The assets to buy now – September 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.

Property

A crash looms

The red-hot UK housing market finally seems to be cooling. Prices are still up by 11% on last year, according to Nationwide data. But a timelier survey by property website Hometrack suggests UK-wide prices barely rose in August, while those in London were flat. Properties are spending longer on the market, and the percentage of the asking price achieved has fallen from 99.2% to 96.4% in just three months. Time will tell whether this heralds a turning point or a pause, but either way we would stay away. Houses remain overpriced, and history shows that when the trend changes, they start to fall rather than plateau.

Energy

Surprisingly calm

Oil prices have slid from $115 a barrel in June to around $100, despite the geopolitical upheaval around the world. None of the trouble spots is as yet interfering with production. Indeed, US air strikes make jihadist incursions into southern Iraq, the source of its exports, less likely. Russia’s oil exports are unlikely to be affected by sanctions, and any shortage would be offset by lower demand within Russia as sanctions dent growth. The global market looks well supplied, with US stockpiles recently hitting a record. For now at least, prices seem more likely to move sideways or drift further down than mount a sustained rally. US natural gas, however, is a different story. As we pointed out a fortnight ago, it is entering a structural bull market as industries and households are encouraged by increasingly stringent regulations to switch to the cleanest-burning fossil fuel.

Precious metals

Hit by stronger dollar

Gold’s appeal has been dented as the global economy continues to recover. The US and UK look set to raise interest rates soon, bad news for an asset that pays no interest and thrives on economic upheaval. But inflation could make a comeback if central banks raise rates too slowly. And with many asset markets looking overextended and Europe faltering, another financial crisis can’t be ruled out. We suggest you keep 5%-10% of your portfolio in gold as insurance. Silver, the other monetary metal, is more risky – only bet on it ifyou can handle volatility and unpredictability. It tends to magnify gold’s moves, and is also affected by the outlook for global industry, which makes up 50% of demand.

Bonds

Going against the grain

This year government bonds have defied expectations by rising, sending yields lower. Central-bank quantitative easing (QE), or money printing, has artificially inflated their prices because the newly created money has been injected into economies through bond purchases.

QE has also inflated prices of corporate bonds, especially junk bonds, by prompting investors to chase riskier assets. All bonds are wildly overvalued and acutely vulnerable to the turn in the interest-rate cycle, or the return of inflation – they’re only worth considering as a hedge against deflation within a diversified portfolio.

Commodities

Out of fashion again

Raw materials had their best first half since 2008 this year. The Bloomberg Commodity index gained 7.1% by late June. Since then, however, all the gains have dissipated. Why? On the one hand, we have tepid demand growth – weakness in China and Europe has offsetsolid US figures. On the other, supply has been healthy, with very few exceptions. That said, mining stocks remain relatively inexpensive and worth buying.

The outlook for agricultural commodities remains bright in the long run. They look well supplied at present, but that won’t be the case forever, as rising populations reduce the world’s supply of arable land. But beware of investing directly in soft commodities, as they are extremely volatile. Fertiliser or farm-equipment stocks are still the best way to play this theme.

Equities

Buy cheap markets

Signs that the eurozone’s recovery is faltering have rattled investors – $3.5bn flooded out of European stockmarket funds in the week to 13 August, the largest outflow for four years. We would stick with Europe, however. Not only are stocks still reasonably valued, but further deterioration in the economy should prompt the European Central Bank to embark on quantitative easing, which tends to be good for stocks. Japan is a buy for similar reasons.

Emerging markets, meanwhile, are on track to beat their developed counterparts for the second quarter in a row. They should benefit from the ongoing recovery, while many investors reckon they can also cope with higher US interest rates, which will draw money away from riskier assets. We prefer markets with little commodity exposure and promising domestic economies, but reasonably valued Brazil and China, which don’t fit those criteria, are also on our buy list.

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