Financial assets will usually perform better after a period of “intense disappointment”, according to Aberdeen Standard Investments’ Andrew Milligan, so it has come as little surprise that many who stayed invested in equities have profited following the sell-off at the end of last year.
However, this comes amid a global picture of increasingly mixed political signals, the head of global strategy said.
Having made a loss of 11.35 per cent in sterling terms during the final quarter of last year, the MSCI World index has returned
Performance of index in Q4 2019
Source: FE Analytics
Milligan (pictured) warned that even after this sunnier spell for markets, now is the key time for investors to become more tactical in their approaches, and crucially maintain diversification to protect investments against a variety of global market challenges. 
Although the firm expects the current cycle to be extended in to 2021, it has begun positioning itself more cautiously.
“Our portfolios remain risk-on, but we have become both more cautious and diversified into the summer,” he explained
This Milligan said reflects Aberdeen Standard Investments assessment of what’s in prices, as well as the imbalances, strains and stresses in the world economy.
It also reflects the likely effectiveness of the monetary policy response by central banks, following the most recent rate cut by the Federal Reserve and support for further loosening in Europe.
Indeed, economic risks have increased during the first half of the year, said Milligan, with a mini recession in the manufacturing sector and global trade growth falling to around zero.
In addition, poor business confidence has been discouraging capital spending and there have been few signs to suggest that it is improving in the early autumn.
Nevertheless, the strategist said world economy is holding up “thanks to solid consumer spending and expansion in the services sector”, leading to it to forecast of GDP growth of around 3 per cent per annum in 2019 and 2020.
“In effect, as long as the credit and corporate bond markets remain open, then we see the flat or modestly inverted yield curve as a sign of slow growth rather than imminent recession,” he said.
Downside risks are likely to come in the form of job cuts from the manufacturing sector undermining household consumption, he noted, while upside risks would reflect improvements in business and consumer confidence encouraging more spending.
While monetary and fiscal easing should be supportive of markets there are causes for concern.
“On the one hand, a reduction in borrowing costs should support, for example, the housing markets and real estate sectors in many countries,” he said.
On the other hand, he said, a rapid deterioration in US-China trade relations could outweigh the benefits of central bank policy. Indeed, it remains to be seen whether a new front in the trade war could open up with the EU.
One thing the trade war has highlighted is the growing strategic rivalry between the US and China.
Another potential area of concern is surrounding monetary policy itself.
“Policy errors are dangerous late in the investment cycle,” said Milligan. “Currency stress would be an obvious channel.”
Sharp changes in the US dollar or Chinese renminbi could put emerging markets under stress at a time where many central banks hope to cut rates.
As such, Milligan said the firm retains a core of global equities in its portfolios it is seeking greater diversification to gain the benefits of other risk premia.
“We prefer developed to emerging market equity,” he added. “Positive profits growth will support both regions, but emerging market equities have greater risks related to trade barriers or currency volatility.”
Within emerging markets, Milligan favour Asia on the grounds that any further stimulus from China should support the region.
In fixed income, interest rate cuts should provide a good backdrop for assets with yield, carry or spread. High yield corporate bonds – in the US and Europe – are one favoured area, as well as emerging market debt.
“However, taking too much risk in fixed income markets does not make sense when bond valuations are rather stretched,” he said.
“Stronger-than-expected economic reports can significantly alter market expectations. Hence we are underweight low-yielding Japanese and US government bonds.”
Another source of income Milligan is focusing on is alternative assets, which he said can provide income in a world of low interest rates due to the state of various centrals banks quantitative tightening and easing policies.
Real estate is one area which works as an alternative asset, but Milligan said it needs to be treated with caution and care.
“The retail sector is under pressure in many countries, noticeably the UK and the US, owing to the inexorable rise of e-commerce,” he explained.
Yet on the other side there is a continuously strong demand for general office space, hotels and student accommodation.
Another area Milligan discusses for providing diversification is currency, even though he admits that the valuation models for them are not providing strong signals for them.
Whilst some emerging market currencies are expected to see some moderate weakness in the next few months as the impact of the interest cuts are felt and shown in the market Milligan said that the dollar is: “Likely to drift as rate cuts by the Fed reduce its carry attractiveness.”
Sterling is the one currency which could be volatile as the “shock of Brexit” as Milligan put it, could very easily see the pound test its previous lows against the US dollar and Euro in the coming months.
“In terms of our investment style, we see the year ahead as one where more tactical decisions will make sense,” he concluded.
“We expect to see sharp rallies and sizeable sell-offs as global investors react to a complicated mix of economic, corporate and political signals. In these circumstances, a diversified portfolio makes sense, as does having cash to put to work as and when value appears in any asset class.”