US. We believe the monetary policy environment will remain supportive of equities in 2020. However, we believe investors will need to be more discerning in this environment. Valuations appear stretched for US equities, in our view, but we recognize that valuations have not often been a good predictor of equity performance in the shorter term. In addition, we believe lower interest rates and low inflation make US equities more attractive. Also, the dollar has weakened recently because of “quantitative easing lite” policies that are expected to be ongoing. That should be positive for US equities. Therefore, we are bullish on US equities, with the caveat that investors should expect more volatility in the coming year.

Canada. We are modestly bullish on Canadian equities. We believe long-term Canadian equity underperformance could be coming to an end as Canadian stocks enjoy some advantages that may be underappreciated by investors. The United States-Mexico-Canada trade agreement (USMCA) appears poised to be ratified, which would benefit Canadian stocks. In addition, the Canadian manufacturing outlook remains positive, suggesting business sentiment is positive, which should bode well for equity returns. Also, Canadian stocks could benefit from a weaker US dollar and the potential for higher commodity prices.

Europe and UK. We are neutral on European (ex UK) equities. Valuations are very attractive (based on an analysis of dividend yield and cyclically adjusted price-earnings ratios), but we have not yet seen signs that the eurozone economy has reached an inflection point. We are bearish on UK equities. We believe it is reasonable to expect earnings declines and slower dividend growth, especially since a large portion of the UK market is exposed to either commodities or banks.

Japan. We are modestly bullish on Japanese equities given that we envision a moderately brighter economic picture for Asia and expect limited downside to US long-term yield in our base case, which will likely result in either more stable or even weaker yen. (It has often been the case that stronger yen worked negatively for Japan equities, including this year.)

Emerging markets. Overall, we are bullish on emerging market equities. Catalysts for emerging markets include a more accommodative Fed. In particular, balance sheet normalization recently ended, which should end the liquidity suck it created for emerging markets. We also expect the search for yield to drive investors to emerging market equities. Asian emerging equities should benefit from fiscal stimulus from China and India. Chinese stocks in particular should benefit from Chinese financial liberalization and the increased weighting of Chinese A share stocks in MSCI indexes. We are bearish on Latin American equities, many of which are too closely tied to the fortunes of commodities prices and some of which we expect to suffer from policy uncertainty. We have a neutral view of emerging Europe equities given decelerating growth in the euro area.

Real estate. We are most positive on real estate, given its relatively high yields and potential for outperformance in what we expect to be a relatively low return environment. We favor eurozone and emerging market real estate but favor avoiding UK real estate until Brexit is resolved.

Gold. We are bearish on gold. While we recognize the diversification benefits of gold as well as a lower opportunity cost given lower rates globally, we expect low returns for gold in the coming year given the rally it experienced this year. In addition, gold typically performs best in recessionary or stagflationary environments, neither of which we expect for next year.]

Private equity and hedge funds. Private equity looks attractive in this environment given its risk-adjusted return potential, while we are neutral on hedge funds.

Commodities. We are bearish on commodities, as we believe valuations are much higher than historical norms for commodities in real terms. In addition, our historical analysis suggests that industrial commodities have performed poorly when the Fed is cutting rates.