"We believe it timely for clients to rebalance their portfolios back towards fixed income, or consider adding some short positions as portfolio insurance against a market retreat."
Equity markets have rallied strongly in the past few months, with the NZX50 rising about 17% since early March.
Mr Watson believed equity market growth would be curbed as consumption slowed, given household debt remained high.
"De-leveraging is the only way out of the current quagmire and this, we believe, will be a long process."
Equity markets had got ahead of themselves in the short term, and he expected they would recover and deliver returns above those available from cash in the longer term.
He believed the world was heading for a year of low growth and "deflationary-like price declines," from which the global economy would emerge healthier.
Following a visit to the the United Kingdom and the United States, Mr Watson said it was more apparent than ever that portfolio managers should be proactive in trimming exposure to problem or poor performing stocks.
ABN Amro Craigs recommended maintaining a core portfolio of quality equities and an appropriate allocation of quality fixed-income investments with the flexibility to take advantage of market developments and views.
"We recommend clients address the possibility of a pull back in markets over the shorter term by either rebalancing back to fixed income or adding some short exposures as portfolio insurance."
Mr Watson recommended adding short positions to a portfolio - where stock was sold and the seller looked to buy at a lower price - but said such stock should represent less than 5% of an investment portfolio.
But in order to succeed, timing had to be accurate.
"This is why we are suggesting considering them at this time after the market has rallied strongly but serious risks remain."
ABN Amro Craigs analyst Mark Lister said property remained "a vital asset class within balanced portfolios" but warned investments should deliver stable, consistent dividend growth.
Property traditionally delivered reliable income streams with relatively low level of price volatility, but the slowing economy created some risks with property stocks.
"Listed property offers more diversity and liquidity than direct holdings, while still providing a degree of diversification from equities."
Mr Lister said while valuation risks remained with property, investors should focus on dividends and cashflow.
"It is cash flows from rental income that is distributed to investors and the security and growth potential of these cash flows that will ultimately drive capital and share price growth."
Mr Lister was forecasting an average 12% decline in dividends over the next two years, even in previously well-performed listed property stocks.
He suggested investors look carefully before increasing their exposure to the sector.
However, successful capital raising by Kiwi Income Property Trust and AMP NZ Office Trust reduced their risk, he said.
