Global investors will need to weather more volatility in order to capture opportunities in 2019, according to a report from UBS, one of the world's leading wealth managers.
Global economic growth was expected to decelerate next year to 3.6 per cent, from 3.8 per cent in 2018.
Conversely, the financial institution predicted that companies' earnings would grow at a slower rate.
However, it pointed out that a 2019 recession still looked unlikely as prices of many financial assets had already moved to reflect uncertain prospects.
It explained: "UBS Global Wealth Management's Chief Investment Office (CIO) enters the year with an overweight position in global equities.
"However, as the market cycle matures, investors should diversify and hedge their portfolios to guard against volatility as well as political and other risks.
"They should also take advantage of growth in fields like sustainable and impact investing, and pockets of value where financial asset prices are excessively low," the report stated.
The Chief Investment Officer (CIO) at UBS Global Wealth Management, Mark Haefele, urged investors to retain their positions in global equities, but plan for market volatility.
"A slight slowdown in economic and earnings growth doesn't mean no growth, and the recent sell-off has left a number of assets more attractively valued, but investors must also take into account the tense geopolitical environment as well as monetary policy tightening," he added.
In its investment process, the CIO sought to test its ideas against professional investors' views. Surveys of professional investors and wealthy US-based individuals revealed divergent outlooks for the year ahead.
According to the survey, close to half of professional investors saw the US lagging global markets next year, while two-thirds of individual investors surveyed expected US stocks to match or beat global equities.
Also, nearly half of the professionals surveyed anticipated the US dollar declining versus the euro, compared with less than one-sixth of individual investors.
The most popular asset class for professional investors entering the new year was emerging market equities.
For individual investors the top pick was US stocks. Professional investors were nevertheless more optimistic than individual investors on how much upside remains in the US equity bull market.
"Few professionals regard US political risk as a bigger threat than US-China trade tensions and higher interest rates. Individual investors are more concerned about US political risks than professionals are.
"When asked when the next recession will start, the most common answer among professional investors is 2021.
"Half of the individual investors surveyed expect the next recession to start within two years," the report added.
The survey recommended that investors should retain an overweight position in global equities as we enter 2019. Nevertheless, they were advised to hedge against volatility by holding overweight positions in medium-duration US government bonds and the Japanese yen, as well as focusing on quality companies and avoiding excessive credit risk.
"They should also look to neglected areas of the market, including value stocks in the US and emerging markets, energy equities globally, and shares of financial companies in the US and China.
"Sustainable and impact investing continues to provide longer-term growth opportunities, as do emerging market and Japanese stocks, and US dollar-denominated emerging market sovereign bonds.
"The US Federal Reserve should approach the end of its tightening cycle in 2019, while the support from US fiscal stimulus should wane.
"In this context, the US's twin fiscal and current account deficits will likely weigh on the US dollar.
"Within Latin America, investors should keep an eye on Brazil, where the incoming administration has proposed a range of reforms that could improve the country's fiscal sustainability.
"The European Central Bank should start to normalise interest rates in 2019, which would support the euro against the greenback. A clear recovery by the euro is needed before the Swiss National Bank will hike rates, although the Swiss franc has limited scope to depreciate against the euro.
"Within emerging EMEA, CIO sees the recent sell off in crude oil prices as overdone, and expects prices to rise towards USD 85 / barrel over the next six to 12 months, supporting prospects for the Middle East," the report added.