Counting the cost of the trade war, most investors seem convinced that central banks will ride to the rescue with aggressive monetary stimulus. We don't share their optimism.
We anticipate subdued global growth in the coming months as uncertainty from trade tensions hits industrial production and business sentiment, especially in developed economies.
Although we expect central banks to ease monetary policy to arrest the economic slowdown, they aren't likely to deliver the volume of stimulus that the markets are hoping for, so we remain underweight equities.
At the same time, we have more reasons to keep our cautious stance on bonds now that this year's rally has pushed the yield on nearly a third of the global bond universe below zero (1) - a record $15.5trn. We remain overweight safe-haven assets.
US stocks look particularly unattractive. The S&P 500 index is only a few points off all-time highs but US recession indicators are flashing red - the yield curve has inverted and, for first time since the GFC, stock dividend yields are higher than those on 30-year Treasuries.
Alongside greatly reduced consensus profit forecasts, a recent dip in stock buybacks is another worrying sign for US equity investors, given that these accounted for around 20 per cent of the market's returns during the past decade.
But there are bright spots - we remain overweight European equities. Germany may be in technical recession, but Europe has been improving recently thanks to momentum in France and Spain. A fresh round of stimulus from the ECB should also help.
The UK also offers good value, particularly for overseas investors. Sterling is cheap, valuations are attractive, a substantial proportion of corporate Britain's earnings are generated abroad, and the market's 5 per cent plus dividend yield offers some insulation from volatility.
Economic prospects for emerging markets have been hurt by the trade war, but that's being mitigated by interest rate cuts. Asia is a bright spot as the Sino-US trade war is seeing business diverted to other Asian exporters.
During periods when the world economy is slowing, it generally makes sense to increase allocations to defensive assets such as government bonds. The trouble is, with bond yields having fallen precipitously in recent months, what would normally be considered safe now looks risky.
Some would argue that valuations are justified by the dovish shift in central bank rhetoric. Our analysis shows the gap between the current and market-implied volume of monetary stimulus - measured as a percentage of GDP - has never been wider, which means the market is set up for disappointment.
Such has been the strength of the bond market rally that valuations for previously cheap emerging market (EM) local currency debt are now beginning to look hard to justify over the near term.
True, EM bonds offer an attractive real yield of 3%. But, with the negative impact of the US-China trade dispute, emerging market currencies might weaken over the near term. Thus, we have reduced EM debt to neutral.
In terms of currencies, we remain overweight in both the Swiss franc and gold - both should do well in a period characterised by geopolitical upheaval and a deterioration in global economic conditions.
Luca Paolini is chief strategist at Pictet Asset Management