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.
Buy cheap stocks
Developed stockmarkets have hit new highs in recent days, with Britain's FTSE 100 benchmark finally eclipsing its 1999 peak. Economic data has been solid, but the main tailwind for stocks is liquidity. Cheap money is lifting all asset markets. Lombard Street Research's Richard Batley notes that the quantitative easing coming from the European and Japanese central banks will be more than enough to counteract any decline in the balance sheet of the US Federal Reserve now that it has stopped printing. We continue to advocate reasonably valued markets supported by money printing, which means the eurozone and Japan are better bets than America.
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As far as emerging markets are concerned, weak commodity prices and the prospect of tighter monetary policy in America have hampered equities. Commodity importers with large domestic markets to offset slower exports are faring best. We like India, Indonesia and the Philippines. Meanwhile, Brazil, a raw materials exporter in turmoil, is in such a mess that it's become very cheap and worth a look for long-term investors.
Dirt-cheap home loans
Average rates on new UK mortgages have fallen below 3% for the first time since records began. With real earnings rising and consumer confidence strong, this helps explain why mortgage approvals have ticked up for a second successive month, suggesting that the annual rate of house-price growth will rise from 5% today. If so, affordability will dwindle further: according to Nationwide, the house-price-to-earnings ratio is at 5.5, far above the long-term average of around 4.2 a level it hasn't hit since 2003. Meanwhile, US prices are now looking mildly overvalued. Japan and Germany still look appealing for property bargain hunters, but steer clear of the bigger cities in Europe's top economy.
A rebound may be coming
Commodities have bounced off multi-year lows over the past few weeks. Positive global economic data, notably an uptick in China's manufacturing sector, suggest metals could make further gains. Supplies generally look healthy, but could fall in some cases, notably nickel and copper. The latter has slid further than the fundamentals warrant, reckons Capital Economics, and should recover from today's $5,900 a tonne to over $7,000 by the year-end as demand grows and the expansion in supply falters. Mining shares are still attractively valued after the falls of the past few years.
In agriculture, the most eye-catching development has been a surge in cocoa prices amid a poor west African harvest. This is a reminder that weather remains the key short-term influence on 'softs' prices, while a relentless expansion in the global population and dwindling supplies of arable land are the main long-term drivers. That implies that agricultural commodities are in a structural bull market, which investors can play through fertiliser and farm-equipment stocks.
Tough times, but hold on
After a strong start to the year, gold has given up most of its gains. The deal between Greece and its creditors has reduced demand for a safe haven, while the prospect of higher interest rates in the US has also dented bullion. Still, we suggest you continue to keep 5%-10% of your portfolio in the yellow metal as an insurance policy. An eventual return of inflation is a distinct possibility. The eurozone could yet rupture painfully.
In addition, the demand outlook remains favourable. Emerging-market consumers will want more gold as they get richer, and emerging-market central banks are diversifying their reserves, which should involve buying more gold. New mined supply is expected to stagnate in the next few years.
Oil bounces back
Oil prices bounced by 27% in February, their largest monthly gain for six years. Production is still rising, but will slide in a few months as the number of rigs drilling for oil in the US has plunged. So oil may have seen the bottom of its latest downhill run. That is likely to be true of US natural gas too. It has ticked up to around $3 per million British thermal units. As more industries and households start to use gas due to environmental legislation, a structural bull market should develop.
Avoid this ever-inflating bubble
The bubble in bonds just gets bigger and bigger. Last week the yield on German five-year government paper turned negative as prices rose even further. Investors in other countries are also effectively paying the government to borrow money from them, seemingly in the hope they will be able to sell their bonds on to someone else at an even higher price. All the liquidity sloshing around the system has also pushed corporate debt notably junk bonds to eye-watering levels. Steer clear.
