“In the coming year, we believe continued central bank support will warrant an overweight to equities,” State Street said.

“This generally positive outlook is tempered, however, by increasingly stretched valuations as fundamentals disconnect from returns.

“This disconnect, combined with persistent trade risk and the prospect of recurrent bouts of volatility, will lead us to maintain a defensive posture in our equity allocations.”

With this in mind, the investment manager said it would adopt a larger position in North American equities where the risks of ongoing volatility were less, compared to European equities which could be impacted by the still unclear path of Brexit.

“Robust domestic demand and fiscal supports lead us to favour North American equities, where we believe there is a lower probability of earnings disappointment,” State Street said.

“Compared with historical trends, European equity valuations are more attractive than those in North America and in emerging markets, but we are relatively neutral on European equities due to persistent political and structural uncertainty.

“Fiscal policy movement and greater political clarity on Brexit and the future of structural reform would go a long way towards catalysing European equity markets.”

State Street added that it was cautious on Australian equities in the coming year, given that successive interest rate cuts in 2019 had driven a market rally that had inflated equity prices.

“Australian equities have generated above-average returns year to date, up more than 25 per cent across the major indices,” the investment manager said.

“The healthcare and IT sectors posted the strongest gains and also now represent the most expensive parts of the Australian market.

“With market valuations on the expensive side, we believe it will be important in 2020 to focus on companies that can deliver on earnings growth and to maintain a valuation discipline in your stock selection.”