The assets to buy now – August 2014

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.

Bonds

Still expensive

High yield bonds “now constitute an offence against linguistic decency”, as PFP Wealth Management’s Tim Price puts it: junk bond prices have risen so high in recent years that yields have plunged to record lows in the mid-single digits. But government bonds are also absurdly overpriced.

Yields have never been as low as they are now, in the entire history of the UK gilt market. Government bonds in the developed world have been in a bull market since the early 1980s. Meanwhile, interest rates have nowhere to go but up; debt loads remain enormous; and inflation could well make a comeback. In short, anyone buying either corporate or government paper now “is unlikely to enjoy an entirely blissful investment experience”.

Property

Look to the US and Germany

Mortgage approvals rebounded in June after falling for four successive months, according to Bank of England data, and the month-on-month increase was the largest since the start of 2012. It appears, then, that the mortgage market review, which tightened affordability standards, will do little to stop overpriced houses becoming even more overpriced – especially now that the strengthening economy will boost consumer confidence and large purchases.

We continue to recommend eyeing up property in the US, where the market has been taking a breather after last year’s uptick in mortgage rates. Germany is also worth a look, provided you steer clear of the central areas of the major cities, especially the ever-popular Berlin.

Precious metals

Less attractive

Gold continues to hover around $1,300 an ounce. Geopolitical jitters have bolstered prices of late, but to really thrive, gold needs economic uncertainty too. Recent data have proved relatively solid, however, making an end to money printing and an eventual increase in interest rates more likely. As gold yields nothing, it always becomes less attractive when real interest rates are set to rise.

Increasingly wealthy emerging-market consumers and investors, however, are a long-term plus for the yellow metal. And a sudden surge in inflation can hardly be ruled out. So keep 5%-10% of your portfolio in gold as an insurance policy. If you’re a gambler,put a bit of silver in it too. It’s a monetary metal that mimics and amplifies gold’s movements. It is also affected by the outlook for industry, which accounts for 50% of silver demand. That makes silver even more volatile.

Commodities

Good value

Industrial metals prices have perked up recently. China’s economy, which accounts for over 40% of global demand, has strengthened thanks to a state-driven infrastructure push in the second quarter. Still, demand is hardly going to surge, as Capital Economics points out. The downturn in China’s property sector and slower growth in heavy industry are keeping a lid on growth.

Beyond China, the global recovery continues at a steady but sedate pace, with European growth now apparently weakening. Supplies of many base metals have fallen of late, but serious squeezes look unlikely in most metals markets. Ample copper supplies and a clampdown on using copper as collateral for loans, which will release more of the metal onto the market, should send prices lower. Mining stocks have priced in the subdued outlook and remain good value.

The short-term weather outlook is, as usual, buffeting around agricultural commodities. The key question now is whether the El Niño weather phenomenon will disrupt crop production across much of the world. Longerterm, the prices of these raw materials are on an upward trajectory as populations swell and more arable land is needed. Fertiliser and farm equipment stocks remain the best way to play the trend.

Energy

Try natural gas

“From the Middle East to Asia to Africa, the list of supply disruptions is hard to ignore,” says Bank of America Merrill Lynch (BAML). However, they have also proved not to be quite as bad as recently assumed, so prices have eased from their recent ten-month high of $115 a barrel.

The fighting in Iraq is not affecting the key oil-producing areas, and Libyan supply has recovered in recent weeks. Global demand is only growing slowly as the recovery is subdued.

The upshot is that oil is likely to move sideways or fall marginally, for now. BAML expects prices to average $110 and $108 a barrel in 2014 and 2015 respectively. Natural gas, meanwhile, is on a long-term upswing. Legislation across the world will encourage industries to shift to the cleanest-burning fossil fuel. Firms involved in fracking are also worth seeking out.

Equities

Japan reasonable

Global equities have continued their march to new peaks, despite a middling earnings outlook and recurrent geopolitical problems. The exuberance is looking increasingly irrational. Valuations are no longer especially compelling, but Japan still looks reasonably priced, while the economy has stabilised after April’s consumption tax rise.

With Abenomics on track, the Nikkei should have further to go. Emerging markets have been rallying since the spring, helped along by appealing valuations and signs of stabilisation in some of the bigger economies. The Philippines, Indonesia and Brazil are among our favourites.

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