The investment climate will become more challenging, with equity and bond prices likely to diverge after both have generated positive returns year-to-date. Our base-case scenario is that the global economic expansion will continue, but we are maintaining our neutral stance on equities and maximum overweight on cash until economic data firms, and the trade threat diminishes.
The latter, trade tensions, took yet another turn for the worse last week, as the U.S. threatened China with more tariffs next month, and there was an escalation in the trade war between Japan and South Korea. Protectionism may yet end the expansion and usher in a bear market in stocks.
To this end, prospective portfolio returns under an equity bear market scenario, are very poor given the starting point of historically depressed bond yields. A 60/40 portfolio (global equities/10-year Treasurys) under various equity price and yield decline outcomes all generate negative returns on a 12-month horizon.