Markets have been volatile over recent months with global equities falling by 17 per cent between early October and late December, only to regain almost all of that in 2019.
A string of positive catalysts have contributed to this rebound including steady stimulus measures from Chinese policymakers, a more positive tone on the trade deal between the US and China and most importantly, the dovish pivot from the Federal Reserve. Investors are rightly asking what does this means for fundamentals and asset markets? 
The Fed’s dovish pivot has not catalysed an extended, 2016–17 style rally. Some investors see the Fed having finished raising rates in this tightening cycle, or at least in this year. This view that policy rates have peaked are seen to support another strong equity market rally.
We disagree. Financial conditions may have eased, but the economy is later in the cycle, and there is less scope for an unleashing of pent-up demand.
While the Fed may talk dovishly at the moment, this may not last that long if higher inflation follows. In other words if things do go well in the economy, interest rate hikes may well be back on the table sooner than the optimists hope.
Investors should also be clear that any actual cut in US interest would be preceded by a run of bad news that would drive markets significantly lower in the first instance. Thus, the dovish pivot by central banks is not a cause for exuberance.
For all that, we have all observed enough of the vagaries of post-global financial crisis central bank maneuverings not to want to stand in the way of easier policy. This leaves investors in a somewhat unsatisfactory holding pattern of data-watching. Equity markets are expected to trade sideways in a range for the time being.
The economic environment is supportive of carry assets over capital appreciation (or growth assets), especially on a risk-adjusted basis. From an economic perspective, the risk of a recession over the next 12 months remains low by late-cycle standards.
And with the Fed communicating a pause in its rate hiking cycle, the business cycle is probably extended by a couple of quarters. Stable but not runaway growth and low risk of inflation might not set the equity world on fire, but they are probably sufficient to take a more positive tone on credit. With corporate earnings forecasts back to levels commensurate with slightly sub-trend global GDP growth, attractive risk-adjusted returns can be achieved in selected carry assets.
Levels of corporate leverage in credits on the cusp of investment and non-investment grade are likely to remain a concern.
By contrast, valuations in US high yield look close to fair, after adjusting for liquidity risks and the prevailing environment. Fundamentals in US high yield have improved after the oil-related volatility in early 2016 and overall leverage has fallen. A more muted monetary policy outlook, still strong technicals, and a sanguine US outlook still make high yield attractive. Emerging market debt also appears a favourable source of carry in an environment in which Fed policy likely keeps the US dollar from appreciating sharply.
Moreover, European high yield, after the European Central Bank’s dovish turn and extension of liquidity operations, are well supported in a low growth, low inflation environment. Clearly if recession risk rises, it would change the calculus. But with a modest improvement in growth in coming quarters alongside an ECB keeping rates on hold throughout the year, European credit markets offer attractive carry. Moreover, once European high yield is hedged into US dollar terms, it offers a positive pick up to US high yield markets – an attractive proposition for certain investors.
The dovish pivot from global central banks, and the Fed in particular, have bought a few more quarters in the cycle. This was necessary to stem the fall in equity markets but is not sufficient to propel them significantly further. Sustainable gains in markets have to be driven by real economic improvement.
In the time being, while we watch the data flow, we find earning carry in select credit markets relatively more attractive than equity on a risk-adjusted basis.
Thushka Maharaj is global multi-asset strategist at JP Morgan Asset Management. All views are her own and should not be taken as investment advice.