The assets to buy now – May 2016

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.

Commercial property

Possibly peaking

The UK commercial property market has delivered excellent returns over the last few years, but despite record levels of investment in sectors such as London offices, the overall UK IPD Capital Growth All Property index has yet to pass the highs it reached on the eve of the global financial crisis. The index, which measures prices for office, retail, industrial, warehouse and leisure sectors across the country, remains around 20% below its peak, as the chart above shows.

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Now there are signs that the market may be peaking. The latest figures (for March) show a slight decline in prices, the first drop for more than three years. The Royal Institute of Chartered Surveyors commercial property market survey reports softer demand from both investors and tenants in the first quarter of the year. And the CIPS/Markit construction purchasing managers' index which has been a reasonable leading indicator for rents dipped in April. A crash seems unlikely, but the next few years may be more muted than investors expect.

Equities

Another bout of nerves

Stocks made a strong start to April, but the second half of the month proved more nervy. The Japanese market dropped by more than 7% in the course of a week after the Bank of Japan failed to announce further measures to boost the economy (see page six). Japanese equities remain an attractive long-term investment, due to the high probability that the central bank will eventually embark on more quantitative easing (which should help buoy share prices), the prospects of economic reforms (good news for growth and profits) and improving corporate governance (leading to a greater focus on rewarding shareholders). But it's likely to be a volatile journey.

Bonds

Ever lower

The average yield across all German government bonds in issue fell to zero in early April. Yields on all bonds with a maturity of nine years or less fell into negative territory, while the benchmark ten-year government bond yield dropped as low as 0.09% at one point. We favour the small number of highly rated governments that still pay even modest yields (notably the UK and the US) and view them purely as a safe-haven investment.

Cash

No change

The US Federal Reserve kept interest rates at 0.5% at its April meeting, but is widely expected to resume hiking at the next meeting in June. We would not be surprised if the Fed leaves rates unchanged: there is self-evidently no desire among central bankers to tighten policy until inflation forces their hand.

Gold

Portfolio insurance

Market jitters are good for gold: the metal ticked up towards the end of the month as stocks wobbled. We suggest holding 5%-10% of your portfolio in gold as crisis insurance.