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.
Property
The bubble keeps growing
UK house prices are climbing at 5%-6% a year, according to Nationwide and Land Registry figures. That’s likely to increase further, thanks to record-low mortgage rates. The average rate on new loans was a mere 2.78% in February, marking a 0.44% decline in six months. So already overpriced houses are set to become ever more expensive.
It doesn’t help that governments always do their best to prop up the market, as shown by the UK’s latest wheeze, the help-to-buy Isa. A change of government is unlikely to change that. US houses no longer look especially good value, but Japan and Germany (first-tier cities excepted) do.
Energy
The outlook’s good for gas
US natural gas prices are likely to dip in the short term as the weather improves and production rebounds from a winter break. But in the long term gas should benefit from increasingly stringent environmental regulations encouraging businesses and households to switch to the cleanest-burning fossil fuel. The rise in demand should mop up the supply glut. Oil prices, meanwhile, may already have bottomed.
Commodities
Low expectations for metals
Raw materials have trod water this quarter and a big rebound seems unlikely, given that most metals look well supplied and China’s growth is slowing. But prices could perk up a bit in the next few months. Copper in particular looks oversold, reckons Barclays, and continual supply disruptions and stronger growth in America, Europe and Japan mean that the metal’s prices may rise modestly from around $6,100 per tonne at present.
In the short term, the primary influence on agricultural commodities is weather patterns. Coffee prices are currently up, owing to poor prospects for this year’s crop; the west African cocoa crop is likely to be strong, however. In the longer-term this sub-sector should enjoy a structural bull market, thanks to rising populations and constraints on land. Fertiliser and farm-equipment stocks remain the best way to play the theme.
Precious metals
Keep gold as insurance
Gold has traded sideways this year, held back by low consumer price inflation and the gradual strengthening of the US economy – good news is bad news for gold. However, higher demand for jewellery in emerging markets should buoy the yellow metal over the next few years, while inflation could well come roaring back if central bankers respond too late to tightening labour markets. Keep 5%-10% of your portfolio in gold.
Silver, as usual, has been mimicking and amplifying gold’s movements in both directions. With industry accounting for 50% of demand, the global recovery should give it a lift. It has also hugely underperformed gold in recent years, so there is scope for some catch-up on this front. Hence silver could reach $23 an ounce by the end of this year, says Capital Economics. But be warned: it is extremely volatile and thus highly risky.
Equities
Still afloat on a tide of QE
As long as central banks keep the money taps on, liquidity will boost stocks. But European and Japanese stocks are likely to do better than US peers. There, quantitative easing is over, while in Europe it has just begun. These markets are also better value.
Europe’s improving economy also bodes well. In the US, monetary policy is about to be tightened, multinationals’ earnings have dwindled due to the strong dollar, and stocks are wildly overvalued. The cyclically adjusted price/earnings ratio for the S&P 500 is almost 60% above its long-term average.
Emerging markets as a whole are currently growing by 4% a year, the slowest growth rate since the global financial crisis. The fall in commodity prices, notably oil, and the prospect of higher US interest rates, which bolster the dollar, all suggest growth is unlikely to pick up significantly anytime soon.
The MSCI Emerging Markets index reflects the shaky outlook. It is on a 35% discount to developed-world stocks in price/book-value terms. We generally prefer commodity importers with large domestic economies, such as India and the Philippines, although we also think troubled Brazil is enticingly cheap.
Bonds
An asset to avoid
Government debt is so overvalued that negative yields have become common all over Europe. Investors clearly expect to be able to sell their bonds on to someone else rather than hold them to maturity and take a loss. In the corporate-debt market, yields are still positive, which is why investors have continued to pile into US company paper in the past three months.
But even these rates have fallen fast: the average yield on high-grade US corporate debt is around 3%; riskier “high-yield” debt is now a misnomer, with the average yield at 6%. Indeed, junk-bond yields have shrunk to levels seen on many governments’ debt a decade ago. Stay away.