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:Tough times ahead
So the backdrop for industrial commodities remains poor. GDP growth in China, which accounts for 40% or so of global base metal demand, is set to slow from 7.5% this year to 7% next, says Capital Economics. In the next few years, Chinese growth will become less commodity-intensive as the government tries to promote consumption. On the supply side, production has increased after miners have rushed to boost it following years of underinvestment. The iron ore, copper, aluminium, zinc and nickel markets are all in or soon to be in surplus.
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Nevertheless, mining stocks have recently fallen to cheap enough levels to have discounted the bearish near-term outlook. And we continue to like stocks that allow investors to bet on long-term upswings in the price of agricultural commodities, a result of rising populations and the scarcity of arable land. Farm equipment or fertiliser stocks are a better bet than the commodity futures themselves, which are highly volatile.
Equities: Buy cheap stocks
But "forget fundamental analysis", says Henny Sender in the FT. "It is all about liquidity." The Federal Reserve's money-printing, which will now probably continue at this pace until next spring, hasn't done that much for the economy, but it has done wonders for asset prices. We would suggest sticking with markets that are cheap enough to have factored in any bumps ahead. That means Europe, notably Italy, and Japan.
Emerging equities have found their feet again too, now that global jitters have subsided. The medium-term outlook has clouded over now that the likes of China, India and Brazil have slowed, and US monetary policy is set to be tightened next year. Many countries have put off structural reforms that would help them grow faster.But one country that hasn't is Mexico, while we also still like the Philippines and Vietnam. Brazil is also cheap enough to be reconsidered, despite the commodities decline.
Precious metals: Still the best insurance
Energy: Bet on natural gas
Cheap gas is also persuading some US firms that have outsourced production to bring operations back home. Companies that benefit from these trends, or provide services to gas explorers, are thus worth further investigation.
Property: A very British bubble
The ratio of house prices to average earnings never fell below the long-term average. In Germany, despite the Bundesbank worrying about an incipient bubble, property is still worth a look.
Bonds: Still too expensive
This year, the yield on a global index of junk bonds fell to around 6%, a level that in normal times would be appropriate for some government debt. Keep away.
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