NEW YORK (Reuters) – Declining global economic growth rates will boost defensive stocks and could lead to opportunities in emerging market currencies and mortgage bonds in the year ahead, asset manager Pacific Investment Management Co (Pimco) said in its 2019 outlook on Thursday.

Higher interest rates and fading fiscal stimulus will leave the U.S. economy at a 30 percent chance of falling into a recession, the highest probability at any point during the nine-year economic expansion, Pimco said.

“The models are flashing orange rather than red,” the firm noted.

A slowing economy will bring the U.S. growth rate closer to the stalled economies of China, Europe and Japan and limit inflation, making mortgage-backed securities an attractive alternative to investment-grade credit, Pimco wrote.

“While the expansion has been aging gracefully, we believe the global economy is past peak growth in the cycle,” the firm wrote.

Falling growth expectations will depress valuations in the U.S. stock market and leave equity markets volatile in 2019, Pimco expects. There is also little likelihood of a breakthrough in the simmering trade war between the U.S. and China, the firm predicted.

“The conflict between the U.S. and China is more deep-rooted and about much more than trade alone, and would thus continue to be a source of uncertainty and volatility even if there were a deal on trade,” the firm said.

In Europe, UK financial bonds continue to look attractive given the low probability of a chaotic, no-deal Brexit, the firm noted. At the same time, the firm remains “cautious” on both sovereign credits and corporate bonds in peripheral Europe given Italy’s budget deficit.

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