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.
Back to the boom times
The average UK property price has eclipsed the 2007 peak, according to the latest Nationwide figures. The average house now costs £186,512 and has risen in price by 11.1% in the past year, although London remains far and away the most expensive area.
Expansion could slow in the coming months, however, with mortgage approvals in April 17% below January’s high, and a growing number of banks putting restrictions on the amount they will lend to individuals.
In the US, meanwhile, the recovery in prices may be slowing too, but property in many areas is still reasonably priced. Small German cities also look good value.
Not very appealing
Interest rates on both sides of the Atlantic have “clearly been in a bull cycle for over 30 years”, thus bolstering government bond prices, says Tim Price of PFP Wealth Management. UK short-term rates have not been this low in the 320-year history of the Bank of England.
But there can be little upside left in government bonds and plenty of downside, given that interest rates will inevitably rise and inflation could yet erupt. Corporate bonds, especially junk, or high-risk, bonds, also look pricey. “Bonds, as a whole, are clearly an unattractive asset class.”
Complacency breeds contempt
Gold has slid to a five-month low below $1,250 an ounce. That puts it in the lower range of the $1,200-$1,400 range it has been in for the past year.
The latest slide was due partly to fears that the El Niño weather phenomenon will cause a weak monsoon season, in turn crimping demand among rural Indians for physical gold. Signs of a strengthening global economy, implying a gradual rise in interest rates, are also hampering gold, which thrives on bad news.
Still, keep 5%-10% of your portfolio in the yellow metal as insurance. There is still scope for nasty blow-ups in the global financial system, inflation could well revive after all this money printing, and geopolitical turmoil is here to stay.
Silver would benefit from these factors too, but the outlook is complicated by the fact that 50% of demand stems from industry, while the market remains very small and even more volatile than gold.
Where’s the value?
As the post-crisis rally moves into its sixth year, it’s getting harder and harder to find attractively priced stocks. The US market is still historically expensive.
Now that Europe has rebounded, bargains are also getting thinner on the ground there, although the ‘peripheral’ economies, such as Italy and Greece, still look pretty cheap compared to history.
We remain bulls on Japan, which still looks good value. Profits are rising, the economy looks solid, and there is scope for more central-bank money printing to weaken the yen, which is generally good news for stocks.
There is also “a lot more improvement going on in governance [and] capital efficiency…than most casual investors realise”, says Howard Smith of Indus Capital Advisors. Japan remains “under-appreciated”.
The MSCI Emerging Markets index has gained over 10% in the past two months. Investors appear to have realised that valuations had priced in the well-documented structural problems in the larger economies, such as Brazil, Russia and India.
India now looks particularly appealing, given the recent change of government. The potentially nasty slowdown in the Chinese property market, meanwhile, looks to be in the price: the MSCI China trades on a price/earnings (p/e) multiple of just 8.8.
China is bolstering metals
The key driver of demand for industrial metals is demand from China, and here the short-term outlook has improved.
Moves by China’s government to boost growth have fed through to stronger data, bolstering metals. Supplies of metals have been looking healthy of late, however, especially iron ore: seaborne traded supply is set to grow by more than 11% this year.
Longer term, China’s increasing emphasis on consumption implies less commodity-intensive growth. The latest uptick in metals prices follows months of falls or treading water, and some mining groups still look reasonably priced.
We remain bullish on agricultural commodities, which will benefit from dwindling arable land and burgeoning populations. But play the theme through farm equipment or the fertiliser sector.
Oil still stuck in a rut
Oil prices ticked up in May as violence in Libya and the Ukraine crisis caused supply fears. But there seems to be little scope for a sustained rise from current levels. Demand from China is unlikely to accelerate significantly as the government treads the line between boom and bust.
And in the longer term, the country should also become more fuel-efficient. Current oil supplies, meanwhile, look more than adequate for the economy’s needs, with US stocks “extremely high”, says Capital Economics.
Natural gas prices have fallen in the past few weeks, thanks to warmer weather. But over the next several years they should rise steadily. Industries are increasingly switching to this cleaner-burning (and cheaper) fuel, while firms involved in ‘fracking’ in both America and the UK are also worth researching.