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As we head into 2020, we expect economic growth to edge higher, with limited near-term recession risks. The growth uptick is likely to take root in the first half of the year, led by global manufacturing activity and rate-sensitive sectors such as housing.

This economic environment marks a big shift from the dynamics of 2019, when an unusual late-cycle dovish turn by central banks cutting interest rates helped offset the negative effect of global trade tensions. But the U.S. dovish pivot looks to be over for now, although emerging markets (EMs) still have room to provide monetary stimulus. In addition, any meaningful support in the euro area and Japan will have to come from fiscal policy, and we do not see this in 2020.

Meanwhile, inflation risks look underappreciated and could lead to a market regime change, particularly if growth flatlines. A deeper economic slowdown is another risk to consider, along with any re-escalation of global trade disputes.

Still, overall, the current environment is a favorable backdrop for risk assets such as stocks. We are modestly overweight equity and credit due to the firming growth outlook, but we have made meaningful changes to our granular views. We prefer Japanese and EM equities, as well as EM bonds and high yield. We are cautious on U.S. equities amid 2020 election risks.

To help investors navigate 2020, 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. Growth edges up

What to know: We see an inflection point in global economic growth as easier financial conditions start filtering through. The growth mix is shifting as the modest pickup is likely to be led by manufacturing, business spending and interest rate-sensitive sectors such as housing.

What to consider: We favor assets geared to global growth such as Japanese and EM equities. We have moved to a neutral position on U.S. stocks, amid 2020 election risks, but prefer quality.

2. Policy pause

What to know: We see economic fundamentals driving markets in 2020, and less scope for monetary easing surprises or fiscal stimulus. Major central banks appear intent on maintaining easy policies – and interest rates and bond yields look likely to linger near lows.

What to consider: Income streams are crucial in a slow-growth, low-rate world. We like EM and high yield debt. Infrastructure can also offer potential income.

3. Rethinking resilience

What to know: Yields are testing lower limits in many developed markets as central banks exhaust their toolkits of conventional easing measures. Low or negative yields make many government bonds less effective portfolio ballast in case of equity market selloffs. A focus on sustainability can help add resilience to portfolios as markets wake up to environmental, social and governance (ESG) risks.

What to consider: We prefer U.S. Treasuries to lower-yielding peers as portfolio ballast and like inflation-protected securities against inflation risks.

Christopher Dhanraj
Head of iShares Investment Strategy
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