The bottom line: Asset allocation
As was the case in early 2016, we expect that the twin policy response of a Fed pause and Chinese stimulus is likely to provide support for risk assets in 1H 2019. But overarching policy objectives and economic conditions facing both sets of policymakers will likely prevent as swift a rebound as that witnessed three years ago. Concerns about cycle length and ongoing geopolitical uncertainties should also keep volatility elevated and the path to higher returns bumpy.
The combination of a less hawkish Fed and Chinese stimulus should have clearer effects on the US dollar, which we expect to weaken over the course of 2019. This has made us more constructive on emerging market equities and debt, which we expect to outperform. Indeed, it is notable that EM equities and debt outperformed US equities and credit respectively during the Q4 selloff, suggesting a lot of negative news for EM indexes was already in the price. At current valuations we find global equities attractive, but maintain an underweight in US credit to hedge against further disruption in risk assets.