2019: make usd cash great again?

2019 clearly promises to be tricky, with still many risk factors in evidence with the potential to be disruptive (trade war, Italy). The recession risk remains very slight in our view, not justifying a bear market positioning for 2019. However, asset allocation needs to be cautious as well as flexible. Besides the political factors, macro and micro uncertainties along with more data-dependent monetary policies will continue to fuel volatility, lead to a deterioration in Sharpe ratios for all asset classes in 2019, and increase the attractiveness of $ cash. We are cautiously optimistic, with a preference for equities (bias for defensive and quality plays). This year’s correction was excessive in our opinion, so that at current valuation levels and barring a brutal deterioration in the fundamentals, equity indices still have some rebound potential: in the short term, US markets remain the first catalysts, followed by emerging markets and, finally, Europe, whose fate will be tied as before to the political news flow. Commodities (first and foremost crude oil) are the other asset class susceptible of outperforming $ cash in 2019. We remain short duration $ and €, expecting a further normalisation of monetary policies and an asymmetric inflation risk (especially in the United States). We are underweight High Yield credit, spreads being expected to continue to widen. Given the exacerbated volatility and less favourable bond/equity correlation, our opinion is that alternative strategies will be particularly attractive in 2019 in order to diversify and hedge portfolios. We also see gold as a useful hedge in 2019, as well as $ linkers.