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For investors looking to make the most of their portfolios in the new year, a changing global economic environment will likely provide plenty of opportunities, so long as investors are vigilant and know what signs to watch.

A Mercer report outlines those signs as it forecasts four overarching investment themes that will shape market dynamics in 2019.

First is greater volatility as the business cycle winds down. Credit is overextended, with debt increasing and debt quality decreasing, says the report, yet the equity market continues to benefit from a positive macroeconomic backdrop. Such an environment requires that investors revisit and stress-test strategic asset allocation for fit and robustness, it says.

In particular, highly levered companies may be at risk of failure if they’ve avoided bankruptcy due to low refinancing costs. In contrast, “Shares that are growing their dividends sustainably year-on-year may be the best port in a storm for equity investors,” says the report. Within fixed income, Mercer see opportunities where managers can rotate between credit sectors to take advantage of sectors’ changing prospects.

The report adds that the return of inflation is a potential threat, requiring inflation-proofing of portfolios.

Second, investors should be alert to signs of market stress as accommodative monetary policy is removed and liquidity is potentially affected. Less ability for individuals and corporations to borrow for investment or consumption will likely impede economic growth.

“The prevailing wind looks increasingly challenging for public market investors, with extraordinarily low yields and generally elevated valuations,” says the report.

While private equity and private debt offer attractive, alternative growth opportunities, investors must understand their tolerance of illiquidity in a range of scenarios, it says.

The third theme is political fragmentation, likely to be a concern in 2019 and beyond, and exemplified by international trade woes. A potential impact of increased protectionism is greater divergence in investment returns across regions and countries, which could affect investing strategy.

That divergence would “present a challenge to our view that global investment mandates are generally better placed than portfolios of regional mandates to deliver active returns […], so this is a dynamic that we will be watching closely,” says the report.

It adds that, with concern about China’s growth as well as that country’s efforts to open up capital markets, investors should consider how to manage their exposure to China.

The final theme is sustainability, with governments and regulators now expecting that capital be allocated with a “broader perspective of risk and return,” says the report. While incorporating sustainability considerations into portfolios requires a longer timeframe than typically used for investment decision, that longer-term view may uncover opportunities not currently priced in, it says.

For complete details, read the full Mercer report.

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Your sneak peek at investing in 2019