As we begin 2019, we definitely tilt more positive in our global asset allocation and macro positioning, despite our call for a weaker economic environment. Many asset classes, Public Equities and Liquid Credit in particular, now appear attractive to us, and as such, we are selectively boosting exposures. However, it is not business as usual in the global capital markets these days. In our humble opinion, the game has changed. Specifically, we see four major influences that require a different approach to asset allocation in 2019: 1) a notable shift from monetary policy to fiscal is under way; 2) Technology, while still an incredibly powerful agent of change in the global economy, now faces more valuation and regulatory headwinds than in the past; 3) tightening liquidity conditions amidst higher real rates are macro headwinds that must now be considered; and 4) the rise of geopolitical uncertainty warrants a higher risk premium than in the past. Our message, however, is not to head to the sidelines and wait for these four considerations to dissipate. Rather, we want to stay invested, and maybe more importantly, we want to use periodic dislocations like we saw in the fourth quarter of 2018 to lean into areas of the global capital markets that seem to be pricing in recessionary conditions. Our bottom-line for 2019: Thoughtful asset allocation preferences, coupled with several key top-down investment themes, can drive above-average returns from current levels. No doubt, return per unit of risk is headed lower, but for investors with a long-term game plan and the ability to buy complexity amidst uncertainty, we see significant opportunities in 2019. And for those who understand how to adeptly navigate the reality that the game has changed, the upside could be even more significant.
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