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.
The bubble continues
Mortgage approvals slid to their lowest level in nearly a year in June, leaving them almost 20% below January’s peak. April’s introduction of the Mortgage Market Review, which forces banks to do affordability checks before lending, may be behind the drop. Yet houses in many parts of the UK remain historically expensive, and are absurdly overvalued in London. America, where prices have been rebounding for two years after falling to bargain-basement levels, remains more appealing for property investors. The same goes for German towns beyond the overheated big cities, such as Hamburg, Munich and Berlin.
We haven’t liked bonds for some time now, and we’re not about to change our minds. One worry is that all the quantitative easing (QE), or money printing, of recent years will lead to inflation. Inflation is a tempting way for governments to reduce the ‘real’ value of their borrowings, as PFP Wealth Management’s Tim Price notes, and it’s always bad news for assets offering a fixed income. Bonds of all kinds also look very pricey compared to history. For example, yields on risky corporate debt (‘junk bonds’) have fallen to the mid-single digits in recent years, as bond prices have soared. That’s the kind of yield governments with good credit histories were offering before the financial crisis hit.
Gold climbs higher
Gold ticked up to a three-month high above $1,300 last week. Markets have begun to worry that the US Federal Reserve is too sanguine about a possible return of inflation. We suspect this theme won’t go away in a hurry, as central banks are notoriously late to raise interest rates. A return of inflation in the next few years is a reason to continue holding 5%-10% of your portfolio in the yellow metal as insurance.
Silver is also a monetary metal, and to an extent can be expected to mimic gold’s movements, but it tends to be a lot more volatile than the yellow metal.
Could US exports hit the oil price?
Brent crude-oil prices jumped by about 5% when the Iraq crisis flared up, but they’ve receded somewhat since. So far the fighting hasn’t affected Iraqi production or exports, as these are based largely in the south of the country. If the conflict worsens and spreads it could have a major impact on supply, but for now a significant oil-price spike looks unlikely. Also, the US is showing signs of loosening its restrictions on exporting unrefined crude oil, as fracking boosts US supplies.
US natural gas prices, meanwhile, have hit their highest level since May because the warmer weather is increasing demand for air conditioning. Thanks to the shale-gas boom, production of the gas has grown by 35% between 2005 and 2013, lowering prices by 57% over the same period. But the long-term outlook is bullish, not least because more and more industries worldwide are being forced by environmental legislation to opt for the cleanest-burning fossil fuels.
Be very, very careful
Stockmarkets in the developed world keep hitting new highs and volatility is at pre-crisis lows. “Vast amounts of central-bank liquidity and fair-weather guidance on the distant prospects for [interest-rate hikes] have created this calm,” as Deutsche Bank puts it. The market has long been ignoring lacklustre fundamentals, but the timing of a collapse is never easy to predict. But now that stocks are getting pricey, investors should choose their investments especially carefully. Japan remains our favourite developed market. It is still very reasonably valued and the government’s latest stab at structural reforms was well received.
Emerging-market equities outstripped their developed counterparts performance-wise for the first quarter in six between April and June 2014. They should keep catching up, reckons Capital Economics. Relative valuations are appealing, suggesting that investors have factored in structural slowdowns in heavyweights such as India, Brazil, Russia and China. The gap between the forward price/earnings ratio in developing and developed stocks is at an eight-year high.
The global economy is slowly gathering strength, with the US rebounding from a first-quarter weather-related slump, and Chinese data ticking up last month. China’s government has been trying to soften the fallout from a crackdown on credit-fuelled investment. This has helped industrial metals make gains, although plentiful supplies of many metals, notably copper, imply that prices are set to ease or stay stable in the next few months. Some miners remain appealing, given their previous falls to cheap levels.
The key determinant of agricultural commodity prices in the short term is the weather: the price of corn, soybeans and wheat has been trending lower as good growing weather in America has boosted yield prospects. Longer term, a dwindling supply of arable land amid climate change and population growth should ensure that prices for these raw materials increase. But play the theme through fertiliser or farm-equipment companies – soft-commodity prices are extremely volatile.