The assets to buy now – January 2016

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.

The start of a shake-out

Last month's high-profile meltdown in a US fund that specialised in junk bonds has focused investors' attention on risks in this part of the bond market. In recent years, income seekers have flocked to bonds issued by companies with lower credit ratings in pursuit of higher yields. But as interest rates begin rising and the credit cycle turns, higher defaults are likely to hand heavy losses to unwary buyers.

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The yield on the Bank of America Merrill Lynch US High Yield index has risen from 6.3% in April to 9% at the end of December as investors head for the exits (bond yields move inversely to prices). We think this is just the start of a major shake-out. Stick to the safest government debt if you want to hold bonds.

The Fed moves, finally

The US Federal Reserve raised interest rates in December, for the first time in a decade. The Bank of England is likely to take longer to act: markets are not pricing in a hike until the end of 2016 at the earliest. However, interest rates vary widely between banks, from virtually nothing to 6% on some "regular saver" accounts, so shop around for a good rate.

Still heading up

UK commercial property had another good year in 2015, according to the IPD All Property index. The asset class delivered a return of 12.5% in the first 11 months of the year, with 7% coming from capital growth and 5.5% from rental income. Commercial property values are potentially vulnerable to higher interest rates or an economic slowdown, butthe asset class can be a useful addition to a portfolio, since rents would be expected to rise with inflation over the long term.

A mixed year

Japanese and European stocks posted respectable returns last year. The MSCI Japan index was up by 8% in local currency terms, while the MSCI Europe excluding UK was up by 6%. These remain our favoured major markets: both are reasonably valued and their central banks are in easing mode, which should help to support stocks. US stocks are expensive, while the FTSE 100 is skewed by its exposure to energy and natural resources stocks (the FTSE 250 index of mid-caps offers better and more balanced exposure to the UK economy).

Emerging markets, another MoneyWeek favourite, had a dire year. The MSCI Emerging Markets index was down by 12% in sterling terms. Russia was the only major market to post a gain (up 6% in sterling terms), but it's still down 30% since peaking in April. Nonetheless, we continue to recommend that long-term investors hold emerging-market stocks: they are one of the cheapest asset classes and there is immense potential for long-term consumer demand growth in many of these economies.

Low expectations

Gold does best during times of high inflation or crisis. Neither are prevalent right now. So the yellow metal has continued performing poorly in recent weeks: it ended December at $1,060 per oz, down 10% for the year. We recommend allocating a small part of your portfolio (5%-10%) to gold as crisis insurance and because we expect inflation to return in the long term. But otherwise we have low expectations for gold prices in the near term.

Silver could beat gold in 2016

Silver is a metal with a dual role. Like gold, it was historically a monetary metal, as well as being used in jewellery. But it also has a number of industrial uses. So it tends to be more volatile than gold, both upwards and downwards. This was true in 2015: it finished at just under $14 per oz, down 12% for the year. However, if industrial demand remains reasonably robust, silver could outperform gold in 2016, since production cuts are squeezing supplies.

Rising supply meets weak demand

The supply glut in base metals saw prices continue to slide in 2015: the LMEX which tracks the price of copper, aluminium, lead, tin, zinc and nickel on the London Metal Exchange dropped by more than 25%. Lead was the least-bad performer, down just 2%, helped by tight stocks. Meanwhile, iron-ore prices fell by almost 40%, pressured by falling demand from Chinese steelmakers. We think metals prices could be approaching a bottom, but it's too early to turn bullish.