The weakness of manufacturing remains a source of fragility for the global economy. Data today pointed to a contraction in industrial activity in both Japan and Germany. Meanwhile, China's industrial output is rising at the slowest pace in 17 years, and the US ISM Manufacturing index looks set to fall below 50 – the level pointing to contraction – in the coming months.

In contrast, strong second quarter results from US retailers confirmed that consumers remain in a confident mood. Shares in Target, for example, soared 20%, while home improvement chain Lowe's ended 10% up. Data last week suggested this confidence spilled over into the third quarter, with national retail sales for July rising at the fastest rate in five months. Consumers are also being supported by easier monetary policy, with lower interest rates contributing to a 3-year high in mortgage refinancing, according to the Mortgage Bankers Association. Locking in cheaper rates will provide homeowners with more spending power over coming months.

This all underlines our view that the US economy should avoid a recession in 2020, as the strength of the consumer helps to compensate for a downturn in industrial output. But investors can't afford to be complacent, and a period of sub-par economic growth looks likely for the coming year. Even if the manufacturing slowdown isn't sufficient to provoke a global recession, it is likely to keep growth below trend. And consumer strength would also likely be affected by any further escalation of the US-China trade conflict. Although US President Donald Trump has delayed the imposition of a 10% tariff on the full USD 300bn of previously untaxed Chinese imports, an increase in tariffs on these goods to 25% remains a risk case, and we believe this would have the potential to undermine US consumer spending by raising retail prices.

So although the continued resilience of consumers keeps us confident enough in the global economy, we do not see this as the best environment for taking outsized risks on stocks. We therefore balance our overweight to global stocks with countercyclical positions, and favor the US market over the Eurozone – which is more vulnerable to industrial weakness. Instead, with rates likely to stay lower for longer, we look for income-enhancing opportunities. We are long the higher-yielding South African rand, Indonesian rupiah, and Indian rupee relative to the lower-yielding Australian, New Zealand, and Taiwanese dollars, as well as overweighting emerging market sovereign bonds and euro investment grade credit.