Asset allocation is at least as important as individual share selection. So where should yoube putting your money? Here's our monthly take on the major asset classes.
Equities
A shaky start
Stockmarkets have opened 2016 with sharp falls. The US has suffered its worst-ever start to the year, while markets from the UK to Japan have also slumped. We'd caution that while stocks are starting to look more attractive, some of the value may be deceptive: the FTSE 100 now yields around 4%, but some of that reflects unsustainable dividends in the resources sector. Nonetheless, we see long-term value in some markets, including Japan, parts of Europe and many emerging markets.
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Gold
Perking up
Gold pays no income to its holders, so the yellow metal was expected to suffer as central banks began to nudge interest rates higher and the returns available on other investments improved. However, equities and economic growth are spluttering, raising doubts about how quickly the US Federal Reserve can hike rates. Meanwhile, other central banks are increasingly heading in the other direction: the Bank of Japan became the latest to embrace negative interest rates this week. Together with unsettled conditions in markets an environment that usually helps gold, since it is seen as a safe haven this has helped the metal make a strong start to the year. It finished January up by 6% in dollar terms and 9% in sterling.
Cash
Keep some powder dry
The chances of the Bank of England raising rates in the near term are falling: markets are now pricing in a first hike in 2018. This is bad news for savers, although with inflation tepid, acceptable real (inflation-adjusted) rates are still available on the highest-yielding savings accounts. Meanwhile, holding part of your portfolio in cash givesinvestors the buying power to snap up shares at better prices if the bear market continues.
Bonds
Opt for safety
Low-quality corporate bonds have been one of the most overpriced assets in global markets for many years. Investors are waking up to this and heading for the exits: the Bank of America Merrill Lynch High Yield index now yields 9.5%, compared to 6.3% in April 2015 (higher yields mean bond prices are falling). We don't believe that yields are yet high enough for the wave of defaults we expect in the years ahead. Stick to high-quality issues for the cornerstones of a bond portfolio.
Rents are still looking robust
Turmoil in equity markets may not be good for UK commercial property prices although the asset class is often more defensive than shares. But prospects for rental growth still look fairly solid, especially in hot spots such as London offices, where availability of prime property remains relatively tight.
Chronic oversupply
Oil has tracked stockmarkets lower this year, plunging below $30 per barrel at the end of January for the first time in 13 years. When markets collapsed in 2008, oil prices rebounded quickly, so investors have been conditioned to think of crude oil as a choppy market that will recover at speed. But with Russia, Iran, Iraq and Saudi Arabia all pumping at record levels, the world needs a major growth spurt before it can mop-up the oversupply in the energy markets.
Not so sleepy
Cocoa was last year's top-performing agricultural commodity, with prices rising by more than 20% over the year. But it's made a poor start to the year, falling by 14% in January as shipments arriving at ports in Cote d'Ivoire, a key producer, remained unexpectedly strong. Sugar prices slid by a similar amount on expectations that the Brazilian sugar-cane harvest would be stronger than expected, while rising Vietnamese exports also pushed down coffee prices
Industrial metals
Deeper distress
A painful war of attrition is being fought in the mining sector. The mega-miners ramped up supply aggressively over the past decade in response to soaring Chinese demand, but are now suffering a supply glut as China's economy slows. This state of affairs will continue until higher-cost producers fail or permanently shutter large swathes of their excess capacity. Until that happens, there's little reason to feel bullish about industrial metals.
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