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.
Global equities, as measured by the FTSE All-World Index, have gained 13% so far this year. But it looks as though they will be lucky to build on these gains. The US Federal Reserve has delayed a gradual reduction in the pace of its money-printing programme. But the main source of uncertainty for now is the fiscal stand-off in the US, especially the debt ceiling dispute. But the euro crisis could flare up at any time as Italy showed this week and with the global economic backdrop uninspiring, there are unlikely to be major earnings surprises ahead. We continue to favour Europe, especially cheap-looking Italy, and Japan, where ongoing money printing and structural reforms should continue to bolster stocks.
Emerging-market equities have stabilised after falling for most of the year. This is partly due to the Fed's tapering delay, which has boosted risk appetite. But investors have also realised that the sell-off was overdone. They had finally noticed structural weaknesses, such as current-account deficits, implying a reliance on foreign capital to bolster the economy. But with higher foreign-exchange reserves and lower foreign-currency debt than in the past, the likes of India were better equipped to withstand a foreign loss of confidence, while emerging markets have also become good value again: the overall emerging market price/earnings (p/e) ratio is around 15% below its historic average. Good GDP data from Brazil and China have also buoyed sentiment, fuelling hope that the slowdown in developing markets is over.
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We now reckon Brazil is cheap enough to tempt long-term investors, and continue to like the emerging markets whose large domestic economies gives them shelter from the commodities cycle, ie Indonesia and the Philippines. Mexico, as noted last week, is moving in the right direction, and Vietnam, a long-term favourite of ours, is getting its act together.
Energy:Oil will continue to dwindle
The political risk premium in oil prices has dwindled now that military strikes on Syria seem to be off the table, with the price of Brent Crude falling from $115 a barrel to $107 in September. This is likely to continue, amid a thawing in Western relations with Iran. Sanctions have seen Iran's daily oil exports fall by a million barrels a day, notes Liam Denning in The Wall Street Journal. Given that global spare capacity is under three million barrels a day, "getting even half of those lost Iranian barrels back" would push down prices. Meanwhile, it shouldn't be difficult to top up supply from Libya, says Capital Economics. Add in shale oil and the likely drop in demand stemming from recent high prices, and oil looks set to keep drifting down. As far as gas is concerned, companies set to profit from growing demand for shale gas are still worth exploring.
Commodities:Metals prices still vulnerable
It's not clear that any rebound in China's economy will last, while strong recent supply growth bodes ill for base metal prices, says Barclays. Tin appears to be the only metal with fundamentals "firm enough to sustain a rally". However, we'd argue that mining stocks have fallen far enough to be worth a look.
Agricultural raw materials remain promising due to the squeeze on arable land amid population growth, and can be played via fertiliser and farm equipment stocks. The relative performance of the New Zealand and Aussie dollars also reflects soft commodities' better prospects.
Precious metals: Scope for accidents
There is still plenty of scope for accidents in the global financial system, with the US debt-ceiling showdown and a renewed meltdown in Europe top of the list. But the longer-term danger a sharp rise in inflation as all this printed money continues to filter through Western economies shouldn't be discounted either. So we'd still keep 5%-10% of your portfolio in gold as insurance.
Government bond yields have fallen back slightly, reflecting rising prices, since the Fed decided to delay its taper'. But they are still very expensive following a 30-year bull market, and should be avoided. Corporate bond prices have also risen strongly in recent years and don't look worth the risk.
The UK property market is buoyant: mortgage approvals are at levels not seen since February 2008. The government's Help to Buy scheme, the second part of which has been brought forward a few months, is inflating another bubble even before the old one has properly burst. There are short-term opportunities, but we still prefer Germany. The housing rebound in the US has lost momentum of late due to higher long-term interest rates.
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