Falling oil prices, the strengthening US dollar, continued economic growth in the US and QE in Europe and Japan make up part of the confusing mix investors have to sort through in 2015.
But Bacon said he was "reasonably upbeat" about the coming year.
"We think 2015 will be a pretty challenging year," he told Fund Selector Asia. "We're constructive, but worried about banana skins and need to make sure we don't walk on them."
Alpha hunt
Citibank has chosen to focus on some key themes in 2015, and top of list is a stronger emphasis on alpha generation rather than exploiting beta, Bacon explained.
"We'll stick to our area of expertise, finding alpha managers over trying to be clever by moving around exposure to beta."
The bank will model for that by putting attention on multi-asset class portfolios.
"We'll focus on unconstrained strategies, less benchmark hugging, more focus on absolute return."
On the fund side, he will use more alternative hybrids – liquid alternatives, which give the ability to hedge but retain the flexibility and liquidity of a mutual fund.
"Seeking alpha over beta is our bread and butter, but we will be more systematic about it and not try to be too clever with structures."
Disaster planning
A second theme concerns the expected increase in market volatility. Bacon said the bank is paying attention to portfolio-level hedging, which is currently cheap.
"We will continue to be in an environment of well-constrained volatility, interspersed by major events that are difficult to predict – what we used to call `black swans'.
"We don't think a black swan event is out there, but we want to do disaster planning at the portfolio level because protection is cheap. You don't want to wait for volatility to spike first."
Other investment themes for the coming year include the bank's ongoing focus on disruptive technologies, for example, e-cigarettes, rapid prototyping and shale oil production. (The bank is staying with shale oil exposure, despite the freefall in oil prices).
An emerging theme that will get more attention on in 2015 is philanthropic investing, he said.
"Ultra high net worth individuals, particularly in the US, are spending a lot more time on philanthropic endeavours."
Equities bull
Bacon said he does not believe outsized returns will come from any particular asset class next year. However, Citibank is overweight developed and emerging market equities.
Looking at geographies individually, he is fairly comfortable with the direction of US economy. The bank has a rough expectation of a 10% upside in US equities in 2015.
The only neutral area is US small and mid cap equities.
The bank is slightly overweight European equities.
"We are conscious of what happened a couple years ago, when Europe was right on the brink and fashioned what I'd call an outcome, not a solution. Europe didn't fall off a cliff, so they are not quite the basket case that some people think."
European valuations look better than those in the US and a lot of companies have earnings streams outside of Europe, he added. The bias is toward small and mid caps, which could do better than large caps in certain markets.
"Banks were forced to restructure their balance sheets, crimping lending to small and medium-size businesses. That will now start to open a little more."
In fixed income, caution prevails. He is underweight emerging and developed market sovereign debt. Specifically, underweight peripheral and core Europe and Japan sovereign fixed income.
"The only slightly positive fixed income area is US corporate high yield."
Asia positives
In Asia, India was singled out as positive. Bacon believes the market will deliver a multi-year gain. Not only will the oil price collapse benefit the state budget, but branches of the government seem to be aligning forces.
"The central bank governor is pushing the government to deliver on its promises, and also giving a carrot. It says it will help from a monetary standpoint if the government helps it from a fiscal standpoint.
"If they're moving in synch, then that should mean much more progress on a medium-term basis.
On China, he is "cautiously optimistic".
"If people become comfortable with a lower level of growth, maybe around 6%, then that will give the market some stability and investors will focus on fundamentals of companies."
In Japan, the bank is slightly overweight. Bacon said the outcome of the December 14 elections, which will show the type of mandate Prime Minister Shinzo Abe gets, will determine the level of the bank's optimism.
Looming risks
One trend that investors will watch in 2015 is the strengthening US dollar, which Bacon said has typically been negative for local Asian currencies.
At some point, that could signal a move out of local currency bonds into US dollar-based products.
"If the US dollar continues to strengthen through 2015 and rates rise, you'll see a more explicit move into hard currency fixed income allocation."
He added that the bank's clients have most of their exposure already in hard currency for reasons of liquidity and depth of market.
Deflation is another risk, particularly in Europe.
"Deflation is not yet a major problem, but we will be watching for it in 2015. Signs of deflation could cause us to review equities in Europe."
However, deflation is not a Europe-only issue, he added. Plunging oil prices have a potential deflationary effect on other economies.
"We've got much more focus on risk management. It's not just about making money, but to avoid losing money. That's how we see 2015 evolving," Bacon said.
Next week: Part 2: Citibank's fund choices to address investment themes
