With market volatility on the rise, consider a broad set of relative value opportunities across global markets.

Markets entered 2018 with the wind at their back: double-digit equity returns, strong momentum, and expectations that the synchronized global growth and corporate earnings recovery we saw in 2017 should continue into 2018.

However, recent volatility suggests some storm clouds could be gathering. Central banks globally are moving away from emergency levels of easing, and large fiscal stimulus in the U.S. in the late stages of the business cycle could have unintended consequences.

Rich valuations combined with crowded positioning create an environment where investors should seek to grind out returns by pursuing multiple country- and sector-specific macro or micro relative value opportunities.

Here are our asset allocation themes for multi-asset portfolios in 2018. For further insights into global asset classes, please read our Asset Allocation Outlook, “Singles and Doubles.”

Overall risk

We are modestly risk-on in asset allocation portfolios, focusing on multiple relative value opportunities across sectors and regions. Synchronized, above-trend global economic growth and low but gently rising inflation are likely to characterize 2018, but this scenario is already reflected in most asset prices. Risks to the outlook include greater volatility, higher inflation and unstable stock-bond correlations – and policymakers may not have sufficient tools to effectively counter a downside turn.

Equities

Given the recent cheapening, we are overall constructive on equities; we are overweighting non-U.S. markets relative to the U.S., where markets have already priced in a very optimistic scenario. That said, we do see an attractive opportunity in a combination of U.S. bank stocks and real estate investment trusts (REITs). We are moderately bullish on European equities, with growth in the region above trend and an accommodative European Central Bank (ECB). Attractive valuations and low corporate leverage are positives for Japan’s equity market.