Asset allocation is at least as important as individual share selection. So where should you have your money? We give our monthly view on the major asset classes.
Base metal prices have ticked up amid firmer economic data from China. But this is unlikely to be sustained. China's uptick looks slow and unbalanced, as Capital Economics points out, with small and medium-sized firms not taking part in the manufacturing recovery. That is because infrastructure spending is a key driver of the bounce, and the government will be wary of stimulating too much, as this would imply yet more overinvestment and stored-up bad bank loans.
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More to the point, longer term if the economy is to become more consumer-driven, China's growth will become less focused on infrastructure investment, and so less commodity-intensive. Given that China has been the key force driving industrial commodity prices higher over the past decade, it's hard to see the gains market continue if China's demand drops.
What about softs?
Agricultural commodities remain a compelling long-term story as the global population grows and gets richer, and the amount of arable land declines. Investing in food or fertiliser producers, or their suppliers, is the best way to play this trend, however. Agricultural raw materials prices are extremely volatile and suitable only for short-term trading.
Developing countries are a geared play on global growth. The outlook on this front is not encouraging. As investors often learn to their cost, emerging market stocks can't detach from global risk appetite, no matter how bright the prospects of individual countries. Given all this, and the commodity dependence of many emerging markets, keep exposure to a minimum. Possible exceptions are markets that don't depend on raw materials, such as India or Mexico. Indonesia is a long-term story now worth a look.
These look unlikely to embark on another multi-year bull market until we are over the hangover from the credit crunch. That could take years. But it doesn't mean stocks are a write-off. Based on the cyclically adjusted price earnings ratio, the best predictor of long-term returns, US stocks are expensive, but continental European ones are cheap, as are some UK stocks. In both cases, go for firms with solid balance sheets and decent dividend yields.
Stick with gold
All the world's major central banks are printing money, debasing their currencies and sowing the seeds of future infl ation. Emerging market central banks are diversifying their currency reserves by buying gold. And there should be more demand from this source: in China, gold still comprises just 1.8% of overall reserves. Overall, central bank demand is on track to hit its highest level since 1964. Over the long term mounting wealth in emerging markets points to higher demand for gold jewellery and gold investment products.
Oil versus gas
Oil's fundamentals look bearish as the global economy has weakened, production from oil cartel Opec continues at near-record levels and developed world inventories look ample. But we are bullish on natural gas as the discovery of shale deposits will encourage more consumption of this relatively clean fuel.
The next bubble to blow?
Government bond prices have reached a historic extreme with yields at, or near, record lows. There is unlikely to be much more in the way of gains to be made, while the danger of a future surge in inflation following constant money printing suggests they could fall fast once the bubble finally bursts. Nor would we join the rush for corporate bonds.
The chances are that American property, having fallen to bargain levels, has finally turned the corner, with various indices now recording sturdy year-on-year rises and the demand-supply outlook mildly positive. Germany, where locals and foreign investors rattled by the euro crisis are fleeing into bricks and mortar, is also worth a look for investors. British property still isn't most of our experts agree, as you can see in our property Roundtable: Where to now for the property market?
Keep some powder dry
The global economy is nowhere near a sustained recovery, but central banks are likely to throw yet more printed money at markets if the outlook deteriorates sharply. So markets look set to keep moving broadly sideways, with plenty of ups and downs as risk appetite ebbs and flows. Build a watch list and keep some cash aside to scoop up assets you've got your eye on when they become cheap.
British economy watch
This week saw chancellor George Osborne's Autumn Statement. While this mini-budget' contained the usual mix of gimmicks and fudges, the main point to take from it is that Britain's financial position has deteriorated even further. As a result, it seems to us that Britain's main hope for getting out of its debts is to encourage more inflation via Bank of England money-printing.
The danger is that investors wake up to this fact and decide they are no longer prepared to keep buying British government debt. This would likely see the Bank of England print more money to avoid a gilt crash, but in turn this could drive a crash in the value of sterling, pushing up inflation, and eventually forcing a rise in rates in any case.
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