The assets to buy now – December 2014

Asset allocation is at least as important as individual share selection. So where should you be putting your money? Here’s our monthly take on the major asset classes.

Asset allocation is at least as important as individual share selection. So where shouldyou be putting your money? Here's our monthly take on the major asset classes.



A boost to come?

Annual house-price growth slowed to 8.5% in November, according to figures from Nationwide slowing down for the third month in a row. Meanwhile, mortgage approvals continued to fall. And "forward-looking indicators, such as new buyer enquiries, point to further softness in the near term". The market has been hit by stricter lending criteria (the result of the Mortgage Market Review). Don't be surprised if the chancellor's budget changes to stamp duty give the market (outside London in any case) a convenient pre-election boost in the months to come. However, all told the US market and second-tier German cities remain better value.

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Trouble ahead

In recent years, the price of both government bonds and corporate bonds has been driven higher and higher by a combination of quantitative easing (QE printing money to buy bonds), low interest rates (which make any sort of yield attractive), and low inflation. As a result, yields for most types of bonds are near all-time lows (yields fall as prices rise). So we'd argue that most forms of debt are too expensive to justify the potential risks ahead. These include the potential return of inflation (assuming the economic recovery continues) and in time, possibly even rising US interest rates. Junk bonds (also known as high yield debt) in particular look vulnerable as we note in our cover story, the oil-price plunge has rattled bonds from energy explorers, and there's a risk that this could spread into other areas of the market if investors panic.



Oil collapses

As discussed in the cover story, oil prices have continued to slide in the past month. Oil cartel Opec at the behest of Saudi Arabia refused to cut production at its last meeting, which suggests that prices may have some way further to fall. On balance, it's largely good news for the global economy, giving consumers a bit more money in their pockets. As for US natural gas, prices have fallen to their lowest level in a month, to around $3.90 per million British thermal units. The price has been hit by "forecasts for unusually warm weather across the US this month", reports Timothy Puko in The Wall Street Journal. Around 50% of all American houses use natural gas for heating,which is why unseasonal fluctuations in the temperature can have such an impact on the short-term price. In the longer run, more and more households and industries are opting for this fossil fuel, which produces less pollution than coal or oil.


Precious metals

Hang on

The Swiss referendum on whether or not to return to the gold standard was resoundingly defeated, and yet after a brief crash, in which silver dropped as low as $14.20 per ounce, and gold slid to below $1,150 an ounce, both of the precious metals rebounded strongly silver leapt back above the $16 mark and gold headed back above $1,200 by mid-week. Chinese demand for gold remains strong, notes Ned Naylor-Leyland of asset manager Quilter Cheviot, and we'd keep hanging on to gold as insurance.

Silver tends to be more volatile than gold.



Buy miners

Along with oil, it's been a tricky time for many industrial commodities. For example, the price of iron ore a key steel-making ingredient has fallen in half so far this year, hit by increased supply and weaker demand, particularly from China, which is trying to shift its economy to be more focused on consumer spending. That'staken its toll on mining giants such as BHP Billiton and Rio Tinto, while Brazil's Vale the world's largest iron-ore producer has slashed its spending by 26% to the lowest level in six years.

Agricultural commodities have had a better time of it recently. Corn futures are up by 15% since September due to a "slow US harvest", notes The Wall Street Journal, while soybeans are up 10% that's the biggest gain corn has seen during that time period for eight years. In the long run, food prices are more likely to rise than fall as the global population expands and the amount of arable land available shrinks. But it's best to play this with fertiliser and farm-equipment stocks rather than bets on soft commodities themselves.



America's still expensive

The S&P 500 index in the US has once again hit record highs as investors remain confident in the US economy, yet unfazed by the potential interest-rates rises that such a recovery might bring. We'd steer clear of the American market it is expensive in historic terms, trading on a cyclically adjusted price/earnings (Cape) ratio of more than 26. In developed markets we prefer prospects in Europe which is far cheaper and looks set to benefit from eventual money printing by the European Central Bank and Japan, which is already enjoying one of the biggest QE programmes the world has ever seen.There are also a few emerging markets we like, although you have to be picky we look at some of the markets that will benefit from falling oil prices in the cover story.