Asset allocation is at least as important as individual share selection. So where should you have your money? We give our monthly view on the major asset classes.
China comeback? Don’t be fooled
China ended the year on a high note: the latest economic data from HSBC showed activity in the manufacturing sector picking up, which boosted base-metal prices. Chinese stocks have also rebounded from their recent lows. But we wouldn’t bet on the rampant growth of recent years returning.
The pick-up in growth has been fuelled by a rise in lending and investment, but this is unsustainable. China needs to rebalance its economic model away from dependence on investment in infrastructure and more towards consumption.
As Michael Pettis, professor at Peking University, argues, temporary lulls in China’s slowdown “do not represent any sort of ‘bottoming out’… they simply represent that Beijing cannot afford politically to allow the adjustment to take place too quickly”.
In short, China’s economy will either shift gradually to a more consumer-led model, or it will end up with a banking crisis due to years of ‘malinvestment’ in unproductive infrastructure projects. In either case, its demand for industrial commodities looks likely to drop.
As we’ve noted before, we’d be happier sticking with companies that profit from rising demand for ‘soft’ commodities (such as corn and soybeans) due to rising demand for foodstuffs as the global population grows. However, we’d invest in producers rather than directly in the commodities themselves.
Emerging markets – go for Mexico
Given the commodity-dependence of many emerging markets, we’d be inclined to stick with more domestically driven markets, such as India and Mexico.
Developed markets – buy Japan
The deal hammered out over the ‘fiscal cliff’ in America saw markets around the world start 2013 on a high note. But by far the most exciting developed market right now (to our minds at least) is the Japanese. As our Roundtable experts note, with the new prime minister Shinzo Abe pushing the Bank of Japan to print more money and weaken the currency, the Japanese economy could finally escape deflation.
A weaker currency is also good news for Japanese manufacturers, who have been hammered by the strong yen in recent years. We also remain keen on Europe in general, where markets look very cheap compared to the US.
Stick with gold
As noted above, the Japanese government is keen to weaken the yen and is finally taking some serious steps to do it. But the Federal Reserve and the Bank of England are also still in the printing business, while the Swiss are still pegging their own currency to the euro. In other words, almost everyone is deliberately trying to weaken their currency.
Against such a backdrop, we still think you should be holding on to gold as insurance against a collapse in fiat currencies. You could consider silver too, but bear in mind that it’s best thought of as a leveraged play on gold – if you dislike volatility and want to be able to sleep well at night, then silver probably isn’t the precious metal for you.
Go for gas over oil
Oil is still the lifeblood of the global economy. However, with supply relatively healthy and demand being dented by weak Western economies and improving fuel efficiency, it’s not the most interesting area of the energy sector to invest in. Instead, we believe that the most interesting investment opportunities are coming out of the natural-gas boom.
In America the price of the fuel remains very cheap, though not at the record low levels it saw early in 2012. The availability of cheap energy means that America is driving the process of ‘reshoring’, by which America is becoming an increasingly important base for various manufacturing companies.
The low price of natural gas, along with rising demand, is likely to drive consumption higher, and prices along with it – good news for natural-gas producers and explorers.
Avoid for 2013
Almost everything about bonds screams ‘bubble’ at the moment. Prices hit record highs (ie, yields hit record lows) in many countries, including America and Britain, in 2012. We can’t say for sure that this won’t continue in 2013, but we don’t want to be invested in the bond market when the bubble finally blows.
As the New Year kicks off with investors in exuberant mood, yields on government bonds in both the US and Britain have risen, suggesting risk-hungry investors might be keen to shift out of low-yielding government debt. A bigger concern will come if and when evidence of rising inflation arrives. As James Ferguson notes, the US looks particularly vulnerable on this score this year.
It seems clear that US property has fallen as far as it is going to, with prices managing to tick higher for much of last year. Other promising areas include Germany. However, we’re still bearish on British property – even though prices have fallen significantly in most areas since the 2007 peak (particularly if you take into account inflation), the market remains overpriced and dependent on many factors, including low interest rates and, in London, demand from nervy European investors.
Worth holding onto
It’s always a good idea to have some cash in your portfolio. Between panic in the eurozone and the ‘fiscal cliff’ saga in America, you can expect there to be many buying opportunities in the year ahead. Have cash on hand to snap them up.