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 boom continues
British house prices are rising at the fastest rate in four years, up 9.4% year-on-year in February. London prices are climbing even faster.
With mortgage approvals at their highest level since late 2007, houses that are already expensive are likely to get even dearer – although in the unlikely event of a crackdown on Russian oligarchs’ assets, much of the air could hiss out of the London bubble.
America is a better bet for bargain-hunters, as the housing market continues to recover from a low base. Last year prices rose by 12%, according to CoreLogic, and a similar gain is predicted for this year. German property, beyond a few hotspots in the centres of some major cities, also still looks reasonably priced.
Interest rates in the major Western economies are at near-zero levels and have nowhere to go but up. How quickly this will happen is unclear, but the direction of travel is obvious, and higher interest rates imply lower bond prices. Nor can we rule out a surge in inflation, which is also bad news for bonds.
Investors should steer clear of corporate bonds, which yield-hungry investors have driven to extreme levels. Last year junk-bond yields fell to around 6%, as prices soared. Before the crisis, you’d typically have expected junk bonds to yield 10% or more.
A fear-induced spike
Oil prices typically jump when a conflict appears to be looming, and the Crimea crisis has been no exception. But sanctions against Russia, which produces 12% of the world’s oil, are unlikely, so supply should remain steady. US production continues to rise and demand is ebbing in China and emerging markets, where falling local currencies make oil priced in dollars more expensive.
However, ‘Big Oil’ stocks remain attractive dividend plays. Natural gas prices should also fall back from their Crimea-induced jump, but the long-term outlook is bullish. New environmental rules in America are prompting power stations to switch to gas, for example.
A bounce for gold
Gold hit a five-month high this week, underlining its status as an asset that thrives when trouble looms. But with developed economies apparently gradually recovering, the threat of rising real interest rates (ie, rates after inflation) is a headwind for the yellow metal, which offers no yield. But don’t expect gold to slide far.
Emerging-market demand is robust, and gold is not too far off levels that would prevent miners breaking even on production, implying supply falls. So keep 5%-10% of your portfolio in gold as insurance.
Silver continues to yo-yo around $20 an ounce. It often mimics gold’s movements, in a far more volatile manner, so it’s viewed as being higher risk than gold.
Buy low, sell high
There are ample signs of overheating in the US stock market, which hit another record this week. While a setback on Wall Street would imply the same elsewhere because America sets the tone for world markets, we would still add to Japanese or European equity holdings on the dips.
Meanwhile, the latest global market sell-off has made some emerging markets look evenbetter value. The asset class as a whole is now trading on its biggest price/earnings discount to developed markets in ten years.
Many developing markets have reduced their reliance on foreign capital or are pushing through structural reforms, and several individual markets – such as Russia – now look very cheap indeed.
Buy miners and fertiliser
The outlook for industrial metals is not especially encouraging. In China, which accounts for most of the world’s metals demand, a gauge of manufacturing has just hit a seven-month low, and the government is planning to keep cooling the credit-dependent economy.
Many metals, notably copper and iron ore, have swung into surplus in the last couple of years. However, as our cover story noted last week, last year’s falls in raw-materials prices mean that the lacklustre backdrop is largely priced in, with miners becoming more disciplined in capital management, and many mining stocks are now worth scooping up.
Meanwhile, grain prices have bounced in recent days amid fears that supplies from Ukraine could be disrupted. Ukraine supplies 15% of the world’s corn and 7% of its wheat.
Still, despite fears over Ukrainian supply, grain prices still look likely to fall due to healthy US production, says Andrew Critchlow in The Daily Telegraph. Longer-term, growing populations and a dwindling supply of arable land mean that agricultural commodities are in a long-term bull market. Investors should play the theme with fertiliser or farm equipment stocks.