sector will remain strong, with the emergence of new areas of focus such as virtual reality and artificial intelligence. A second key sector that is likely to influence the fate of equity markets is healthcare, with investors keeping an eye on gene therapy and other innovative treatments.
Goldman Sachs
Corporations will once again be the largest buyer of equities in 2019. Corporate demand for stocks will rise by 17 percent next year driven by share buybacks and M&A but offset somewhat by a potential record-breaking year in share issuance. Foreign investors will likely also be net buyers of U.S. stocks given a modestly weakening dollar, and equity purchases through ETFs should persist.
Goldman Sachs
Mutual funds, pensions, and households will remain net sellers of stocks. Investor outflows from active mutual funds will continue to weigh on mutual fund equity demand. Pension funds and households generally sell equities during periods of rising interest rates and decelerating economic growth, respectively.
Jefferies
As the Fed’s balance sheet normalization continues it will mean further de-risking as excess liquidity is mopped up. However, don’t short the S&P 500. We expect buybacks will continue to squeeze EPS through 2019. FCF generation is still strong across a range of sectors. We expect the S&P 500 to reach 2,900—slightly lower than our 2018 target of 2,950.
Jefferies
An upside risk to our earnings forecast would come from a decline in the dollar, a suspension of balance sheet normalization and a slower pace of rate hikes in 2019.
Jefferies
A downside risk to our numbers would come from the U.S. yield curve shifting upwards on higher inflation pressures.
Jefferies
The bottom line is that a strong dollar and rising cash rates are creating competition for dollar capital. Equities offering high FCF yield and a “cheap growth multiple” ought to do reasonably well. Equities are long duration assets and convertible bonds are the best equity instrument in a rising interest rate environment.
JPMorgan
U.S./global recession is not inevitable over the next one to two years, nor is there only downside left for equities. Before this cycle is finished, equities can still deliver a period of significant outperformance versus fixed income.
JPMorgan Asset Management
Corporate earnings growth should also converge toward a slower, yet still positive rate of growth. Equity investors may wish to seek more regionally diversified portfolios and to reduce risk by focusing on quality, larger cap stocks in historically defensive sectors.
Lombard Odier
Despite strong earnings, tech valuations have fallen significantly. Recent profit warnings from Apple’s supply chain provide interesting entry points to a much less crowded trade and investors will return to a sector that offers both growth and defensive characteristics.
Macquarie
Global equity prices are likely to remain choppy for much of the year, but to end 2019 modestly higher.
Morgan Stanley
In equities, emerging markets and Japan are our most preferred regions, and U.S. remains our least-favored region.
Pimco
We believe equity markets will remain volatile, favoring cautious positioning overall and a focus on high quality defensive growth and minimal exposure to cyclical equity beta. We continue to favor more profitable U.S. equity markets to the rest of the world and prefer high quality large-cap equities at this stage in the cycle, while we wait for select opportunities to present themselves over the cyclical horizon.
Russell Investments
Volatile equity markets that deliver mid-single-digit returns; better potential in Europe and Japan than the U.S.
Russell Investments
Our cycle, value and sentiment investment process results in an overall neutral view on global equities.
Russell Investments
We have an underweight preference for U.S. equities, mostly driven by expensive valuation. The cycle is broadly neutral but is likely to be under downward pressure later in 2019. The sell-off in late 2018 has triggered some contrarian oversold signals, so there is scope for a tactical bounce.
Russell Investments
We’re more positive on non-U.S. developed equities. Valuations in Japan and Europe are reasonable, and the cycle should be a modest tailwind given that we believe industry consensus expectations are too pessimistic.
Societe Generale
We see downside potential to global equity indexes for the next 12 months, with poor performances likely to be concentrated in the second half as investors discount the next U.S. recession
Societe Generale
A short-term rebound in the eurozone economy after several disappointing quarters could be a support for the eurozone indexes. However, we see limited equity upside potential as we expect earnings expectations to continue to be revised down. In the second half, eurozone investors are likely to turn their attention to ECB rate hikes (we anticipate a September hike) in addition to cyclical concerns in the U.S.
Societe Generale
It will be necessary to adapt portfolios and prepare for central banks in Europe and later Japan starting to unwind QE, while both economies recover—we reweight the euro (+7.5 points to 38.5 percent) and the yen (+5 points to 15.5 percent), mainly through equities. Exposure to the value style is a good way to benefit from the central banks’ exit in both regions.
State Street
Small-cap international firms with a greater percentage of domestic sales stand to benefit both from an uptick in local demand for their products and services and cost reductions. Smaller companies are also less likely than large caps to be caught in the crossfire of protectionism. The recent downturn has created potential value opportunities. Emerging-market small caps are trading at a larger discount to U.S. small caps than historically, while international developed small caps are trading right at their 10-year median.
State Street
Adding more quality companies with high profit margins and healthy balance sheets at a reasonable price may provide more resilience and cushion some downside risks.
UBS
Be selective. Amid fading earnings growth investors should focus on companies exposed to secular growth trends, those already pricing in adverse scenarios, or those with a track record of weathering downturns.
UBS
Diversify globally. No single region offers a uniquely compelling case. We favor global diversification within equity holdings, which should also help mitigate volatility.
UBS
Consider neglected sectors. Financials could be set to outperform in the U.S. and China, thanks to rate rises and favorable changes in regulations in the former, and to economic stimulus in the latter. The U.S. and European energy sectors also offer value. And we think oil prices will recover in early 2019.
UBS
Euro zone profits are being pressured by higher input costs and exposure to a slowing China. The best opportunities we see are centered in the energy and utilities sectors, in quality and sustainable dividend stocks, and in Swiss real estate funds.
Vanguard
Our near-term outlook for global equity markets remains guarded, but a bear market would not appear imminent given that we do not anticipate a global recession in 2019. Risk-adjusted returns over the next several years are anticipated to be modest at best, given the backdrop of modest growth and the gradual unwinding of accommodative policy.
Vanguard
Returns in global equity markets are likely to be about 3 percent to 5 percent for sterling-based investors, slightly down on expected returns this time last year. This also remains significantly lower than the experience of previous decades and of the post-crisis years, when global equities have risen over 10 percent a year since the trough of the market downturn. We do, however, foresee improving return prospects building on slightly more attractive valuations (a key driver of the equity risk premia) combined with higher expected risk-free rates.
BlackRock
In fixed income, we have upgraded U.S. government debt as ballast against any late-cycle risk-off events. We prefer short- to medium-term maturities, and are turning more positive on duration. We favor up-in-quality credit.
BNP Paribas
While capacity constraints are emerging in many countries, the key risk is slower growth, which we expect to limit the pace of monetary tightening globally. We think the 10-year Treasury yield is unlikely to rise much beyond 3.5 percent, thereby keeping the rate curve fairly flat for most of 2019. While we expect Bund yields to rise in 2019 with the end of the ECB’s public-sector purchase program, we think this rise in the 10-year will be capped at 1 percent at the end of 2019.
Brooks Macdonald
We expect fixed income markets to be weighed by slowly tightening global monetary policy. Furthermore, the Treasury market faces the headwind of rising U.S. government debt issuance in the second half of 2019 and this could have negative ramifications for bond markets globally.
Citigroup
In the government bond space, Treasuries are downgraded modestly to +1 after the rally in the market, but the bank still thinks the cycle favors fixed-income returns. We raise periphery euro-area sovereigns a notch to -1 as Italy risks are more contained and political change in 2019 could generate a pullback in spreads.
Credit Suisse
The key implication of an expected flattening of the U.S. yield curve is that dollar-based investors should prepare to extend duration in 2019. For bonds in other hard currency regions such as Japan, the Eurozone and Switzerland: As yields in most markets remain extremely low, returns are likely to be weak or even negative in 2019.
HSBC
The longer-term risks still look biased to lower rates. We expect the Fed to end its tightening cycle after two more hikes in 2019 and to then ease its policy in 2020. We continue to forecast a 15 basis-point rise in the ECB’s deposit rate in September 2019 as the central bank remains confident inflation is rising towards its target and has brushed aside growth concerns. We are bearish on core rates around the second quarter and forecast the 10-year German yield to rise towards 50 basis points by end-2019.
JPMorgan
Rates curve to continue to bearishly flatten and eventually invert in the second half. Look for two- and 10-year yields to reach 3.7% and 3.6%, respectively, in the fourth quarter. FRA/OIS should be biased narrower; overweight Treasuries versus OIS. TIPS breakevens should widen modestly.
JPMorgan
Look for net issuance across U.S. fixed income to rise to $2.06 trillion in 2019, but ex-Treasury supply should decline to $941 billion. Institutional investor demand for U.S. debt securities was weak in 2018 and will likely remain weak in 2019.
Lombard Odier
We are getting closer to the peak in real rates. We still expect relatively low returns for bonds but begin opportunistically reducing our long-held underweight in sovereign bonds while maintaining a short duration for now.
Macquarie
Long rates in the U.S. and Europe are likely to drift higher over the course of the year, with the U.S. 10-year approaching 3.75 percent by year end, and the German 10-year to 1.25 percent. Japanese long rates will remain under the control of the BOJ.
Morgan Stanley
Narrowing growth and policy differentials should drive convergence in U.S. versus European rates. Curves should flatten across the G-4. We see the U.S. 10-year falling to 2.75 percent by end-2019.
Morgan Stanley
In rates, we prefer U.S. Treasuries and emerging-market local rates over bunds, gilts and JGBs.
Natwest
Market volatility still too low; rates volatility should rise. Steeper curves are our highest conviction fixed-income view in 2019. Front-ends should offer good tactical and strategic trades.
Natwest
Buy some upside inflation, just in case.
Pimco
Modestly underweight duration, overweight TIPS. Curve, long the belly, short the long end. Underweight European peripheral risk.
Russell Investments
For government bonds, we like the value offered by Treasuries. Our models give a fair-value yield of 2.7 percent for the U.S. 10-year bond. German, Japanese and U.K. bonds are very expensive, with yields well below fair value. The cycle is headwind for all bond markets as inflation pressures build and central banks tighten further—such as the Fed and Bank of England—or move away from extreme stimulus—such as the ECB and Bank of Japan.
State Street
With rates rising and record high duration risk, we favor short-duration corporate exposures and floating rates structures to lower interest rate sensitivity and deliver a more optimal yield and duration profile. This may lead to improved risk-adjusted performance and less drawdown than the broader fixed-income market.
UBS
Central bank policy is generally well priced by government bonds, but risks remain. At 45 percent of GDP, debt held by non-financial U.S. firms is at its highest on record. We do not expect credit conditions to deteriorate significantly, but fundamentals are likely to continue to worsen. Within developed markets we like long-duration U.S. government bonds and euroynthetic credit exposure.
Vanguard
U.K. fixed income returns are likely to be in the 1 percent to 2.5 percent range, annualized over the next decade, marginally higher than last year, driven by rising policy rates and higher yields across maturities as policy normalizes. The outlook for global fixed income returns (excluding sterling assets) is centred around 1 percent to 3 percent, annualized, much lower than the historical average of around 7 percent.
Bank of America Merrill Lynch
Credit cycle continues, despite widening spreads and flattening curves. Globally, the credit markets face high levels of episodic volatility with shrinking supply and quantitative tightening putting upward pressure on investment grade and high yield bond spreads. In the U.S., total returns of 1.42 percent are forecast for high grade corporate bonds and 2.4 percent for high yield. The U.S.-leveraged loan market remains a bright spot, with total returns of between 4 and 5 percent.
Barclays
The credit cycle will not end in 2019 and the chances remain low even for early 2020. Expect spreads to move wider in the second half of 2019, since higher-quality credit spreads typically increase four to five quarters ahead of a recession. Modest spread widening is expected across most credit markets and therefore total returns to be firmly in the black. In excess return terms, expect Europe to be just above the U.S., but if the rate moves play out, dollar total returns will likely be superior.
BNP Paribas
The one well-flagged risk is the U.S. corporate sector’s leverage level and the fact that corporate America will face a large refinancing burden, starting in 2019 and worsening in 2020, 2021 and 2022. This will take place in a world of higher yields and weaker margins. We expect defaults to pick up in 2019 and accelerate in 2020, leading to a more marked economic slowdown in that year.
Brooks Macdonald
Within fixed income we are most cautious on credit markets. There has been a significant increase in corporate leverage over the last few years, particularly among smaller-capitalisation companies, as businesses have sought to take advantage of the low interest rate environment to take on debt. Meanwhile, there has been a simultaneous deterioration in the quality of bond issuance throughout credit markets. Both of these factors add risk to the sector, in which valuations are already high.
Citigroup
In credit overall, remain underweight, with no changes to allocations. Cash remains at neutral.
Credit Suisse
As long as the global economy avoids a contraction in 2019, as we assume, our analysis suggests that credit should outperform Treasuries. U.S. investment grade bonds seem less attractive; although cash positions of U.S. corporations remain quite high, leverage has increased substantially since 2014 due to stock buybacks and higher investment spending. Senior loans still seem attractive in Europe as bank asset quality should continue to improve. However, a specific tail risk for European credit is a loss of fiscal discipline in Italy and rising concerns regarding a possible Italian exit from the euro.
HSBC
We downgrade our view to mildly bearish on both investment-grade and high-yield dollar-denominated credit from neutral and forecast reduced corporate bond issuance in 2019.
Jefferies
Don’t fear an inversion. Our analysis shows that it is not a perfect timing tool and the Fed’s QE program has distorted the conclusions. Credit spreads have been too tight and any widening must be seen in the context of “normalization.” That said, higher spreads = higher volatility.
JPMorgan
Investors’ fears about credit are somewhat overblown, but we don’t expect returns to be particularly compelling in 2019 either. Look for spread widening across sectors. MBS spreads have widened 20 basis points in 2018 and valuations appear attractive. Overweight MBS versus Treasuries.
Lombard Odier
We remain underweight credit and hold no high-yield bonds.
Morgan Stanley
Be defensive on securitized credit. We forecast wider spreads across securitized credit and sharp underperformance in BBs. Agency MBS spreads widen, but outperform investment grade credit.
Morgan Stanley
In credit, we prefer emerging-market sovereign credit to developed-market and securitized credit.
Oppenheimer Funds
The best-case scenario for most U.S. fixed income sectors will be coupon-like returns.
Pimco
We continue to be concerned about crowded credit positioning in the market and credit market structure/illiquidity, which could lead to significant overshooting in the event of a more generalized bout of credit market weakness. Cautious on generic corporate credit, but see relative value in financials and mortgages.
Russell Investments
High-yield credit is expensive and losing cycle support, as is typical this late in the cycle, when profit growth slows and there are concerns about defaults.
State Street
Investors interested in boosting yield without taking too much credit risk or duration induced downside risks may be better served by a one- to three-year corporate bond exposure than one- to five-year corporate (compensation for the four- to five-year corporate bucket provides little pickup in yield for the extended duration). An active short-duration strategy may also be ideal to balance yield, duration and credit risks across many different bonds.
TS Lombard
CLOs have been an important source of non-bank financing for firms. The rise of money market yields and apprehension about the future together should force a repricing of these vehicles to ensure a sufficient supply of investment capital. Firms dependent on this financing will face a meaningfully positive cost of capital for the first time in 10 years.
Vanguard
U.K. fixed income returns are likely to be in the 1 percent to 2.5 percent range, annualized over the next decade, marginally higher than last year, driven by rising policy rates and higher yields across maturities as policy normalizes. The outlook for global fixed income returns (excluding sterling assets) is centred around 1 percent to 3 percent, annualized, much lower than the historical average of around 7 percent.
Bank of America Merrill Lynch
Cash gets competitive. With cash yields higher than dividend yields for 60 percent of the S&P 500 already, cash becomes even more competitive in 2019. This year boils down to a strategy of buying sources of cash and selling users of cash.
Bank of America Merrill Lynch
A weaker dollar is expected in 2019, against a stronger euro and Japanese yen. The strength of the dollar will depend heavily on evolution of the trade relationship between China and the U.S., which in the short term may mean selling the dollar against an insulated currency such as the British pound or Swiss franc.
BNP Paribas
Dollar strength to fade: Higher short-term real yields in the U.S. and an ongoing growth differential between the U.S. and the rest of world are likely to continue to support the dollar near term. This strength will continue to weigh on emerging markets, especially in light of the ongoing slowdown in China. In the medium term, however, we expect the dollar to weaken as focus returns to the trade deficit and the Fed shifts to a neutral bias.This should bring some much needed relief to EM.
Citigroup
In credit overall, remain underweight, with no changes to allocations. Cash remains at neutral.
Credit Suisse
Stable dollar. With Federal Reserve tightening well advanced, and the European Central Bank as well as the Bank of Japan gradually catching up, chances are good that the dollar will be stable. That should ease the strain on economies depending on cheap dollar funding, and help stabilize financial markets.
Lombard Odier
We expect 2019 to bring broad-based dollar depreciation due to the declining effect of 2018’s expansionary fiscal policy, followed by fading U.S. growth.
Lombard Odier
We believe the U.K. will avoid a hard or no deal Brexit, because Theresa May eventually gets a withdrawal agreement through Parliament, or because the country halts the process unilaterally. Both scenarios would be pound positive.
Macquarie
The dollar should remain supported in the first half, but we expect it to peak and then decline a little in the second half as U.S. growth catches down to the rest of the world and the market begins to focus on the end of Fed tightening and a possible ECB hike.
Morgan Stanley
We forecast a major peak in the dollar and outperformance by European currencies (SEK, GBP, EUR). In emerging markets, CEEMEA outperforms, while MXN and low-yielding Asia lag.
Natwest
Twin deficits will weigh on the U.S. dollar in 2019. Emerging-market currencies have pockets of value.
Oppenheimer Funds
The U.S. dollar will be stable or weaker.
Russell Investments
U.S. dollar to have modest upside potential; Japanese yen to be the strongest major currency.
Russell Investments
The yen is our preferred currency. It’s significantly undervalued, getting cycle support as the BOJ becomes less dovish, and it has contrarian sentiment support from extreme short positions in the market. The euro and British sterling appear undervalued as we move into 2019. The recovery in European economic indicators should support the euro. Sterling will be volatile around the Brexit negotiations but should rebound if a deal is agreed with Europe. It has more upside potential than the euro.
TS Lombard
More debt needs to be financed with the Fed buying less of it. The needed pull of foreign capital will keep the dollar on the strong side and raise real term yields.
UBS
Higher U.S. rates in a maturing cycle have pushed rate differentials to record levels, supporting the dollar. While we expect the greenback to retain its strength in the near term, we think the dollar is likely to depreciate over time as policy normalization gets underway in Europe and Japan.
Bank of America Merrill Lynch
Emerging markets are a gamble. Assets are cheap and under-owned and could be a big winner in 2019 as the dollar weakens, yet EM remains highly vulnerable to spillover effects of U.S.-China trade tensions. Bullish Brazil and Russia, bearish Mexico.
Barclays
Recommend caution on emerging markets. While developing-nation dollar debt looks attractive, currency-sensitive assets such as equities and local debt are likely to struggle, given our forecast that emerging-market currencies have more downside against the U.S. dollar.
Barclays
For hard currency emerging-market corporates, expect widening across the board. China has become by far the biggest portion of the EM corporate universe; expect heightened volatility, as well as high issuance to address a large maturity wall. LatAm is also likely to come under pressure.
BNP Paribas
Dollar strength to fade: Higher short-term real yields in the U.S. and an ongoing growth differential between the U.S. and the rest of world are likely to continue to support the dollar near term. This strength will continue to weigh on emerging markets, especially in light of the ongoing slowdown in China. In the medium term, however, we expect the dollar to weaken as focus returns to the trade deficit and the Fed shifts to a neutral bias.This should bring some much needed relief to EM.
Citigroup
In Equities, upgrade neutral EM allocation to +1, but reduce Japanese equities to neutral, leaving overall equity weight at +1.
Credit Suisse
At the end of 2018, there were indications that the internal and external balance sheets of EM nations was being restored, in part with the support of the International Monetary Fund. If that process continues in 2019, emerging markets can recover and global investors would benefit.
HSBC
We recommend an overall short-duration stance on emerging-market local rates for 2019, capturing sizable carry at the front-end of the yield curves in Indonesia, India and Mexico. Strongest conviction in local bonds is in Brazil, Russia, Indonesia and India among high-yielders, while China and Korea are top picks within low-yielders. We like external debt in Brazil, Egypt and Qatar, and we expect emerging-market external debt to outperform local debt in 2019.
HSBC
The outlook for emerging-market currencies looks less negative in 2019 as contagion pressures have moderated amid rising defenses. We favor quality over quantity, particularly when it comes to the high-yielding currencies. Weakening growth and some idiosyncratic risks prevent us from liking a broader range of currencies. We prefer CNY, IDR, PHP, SGD and THB in Asia; CZK and ILS in CEEMEA; and BRL, CLP and PEN in LatAm.
JPMorgan
We think one should be buying into emerging markets now, and believe that the peaking in U.S.-rest-of-world growth differential might constrain the dollar. Specifically, emerging-market equities are currently trading even cheaper than at the low point in 2015-2016, when China appeared even worse than currently.
Lombard Odier
Emerging markets are priced for very negative growth, yet enjoy broadly sound account balances, adequate foreign exchange reserves and still-young economic cycles. Fiscal stimulus in China, a dollar that has peaked and a temporary trade truce should all support investor confidence.
Lombard Odier
As we move into 2019, we expect emerging currencies to stabilize and prefer currencies with strong external balances, with reforms underway and low dependence on the dollar.
Morgan Stanley
Emerging market fixed income is a preferred source of carry. An improved currency outlook means we now prefer local currency over hard currency.
Morgan Stanley
In equities, emerging markets and Japan are our most preferred regions, and U.S. remains our least-favored region.
Morgan Stanley
In credit, we prefer emerging-market sovereign credit to developed-market and securitized credit.
Natwest
Twin deficits will weigh on the U.S. dollar in 2019. Emerging-market currencies have pockets of value.
Pimco
Opportunities in emerging-market currencies and bonds.
Russell Investments
We like the value offered by emerging-markets equities, but the threat of trade wars, China slowing, and further U.S. dollar strength keeps us at a neutral allocation. A stronger contrarian signal that investors are turning negative on emerging markets would be a reason to increase allocations.
State Street
Chinese equity valuations are attractive, as on a relative basis they are trading in the bottom 10th decile below their historical discount to U.S. stocks. They seem to ben a supportive position to rebound if the Chinese government takes the fiscal policy sugar-rush path in this downhill climb.
State Street
Small-cap international firms with a greater percentage of domestic sales stand to benefit both from an uptick in local demand for their products and services and cost reductions. Smaller companies are also less likely than large caps to be caught in the crossfire of protectionism. The recent downturn has created potential value opportunities. Emerging-market small caps are trading at a larger discount to U.S. small caps than historically, while international developed small caps are trading right at their 10-year median.
TS Lombard
We have become modestly bullish on EM prospects – they could be bottoming out, following the severity of their downswing and the oil price slump. But their current-account deficits have been huge for a dozen years now, so debts are large as well as deficits, meaning some normalization of dollar interest rates is also a problem. While their FX rates may have adjusted, the associated cutbacks of domestic demand will continue to affect world trade into 2019.
UBS
Concerns about rising interest rates, slower Chinese growth, and the U.S.-China trade dispute drove a selloff in emerging markets in 2018. Headwinds and volatility will continue, but opportunities exist. EM value stocks could be poised for a catch-up, while in APAC we see specific opportunities in South Korea, Vietnam, and Chinese “old economy” stocks.
UBS
With yields now higher and Fed hikes better priced in, we see value in emerging-market dollar sovereign bonds and Asian high yield, and anticipate opportunities in countries enacting investor-friendly reforms, like Brazil.
Bank of America Merrill Lynch
The commodities outlook is modestly positive. We forecast Brent and WTI crude oil prices to average $70 and $59 per barrel. Weather-induced volatility is expected in the near term for U.S. natural gas, yet we remain bearish longer term on strong supply growth. In metals, we remain cautious about copper because of Chinese downside risk. We forecast gold prices will rise to an average of $1,296 per ounce, but could rally to as high as $1,400, driven by U.S. twin deficits and Chinese stimulus.
BNP Paribas
Oil to rebound, headline inflation to rise. In spite of the recent correction in oil prices, we expect prices to rise over the next six months, with Brent reaching $82 per barrel in the second quarter.
Citigroup
Restore energy to neutral from underweight after the sharp fall in oil prices. Push precious metals to +1.
Credit Suisse
As long as China’s all-important demand for commodities holds up, cyclical commodities should remain supported.
HSBC
We see upside for gold in 2019, but lower forecast average to $1,292 per ounce and expect emerging-market buyers to put a floor on prices.
JPMorgan
Commodities: Brent in the $55 to $75 per barrel range, gold trending higher to $1,400 per ounce, base metals higher in the first half and lower in the second.
Lombard Odier
A diversified exposure to commodities is appropriate in this environment. Current prices don’t indicate tight supply-demand balances, with potantial upside in oil and base metals. Escalation of the trade war or Middle East tension would provide upside to gold and/or oil. A solution to the trade war would see base metals outperform.
Macquarie
Metals and bulk commodity prices to remain mixed, with base metals outperforming the bulks.
Morgan Stanley
A tight oil balance should push Brent to $80 per barrel by end-2019. Forecasts for a weak dollar and lower yields mean we remain bullish on gold.
Natwest
Oil prices will bounce modestly in 2019.
Pimco
We are broadly neutral overall on commodity beta risk, combined with a modestly positive view on crude oil. We continue to see gold as a long-duration asset and prefer other long-duration assets, such as U.S. TIPS at current valuations.
Russell Investments
We like real assets. Real Estate Investment Trusts (REITs) are slightly cheap, while Global Listed Infrastructure (GLI) and commodities are around fair value. Commodities typically benefit from late-cycle support as inflation pressures build. We expect GLI will benefit from its European focus as the region rebounds. Rising Treasury yields, however, are a headwind for REITs.
Societe Generale
The fundamentals for metals remain constructive and are centered on broadly balanced supply/demand, falling inventories, smelting bottlenecks and moderate demand. Macro sentiment remains negative amid slowing global/China growth and rising protectionism/trade wars. Were it not for the negative macro headwinds prices would be a good deal higher. We are bullish on aluminium prices. Copper prices remain under pressure from negative macro sentiment, but the fundamental supply/demand situation points to a decidedly bullish price outlook. Despite the 30% price decline since the peak in February, we remain neutral on the outlook for zinc prices. Nickel remains our preferred base metal.
Societe Generale
While recent price action is likely overdone on many markets, prices for most industrial commodities are unlikely to rise back above this year’s peak. Price volatility should continue to normalize at higher levels for many commodities.
Societe Generale
We are moderately bullish on crude oil prices, premised on the fact that the recent sell-off is likely to be partially reversed as Saudi Arabia and OPEC seek to balance the market in 2019. Gold prices could decouple from U.S. monetary policy in 2019 and be buoyed by speculative inflows.
State Street
Adding gold exposure to a portfolio may help moderate the impact of market volatility and reduce portfolio drawdown. Gold can increase portfolio diversification, mitigate tail risk and enhance long-term returns.
UBS
We believe the oil market’s cautious turn is overdone. U.S. sanctions cut a million barrels of Iranian oil from the market at the end of October, a number that will increase. Saudi Arabia has vowed to maintain an equilibrium, but this will push global spare capacity to a 10-year low. And U.S. shale production will be tempered by distribution constraints, with new pipelines only expected to come online in the second half of 2019. On balance, we keep a positive view on crude. Provided OPEC maintains production discipline, we see Brent oil prices at $75 to $80 per barrel.
UBS
As 2019 proceeds, a weaker dollar, higher equity market volatility, and signs that the Fed is nearing the end of its hiking cycle should act as tailwinds for gold, which we see climbing to $1,300 per ounce in 12 months. As the cycle advances and volatility picks up, some investors may consider buying more gold for its insurance qualities. We think any dip below $1,200 would offer a particularly attractive entry point.
Brooks Macdonald
Given the many risks to the outlook, we continue to endorse a balanced approach to portfolio construction incorporating alternative income-producing assets, such as structured investments, to increase portfolio diversification.
Russell Investments
We like real assets. Real Estate Investment Trusts (REITs) are slightly cheap, while Global Listed Infrastructure (GLI) and commodities are around fair value. Commodities typically benefit from late-cycle support as inflation pressures build. We expect GLI will benefit from its European focus as the region rebounds. Rising Treasury yields, however, are a headwind for REITs.
UBS
The case for holding alternative assets in strategic asset allocations is strong. We seek exposure to low beta and diversified hedge fund strategies, segments of the private market space with reduced leverage and attractive valuations, and select opportunities in impact investing.
UBS
The advanced stage of the cycle means low rental yields and falling transaction volumes for real estate. Total returns now rely on income rather than capital growth. E-commerce distribution and co-working have supported demand for commercial real estate, but slower growth and/or higher rates could push values lower.
Bank of America Merrill Lynch
For 2019, risk-off for stocks and bonds—cash is king.
Barclays
Expect a near-term risk rally into the start of 2019, driven by dovish Fed-speak, the recent U.S.-China trade detente, and very strong seasonal factors. But 2019 should be a year of low single-digit total returns in most large financial assets and higher volatility.
BlackRock
We see a slowdown in global growth and corporate earnings in 2019, with the U.S. economy entering a late-cycle phase. We expect the Federal Reserve’s policy to become more data-dependent as it nears a neutral stance, making the possibility of a pause in rate hikes a key source of uncertainty.
BNP Paribas
Slower growth and tighter monetary policy, coupled with a significant drop-off in central bank bond purchases, point to a shift to risk-off sentiment and a period of recalibration in global markets as investors move away from the QE driven carry trade. While we see room for further outflows from risky assets, we are not of the view that we are entering a bear market in 2019.
Brooks Macdonald
Given our macroeconomic view, the sector-specific headwinds facing bond markets and relative asset-class valuations, we retain our preference for equities over fixed income.
Citigroup
This year’s poor market returns are a reset to weaker economic growth and earnings expectations globally as markets expect U.S. fiscal fade in late 2019 and lagged monetary tightening evident in a flat yield curve to slow activity. Events still feel more mid- to late-cycle reset than end-cycle bear market.
Credit Suisse
Our base case for 2019 foresees only a moderate further increase in U.S. yields. This suggests that U.S. fixed income investors should prepare to lengthen duration. In core bond markets outside America where yields are far lower, duration should remain short. In credit, the risk-return trade-off looks better for high-yield than for investment-grade bonds. Equities should continue to outperform on the back of robust earnings growth. Emerging-market assets should regain ground as long as the risk of U.S. rate hikes and dollar strength abates.
Goldman Sachs
Investors will reduce portfolio risk in 2019. A flattening yield curve, modest equity market outperformance versus bonds and cash, and low current cash balances should continue to support risk-averse asset rotations next year.
HSBC
The multi-asset team’s base case for 2019 “is neither significant retracement nor rebound for global risk assets,” with equity volatility curves “still subdued and expectations for a more dovish Fed mounting.”
Jefferies
Jefferies does not expect a recession in 2019 but the U.S. yield curve is close to inverting just as earnings growth moderates, forcing a trade-off between equity and bond valuations. The Fed’s balance sheet normalization implies an increasing competition for capital favoring quality. Equally, widening credit spreads will mean higher equity volatility. Our 2019 strategy reflects a mature, not end of, cycle.
JPMorgan
The end is not near, but markets will behave like the end of the cycle is at hand. Fed to continue with normalization and Treasury curve to bearishly flatten. Credit is somewhat concerning, but likely to outperform rates. Cash and short-duration should provide strong risk-adjusted returns.
JPMorgan Asset Management
Significant U.S. economic outperformance is unlikely to persist through 2019 as the sugar rush of the fiscal stimulus wanes. Growth in the major developed economies looks set to reconverge over the course of 2019 to a more lackluster pace by recent standards, thanks in large part to Washington’s more hostile approach to trade. Companies globally are deferring investment and becoming more hesitant about hiring.
Lombard Odier
While the U.S. dollar looks as though it has peaked, equity valuations still look promising, despite the inevitable volatility ahead and the risk of a U.S. recession is not on the horizon so far. There are opportunities for the prudent investor to take advantage of an environment that overall remains relatively supportive.
Macquarie
The market is once again focused on the dark clouds on the horizon, with many investors convinced that global growth is in the process of slowing sharply. While we agree that risks are building—known unknowns include the impact of the trade war, European politics, the fallout from higher U.S. interest rates, as well as ongoing concerns about China—we continue to feel that the market is too pessimistic, with global growth actually strengthening.
Morgan Stanley
A rolling bear market across assets defined 2018: We think the bear market is mostly complete for emerging markets, has further to go in U.S. credit and is about to begin for the dollar. We remain neutral equities, underweight credit, neutral government bonds and overweight cash. Within this defensive posture, we are taking larger relative positions and adding to EM.
Natwest
Late but not end cycle. Steeper curves, lower dollar and higher volatility top the headlines for 2019.
Oppenheimer Funds
The global expansion continues but the U.S. slows. Effects of U.S. stimulus will fade and monetary policy tightening will also ease. Chinese growth is likely to stabilize by mid- 2019, supporting the emerging markets and Europe. Returns will be more modest across most asset classes.
Pimco
Global growth is ‘synching lower’ as the end of U.S. economic exceptionalism looms. We see a synchronized global slowdown in 2019. We position cautiously but anticipate opportunities ahead.
Russell Investments
U.S. Federal Reserve tightening, trade wars, China uncertainty, Italy and Brexit imply 2018’s volatility should continue into 2019. The U.S. recession danger zone is 2020, which gives equity markets some upside. But late-cycle risks are rising.
Societe Generale
We see limited potential for capital gains again in 2019, due to a combination of headwinds: most financial assets remain rather expensive, with the exception of the Treasury and inflation markets, and some emerging-market assets (especially China); the Fed will continue to up the price of money and draw liquidity off the global economy while debt has never been higher; and this time, with President Trump having lost his majority in the House of Representatives, the probability of another fiscal boost is extremely low.
State Street
Slower global economic growth, higher volatility, less accommodative monetary policies and falling earnings likely mean lower returns. However, the risk of a recession, particularly inhe U.S., remains quite low. This should provide a backstop for market multiples. Discerning investors may be able to uncover a greater number of high quality investment opportunities.
TS Lombard
The risks are biased to the downside, though trade war resolution would be a big plus. On the other hand, the trade war could easily move from luke-warm to hot, and this would hurt stock prices and aggravate the negative aspects of the world economy
UBS
Our view is that, on balance, overweight equity exposure, combined with relative value trades, and portfolio hedges, is the right positioning for the start of 2019. We expect continued volatility: economic growth is slowing, central banks are tightening policy, and political risks all pose challenges, making hedging prudent.
Vanguard
Investment outlook: No pain, no gain. With slowing growth, disparate rates of inflation, and continued policy normalisation, periodic bouts of volatility in equity and fixed income markets are likely to persist.
Bank of America Merrill Lynch
Real U.S. GDP growth to slow in the second half of the year as the effects of fiscal stimulus begin to fade. Unemployment rate could reach a 65-year low by year-end, pushing wage growth. Consequently, core price inflation should gradually rise. Housing sales have peaked and home price appreciation is forecast to slow.
Bank of America Merrill Lynch
Most major economies are likely to see decelerating activity, with real GDP growth of 1.4 percent in both Europe and Japan, and 4.6 percent growth in aggregate among the emerging markets. Chinese growth is likely to further weaken. A steady stream of monetary and fiscal stimulus measures to turn the economy around is expected.
Barclays
Can European equity indexes close the gap with the U.S., after American shares massively outperformed European stocks in 2018? Such a reversal is unlikely, given growth differentials, European political risk, and the high beta of European equities to U.S. weakness.
Barclays
One significant macro theme is that while Europe slowed sharply this year from a strong second half in 2017, the euro-zone economy will stabilize near current levels, and not weaken further.
Barclays
The credit cycle will not end in 2019 and the chances remain low even for early 2020. Expect spreads to move wider in the second half of 2019, since higher-quality credit spreads typically increase four to five quarters ahead of a recession. Modest spread widening is expected across most credit markets and therefore total returns to be firmly in the black. In excess return terms, expect Europe to be just above the U.S., but if the rate moves play out, dollar total returns will likely be superior.
BNP Paribas
After the synchronised upswing in 2017 and the mixed picture that has prevailed for most of 2018, the main story for 2019, in our view, will be a concerted slowdown in GDP growth across major economies.
BNP Paribas
While capacity constraints are emerging in many countries, the key risk is slower growth, which we expect to limit the pace of monetary tightening globally. We think the 10-year Treasury yield is unlikely to rise much beyond 3.5 percent, thereby keeping the rate curve fairly flat for most of 2019. While we expect Bund yields to rise in 2019 with the end of the ECB’s public-sector purchase program, we think this rise in the 10-year will be capped at 1 percent at the end of 2019.
BNP Paribas
In equity markets, we expect the focus to shift from higher rate concerns to slower growth, diminishing margins and weaker earnings. We think expensive market valuations will be challenged. With equity markets no longer in a bullish trend, we may finally see better performances in Europe, where valuations are less stretched.
BNP Paribas
Dollar strength to fade: Higher short-term real yields in the U.S. and an ongoing growth differential between the U.S. and the rest of world are likely to continue to support the dollar near term. This strength will continue to weigh on emerging markets, especially in light of the ongoing slowdown in China. In the medium term, however, we expect the dollar to weaken as focus returns to the trade deficit and the Fed shifts to a neutral bias.This should bring some much needed relief to EM.
Credit Suisse
At the end of 2018, there were indications that the internal and external balance sheets of EM nations was being restored, in part with the support of the International Monetary Fund. If that process continues in 2019, emerging markets can recover and global investors would benefit.
HSBC
The outlook for emerging-market currencies looks less negative in 2019 as contagion pressures have moderated amid rising defenses. We favor quality over quantity, particularly when it comes to the high-yielding currencies. Weakening growth and some idiosyncratic risks prevent us from liking a broader range of currencies. We prefer CNY, IDR, PHP, SGD and THB in Asia; CZK and ILS in CEEMEA; and BRL, CLP and PEN in LatAm.
JPMorgan
U.S./global recession is not inevitable over the next one to two years, nor is there only downside left for equities. Before this cycle is finished, equities can still deliver a period of significant outperformance versus fixed income.
JPMorgan
We think one should be buying into emerging markets now, and believe that the peaking in U.S.-rest-of-world growth differential might constrain the dollar. Specifically, emerging-market equities are currently trading even cheaper than at the low point in 2015-2016, when China appeared even worse than currently.
JPMorgan
We still think it’s too early for the great rotations from equities into bonds, from cyclical into defensive stocks and from growth into value and quanlity. Peak EPS growth and the JPM recession risk model are two tools for timing these switches at some point in 2019.
Lombard Odier
We expect 2019 to bring broad-based dollar depreciation due to the declining effect of 2018’s expansionary fiscal policy, followed by fading U.S. growth.
Macquarie
Our relatively optimistic forecast for global growth does not mean that 2019 won’t be another challenging year for investors, with the volatility seen in recent months continuing. However, for those brave enough to “live dangerously,” we expect risk assets to bounce back from their current oversold levels, with still good economic growth once again underpinning gains.
Macquarie
The dollar should remain supported in the first half, but we expect it to peak and then decline a little in the second half as U.S. growth catches down to the rest of the world and the market begins to focus on the end of Fed tightening and a possible ECB hike.
Morgan Stanley
2019 will see the turning point in macro... The world still faces slower growth, higher inflation and tighter policy. But 2019 should see a turning point in this narrative, specifically in U.S. growth, inflation and policy relative to the rest of the world.
Morgan Stanley
Narrowing growth and policy differentials should drive convergence in U.S. versus European rates. Curves should flatten across the G-4. We see the U.S. 10-year falling to 2.75 percent by end-2019.
Pimco
Quantitative models indicate that the probability of a U.S. recession over the next 12 months has risen to about 30 percent recently and is thus higher than at any point in this nine-year-old expansion. The models are so far flashing orange rather than red over our cyclical six- to 12-month horizon.
Societe Generale
Synchronisation is back, diversify out of the dollar. We see no reason to upgrade global risk now, and believe the best time to position for the next U.S. recession should become more apparent in the latter part of 2019.
Societe Generale
Market conditions should, nevertheless, differ somewhat to those of 2018 in several aspects. 2019 is set to be a year of economic re-convergence and no longer a G1-only story. The symmetry of the Fed’s profile should lead market anticipations to swing from fear of more tightening and flattening to fear of less tightening and bull steepening. Meanwhile, the expensive dollar should return to its structural downward trajectory initiated in early 2017 and growth stocks should continue to de-rate. We continue to recommend heavy exposure to 10-year Treasuries.
Societe Generale
We see downside potential to global equity indexes for the next 12 months, with poor performances likely to be concentrated in the second half as investors discount the next U.S. recession
Societe Generale
Going forward, our strategists expect the U.S. dollar rally to fade as the market’s attention turns to the end of the economic cycle in America, as well as the looming fiscal and trade deficit. If markets indeed follow this script, commodity prices could find themselves relatively better supported, even going into the end of the cycle.
TS Lombard
We have become modestly bullish on EM prospects – they could be bottoming out, following the severity of their downswing and the oil price slump. But their current-account deficits have been huge for a dozen years now, so debts are large as well as deficits, meaning some normalization of dollar interest rates is also a problem. While their FX rates may have adjusted, the associated cutbacks of domestic demand will continue to affect world trade into 2019.
TS Lombard
The euro area cycle is not over. The sharp loss of momentum in the eurozone this year has raised concerns that the EA cycle is fast-approaching an end. Having contracted in the third quarter, the risk of a technical recession is high in Germany and Italy. But we think the while the cycle is maturing, there is ample room to expand further.
UBS
In a scenario where global economic growth slows but remains solid, while ongoing trade tensions, monetary tightening, and uncertainty about growth keep volatility high: U.S. and European equities gain up to 5 percent, EURUSD 1.15-1.20.
UBS
In a scenario where Chinese GDP growth returns to a 6.6 to 6.8 percent range, and the current account balance goes back above $100 billion: Chinese equities rally 15 to 20 percent. Emerging-market bonds return 6 to 7 percent. USDCNY to 6.50.
UBS
A maturing cycle can be perilous for bond investors as labor markets tighten, corporate leverage increases, and central banks restrict policy. That said, bonds can provide returns and help stabilize portfolios. We see particular opportunities in long-duration U.S. government bonds and Asian high yield. We also favor euro “synthetic credit exposure,” a strategy that offers exposure to corporate credit by selling credit default swaps instead of buying cash bonds. Various investment vehicles, such as notes, can provide access to this market.
Societe Generale
Our near-term outlook for global equity markets remains guarded, but a bear market would not appear imminent given that we do not anticipate a global recession in 2019. Risk-adjusted returns over the next several years are anticipated to be modest at best, given the backdrop of modest growth and the gradual unwinding of accommodative policy.
Bank of America Merrill Lynch
BAML’s top 10 macro calls imply a backdrop of rising rates and falling earnings in 2019; the “Baby Bear” market on Wall Street that began in the first quarter of 2018 is not yet over; we believe asset prices will find their low once rate expectations peak and EPS expectations trough.
Bank of America Merrill Lynch
Global monetary policy is expected to become less friendly in 2019. A divided government means that additional fiscal stimulus in the U.S. seems unlikely. Europe is largely frozen in place by its budget rules, and Japan appears ready to implement yet another ill-timed consumption tax hike, in our view.
Brooks Macdonald
We expect fixed income markets to be weighed by slowly tightening global monetary policy. Furthermore, the Treasury market faces the headwind of rising U.S. government debt issuance in the second half of 2019 and this could have negative ramifications for bond markets globally.
Credit Suisse
Stable dollar. With Federal Reserve tightening well advanced, and the European Central Bank as well as the Bank of Japan gradually catching up, chances are good that the dollar will be stable. That should ease the strain on economies depending on cheap dollar funding, and help stabilize financial markets.
Goldman Sachs
Mutual funds, pensions, and households will remain net sellers of stocks. Investor outflows from active mutual funds will continue to weigh on mutual fund equity demand. Pension funds and households generally sell equities during periods of rising interest rates and decelerating economic growth, respectively.
HSBC
The longer-term risks still look biased to lower rates. We expect the Fed to end its tightening cycle after two more hikes in 2019 and to then ease its policy in 2020. We continue to forecast a 15 basis-point rise in the ECB’s deposit rate in September 2019 as the central bank remains confident inflation is rising towards its target and has brushed aside growth concerns. We are bearish on core rates around the second quarter and forecast the 10-year German yield to rise towards 50 basis points by end-2019.
Jefferies
As the Fed’s balance sheet normalization continues it will mean further de-risking as excess liquidity is mopped up. However, don’t short the S&P 500. We expect buybacks will continue to squeeze EPS through 2019. FCF generation is still strong across a range of sectors. We expect the S&P 500 to reach 2,900—slightly lower than our 2018 target of 2,950.
JPMorgan Asset Management
The Fed may become more data dependent and rates are unlikely to rise much beyond the middle of the year. More sluggish growth may hinder the ECB’s attempts to normalize policy. Global monetary conditions will remain relatively loose, providing some solace for investors who had been concerned about the Fed hitting the brake.
Lombard Odier
We are getting closer to the peak in real rates. We still expect relatively low returns for bonds but begin opportunistically reducing our long-held underweight in sovereign bonds while maintaining a short duration for now.
Natwest
The U.S. expansion remains intact. The Fed hiking cycle will pause after two 2019 hikes. The ECB will not hike in 2019; nor will the BOJ. RBA, Riksbank join the policy normalisers club. Expect low inflation with material upside risks.
Russell Investments
For government bonds, we like the value offered by Treasuries. Our models give a fair-value yield of 2.7 percent for the U.S. 10-year bond. German, Japanese and U.K. bonds are very expensive, with yields well below fair value. The cycle is headwind for all bond markets as inflation pressures build and central banks tighten further—such as the Fed and Bank of England—or move away from extreme stimulus—such as the ECB and Bank of Japan.
Russell Investments
The yen is our preferred currency. It’s significantly undervalued, getting cycle support as the BOJ becomes less dovish, and it has contrarian sentiment support from extreme short positions in the market. The euro and British sterling appear undervalued as we move into 2019. The recovery in European economic indicators should support the euro. Sterling will be volatile around the Brexit negotiations but should rebound if a deal is agreed with Europe. It has more upside potential than the euro.
Societe Generale
A short-term rebound in the eurozone economy after several disappointing quarters could be a support for the eurozone indexes. However, we see limited equity upside potential as we expect earnings expectations to continue to be revised down. In the second half, eurozone investors are likely to turn their attention to ECB rate hikes (we anticipate a September hike) in addition to cyclical concerns in the U.S.
Societe Generale
It will be necessary to adapt portfolios and prepare for central banks in Europe and later Japan starting to unwind QE, while both economies recover—we reweight the euro (+7.5 points to 38.5 percent) and the yen (+5 points to 15.5 percent), mainly through equities. Exposure to the value style is a good way to benefit from the central banks’ exit in both regions.
State Street
With rates rising and record high duration risk, we favor short-duration corporate exposures and floating rates structures to lower interest rate sensitivity and deliver a more optimal yield and duration profile. This may lead to improved risk-adjusted performance and less drawdown than the broader fixed-income market.
UBS
Central bank policy is generally well priced by government bonds, but risks remain. At 45 percent of GDP, debt held by non-financial U.S. firms is at its highest on record. We do not expect credit conditions to deteriorate significantly, but fundamentals are likely to continue to worsen. Within developed markets we like long-duration U.S. government bonds and euroynthetic credit exposure.
UBS
Higher U.S. rates in a maturing cycle have pushed rate differentials to record levels, supporting the dollar. While we expect the greenback to retain its strength in the near term, we think the dollar is likely to depreciate over time as policy normalization gets underway in Europe and Japan.
Bank of America Merrill Lynch
Emerging markets are a gamble. Assets are cheap and under-owned and could be a big winner in 2019 as the dollar weakens, yet EM remains highly vulnerable to spillover effects of U.S.-China trade tensions. Bullish Brazil and Russia, bearish Mexico.
Bank of America Merrill Lynch
A weaker dollar is expected in 2019, against a stronger euro and Japanese yen. The strength of the dollar will depend heavily on evolution of the trade relationship between China and the U.S., which in the short term may mean selling the dollar against an insulated currency such as the British pound or Swiss franc.
BlackRock
Markets are vulnerable to fears that a downturn is near, even as we see the actual risk of a U.S. recession as low in 2019. Trade frictions and a U.S.-China battle for supremacy in the tech sector loom over markets. We see trade risks more fully reflected in asset prices than a year ago, but expect twists and turns to cause bouts of anxiety.
BNP Paribas
Trade war uncertainty to weigh on equities and emerging markets. With the U.S. trade deficit growing, we expect continued uncertainty regarding China–U.S. trade relations. This will likely add to the drag on global growth and drive up risk premia in global equity markets, particularly the technology sector. Europe and EM are bearing the indirect consequences of this dispute.
JPMorgan
JPM’s baseline assumes further tariffs after the trade truce expires on March 1, but that the impact on China growth will be trivial due to further monetary and fiscal stimulus plus yuan depreciation.
Lombard Odier
A diversified exposure to commodities is appropriate in this environment. Current prices don’t indicate tight supply-demand balances, with potantial upside in oil and base metals. Escalation of the trade war or Middle East tension would provide upside to gold and/or oil. A solution to the trade war would see base metals outperform.
Russell Investments
We like the value offered by emerging-markets equities, but the threat of trade wars, China slowing, and further U.S. dollar strength keeps us at a neutral allocation. A stronger contrarian signal that investors are turning negative on emerging markets would be a reason to increase allocations.
State Street
Small-cap international firms with a greater percentage of domestic sales stand to benefit both from an uptick in local demand for their products and services and cost reductions. Smaller companies are also less likely than large caps to be caught in the crossfire of protectionism. The recent downturn has created potential value opportunities. Emerging-market small caps are trading at a larger discount to U.S. small caps than historically, while international developed small caps are trading right at their 10-year median.
TS Lombard
A more severe escalation of trade war with China would significantly raise the chances of a 2020 recession in the U.S., driven by an overvalued dollar.
UBS
In a scenario where U.S.-China trade disputes induce a slowdown in China, considerable uncertainty, and a rerouting of global trade, more countries will start to feel pain via disrupted supply chains: U.S. equities lose from 5 to 10 percent, Chinese equities drop 20 to 25 percent. EURUSD around 1.10.
UBS
In a scenario where negotiations between the U.S. and China result in actual progress and a reduction of trade barriers. Although tensions remain high, both countries agree on a trade truce: U.S stocks climb 10 to 15 percent. Chinese shares add 10 to 15 percent. EURUSD to 1.20-1.25.
Bank of America Merrill Lynch
The commodities outlook is modestly positive. We forecast Brent and WTI crude oil prices to average $70 and $59 per barrel. Weather-induced volatility is expected in the near term for U.S. natural gas, yet we remain bearish longer term on strong supply growth. In metals, we remain cautious about copper because of Chinese downside risk. We forecast gold prices will rise to an average of $1,296 per ounce, but could rally to as high as $1,400, driven by U.S. twin deficits and Chinese stimulus.
Barclays
For hard currency emerging-market corporates, expect widening across the board. China has become by far the biggest portion of the EM corporate universe; expect heightened volatility, as well as high issuance to address a large maturity wall. LatAm is also likely to come under pressure.
Credit Suisse
As long as China’s all-important demand for commodities holds up, cyclical commodities should remain supported.
Credit Suisse
Trade pressures may persist but if Chinese policymakers proceed cautiously, as in 2018, risks of instability should be limited and the expansion can be extended. Aggressive currency policy, credit easing or foreign policy, would be destabilizing, however.
Lombard Odier
Emerging markets are priced for very negative growth, yet enjoy broadly sound account balances, adequate foreign exchange reserves and still-young economic cycles. Fiscal stimulus in China, a dollar that has peaked and a temporary trade truce should all support investor confidence.
Natwest
China will stabilize the economy, but not much more. U.S./China tensions will escalate further in early 2019.
State Street
Chinese equity valuations are attractive, as on a relative basis they are trading in the bottom 10th decile below their historical discount to U.S. stocks. They seem to ben a supportive position to rebound if the Chinese government takes the fiscal policy sugar-rush path in this downhill climb.
TS Lombard
Recent relief has been provided to China by some de-escalation of the trade war, but only modest policy stimulus is expected, and together with the benefit of a much cheaper yuan this should revive growth in the second half of 2019 after a slow first half.
TS Lombard
Beijing will tolerate slower growth in 2019. Recent macro data confirms our view that market expectation of China relying on old-style credit easing and tried-and-tested fiscal measures to prop up the economy is misplaced.
Bank of America Merrill Lynch
One event risk for next year is that Washington gridlock may not be the market’s friend when the debt ceiling needs to be raised in March – brinkmanship is a risk as it was in 2011.
BlackRock
We worry about European political risks in the medium term against a weak growth backdrop. We believe country specific risks may ebb in the emerging world, and see China easing policy to stabilize its economy.
Citigroup
In the government bond space, Treasuries are downgraded modestly to +1 after the rally in the market, but the bank still thinks the cycle favors fixed-income returns. We raise periphery euro-area sovereigns a notch to -1 as Italy risks are more contained and political change in 2019 could generate a pullback in spreads.
Credit Suisse
European politics will be calmer. The exit of Britain from the European Union should not do much harm to either side if handled wisely. In Germany, the ongoing political realignment is unlikely to cause instability, as the influence of the extreme parties remains limited.
JPMorgan Asset Management
U.K. investors face the greatest conundrum. A resolution to the current Brexit impasse will be good for the economy, but is likely to challenge Gilts and internationally focused stocks in 2019.
Lombard Odier
We believe the U.K. will avoid a hard or no deal Brexit, because Theresa May eventually gets a withdrawal agreement through Parliament, or because the country halts the process unilaterally. Both scenarios would be pound positive.
Natwest
Italian pressures intensify and spread to other markets. Brexit risks will ease, and the BOE will hike in May 2019, February 2020.
Natwest
Any Italy contagion most likely to be felt in credit, currencies.
Natwest
Brexit: Keep calm and buy sterling, sell pound-denominated fixed income.
TS Lombard
The UK continues to be politically convulsed by Brexit, but our view of the likely outcome should leave growth relatively unaffected once the uncertainty is reduced in a few months’ time.
UBS
We believe the oil market’s cautious turn is overdone. U.S. sanctions cut a million barrels of Iranian oil from the market at the end of October, a number that will increase. Saudi Arabia has vowed to maintain an equilibrium, but this will push global spare capacity to a 10-year low. And U.S. shale production will be tempered by distribution constraints, with new pipelines only expected to come online in the second half of 2019. On balance, we keep a positive view on crude. Provided OPEC maintains production discipline, we see Brent oil prices at $75 to $80 per barrel.
Bank of America Merrill Lynch
Credit cycle continues, despite widening spreads and flattening curves. Globally, the credit markets face high levels of episodic volatility with shrinking supply and quantitative tightening putting upward pressure on investment grade and high yield bond spreads. In the U.S., total returns of 1.42 percent are forecast for high grade corporate bonds and 2.4 percent for high yield. The U.S.-leveraged loan market remains a bright spot, with total returns of between 4 and 5 percent.
Bank of America Merrill Lynch
Concerns over the pace of Fed tightening could cause periods of volatility in both the bond and equity markets.
BNP Paribas
We expect dispersion to increase across credit, sectors and regions as investors focus more on fundamentals and risk mitigation due to the waning beta effect of QE. That said, the stock effect of the size of G-4 central bank balance sheets remains a significant dampening influence on interest rate volatility and will likely keep global bond yields contained. This in turn should be a moderating influence on broad-based market volatility.
Jefferies
Don’t fear an inversion. Our analysis shows that it is not a perfect timing tool and the Fed’s QE program has distorted the conclusions. Credit spreads have been too tight and any widening must be seen in the context of “normalization.” That said, higher spreads = higher volatility.
Lombard Odier
Volatility is here to stay, but the New Year will begin with more favorable valuations and still sound fundamentals.
Macquarie
Global equity prices are likely to remain choppy for much of the year, but to end 2019 modestly higher.
Natwest
Market volatility still too low; rates volatility should rise. Steeper curves are our highest conviction fixed-income view in 2019. Front-ends should offer good tactical and strategic trades.
Pimco
While judging by macroeconomic considerations we are still some distance from the next recession, the current market environment makes amply clear that a recession is no pre-equisite for turmoil in financial markets. Moreover, rather than traditional macro overheating, it may be the derating of financial assets that leads to the next recession.
Russell Investments
Volatile equity markets that deliver mid-single-digit returns; better potential in Europe and Japan than the U.S.
State Street
Adding gold exposure to a portfolio may help moderate the impact of market volatility and reduce portfolio drawdown. Gold can increase portfolio diversification, mitigate tail risk and enhance long-term returns.
TS Lombard
U.S. markets remain volatile because the rising political cacophony, in the U.S. and globally, will leave few openings for investors to separate signal from noise.
UBS
Volatility has increased and drawdowns are becoming more commonplace. Investors should expect more of the same in 2019, as markets begin to try and anticipate an end to the cycle.
UBS
Diversify globally. No single region offers a uniquely compelling case. We favor global diversification within equity holdings, which should also help mitigate volatility.
UBS
Concerns about rising interest rates, slower Chinese growth, and the U.S.-China trade dispute drove a selloff in emerging markets in 2018. Headwinds and volatility will continue, but opportunities exist. EM value stocks could be poised for a catch-up, while in APAC we see specific opportunities in South Korea, Vietnam, and Chinese “old economy” stocks.
UBS
As 2019 proceeds, a weaker dollar, higher equity market volatility, and signs that the Fed is nearing the end of its hiking cycle should act as tailwinds for gold, which we see climbing to $1,300 per ounce in 12 months. As the cycle advances and volatility picks up, some investors may consider buying more gold for its insurance qualities. We think any dip below $1,200 would offer a particularly attractive entry point.
BNP Paribas
Oil to rebound, headline inflation to rise. In spite of the recent correction in oil prices, we expect prices to rise over the next six months, with Brent reaching $82 per barrel in the second quarter.
Citigroup
In a stagnation phase (lower real growth, stable/low-flation) there are lower expected equity market returns, and bonds are the asset class outperformers. Volatility stays high. But after a correction it makes sense to be overweight both.
Credit Suisse
Keeping inflation under control is a key driver or risk. The important question is whether inflation will remain benign. If not, the Fed will be seen as behind the curve—bond yields would increase significantly while equities and other risk assets decline substantially. Wage growth will likely be the key driver.
Natwest
Buy some upside inflation, just in case.
Pimco
Modestly underweight duration, overweight TIPS. Curve, long the belly, short the long end. Underweight European peripheral risk.
Russell Investments
We like real assets. Real Estate Investment Trusts (REITs) are slightly cheap, while Global Listed Infrastructure (GLI) and commodities are around fair value. Commodities typically benefit from late-cycle support as inflation pressures build. We expect GLI will benefit from its European focus as the region rebounds. Rising Treasury yields, however, are a headwind for REITs.
Bank of America Merrill Lynch
Global profit growth declines. Earnings growth is expected to decline sharply next year, from more than 15 percent to less than 5 percent on a year-over-year basis. The team is bearish stocks, bonds, and the U.S. dollar; bullish cash and commodities; and long on volatility. We expect to turn tactically risk-on in late spring, but to start 2019 with a bearish asset allocation of 50 percent stocks, 25 percent bonds and 25 percent cash.
Bank of America Merrill Lynch
S&P 500 Index to peak. Earnings growth is also likely to slow in the U.S., though the near-term outlook remains somewhat positive. The S&P 500 Index is expected to peak at or slightly above 3,000 before settling in at a year-end target of 2,900.
Bank of America Merrill Lynch
The U.S. equity strategists’ view is to be overweight health care, technology, utilities, financials and industrials, and underweight consumer discretionary, communication services and real estate.
Bank of America Merrill Lynch
Cash gets competitive. With cash yields higher than dividend yields for 60 percent of the S&P 500 already, cash becomes even more competitive in 2019. This year boils down to a strategy of buying sources of cash and selling users of cash.
Barclays
Investment grade and agency mortgage-backed securities over global equities, given our forecast of single-digit equity earnings growth and the view that longer yields will stay close to current levels.
BNP Paribas
The one well-flagged risk is the U.S. corporate sector’s leverage level and the fact that corporate America will face a large refinancing burden, starting in 2019 and worsening in 2020, 2021 and 2022. This will take place in a world of higher yields and weaker margins. We expect defaults to pick up in 2019 and accelerate in 2020, leading to a more marked economic slowdown in that year.
Brooks Macdonald
Within equities, we continue to prefer growth assets, particularly those linked to our favored technology and healthcare themes, over value.
Credit Suisse
Tech and healthcare are key market drivers or risks. An important question for investors is whether growth in the tech sector will remain strong, with the emergence of new areas of focus such as virtual reality and artificial intelligence. A second key sector that is likely to influence the fate of equity markets is healthcare, with investors keeping an eye on gene therapy and other innovative treatments.
Goldman Sachs
Corporations will once again be the largest buyer of equities in 2019. Corporate demand for stocks will rise by 17 percent next year driven by share buybacks and M&A but offset somewhat by a potential record-breaking year in share issuance. Foreign investors will likely also be net buyers of U.S. stocks given a modestly weakening dollar, and equity purchases through ETFs should persist.
Jefferies
The bottom line is that a strong dollar and rising cash rates are creating competition for dollar capital. Equities offering high FCF yield and a “cheap growth multiple” ought to do reasonably well. Equities are long duration assets and convertible bonds are the best equity instrument in a rising interest rate environment.
JPMorgan Asset Management
Corporate earnings growth should also converge toward a slower, yet still positive rate of growth. Equity investors may wish to seek more regionally diversified portfolios and to reduce risk by focusing on quality, larger cap stocks in historically defensive sectors.
Lombard Odier
Despite strong earnings, tech valuations have fallen significantly. Recent profit warnings from Apple’s supply chain provide interesting entry points to a much less crowded trade and investors will return to a sector that offers both growth and defensive characteristics.
Russell Investments
High-yield credit is expensive and losing cycle support, as is typical this late in the cycle, when profit growth slows and there are concerns about defaults.
State Street
Adding more quality companies with high profit margins and healthy balance sheets at a reasonable price may provide more resilience and cushion some downside risks.
UBS
Be selective. Amid fading earnings growth investors should focus on companies exposed to secular growth trends, those already pricing in adverse scenarios, or those with a track record of weathering downturns.
UBS
Look for value and quality. We expect U.S. and emerging-market value to outperform growth, reversing their 2018 underperformance. Quality companies, meanwhile, with higher profitability, lower financial leverage, and less earnings variability than average, should withstand volatility better than the overall market.
UBS
Consider neglected sectors. Financials could be set to outperform in the U.S. and China, thanks to rate rises and favorable changes in regulations in the former, and to economic stimulus in the latter. The U.S. and European energy sectors also offer value. And we think oil prices will recover in early 2019.
UBS
Euro zone profits are being pressured by higher input costs and exposure to a slowing China. The best opportunities we see are centered in the energy and utilities sectors, in quality and sustainable dividend stocks, and in Swiss real estate funds.
HSBC
A euro-zone crisis is sparked by the need for stimulus and a backlash by populists: The euro would get close to parity with the dollar. The pound would face great uncertainty as post-Brexit trade negotiations get complicated.
HSBC
A liquidity run in corporate bonds in a sharp risk-asset selloff: As mutual funds and ETFs sell liquid holdings, their holdings get more illiquid—subjecting remaining investors to time subordination.
HSBC
Volatility spikes in fixed-income as bonds lose central bank backstop: Volatility spreads to other asset classes that depend on low and stable long-end real rates; the correlation between bonds and equity returns would probably change.
HSBC
Fed extends the hiking cycle: Were policy makers to deliver more than implied by the dots, the dollar would strengthen to the detriment of emerging markets. Tighter rates to address inflation (rather than growth) would hurt U.S. equities.
HSBC
Emerging-market economies introduce reforms to address imbalances, boost productivity: Strong rally in EM “carry” currencies; stocks and bonds climb.
HSBC
In a trade truce scenario, RMB would likely retrace some of the depreciation seen in 2018, emerging markets and cyclical commodities would gain with China, Korea and Taiwan benefiting disproportionately.
Jefferies
An upside risk to our earnings forecast would come from a decline in the dollar, a suspension of balance sheet normalization and a slower pace of rate hikes in 2019.
Jefferies
A downside risk to our numbers would come from the U.S. yield curve shifting upwards on higher inflation pressures.
Macquarie
While we do not expect the trade war to significantly slow growth in the near term—it is already five months since the first significant tariffs were introduced—we do not expect a quick resolution, with the risk that President Trump continues to increase the stakes as the year progresses.
Macquarie
While we expect a near-term resolution to Brexit sometime in the first quarter , this is unlikely to stem the internal conflict in the not so “United” Kingdom. While the U.K.’s share of the global economy is relatively small, if the large recession that the Bank of England predicts under a hard Brexit scenario were to occur, it would have a material impact on markets and global growth.
TS Lombard
Japan’s huge and mounting government debt burden could finally lead to a crisis that some commentators have expected for 15 years or more.
UBS
In a scenario where U.S. inflation rises rapidly, the Fed is forced to hike rates at each FOMC meeting. This leads to a flat or inverted Treasury yield curve by mid-2019, and an equity market selloff: U.S. recession starts in early 2020. U.S. stocks lose 10 percent to 15 percent. U.S. high yield loses 6 to 9 percent. EURUSD to 1.10 or below.