The global economy remains stuck in a rut. The situation in many emerging markets is dire andcould get worse as flagging growth causes financial stresses to surface. The U.S. economy is likelyto disappoint, prompting the Fed to stand down from its ill-conceived plan to raise rates four timesthis year. The euro area continues to benefit from a weaker currency and a loosening in bank lendingstandards, but these tailwinds will ebb later this year. Efforts by Japanese policymakers tobring inflation up to 2% look increasingly elusive. Ultimately, some degree of debt monetizationmay be necessary to reflate Japan’s economy. Globally, the political backdrop remains fraught withuncertainty, not just in the usual hotspots such as the Middle East, but increasingly in developedeconomies as well, where populist politicians are finding a receptive audience for their message.Reflecting these risks, BCA’s Global Investment Strategy service downgraded global equities fromoverweight to neutral last month, after having been overweight this asset class since April 2009.We continue to favor DM over EM equities and defensive sectors over cyclical ones. Within the DMequity universe, we have a modest preference for the euro area and Japan over the U.S. This ispartly because U.S. stocks are considerably more expensive, but it is also because the Fed is hikingrates, whereas the ECB and BoJ are standing pat. In addition, profit margins have greater scope toincrease in Europe and Japan. Within EM, we would avoid countries such as Brazil, South Africa,and Turkey, which are vulnerable to sudden stops in capital flows, preferring instead economiessuch as China which have the policy tools to deal with weaker growth.One of our highest conviction calls over the past few years has been that safe-haven bond yieldswould stay depressed, even in the face of the tentative economic recovery in much of the developedworld. This judgement was driven not by the widespread presumption that central banks were “artificiallymanipulating” rates, but rather reflected the view that low rates would remain a necessityin a post-debt supercycle, slow growth world. Although Treasury yields could drift higher over thenext few months, as the Fed starts to prep the market for a second rate hike, we ultimately expectthe 10-year yield to finish the year at around 2%.Last year’s selloff in high-yield credit has made this asset class more attractive from a valuationperspective. However, with U.S. corporate balance sheets still deteriorating, spreads could continueto widen. Regulatory changes that have reduced liquidity in this market could further fan the flames.The challenging outlook for the energy sector will also put pressure on high-yield indices.While a variety of geopolitical developments could give crude prices a temporary lift, ongoingtechnological progress in shale will continue to push down breakeven costs, and ultimately, prices.Likewise, rising mining supply, combined with China’s transition to a more service-oriented economy,should cap any rally in bulk and base metals. Gold will remain in a prolonged bear market.The dollar will continue to strengthen this year, but mainly against EM and commodity currencies.The euro and yen are likely to be range-bound against the greenback, given the lack of any freshmonetary stimulus from either the ECB or the BoJ. The trade-weighted Chinese yuan will weakenmodestly, although a large one-off depreciation remains a low-probability, high-impact risk.