With late cycle features continuing to materialise and a higher level of vulnerability developing due to the uncertain geopolitical backdrop, 2019 will require investors to embrace a more prudent approach, despite the benign global economic outlook.
In our view, this new investment landscape will translate into not only the need for more cautious risk allocation through the year, but also more selective exposure to countries/sectors and names that could prove to be more resilient: less indebted, less exposed to geopolitical frictions, and to financial and economic imbalances. The sustainability of future returns will be the name of the game in 2019. It will also be a year of higher focus on portfolio construction and diversification to balance risk, avoid crowded trades, and deal with multiple divergences that will likely materialise. Meanwhile, liquidity management will be even more critical as we enter uncharted waters associated with central bank (CB) liquidity tightening for the first time post the last financial crisis. With limited market directionality, and as swings are expected to be frequent, investors should seek tactical opportunities throughout the year that will emerge on the basis of the evolution of three main themes, as noted below.
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