The assets to buy into now – February 2014

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.


Go bargain-hunting

Stockmarkets have endured their worst start to the year since 2010. The FTSE All-World index slumped by 4% in January. It’s now at a four-month low. The emerging-market sell-off has spread to developed markets as economic data from both China and the US have underwhelmed.

“Getting out of emerging markets is a consensus trade,” as Harald Espedal of Norway’s Skagen Funds puts it. That means it’s worth considering going against the flow and doing some bargain-hunting, especially as developing-world stocks haven’t been this cheap compared to developed ones in nine years.

Among the most promising markets are those that should benefit from a recovery in the developed world and boast good governance. Mexico is a prime candidate, but it remains relatively expensive for now – wait for further falls. Cheaper options are Brazil and Russia – both are grappling with long-term problems, but these look priced in.


A comeback for mining stocks?

China’s government is once again trying to crack down on credit growth. That’s left China, one of the main consumers of commodities, with slowing growth, suggesting a drop in demand for metals and other resources.

Still, after a tough few years for mining stocks and commodities prices, the uncertain prospects are largely priced in, as commodities’ resilience amid the stock-market turmoil in recent weeks suggests.

Miners have slashed costs and should benefit from weakening emerging-market currencies and a strengthening dollar – in short, costs will fall and sales will rise, an attractive combination.

Meanwhile, on the metals front, the demand-supply outlook for platinum and palladium is particularly encouraging, says Matt Day in Barron’s, thanks to strikes in key supplier South Africa, and the recovery of the global car industry.

Precious metals

Ignore the analysts

Analysts are extremely bearish on gold this year, expecting the price to average $1,220 an ounce. But analysts are often, if not usually, wrong (see page 10) – last year they expected an average price of $1,700 and got $1,411.And as Ed Bowsher points out in our free daily email Money Morning, any further price declines would stop miners from breaking even on gold production, so they will produce less, and supply will fall. Meanwhile, demand from emerging-market central banks remains robust.

Longer term, gold remains an insurance policy (around 5% of your portfolio) against either financial turbulence, or a possible surge in inflation following unprecedented money printing.

Silver tends to mimic and amplify gold’s movements, and should only be played by investors with very strong stomachs.


London looks bubbly

House prices continue to rise in Britain. The bubble is clearly back in London, with predictions by the respected Ernst &Young Item Club that the average price will hit £600,000 by 2018, from £404,000 today. London’s house-price-to-income ratio has returned to its pre-recession peak, though this is not the case elsewhere.

In the US, prices rose by 11% last year, but gains are slowing. Demand has weakened as mortgage rates begin to climb. But this looks more like a pause than a reversal – the market had slid by a third before the rebound and there is still money to be made. German property also continues to look reasonable.


No ‘great rotation’ yet

Everyone thought that 2014 would be the year the ‘great rotation’ from bonds to equities started. But investors seeking safe havens amid the January market turmoil have actually driven government bond prices up (and yields down) so far this year. That just makes them even more expensive after a 30-year bull run.

The US Federal Reserve’s tapering of its money-printing programme, along with a gradual recovery in developed markets, implies lower prices and higher yields in the next few years.

A surge in inflation is a danger to both government and corporate debt; the latter is just as overpriced now that years of easy money have driven investors into the market in droves.

Bonds may benefit from ‘safe haven’ demand, but in the long run, they are too dear.


Gas is still a better bet than oil

US natural gas prices have jumped to a four-year high above $5 per million British thermal units (MMBtu), thanks to the unusually cold weather across the Atlantic. The price will drop as spring nears, but the longer-term outlook is encouraging as more and more industries switch to this clean-burning fuel.

As for oil, the likelihood is that prices will ease in the next few months amid plentiful supplies and lacklustre demand growth. But Big Oil stocks look cheap enough to have priced in this scenario and are appealing dividend plays.

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