Asset allocation is at least as important as individual share selection. So where should you be putting your money? We give our monthly view on the major asset classes.
Commodities: China's Minsky moment?
Commodities have had a difficult year so far. And it only looks set to get worse. China's growth on which the price of many commodities is dependent shows no sign of improving and there are signs that the country's dependence on using easy money to keep growth moving might come home to roost. Socit Gnrale's China economist Wei Yao has gone as far as to suggest that China may be heading for a 2008-style banking crisis, as the level of debt building in the economy continues to outstrip the rate of growth. We'd continue to avoid industrial mining stocks and, if you feel particularly bold, then betting against the Australian dollar is a way to bet on further trouble in China: the Aussie has already slid substantially in recent weeks, but could have further to go.
Stocks: Stick with Japan
The economic outlook for the developed world remains uninspiring. Last month, wealthy-nation think tank the OECD cut its growth forecasts for the global economy to 3.1% this year and 4% in 2014, from November's estimates of 3.4% in 2013 and 4.2% next year. It expects the eurozone to stay in recession for another year, America to recover gradually, and Japan to grow too, by 1.6% this year. Of course, markets often move completely independently of economic growth. Despite the recent plunge in Japanese stocks, we still think they are worth buying. Indeed, the remaining scepticism in the market is a sign that plenty of investors remain fundamentally bearish on the nation. We'd also consider drip-feeding money into the cheaper eurozone markets.
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Precious metals: Gold looks a sensible option
Gold's recent slide seems to have been arrested for the time being, with the yellow metal trading at around the $1,400 an ounce mark. Investors have been rattled by fears that central bankers may not be able to keep control of the bond markets: volatility in the Japanese debt market has spiked since the Bank of Japan launched its massive quantitative easing (QE) programme, while hints that the Federal Reserve might taper' off its own QE have investors concerned over how markets will copewithout a constant stream of printed money. Holding 5%-10% of your portfolio in gold as insurance seems like a very sensible option in the face of this uncertainty. As for silver, you can read US money manager Jeff Gundlach's rationale for holding it here. Silver is highly volatile, however, so we'd favour gold as insurance and silver for speculating.
Energy: Betting on gas
The oil price neared $93 a barrel last week on fears that the Federal Reserve may ease its bond-buying programme as the US economy recovers. Other more fundamental trends, such as record supply levels in America, coupled with lower demand from customers and a drive towards energy efficiency, are also an issue. Demand from China, the world's second-biggest oil consumer, has slowed, with refinery crude output down by 3% in April compared to March an eight-month low.
Analysts at Bank of America Merrill Lynch have cut 2014 forecasts for oil on weaker Chinese demand, increased supply and weaker growth in emerging markets. However, we remain bullish on natural gas. Low prices are boosting demand as industries seek to use it instead of other fossil fuels. For more on how to play the energy market, see A picks, shovels and pipelines play on the energy revolution.
Bonds: Stay away
The Fed's threat to taper QE hit all asset classes last month, but the most vulnerable is the bond market. Mutual funds investing in fixed-income suffered their worst monthly losses in years as fund managers and strategists were left wondering whether this is merely a correction or the end of the 30-year bull market in bonds. Whatever the case, most fixed-income investments currently look too expensive considering the risks. Tinkering by central banks in money printing could cause inflation, while the recent sell-off gives a taste of what could happen when interest rates eventually rise.
Property: Blowing a new bubble
British mortgage approvals in April were lower than expected at 53,710. The figures came in at their highest level since January, but were still lower than the 54,500 economists had predicted in a poll by Reuters. Meanwhile, lender Nationwide said that house prices are rising at their fastest rate in 18 months. New schemes, such as Help to Buy and NewBuy, are aimed at helping first-time buyers and now those on the second rung of the housing market purchase a new house, but critics of these new programmes including the Office for Budget Responsibility fear that government meddling is merely blowing up another bubble.
We certainly think British residential property remains overvalued for now there are more attractive offerings in America and Germany.
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