Asset allocation is at least as important as individual share selection. So where shouldyou be putting your money? Here's June'stake on the major asset classes
Bonds
Eurozone complacency
Yields on top-rated government bonds have risen slightly in the past month (meaning prices have fallen), but they remain very low by historic standards. UK gilts maturing in ten years now yield around 1.87%; US Treasuries offer 2.15%. German bunds and Japanese government bonds are far lower, at 0.54% and 0.41% respectively. But while these "safe haven" government bonds look unattractive, the real madnesslies elsewhere.
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Italian and Spanish ten-year government bonds yield under 2% less than US Treasuries. Bloomberg's index of investment-grade euro-denominated corporate bonds has an average yield of under 1%; its high-yield euro-denominated bond index belies its name, with a yield of 3.5%. All told, this looks like a big bet that if Greece defaults on its next debt repayment early in June, the consequences can be contained and won't spread to the other peripheral eurozone economies.
Equities
The lesser of two evils
Stocks don't look good value relative to history either. Developed world stockmarkets trade on an average price/earnings ratio more than 25% higher than the average over the past ten years, according to Capital Economics. But dividend yields are roughly in line with their recent average, as companies lacking better investment opportunities continue to return cash to shareholders. We favour stocks over bonds, as the "lesser of two evils". The best opportunities for capital gains are to be found in regions such as Europe and Japan, where central banks are engaged in quantitative easing, which provides a useful tailwind to stocks.
Emerging markets have outperformed this year. The MSCI Emerging Markets index is up 8.9% in sterling terms, versus 6.1% for the MSCI World. These markets offer good long-term prospects, especially those with young populations and potentially large domestic markets: India, Indonesia and the Philippines.
Precious metals
Keep gold for insurance
May was another muted month for gold; the yellow metal is still trading near the $1,180 per oz level at which it began the year. With inflation quiescent statistics showed the UK lapsing into deflation for the first time since 1960 that's no surprise. However, it still makes sense to hold a portion of your portfolio in gold as insurance; gold is likely to perform well during market turmoil (such as a fresh round of the eurozone crisis should Greece default).
Property
Tax threat diminishes
The Conservatives' election victory may give the London residential property market a further boost as the prospect of a mansion tax recedes. But the growing disparity between bubbly London and much of the rest of the UK means that the case for looking outside the capital is compelling.
Energy
Natural gas perks up
US natural gas prices have rallied over the past month, rising from under $2.5 per million British thermal units to over $3. That's partly due to colder weather, which increases demand for gas as a heating fuel, as well as falling production as rigs are idled due to lower oil prices. But the long-term outlook also looks robust: coal-fired power stations are being replaced by cleaner gas-fired ones, while Asian countries are keen importers of liquefied natural gas (LNG).
Misery for chocaholics
Cocoa prices surged in May, rising almost 10% during the course of the month, on the back of concerns about a poor harvest in Ghana. Cocoa growers are struggling to keep pace with rising demand from the global confectionary industry a familiar theme across many soft commodity markets as the world's growing population puts an increasing strain on global food supplies. Investors can play this long-term theme through food and fertiliser stocks.
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