As global economic growth enters a period of likely protracted weakness, investors should revisit their exposures. From a multi-asset perspective, focus on surprisingly resilient high-yield credit and higher quality equities, while reducing exposure to parts of the market that are most vulnerable to trade tensions.

Navigating Geopolitics

Global markets have remained volatile through recent months. Numerous geopolitical risks remain unresolved, including ongoing Hong Kong demonstrations, a slight increase in the possibility of a hard Brexit and a potential US-European Union trade war.

The threat from trade tensions is likely to persist and uncertainty about details of a US-China deal is likely to further fuel market volatility. Against this backdrop, the market increasingly expects fresh policy support. In China, imposition of tariffs is putting further pressure on its already decelerating economic growth and has already led to additional stimulus to cushion the potential impact.

For now, the balance of risks seems relatively even: while the growth outlook has moderately worsened, policymakers still have options. The expectation for further easing from central banks around the world has increased, which should provide near-term support. However, the longer-term effectiveness of monetary policy moves to combat economic weakness remains in question.

Surprising Resilience in High Yield

So what should investors do? First, don’t be bound to a typical late-cycle playbook. For example, global high-yield credit typically struggles in a late-cycle environment, yet the asset class has continued to do well year to date. Although gross issuance has picked up this year from last year’s very low levels, we are not seeing the types of excesses typically associated with late-cycle behaviour. Much of the new issuance is being used for refinancing rather than merger and acquisition or buyout activities, and a greater proportion of new issuance has come from higher quality issuers than in previous years. While spreads have been somewhat volatile in response to trade tensions, if growth slows but doesn’t collapse, we think high-yield credit provides an attractive diversifier within our growth assets.

From High Quality Equities to Real Estate

Second, in equities, a more volatile market environment warrants a more risk-aware approach. We think investors should focus their equity exposure on high quality companies with stronger balance sheets and stable cash flows, greater stability and less market risk.

Third, investors can find opportunities in areas of the market that are less vulnerable to ongoing trade tensions. Global real estate is a case in point. Even though real estate valuations look somewhat rich on a long-term basis, they’re close to normal for the post-crisis era. The strength of the labour market, which has kept the consumer in good shape, particularly in the US, should also help support the market. Preferred REITs offer particularly attractive yields, in our view, and a safer rank in the capital structure and typically lower volatility than equity REITs. Select opportunities can also be found among US financials, which are relatively immune to trade issues and have the potential to benefit from a steepening yield curve if the Fed eases.

Maintain Balanced Exposures

As we continue to navigate this more challenging market environment, investors need to be prepared to both protect and participate. We expect markets to remain volatile and range-bound, influenced by continued uncertainty around trade and de-globalization. These trends are likely to weigh on already-weakening growth, though support from central banks could help extend the cycle.

In this context, maintaining balance is key. Investors would be well served to focus on moderately defensive positioning, balanced with some pro-cyclical exposure, while looking for parts of the market more likely to be insulated from the ongoing trade tensions.

Karen Watkin, Portfolio Manager Multi-Asset Solutions, AllianceBernstein

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time. AllianceBernstein Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom.