Asset allocation is at least as important as individual share selection. So where shouldyou be putting your money? Here's May'stake on the major asset classes.
Insanely expensive
Government paper has been extremely expensive for years; now it has become insanely expensive. Yields have gone negative in some cases, meaning that investors will make a loss if they hang on to maturity. The average yield on all German government debt is now zero. Investors are clearly hoping to sell these bonds, which are being hoovered up by the European Central Bank, on to another investor at an even higher price the hallmark of a market bubble.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Corporate debt isn't cheap either. Yields have slipped to the mid-single digits, the kind of level that in normal times would have been associated with solid government credit. Companies have continued to lock in cheap credit for the long term: in the first quarter, firms raised $79bn and $39bn in the US and Europe respectively, according to credit-ratings agency Moody's. While a pin that could burst the bubble, such as a jump in inflation, is not currently in sight, we would steer clear of corporate bonds.
Look abroad for bargains
The housing market has featured prominently in the UK general election campaign, with Ed Miliband's proposed exemption from stamp duty for first-time buyers hitting the headlines this week (see page 5). Like the Coalition's Help to Buy scheme, it would merely boost demand and prices in an already overpriced market. Price rises are already set to accelerate now that lenders appear to have digested the new mortgage regulations introduced last year. According to the British Bankers' Association, mortgage approvals rose at the fastest pace for more than a year in March. Look outside the country for better bargains in residential property.
Follow the printed money
Among developed markets, the most appealing regions are those with a tailwind provided by central banks. In the US, the Federal Reserve is set to raise interest rates later this year, and stocks are also expensive (see page 6). But in Europe and Japan the European Central Bank and the Bank of Japan are busy printing money, which bodes well forstocks as the liquidity finds its way into asset markets. The Bank of Japan is soon likely to print more in order to get inflation up to its 2% target. Equities are still reasonably valued in both regions, and the earnings outlook has improved.
Emerging markets did better than developed ones in the first quarter, a rare example of outperformance in recent years. This was due to a strong showing from China, more stable commodity prices, and a sense that monetary tightening in the US is on hold. Go for countries with large domestic markets and governments working on their structural problems, such as India, Indonesia and the Philippines.
Oil rebound unlikely to last
Oil prices have bounced in the past few days, with Brent futures exceeding $60 a barrel. But it would be jumping the gun to bet on a strong recovery in prices. While oil may have bottomed, a return to $100 seems unlikely for now. The number of rigs at work in the US has fallen sharply, but so have the costs of fracking as technology improves; according to the IHS Cera consultancy, they are down by a third in just a year. So many wells will be able to keep producing despite lower prices. More Iranian oil could soon hitthe market again as sanctions are lifted. Russia has also managed to keep output above anticipated levels despite sanctions, notes Der Spiegel. So supply remains ample, while lower prices have yet to boost demand significantly.
Shelter from the storm
Keep 5%-10% of your portfolio in gold. Not only is it seen as a safe haven in troubled times so shock waves after a potential Greek exit from the euro would give it a boost but it is also insurance against an eventual surge in inflation after all the central-bank money printing of recent years. Emerging-market demand should gradually climb too as increasingly wealthy consumers seek gold jewellery or an inflation hedge; emerging-market central banks are also buying in order to diversify their foreign-exchange reserves. Silver is for gamblers only: while it tends to mimic gold's movements, the small market makes it extremely volatile.
Play the softs
Raw materials are treading water, and a sustained upswing isn't likely yet. China, the key source of demand for metals, continues to slow. Large supply increases are still dampening some metals' prices: the recent bounce in iron ore prices will dissipate, reckons Goldman Sachs, with prices likely to sink towards $40 a ton in the next 18 months. Agricultural commodities are in a structural bull market owing to the dwindling supply of arable land amid climate change and rising populations. Play the theme with fertiliser and farm-equipment stocks.
-
Zelenskyy moves to appease Donald Trump – what happens now?Ukraine’s president Volodymyr Zelenskyy is conceding ground to secure the least-worst deal possible, says Emily Hohler
-
Rolls-Royce stock jumps 15% – could it climb further?Aircraft-engine group Rolls-Royce’s CEO has been hailed as a hero for spearheading the firm’s recovery. And the future looks bright, says Matthew Partridge
-
A new dawn for Asian markets?Advertisement Feature James Thom, Investment Manager, abrdn New Dawn Investment Trust plc
-
The end of cheap money hits the marketsNews Markets have swooned as central banks raise interest rates, leaving the era of cheap money behind.
-
Are stocks back in a bull market or is this just a bear market rally?News The S&P 500 index gained 17% between its June lows and 16 August, while the Nasdaq Composite rose more than 20%. So are stocks back in a bull market or is this just a brief rally before they resume their slide?
-
Enjoy the bear market rally while it lastsNews Investors seem to think that a weaker US economy will cool inflation and see the Fed relent on interest rate rises. But that optimism may be misplaced, with July’s stockmarket gains looking very much like a bear-market rally.
-
The Fed really is fighting inflation – so don’t expect an early end to the bear marketAnalysis In an attempt to contain raging inflation, the Federal Reserve has raised US interest rates by 0.75 percentage points. And it’s going to keep on raising them till something breaks, says John Stepek.
-
The Federal Reserve wants markets to fall – here’s what that means for investorsAnalysis The Federal Reserve’s primary mandate is to keep inflation down, and lower asset prices help with that. So, asks Dominic Frisby – just how low will stockmarkets fall?
-
Interest-rate rises mean more pain for stocksNews Interest rates are rising around the world as central banks try to get inflation under control. That’s hitting stockmarkets – and there is more pain to come.
-
Here’s why markets welcomed America’s big interest rate riseAnalysis The US Federal Reserve raised interest rates by half a percentage point – the biggest hike in 20 years. So why did markets rise? John Stepek explains what's going on, and what it might mean for you.
