Asset allocation is at least as important as individual share selection. So where should you be putting your money? Here’s our monthly take on the major asset classes
Precious metals
Stick with gold
Greece’s decision to ignore the results of the 5 July vote and agree a deal with its creditors seems to have calmed global markets. The likelihood that the Federal Reserve will raise rates sooner rather than later has also added downward pressure to the price of gold, which has now fallen below $1,100 for the first time in over five years. However, the deal could unravel, while concerns about China could also help the price of gold recover. In any case, it still deserves a place in your portfolio as insurance against the return of inflation.
Equities
China shatters
The Chinese rout continues, with stocks now down by nearly a third from their mid-June peaks. The government has responded by blaming a conspiracy by short sellers. As a result it has completely banned short selling. The fallout has also hit Asian and emerging markets. Emerging market equities have also been hurt by looming interest-rate hikes in the US. A higher yield on American assets typically draws money away from risky assets. No wonder, then, that the MSCI Emerging Markets index has slid to a two-year low.
As far as developed markets are concerned, the S&P 500’s high valuation means that you should focus more on Europe. In particular, we’d be interested in Italy, or even Greece (for those with an appetite for risk).
Bonds
Keep avoiding high-risk bonds
Bonds yields remain low and they are also compressed. This means that even riskier countries and firms have relatively low yields. Even Italian and Portuguese bonds yield only 1.78% and 2.3% respectively, despite the fact that they still have debt problems. According to the BAML High Yield index, the average junk bond yields only 7%, miles below the historical average. We think that bonds in general are overvalued, but if you must buy bonds, we’d go for traditional safe havens, such as the US and UK.
Cash
Continue to shop around
It looks increasingly likely that the Federal Reserve will begin hiking rates in the autumn, perhaps as early as September. However, sadly for savers the Bank of England is unlikely to follow suit this year. The market is currently pricing in a first rate rise in the spring. The good news is that zero inflation means that in real terms savers are getting a better deal than they have been for several years. This means that you should continue to follow our advice and shop around for the best deal available.
Property
Look abroad
London residential prices remain at sky-high levels, with the rest of the country also looking extremely expensive. Despite the reduction in inheritance tax (IHT), the crackdown on buy-to-let announced in the budget could provide the tipping point that pushes down prices. We’d therefore suggest that you look to Europe for residential property investments, where prices remain significantly down from their peaks. Markets worth considering are Ireland, Spain and Germany. Indeed, in Germany, real (inflation-adjusted) prices haven’t moved in two decades, and there is a shortage of housing.
Energy
Oil plunge may not be over yet
Oil has fallen below $50 a barrel for the first time since January. It could revisit the six-year low of $45 seen back then. Weak data from China has fuelled fears of weaker demand growth, while the deal between America and Iran to end sanctions looks set to add more oil to an already oversupplied market. The US rig count, meanwhile, has ticked up, portending yet more output, while oil cartel Opec, especially Saudi Arabia, is still producing at full pelt.
Copper
Getting cheaper
Copper prices have slumped to a six-year low just above $5,200 a tonne. However, looming falls in mine production as producers look to cut costs imply a slowdown in supply growth, which should to some extent close the gap with lacklustre demand growth. Moreover, shares in copper miners – and producers of other metals –
may now have fallen enough to be worth buying.