The assets to buy into now – January 2014

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.


A better year ahead?

Raw materials had a poor 2013. The Dow Jones-UBS Commodity index fell by 10%. A sustained comeback looks unlikely anytime soon. On the demand side, the global recovery may quicken this year; the International Monetary Fund expects growth to hit 3.6% in 2014, from around 3% in 2013. But this is tepid compared to the 4% annual average in the ten years before the credit crisis.

In China, the key driver of commodities demand, there is potential for a sharp slowdown. The dollar also seems likely to strengthen as the Fed gradually reduces liquidity, putting pressure on dollar-denominated commodities prices.

Improvements in the supply of many metals are also hitting prices. Aluminium is “chronically oversupplied”, says Liam Denning in The Wall Street Journal. Copper is also abundant now that recent mining investments have come to fruition. This said, mining stocks have priced in much of the bad news and may be worth buying as investors grow more upbeat on growth.

Some agricultural commodities markets also look well supplied. A record US crop means that corn production is set to rise by 12% in the year to October 2014, while global consumption is only expected to rise by 8.9%.

In the long run, however, a shortage of arable land, population growth and changing emerging-market diets all point to higher softs prices. Play the theme with fertiliser or farm-equipment stocks.


Mind the glut

There is a risk of an oil-supply glut, according to Deutsche Bank. Production in the US is rampant – government forecasts expect output to approach all-time highs by 2016. Iranian and Libyan oil is set to return to market. With demand growth unlikely to prove spectacular, the price should ease. Deutsche expects Brent crude, now $110 a barrel, to drop to $97.50 in 2014.

Natural gas futures, meanwhile, have jumped amid recent cold weather. Further gains look likely in the long run. Industries are switching to this clean-burning fuel, and cheap gas has encouraged some US firms who have outsourced production to bring operations back onshore. Companies that benefit from these trends are thus worth a look.


The big squeeze

The price of bonds falls when interest rates rise, which explains why various types of debt had a losing year in 2013. Government bonds in the West weakened for the first time in three decades as long-term interest rates climbed, as markets began to price in less money printing and eventual short-term interest rate hikes by central banks. Government bonds remain historically expensive, however, as are corporate, and especially junk, bonds. Avoid.


Offshore opportunities

Britain’s lopsided new housing boom continues: according to Land Registry figures, London prices were up 10.6% year-on-year in November, while the national average rise of 3.2% masks declines in the north of England.

The boom is built on sand, as the pre-crisis bubble was barely allowed to deflate: prices are 4.8 times the average annual wage, compared to an average of four over the past 30 years, says Halifax. America and Germany are better value for property investors.

Precious metals

Death by tapering

Gold and silver lost a lot of their lustre in 2013. The yellow metal posted its nastiest annual loss in 30 years and silver did even worse. It fell 36% to $19 an ounce. America’s ‘taper’ and higher real interest rates are headwinds for precious metals, but investors should keep holding gold as a long-term insurance policy (we’d suggest about 5%).

But only investors with strong stomachs and an appetite for risk should dabble in silver, which mimics and magnifies gold movements. It is an industrial metal as well as a monetary one, but with the outlook for base metals uninspiring, this is unlikely to give it much of a fillip in 2014.


Further gains

Stocks had an excellent year in 2013. Developed markets are expected to make further, albeit less spectacular, gains in 2014, as liquidity is still abundant. Stick to markets where valuations are still compelling and central banks could opt for further quantitative easing or start to print money. That means Europe and Japan.

Emerging markets may struggle in 2014 too. Investors should keep a close eye on politics in particular – witness Turkey’s turmoil in recent weeks. But many of the risks are in the price. The valuation gap between developed and emerging markets hasn’t been this big since 2005. Investors should look at export-oriented economies with stable politics, such as Mexico and South Korea, and more exotic bets such as Russia.