U.S. trade policy and dollar strength will remain key factors for markets over the next 6 to 12 months, according to Lazard Asset Management.

The Lazard Multi-Asset Team’s recent manager letter discusses recent developments behind the latest changes to the team’s market forecast.

“How U.S. policy shifts as we move past the midterm elections in November will be critical for the direction of global markets,” the letter states. “Risk assets like emerging markets equity and debt, which have been especially vulnerable to new barriers to the flow of commerce, may find support should the hardline rhetoric be dialed down (although there is no guarantee of that).”

The Lazard Multi-Asset Team also believes countries with material external vulnerabilities, negative fiscal balances or local companies that are highly levered in dollars will likely continue to underperform. The team says this could outweigh the positive effects of recent synchronized economic growth and drive further divergent near-term performance of U.S. and non-U.S. markets.

According to Jai Jacob, portfolio manager leading Lazard’s Multi-Asset investment team, the team typically changes allocations between four and six times a year.

“It’s not periodic,” he said during a recent media briefing in New York. “It’s more episodic, in the sense that when we think something has changed we will allocate.”

Lazard’s multi-asset portfolios reflect its assessment of the global economy and the investment landscape 6 to 12 months into the future.

Lazard’s market forecast is based on an evaluation of returns and risks across four subject areas: the macro economy, factors impacting asset valuation, market liquidity and investor sentiment.

Regarding the macro economy, Lazard’s outlook is that global synchronized economic growth may see some fissures over the forecast period. In particular, the Chinese economy appears vulnerable, though Lazard notes that the Chinese government is likely to step up stimulus efforts via investments in fixed assets.

Lazard’s outlook for business costs, profit margins and returns — or factors impacting asset valuation — foresees that tighter U.S. and Japanese labor markets are likely to be a feature as a result of local economic strength. Lazard also thinks many companies will spend more on interest rate payments over the next 6 to 12 months as intermediate bond yields rise.

When looking at market liquidity, Lazard forecasts that looser U.S. lending standards should begin to manifest in some increase in consumer lending, with demand remaining strong given the low unemployment rate and solid consumer confidence.

Despite improved relations with North Korea, Lazard made minimal changes to its investor sentiment outlook as geopolitical risks remain elevated and investor risk appetite is likely subdued going into 2019.

“Policy will likely be dominated by global trade tensions, the slowdown of the European Central Bank’s quantitative easing program, and further Federal Reserve rate increases,” the letter states.

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