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
Too much gloom and doom – Just as everyone seems to have concluded that China’s days as a future superpower are numbered, its economic data have shown signs of perking up, with recent manufacturing surveys beating expectations. While we believe China faces plenty of problems, sentiment towards the nation and related investments – such as mining stocks and the Australian dollar – has become so negative that smart investors can take advantage. The mining sector (and China faces plenty of problems) is worth a look.
We also still like agricultural commodities’ long-term prospects, based on growing, increasingly wealthy populations, and the squeeze on arable land. The best approach is to bet on fertiliser and farm equipment stocks. But it may be best to avoid the potash sector for now, as the collapse of one of the cartels controlling the market has hammered prices.
Precious metals
Insure your portfolio with gold – The gold price has perked up over the past month. It remains well below the record peak of over $1,900 seen in September 2011. But concerns over war in the Middle East, alongside uncertainty over how global markets will react to changes in US monetary policy, have sent investors back to the yellow metal.
We continue to see it as the best form of insurance against financial instability and a failure of trust in the monetary system. Keep 5%-10% of your portfolio in gold. Silver, which tends to mimic gold’s moves, but magnify them, has made a comeback too. While we like silver, it’s far more volatile than gold – stick with the yellow metal unless you have a hefty appetite for risk.
Energy
The future belongs to gas – In the long run, we expect natural gas usage to rise, at the expense of oil. This doesn’t mean we’d bet directly on the price of gas – rather that we’d focus on companies and investment trends that will benefit from the availability and demand for cheap shale gas in America. This includes the ‘reshoring’ theme, whereby US companies bring factories and business back to America, or to Mexico, rather than China. It also includes companies that provide services to both oil and gas explorers – these should profit regardless of which form of energy dominates.
But keep an eye on the oil price. While Syria is not an important oil producer, the dangers of tension spilling out into wider conflict in the Middle East mean that oil has acquired a significant political risk premium. In the absence of any immediate action, the oil price is likely to decline. But it’s worth remembering that spiking oil prices have accompanied most major recessions of the past 30 years, including the 2008 crisis.
Property
A recovery built on sand – British house prices continue to rise. Little wonder – the government and the Bank of England are determined to inflate another property bubble ahead of the 2015 election. But British houses remain overpriced compared to history.
Given that interest rates will be forced higher at some point in the not-so-distant future, it’s hard to see UK property as a good investment right now. Better to play any short-term bounce through easily bought-and-sold housing-related stocks, rather than investing in buy-to-let. In America, meanwhile, fears over rising mortgage rates have pushed housing-related stocks back into a bear market after a long bull run. With US rates still ticking higher, it makes sense to stay out of the market, certainly until the path of the ‘taper’ is clearer.
A better bet is German property (which we looked at in detail last month), where loose European monetary policy and a relatively strong economy is driving prices higher after an extremely long stagnation. Japanese property is making a similar recovery, although it’s probably easier to play Japan’s story through a general stock-market investment rather than property specifically.
Bonds
Keep out of the way – Fears over the ‘taper’ – the US Federal Reserve cutting back on quantitative easing – helped send yields on US Treasuries to a two-year high of 2.93% last month. In the short term, markets may be running ahead of themselves, but bonds remain very overpriced compared to history and we’d avoid them. Index-linked bonds (which offer some protection against inflation) may be worth a look, however, particularly in Britain.
Equities
Go against the tide – Among developed markets, America remains expensive-looking, but Europe and Japan are worth buying. Now also looks a promising time to start building exposure to emerging markets, amid talks of currency crises. We like Brazil for the long run.