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The combination of a global manufacturing recession and tight/tightening policy is raising a red flag for global non-TMT stocks. In China, households are entering a liquidity trap, and deflationary pressures are heightening. Authorities need to reduce interest rates considerably and allow the currency to depreciate. By doing so, China will export its deflation to the rest of the world.

Momentum, high cash balances, FOMO, and expectations of soft landing drive the market higher. This rally may continue for a while, but macroeconomic headwinds are intensifying and will eventually derail the rally. It is too early to celebrate victory.

A benign disinflation will support equities over the next few quarters. Stocks will fall next year as a recession begins when investors least expect it.

Indian EPS growth is set for major disappointments vis-à-vis the lofty expectations. Weak domestic demand amid tight fiscal and monetary policy entails more downside in stock prices. Stay underweight.

The most important question investors need to answer is whether this is the right time to shift the portfolio to a more aggressive and cyclical stance now that the end of the hiking cycle is in sight. To answer this question, we review the most recent macroeconomic, geopolitical, and equity market developments, and do our best to separate facts and data from sentiment and conjecture. We conclude that there are many challenges ahead and equities are not in a clear yet. We recommend investors add small positions in areas of the market that benefit from rate stabilization while maintaining an overall defensive stance.

Global investors should sell Chinese assets on strength this year and diversify into other emerging markets. American investors should limit China exposure. Short CNY-USD.

In this <i>Strategy Outlook</i>, we present the major investment themes and views we see playing out next year and beyond.