TWO important questions that any investor should regularly ask are what is already priced into the market and how are other investors positioned? These issues matter even more after the sharp sell-off in equities seen at the end of last year.

Financial markets are driven by hard economic fundamentals and we can see how much an impact they have by examining investor surveys about who owns what. Currently, several aspects stand out.

The first is a strong overweight position in US assets, especially equities and the dollar. While this is explicable given the boost to the US economy from President Donald Trump’s stimulus package, investors must consider how much longer will this be sustained once that effect starts to fade.

Secondly, there are above-average holdings of cash.

Again, these are understandable when domestic and international politics and policy making are arguably more uncertain than since the late 1980s. That cash will, however, eventually be put to work.

At times of stress, it is important to focus on core issues. First, we need to look at this long economic cycle and ask whether it will end soon. While this expansion has become one of the longest lasting since the 1950s, it has seen its own mini-cycles. One was related to the European Monetary Union crisis back in 2011-12 and the second was related to the oil shock of 2015-16. We are currently living through the third – a reflection of policy tightening in, and strategic rivalry between, the US and China.

It must be emphasised, though, that a slowdown need not turn into a recession. 2020 is the first year where the probability of a recession is high, although history suggests such an outcome is less likely in the year before than after a presidential election.

With China, Europe and Japan already taking steps to stimulate activity, then a moderate growth path is expected.

Of course, risks to such forecasts need monitoring. These could include a shock to global trade or major disruption in the bond markets, the result perhaps of a sharply appreciating US dollar, much higher US interest rates or policy conflict between the US and China.

At the end of the day, equity prices will follow company profits. By carrying out detailed analysis, we can see which markets look better or worse. Yes, there are pressures from rising costs, disruptive technologies and competitive pressures, and bad news from the UK high street sums up the issues well.

However, our analysis indicates that global profits can grow by five to 10 per cent in 2019. We do need to make some important assumptions about the inflation outlook, however. We believe inflation will remain restrained, meaning in turn that central banks can be cautious in their decision making.

In recent months, we have taken some risk out of our portfolios. The rationale is that a number of the issues we are monitoring look likely to get worse before they get better. The slowdown in China is a prime example. Of course, financial markets are forward looking, and therefore a degree of bad news is already in the price. As long as recession is avoided then equity market valuations are the most attractive for several years. Any positive surprises, such as stronger than expected growth, should lead to solid gains for equities when investors put cash on the sidelines to work.

Of course, portfolios should be diversified, owning a mix of bonds, cash and property as well as equities. We are cautious about the outlook for global real estate, because of a poor balance of demand and supply, with some exceptions such as Europe. Most government and corporate bond markets are not attractive at current yields, so we expect modest returns. One exception is emerging-market debt, where we think valuations and investor positioning support an overweight position. Otherwise, where you have spare cash there should be some attractive buying opportunities in 2019 to make your portfolio better suited for the 2020s.

Andrew Milligan is head of global strategy at Aberdeen Standard Investments.