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
Only getting worse The performance of commodity prices since the crisis of 2008/2009 has been the weakest seen during any recovery of the past 40 years, Barclays reports. It could get weaker still. An index tracking manufacturing in China, the key driver of demand for industrial metals, has hit a nine-month low. Activity in the sector is shrinking.
China's recent credit crunch may be ebbing, but China's slowdown "is only going to get worse", says the Financial Times. The authorities are "determined to rein in credit", which has soared in recent years, to prevent a nasty crash and a potential banking crisis as bad loans pile up. History suggests, however, that bubbles burst messily rather than deflating gently, so China could well face a hard landing. In any case, China's future growth is set to be less commodity-intensive, because it is trying to temper its reliance on investment and construction and promote consumption.
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Recent supply growth, notably in oil and copper, also suggests the commodities supercycle is over. The surge in investment in new production capacity after years of demand exceeding supply is bearing fruit. Deutsche Bank and Macquarie expect copper supply between 2013 and 2015 to exceed demand by 500,000 metric tonnes a year. That's more than the surplus in 2009, when the price fell by 25%, notes Liam Denning in The Wall Street Journal.
Stocks
Withdrawal symptoms kick in Investors have reacted to the potential loss of endless liquidity from the US Federal Reserve "like trust-fund kids warned that Daddy is about to cut off their allowance", says Economist.com's Buttonwood blog. Their strop sent some equity markets, especially traditionally riskier emerging markets, into official bear territory a slide of 20% or more. In recent days, central bankers have placated investors by pointing out that tighter monetary policy is still a long way off.
This is just a reminder of how hard it will be to wean liquidity-addicted markets off their endless fixes (see page 42), even if fundamentals improve. And in any case, global growth forecasts have come down recently and judging by the latest manufacturing surveys, we can't expect a global rebound soon. Conditions have improved in Europe but worsened in China. America continues to expand, but hardly spectacularly.
In these circumstances, we would continue to focus on the cheap developed markets of Europe and Japan, perhaps drip-feeding money in to offset the volatility. As far as emerging markets are concerned, we continue to like countries with solid domestic economies that don't overly depend on commodities, such as the Philippines (see page 7) and Mexico (see page 24). Russia is also cheap enough to buy if you have an appetite for risk.
Precious metals
Insurance still worth holding Gold and silver have dropped to three-year lows below $1,250 and $20 an ounce respectively. Threatened monetary tightening appears to reduce the need for a hedge against inflation and suggests the world economy is returning to normal. Even so, we would keep 5%-10% of our portfolio in gold. A nasty jump in inflation is still a possibility after years of money printing by central banks. There could also be further turmoil as banks and investors who loaded up on QE-supported assets face hefty losses as markets fall. Silver tends to mirror and magnify gold's moves, so unlike the yellow metal it is not suitable as portfolio insurance.
Bonds
The US leads the way "The US tends to set the price of debt everywhere," notes Deutsche Bank's Jim Reid. So bond yields (which move inversely to prices) have risen everywhere from gilts to emerging market debt as Treasuries have been sold. The net effect has been a tightening of global monetary policy. Bonds remain historically overpriced after a 30-year bull market and are very vulnerable to declines now that a key support monetary easing may not be around for much longer.
Energy
Gas to outperform oil Stick with natural gas. Historically low prices caused by the shale supply surge are fuelling rising demand as more and more industries switch to this comparatively clean-burning fuel. Oil prices, on the other hand, look likely to drift downwards. Non-Opec supply has surged, with the US on track to surpass Saudi Arabia's output by 2020, while global demand has ebbed.
Property
Reflation will end in tears British house prices rose by 1.9% in June, the biggest annual rise since 2010, says Nationwide. Mortgage approvals for house purchase hit a three-and-a-half year high in May. Government schemes to prop up the market come at a time when houses are still overpriced, so the danger is that the housing bubble, which never properly burst, will be reflated. Germany and America offer better value.
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