The assets to buy into now – December 2013

Asset allocation is at least as important as individual share selection. So where should you be putting your money? We give our monthly view on the major asset classes.

Commodities: Bumpy road ahead

Commodities “are seeing very limited investor appetite”, says Barclays. You can see why. They have traditionally been seen as a hedge against inflation, but many investors currently fear deflation far more. The supply-demand picture isn’t auspicious either. Manufacturing surveys point to a slight strengthening of global growth, says Capital Economics, but Europe remains a weak link, and there is little evidence of a sustained worldwide recovery to underpin demand.

It is also “becoming impossible to ignore the increasing surplus of supply in some raw materials”, says Liam Denning in The Wall Street Journal. Citigroup expects large copper surpluses for the next three years. Mines have finally caught up with the demand of recent years, just as demand has ebbed, particularly from China. Mining stocks have priced much of this in, and are a bet for the bold. But expect a bumpy road ahead.

Long-term demand for agricultural commodities is, however, unlikely to ebb as populations grow and the supply of arable land is squeezed. We think that playing this theme with fertiliser or farm-equipment companies is a safer bet than putting on highly volatile softs themselves.

Equities: A massive bubble?

Stocks, among other assets, are “in a massive speculative bubble”, reckons Gloom, Boom & Doom editor Marc Faber. Most markets have risen sharply, with the gains in the US looking particularly extreme given the fundamentals. Global stocks usually march to Wall Street’s beat, so a nasty setback there would pull other markets down too.

But it’s no use worrying about the exact timing of any slide. Instead, stay with markets that are still cheap enough to promise healthy long-term returns, and drip-feed money in to offset volatility. Europe is one such market. The strong euro is squeezing exporters and making it all the more likely that the European Central Bank will eventually launch a money-printing programme in the hope of averting deflation. That would be good news for stocks, especially Italian ones,which are still on a low cyclically-adjusted price/earnings ratio. Japan also remains promising. The Bank of Japan could print even more money next year, in contrast to America. A weaker yen would further boost earnings, while pending cuts in corporation tax are also good news for stocks. Consumer prices are starting to rise, suggesting deflation could be over. Throw in still-cheap valuations and the rally should endure.

As for emerging markets, given their ongoing structural problems, any recovery in growth next year is unlikely to be rapid. Fears of tapering by the US central bank, which would withdraw liquidity from emerging markets, won’t help either. But valuations have become much more reasonable in the past year. China, which has also announced a series of measures to liberalise the economy further, looks a good bet. We also like Vietnam, the Philippines, and Mexico.

Energy: Back gas

Progress in talks between the West and Iran should reduce the fear of war and raises the prospect of a hefty rise in oil supply as Iranian production rebounds. Along with the lacklustre global economy, this suggests oil prices will fall. Meanwhile, US natural gas futures have jumped to a six-month high, thanks to unusually chillyweather. Longer term prices should keep rising as more industries switch to this cleaner-burning fuel. Play the trend with stocks set to profit from higher gas demand.

Precious metals: A losing year for gold 

Gold has fallen by over 25% in 2013 and is on track for its first losing year in more than a decade. But keep holding 5%-10% as insurance, amid ongoing money-printing by central banks. Silver is also a monetary metal, but it is influenced by industrial trends and the market is much smaller than gold’s, making it especially unpredictable and volatile.

Bonds: Stay cautious

We remain wary of almost all bonds. Government paper is expensive after a 30-year bull run, and with the developed world drowning in debt and inflation a threat, we wouldn’t touch it. Corporate bonds look overpriced too: junk bond yields have fallen as low as around 6%, which would be reasonable for a much-safer government bond in normal times.

Property: Ignore Funding for Lending

The Bank of England’s tweak to its Funding for Lending scheme has been hailed as a way to choke off the incipient bubble in the housing market. But as Ed Bowsher points out in our free daily email Money Morning, banks can still get cheap funding for loans, and the move doesn’t affect the Help to Buy scheme. House prices, already too high, are set to head higher. Germany and the US are much more promising markets for property investors.

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