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.
Taking more risk
Investors have rediscovered their appetite for risky debt. After a heavy sell-off in the second half of last year, bonds issued by companies with poorer credit ratings (known as junk bonds, or high-yield bonds) staged a strong rally in March. The spread between the yield on the Bank of America Merrill Lynch US High Yield index and the yield on US Treasury bonds fell back to around 7% at the end of March, from a high of almost 9% earlier this year (falling bond yields mean rising prices).
This reflects optimism that rising defaults among American energy and commodity companies won’t affect the wider junk-bond market. That bet may prove correct in the short term, if the Federal Reserve holds back from tightening monetary policy and America avoids a recession. Nonetheless, the balance sheets of American junk-bond issuers look stretched, with an average debt-to-earnings ratio of almost five, compared to around three in 2011. When the credit cycle turns, defaults and losses are likely to be severe. Don’t be tempted by eye-catching yields; stick to the highest-quality issuers for your bond portfolio.
The US Fed left interest rates on hold in March, as was widely expected. While there are some signs of growing disagreement among Fed members over how fast rates should rise, there seems little doubt that they will opt to act as slowly as they can. However, while headline inflation remains low, this is largely due to falling oil prices; underlying “core” inflation, which strips out volatile energy and food prices, is picking up, implying the Fed might be forced act more rapidly later this year. Since the Bank of England is unlikely to raise rates before the Fed, this will also be important for UK monetary policy.
A growing gulf
Stocks staged a strong recovery in March, led by America: the S&P 500 is within 100 points of regaining its all-time high. While America’s economy looks in better shape than much of the rest of the world, the disconnect between investors’ optimism and weak earnings makes it difficult to be bullish on US shares (see page 6). We favour Europe, Japan and some emerging markets, which all look more reasonably valued.
Out of steam?
UK commercial property sales fell by almost 60% month-on-month in February, to £2bn. This could reflect uncertainty among foreign buyers over whether the UK will vote to leave the European Union. But it may also imply that the strong capital gains from rising values in recent years are coming to an end, meaning future returns are likely to be driven by rental income.
A quiet month
After a strong start to the year, gold finished March little changed at around $1,240 per ounce. Another strong surge looks unlikely for now, but gold could benefit if inflation starts to pick up and the Fed appears to be dragging its heels.
The MoneyWeek investment trust portfolio
|Investment trust||Ticker||Date bought||Price when bought||Date sold||Price at 29/3/16, or when sold||Change||Total return (divs reinvested)|
|Law Debenture Corporation||LWDB||18/09/15||503.5p||n/a||457.5p||-9.14%||-7.00%|
|FTSE All Share||18.15%||34.48%|
|MSCI World*** (excl. EMs)||47.43%||62.05%|
|MSCI World*** (incl. EMs)||40.61%||54.60%|
|* Return adjusted for 5-for-1 stock split on 30/6/14|
|** Assumes BH Macro holding rolled into Caledonia|
|*** Returns in pounds sterling|
|Investment trust||Ticker||NAV when bought||Latest NAV at 29/3/16||NAV change||Prem/disc when bought||Prem/disc at 29/3/16||Forward yield|
|BH Macro||BHMG||SOLD 11/10/13|
|3i Infrastructure||3IN||SOLD 18/09/15|
|Law Debenture Corporation||LWDB||461p||525p||13.9%||8.5%||-12.3%||3.7%|