The assets to buy now - October 2014

Equities

Correction coming?

The final quarter of 2014 could be a lot more volatile than the last three in fact, markets are already wobbling. While the US economy has strengthened, Wall Street looks "priced for perfection", as The Wall Street Journal's ES Browning puts it. That leaves the US, and by extension many other equity markets, vulnerable at a time when plenty of problems are piling up. These range from a downturn in China, possibly compounded by turmoil in Hong Kong, to stagnation in the eurozone. Rising US interest rates are now on investors' radar screens too the end of cheap money could well cause turbulence in view of record debt levels. Given all this, it's best to stick with markets that are attractively valued and would also benefit from likely further quantitative easing (QE), or money printing: Europe, notably Italy or Greece; and Japan.

The MSCI Emerging Markets Index has slid by almost 10% in the past month. As US rates rise, money will flee risky emerging markets for the US. Investors have also noticed that many former emerging-market stars have been grappling with structural problemssuch as widespread red tape, which have hampered growth in recent years. Focus on markets with compelling long-term stories, such as India, Indonesia and Brazil.

Property

A pause for breath

The average house in London now costs £401,072, according to Nationwide 31% above the 2007 peak. Nationally, however, September saw the first monthly fall since April 2013, fuelling hope that our absurdly expensive property market could soon become merely extremely expensive. Whatever happens from here, however, we would advise against UK property and eye up the US instead. The housing market there has paused for breath this year, and remains relatively good value even after rebounding from bargain basement levels after the crisis.

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Bonds

The biggest bubble around

Government bonds have never been this expensive. The US ten-year Treasury yield, which in 1981 peaked at almost 16%, is just over2%, reflecting rising prices. Its German equivalent, the ten-year Bund, is yielding less than 1%. These yields could slip further if there is a deflation scare. Europe looks especially vulnerable. But given that central banks should succeed in creating inflation if they try hard enough, we would not be inclined to chase overpriced bonds from here. Investors have also poured into corporate debt in recent years, with so-called high-yield (junk) debt no longer living up to its name. At these prices, the risk of a fall easily eclipses the scope for further gains.

Commodities

A stronger dollar takes its toll

The Bloomberg Spot Commodity Price index has hit a four-year low. The dollar's rally is hurting raw materials across the board as they are priced in the US currency, it takes fewer dollars to buy them. The prospect of higher US interest rates also undermines sentiment towards commodities, as they pay no interest. The supply-demand picture doesn't look good either. China's growth has eased, especially in the commodity-intensive property sector, and Europe's recovery is weakening. Meanwhile, most metals markets look well supplied.

Precious metals

Portfolio insurance

Gold has fallen to an eight-month low. Solid US data are bad news for gold, which thrives on poor data and sentiment. As the global economy has gradually strengthened, fuelling confidence that things are returning to normal, the need for a traditional safe haven has dwindled. Still, keep 5%-10% of your portfolio in gold. Trying to raise interest rates from historically low levels could well cause economic and market turbulence, while inflation could well make a comeback if it's not done quickly enough.

Silver, meanwhile, has fallen to a four-year low. It generally tracks and amplifies gold's moves, but it bears the added complexity of being a semi-industrial metal as well as a monetary one. One for risk-takers only right now.

Energy

Oil finally starts to slide

The oil price fell by more than 12% between July and September, the worst quarterly performance seen in two years. Why? Michael Hewson of CMC Markets summed it up: "There's plenty of supply but no demand." Airstrikes have ensured that insurgents have been unable to interfere with production and exports in the Middle East. Meanwhile, US daily production has reached its highest level since early 1986. Hewson says crude prices could decline to $90 a barrel by the end of the year and they are already well on the way there.

But while fossil fuels may be on borrowed time, US natural gas is probably the one with the brightest future we'd expect the price to rise in the long-term as households and industries, prompted by tougher environmental regulations, switch to the cleanest-burning fossil fuel.