While equity markets have entered bear territory in recent days, investors can expect a sizeable "bear market bounce" in the first half of 2019, JP Morgan Asset Management (JPMAM) said.
Its Singapore-based global market strategist Jasslyn Yeo noted that several potential positive catalysts support the case for a significant bounce, including the recent change to a more dovish view by the United States Federal Reserve's policymaking committee.
"The first quarter has typically been a seasonally weak quarter for US growth. Coupled with the US government shutdown, we expect the Fed to pause in March and for this pause to bring about much relief for risk assets," said Dr Yeo.
She added that investor sentiment could improve on the back of a positive fourth-quarter earnings season, further China policy stimulus and a potential US-China trade deal before the March 2 deadline.
Dr Yeo also judged this bear market to be a more cyclical one associated with the normal downturn of business cycles, given the absence of major structural imbalances. Cyclical bears tend to see shallower corrections and quicker recoveries than structural bears.
However, the outlook pointed to further recession risks and longer recoveries ahead, given the limited ability of central banks to stimulate the economy. Going by slowing real gross domestic product figures, global growth was moderating from above-trend to trend rates, and markets were "firmly in late cycle 2.0", Dr Yeo said in the firm's quarterly outlook on Thursday.
Global central banks were also gradually withdrawing liquidity support that bolstered market returns and asset prices in the last several years.
"Global growth is slowing and global liquidity is tightening, but the US Federal Reserve is unlikely to stop hiking rates with no immediate threat of a recession," JPMAM noted.
"The European Central Bank could find it hard to raise rates, while the Bank of Japan is likely to remain status quo. Conversely, the Chinese government could further ease policy to stabilise growth, but we don't expect to see any big-bang stimulus."
She recommended that longer-term investors use the bear market bounce to de-risk their portfolios, and consider more bond exposure to diversify and mitigate volatility.
Demand for safe-haven US Treasuries would likely increase as the Fed approached the peak of its rate-hike cycle and recession risks also increased. US corporate bonds, however, were vulnerable, with large downside risks and typically poor liquidity with the recession risks.
JPMAM remained cautious on equities beyond the prospect for a bounce, preferring those with more defensive, income-generating characteristics.
"Valuations may be looking more reasonable following a difficult 2018, but it's hard to see sustainable re-rating with tightening global liquidity and negative earnings revisions," Dr Yeo said. "Earnings per share growth is likely to fall further as the cycle slows down."
Dr Yeo advised caution on emerging markets and Asia ex-Japan equities, as the US dollar was likely to appreciate with rising recession risk.