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The assets to buy now - November 2015
Asset allocation is at least as important as individual share selection. We look at how the major asset classes have performed in the last 15 years – and what we expect for the next 15.
At the end of 2000, the Bank of England base rate stood at 6%, while inflation stood at 2.9% on the retail price index (RPI) measure. So savers could easily get a real return of 3% or more. Today, the base rate stands at 0.5% and 1.5% is a good rate for a savings account, although inflation is down to 0.8% on the RPI measure, so real returns aren't quite as bad as many savers think. Central banks will be slow to raise interest rates, so this could persist for some time. However, we'd expect both rates and inflation to be higher 15 years from now, because they are likely to persist with relatively loose policies until inflation becomes a problem and significantly tighter policy is needed to tackle it.
Precious metals
Hold on to gold
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
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Gold rose by more than 500% in sterling terms between 2000 and 2011, before falling back sharply.We expect gold to be higher in 15 years' time as inflation returns. Silver, which is part precious metal, part industrial metal, rose by almost 800% then fell by 65% in sterling terms, reinforcing its reputation as "high-beta gold". We recommend that investors take great care with silver due to its high level of volatility.
Emerging markets were the star performers of the past 15 years as a whole. The MSCI Emerging Markets index returned 8.9% per year in sterling terms (including reinvested dividends). UK, US and European stocks returned around 4%-4.5% per year, although smaller companies have done better: UK mid-caps returned 10% per year. MoneyWeek was bullish on Japan from the outset, but we were too early: the MSCI Japan returned just 1.4% per year. More recently, emerging markets have performed poorly, while Japanese and US equities havedone well. However, we think that emerging markets are now cheap and should be a good (if volatile) long-term investment. We continue to like Japan and also European stocks.
Bonds
For safety only
Stocks generally beat bonds, but this hasn't been true in MoneyWeek's lifetime. UK government bonds returned 5.6% per year, as measured by the Bank of America Merrill Lynch UK Gilt index. Riskier debt did even better: US high yield bonds returned 7.2% per year in sterling terms, while emerging-market debts managed 8.9% per year. Bonds now look very expensive, so we doubt the next 15 years will be as good.
Commercial property
An inflation hedge
UK commercial property returned 7.8% per year in rents and capital appreciation from 2000 to 2015, according to the IPD index. London property is not cheap, although there appears to be more value in other parts of the country. But property should do well if inflation returns strongly.
Energy
The search for alternatives
Oil began the decade at around $30 per barrel and soared to over $140 per barrel by mid-2008. It was still at over $100 per barrel a year ago, before collapsing as new supply finally caught up with demand. At present it seems likely that the price of oil and most other fossil fuels will be higher in 15 years, but this depends on how quickly the alternative energy sector advances. The faster and higher oil rises, the more likely we are to develop new technologies to replace it.
Industrial metals
Looking for the next China
Metals such as copper, aluminium and iron ore also soared, buoyed by strong demand from rapidly industrialising China. But as the Chinese economy slowed, prices plummeted: aluminium is back to where it was in 2000. Prices should start to improve as companies close mines and shut down excess capacity. But without a China-style investment cycle in India or Africa, it's hard to see most metals returning to the highs they saw in 2010-2011.
Agriculture
A bet on higher incomes
The agricultural commodities boom took longer to get going than energy and metals: it wasn't until 2007 that prices soared. All the talk was of rising demand as higher incomes led to changing diets in emerging markets. But today, most commodities are well off their highs. We don't think it will be simple to feed a growing population in the years ahead, but we think agribusiness stocks are a better way to invest in this theme than the volatile commodities themselves.
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MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.
