Aside from a few days of volatility, markets have risen steadily this year. So how should you position your portfolio in an environment where risk assets may continue to move in lockstep?

Since February, markets have generally been on a steady rise, aside from a few volatile days around the British vote to leave the European Union. But it is important to remember that financial assets are highly susceptible to changes in central bank policy. With the Fed hinting at a rate increase, investors should prepare for the possibility of a taper tantrum scenario in which most risk assets experience negative returns at the same time. With that as the backdrop, here are six areas of the market worth watching in the fourth quarter.

1. Equities — Emerging markets are beginning to outperform

After years of underperformance, emerging market (EM) equities are beginning to outperform developed markets. GDP growth in EM economies is expected to modestly accelerate, widening the gap between emerging and developed market growth. We expect this trend to continue.

Rising GDP differential signals better emerging market performance
Emerging market to developed market GDP growth differential
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Source: International Monetary Fund, Bloomberg and Columbia Management Investment Advisers, LLC as of April 2016

2. Japan — A weaker yen benefits Japanese equities

Japanese equities look cheap, as earnings have grown over the past 12 months and share prices have fallen. Monetary authorities in Japan have been trying to stimulate the economy through aggressive quantitative easing and, most recently, through the announcement of yield curve management. But market participants question whether the Bank of Japan policies are effective and the yen has strengthened significantly. After recently weakening on expectations of a December hike, we expect the yen to eventually weaken against the dollar, which would benefit Japanese equities.

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