The assets to buy now – February 2015

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

Sensible insurance

Gold has slipped from late January’s six-month high of around $1,300 an ounce. But ongoing jitters over political instability and a possible financial crisis in Europe will keep investors keen on “safe havens”.

Disinflation and fear of deflation is likely to hold short-term interest rates down, which tends to be good for gold (as it pays no interest, the opportunity cost of holding it is lower when interest rates are low).

Demand from emerging markets remains healthy – central banks bought 461 tonnes last year, up 13% on 2013 and the second-highest annual total since 1971. Russia, eager to diversify away from the dollar, accounted for a third of last year’s total. Increasingly wealthy emerging-market consumers also bode well. So hold on to the yellow metal – keep 5%-10% of your portfolio in it as insurance.


Set to get even more expensive?

Annual house-price growth slipped from a peak of 12% to 7% in 2014. It may tick up again: mortgage approvals rose for the first time in six months in December, while the healthy labour market and recent falls in mortgage rates bode well. But don’t chase the market – houses are already overvalued as it is, and London prime property is looking wobbly.


Buy the money printers

“Global growth is still too low, too fragile, and too uneven,” says Christine Lagarde, head of the International Monetary Fund. Six years after the global financial crisis, the world economy is still hungover. Judging by stockmarkets’ performance, however, you’d think the rebound had been unusually strong instead of unusually weak.

US stocks have almost tripled and Europe ex-UK has just hit a seven-year high. Quantitative easing – money printing – has driven the gains, as liquidity leaks into asset markets. As far as developed-market equities are concerned, we think you should stick with the reasonably valued markets where the end of QE is still a long way off. So Europe and Japan remain the best bets; the US is too expensive and QE there is over – for now.

Emerging markets are going through a rough patch, beset by the end of the commodities boom, the Chinese slowdown, structural problems, the tepid global economy and political instability. But beneficiaries of the falling oil price with large domestic markets, which can offset subdued exports, are the best bets here: enter India, the Philippines, and Vietnam. Commodities exporter Brazil, meanwhile, is cheap enough to be worth a look.


The biggest bubble of all

Bonds just keep rising in price, which in turn means that yields keep shrinking – some are now even negative. European bonds have been particularly in demand. This is partly due to investors worrying about a possible euro break-up or long-term deflation.

But the main driver seems to be anticipation of European QE, and the hope of selling bonds at a higher price once the money floods in. The bubble in corporate debt continues too. This week the yield on one Nestlé bond maturing in October 2016 turned negative.


A perfectly negative storm

Raw-materials prices have hit multi-year lows amid “a perfect storm of negative factors”, as Societe Generale’s Robin Bhar puts it. China’s downturn, which last year saw local steel demand drop by 3.4% (the first fall in 14 years), higher supplies and a stronger dollar are driving the trend.The printed money created by US QE, which finished last autumn, also helped prop up commodities.

Iron ore halved last year and is down 12% in 2015; copper and lead are down by a fifth since July. But we may be at or near the bottom of the metals cycle, as we point out this week in our free daily email Money Morning. Supplies are set to dwindle as production is shut down, while European QE is about to rev up. Mining shares also remain reasonably priced.

Agricultural commodities are a solid long-term bet. As the world’s population grows, the amount of arable land is dwindling, so over time land and soft commodities will become more valuable. Farm equipment and fertiliser stocks are better plays on the theme than commodities futures, which are extremely volatile.


A long-term switch

Oil prices are up by more than 20% since troughing at around $46 a barrel last month, as we explain in our cover story. American natural gas has slid to a three-year low, thanks to unusually warm winter weather and ample supplies. In the long term, however, more stringent environmental regulations worldwide should encourage households and industries to switch to gas, negating the surplus.

Leave a Reply

Your email address will not be published. Required fields are marked *