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As we head into the last few months of 2019, trade disputes and geopolitical frictions remain key drivers of the economy and markets. U.S. trade policy has become increasingly unpredictable, denting corporate confidence and slowing business spending, while recent geopolitical volatility, including attacks on Saudi oil infrastructure, underscore our views.

Yet we still believe the economic expansion is intact, supported by dovish central banks and a robust U.S. consumer. This suggests moderate risk taking may be rewarded even as recent events reinforce our preference for a greater focus on portfolio resilience.

Looking ahead, we expect more Federal Reserve rate cuts, but believe markets are pricing in too much monetary easing. The European Central Bank exceeded the expectations of many on their stimulus package, launching a broad package with a combined impact that should be greater than the sum of its parts. However, we do not think the Fed will respond to the trade war fallout with looser monetary policy. Here’s why: supply chain disruptions could deliver a hit to productive capacity that fosters mildly higher inflation even as growth slows. Since containing inflation is part of the Fed’s mandate, this complicates the case for further easing by the Fed.

To help investors navigate the last quarter of 2019, we highlight three key themes for the markets in the next quarter, along with ways to implement these views in your portfolio.

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1. Protectionist push

What to know: The substantial escalation in the U.S. China conflict and unpredictability of U.S. policy actions have injected additional uncertainty into business planning, threatening to weaken economic activity.

What to consider: We favor minimum volatility to help potentially reduce risk, have upgraded Europe to neutral, while also raising some cash.

2. Stretching the cycle

What to know: Central banks have pivoted to easing. The record long U.S. economic expansion is supported by healthy household spending and looks unlikely to morph into a deeper downturn any time soon.

What to consider: We remain positive on U.S. equities and see EM debt as a potential source of income in a low-yield world.

3. Raising resilience

What to know: We believe portfolio resilience is crucial at a time of elevated macro uncertainty. What do we mean by resilience? In short, it is the ability of a portfolio to withstand a variety of adverse conditions – both on a tactically defensive basis and strategically across cycles.

What to consider: Government bonds play an important role in building portfolio resilience - even at low yield levels. Commodities can provide potential diversification benefits.

Christopher Dhanraj
Head of iShares Investment Strategy
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