With our core scenario of benign growth and policy easing, the outlook should be favorable to risk assets like equities and corporate credits. Despite high valuations, U.S. equities remain relatively attractive given a positive corporate earnings outlook and expectations of sustained tax cuts. Cyclically sensitive sectors could excel after several years of tech sector outperformance. For Asia, the tech export story remains strong, benefiting markets such as Taiwan and Japan, with Japan enjoying the boost from corporate governance reforms. For fixed income, DM corporate bonds strike a good balance between income generation and benefiting from the favorable economic environment.

Overlaying this favorable scenario is policy uncertainties. This is not only brought by the change in the U.S. government, but also the ongoing shifts in policy outlook with many western economies. Trade and industrial policies, including tariffs, could see considerable changes. Sectors or markets with lower exposure to trade in goods could benefit. This could be services such as selected technology, media and financial services. In Asia, India has a relative low share of trade in goods to GDP. ASEAN markets could gain in the longer run on changes in global supply chains. For alternative assets, transportation and infrastructure could benefit from expansion of supply chain diversification. More logistics infrastructure is needed to transport manufacturing products and more shipping capacity is required to handle complex shipping routes.

Governments opting for a higher fiscal deficit strategy may face a higher premium on their government bonds. A short duration strategy can help manage volatility in fixed income. Meanwhile, potential beneficiaries of a higher deficit could include corporates through tax cuts, which would then benefit the broader equity markets, or industrials that gain from increased government spending on defense or renewable energy.

Trade policies, fiscal deficits and geopolitical events could cause the soft-landing scenario to shift toward either rebounding inflation or a recession. For inflation rebounding, 2022 has shown that a traditional stock/bond portfolio may not be sufficient. Investors can turn to commodities, inflation-linked bonds and real assets with revenue indexed to inflation. In a recession, high-quality fixed income is the preferred asset class for safeguarding. A positive note is that relatively high government bond yields mean that using this hedge still presents investors with returns above inflation.

While it is not feasible to cover all possibilities and scenarios, this list aims to provide a sample of actions that can be taken to prepare for contingencies. Our ongoing recommendation to stay diversified remains valid even in a promising year with various IFs and BUTs. Investors will also need to be nimble to adjust their portfolios to account for these potential outcomes.