Commodities
Time to revisit resources:Commodity prices have been drifting downward since mid-2011. In the first half of this year, the Dow Jones-UBS Commodity Index fell by more than 10%. China's slowdown, its emphasis on consumption rather than investment, and recent supply increases all point to the end of the commodities supercycle. The latest data may point to a manufacturing recovery in Europe, but this is negated by weakness in China.
However, sentiment towards raw materials is now so negative that the sector is worth revisiting. Everyone now realises China will slow: in July, a Bank of America Merrill Lynch survey of global money mangers showed that 65% expect the Chinese economy to weaken.Eight months ago, 67% expected it to strengthen.
With the bad news for commodities seemingly largely factored in, we reckon some mining investments are worth a look, as we noted in last week's cover story. We continue to like agricultural commodities' long-term prospects, given the squeeze on arable land from population growth. The best approach is to bet on fertiliser and farm equipment stocks.
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Precious metals
Keep hold of gold:The price of gold has dropped by over a third since it hit its record peak in September 2011. It is now selling for around $1,300 an ounce. Keep 5%-10% of your portfolio in gold, and look at it as insurance against further financial instability, driven by unprecedented money-printing. The recovery remains slow. Austerity hasn't made much of a dent in the developed world's debt pile, and is becoming increasingly politically unpalatable.
The most painless way to get rid of the debt is via inflation. So governments could soon be increasingly tempted to allow inflation to drift higher to ease the debt burden. Silver usually mimics gold's moves, but magnifies them, as the market for the white metal is smaller, making it a riskier option.
Energy
Stick with gas over oil: The fundamentals point to a gentle fall in the price of oil, currently at around $105 a barrel. Global demand is lacklustre and supply is ample: American oil in storage is at a three decade-high. Sporadic worries about political upheaval in the Middle East are adding a few dollars to the price, however. As for natural gas, the vast recent supply increase from shale continues to set the tone. But prices should rise over the long term. Cheap gas is prompting more and more industries to switch to this clean-burning fuel.
Property
UK housing remains overvalued: Britain's residential housing market is still overvalued. The long-term average house price-to-earnings ratio is around 3.5; at present, the ratio is still over four. The government's Help to Buy' scheme is undeniably propping up prices, but is merely reflating a bubble that hasn't burst yet, which implies a nastier future bust (sometime after the next election). Germany and the US still look good value. The Irish market may also be recovering: prices are now rising on an annual basis for the first time since the crash.
Bonds
Avoid debt:Debt of all kinds has got cheaper (ie, yields have risen) since the US Federal Reserve signalled that cheap money and bond buying would not last forever. But government bonds in particular still look overpriced after a 30-year bull run, which has been turbocharged by money-printing in recent years. A possible future burst in inflation is another reason to keep avoiding fixed-income investments.
Equities
EMs get interesting:The fundamentals for developed markets are as shaky as ever. The world economy is still years away from a return to normal that would herald a sustainable bull market. Any forward momentum stems from investors hoping that monetary tightening can be put off for as long as possible. In these unpredictable circumstances, the safest bet is to drip-feed money into cheap markets. We still like Europe and Japan on that basis.
Meanwhile, emerging markets have taken a hammering as years of "triumphant Chinese growth and a wilting buck" (the latter a reflection of loose US monetary policy), have ended, notes Kopin Tan in Barron's. The benchmark MSCI Emerging Markets Index is already down 10% this year. But with the index on a 2013 price/earnings ratio of below ten, and valuations across the asset class now much more reasonable, long-term investors can start hunting for bargains.
Given the uncertain outlook, we prefer emerging markets with large domestic sectors, and thus not dependent on raw material exports. That means the Philippines, Indonesia, Mexico and India, where our favourite play, Aberdeen's New India investment trust (LSE: NII), is currently unusually cheap on a discount to net asset value of 14%. But Brazilian investments, such as the JPMorgan Brazil Investment Trust (LSE: JPB) and the iShares MSCI Brazil ETF (LSE: IDBZ) also look worth researching.
