Although we have passed the peak in the global growth cycle, conditions for an imminent sharp slowdown in activity are not yet in place. Growth is expected to be solid ahead, with further gradual increases in interest rates. Amid ongoing elevated volatility, but an expectation that a number of recent risk headwinds are fading, we are entering 2019 with a neutral attitude to risk and are upgrading our overall positioning in equities to neutral.

Modestly underweight domestic equities - Domestic equities have a less compelling earnings outlook compared with offshore markets, which offer greater exposure to faster growing secular trends such as technology and healthcare. Moreover, while growth is only likely to slow toward trend, there are risks of a sharper downturn as the housing market corrects.

Modestly overweight international equities - Our modest overweight in international equities is concentrated in both Europe (deep value with improving macro prospects) and emerging markets. The potential de-escalation of global trade tensions and a less hawkish Fed that stalls the US dollar’s upward trend, are factors likely to benefit these markets.

We expect to be underweight most international fixed income asset classes - The tug of war between growth and inflation is likely to persist throughout the year creating some volatility in interest rates and the end of QE in Europe is likely to add fuel to widening credit spreads.

We expect the Australian dollar to drift higher through 2019 - While the Australian dollar may face renewed downward pressure near term, we expect some recovery toward USD 0.75 most likely in later 2019. This should reflect peaking US policy tightening, as the RBA turns its attention to normalisation; a return of domestic core inflation to the bottom of the RBA's inflation target; stabilising expectations about the outlook for global growth; and increasing signs of stabilising China growth on the back of policy easing.