What has performed best since the 2009 market bottom?
With all the money printing that's gone on, you might have expected it to be the most beaten-down, most risky stocks in the market.
But apparently not. Data from Coutts in The Sunday Times suggests that in fact, you'd have been better off sticking with boring old defensives.
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It's nice to know that our favourite stocks have been doing the business. But can this continue? Or should your contrarian instincts be kicking in and looking for something else to buy?
Defensives have beaten the rest of the market
Defensive stocks such as pharmaceutical companies, tobacco groups and utilities have been the best place to keep your money since the UK stock market bottomed out in March 2009.
According to a Coutts report quoted in The Sunday Times, defensives are up 92.6%, the FTSE 100 is up 81%, and cyclicals which are very sensitive to economic growth, or the lack of it are up just 45.8%.
We've been tipping blue chips like these for quite some time, pretty much since the market bottomed in fact. So it's nice to see that the boring' stocks have provided the sexiest' returns.
But how can this be, given all the money printing, and dash-for-trash' rallying? It boils down to timing. I suspect that if you'd been able to time your buying and selling perfectly to catch the impact of fresh quantitative easing (QE) announcements, then cyclicals would have been the place to be.
Trouble is, you can't do that, and no one can. So in the current environment where risk appetite depends on what mood Ben Bernanke or Mervyn King are in that day you're going to lose on the swings what you gain on the roundabouts.
Defensives might not rocket when QE is announced, but they don't collapse when it wears off either. And all the time that they're sitting in your portfolio, they generate a little bit of income that just keeps adding up.
So how long can this continue?
Investors have been piling into corporate bonds
Well, while it's hardly a contrarian bet to recommend big blue-chips, I wouldn't say it's an overly crowded trade either. If you look at the Investment Management Association's statistics, the most popular sector by far this year has been corporate bonds, not equity income.
That makes it all the more interesting that Chris Bowie of the Ignis Corporate Bond fund is warning that bond investors should "get ready to sell". Speaking to The Telegraph's weekend money section, he said: "Will central banks around the world print money to get out of this debt hole? If they do, that will mean inflation, which is very bad news for bond holders".
Of course, inflation has been the big worry since central banks started printing money. But as Bowie points out in the comments section below the piece: "Even in Japan ten year bond yields didn't go much below 50 basis points. We are not far from that now in Germany and to a lesser extent, the UK the downside risks to your capital are much greater than the upside potential".
Bowie is talking about sovereign bonds here, but as my colleague Phil Oakley pointed out earlier this year, corporate bonds are looking expensive too.
We've been avoiding government debt in particular for a very long time now, and I have no intention of recommending that you short it. Plenty of people tried doing that with Japanese government bonds, and it ended badly for most. It's one reason why I think the current enthusiasm for hedge funds to short Germany's government debt is probably a sign that bunds will stay stronger for longer than anyone expects.
However, I don't see the point in being invested in low-yielding, fixed-income government debt either. I'm reading Jack Schwager's excellent new book, Hedge Fund Market Wizards it's a cracker, you should get it and a quote from Comac Capital's Colm O'Shea caught my eye.
O'Shea makes the point that even although the credit crunch began in the summer of 2007, stocks didn't react in fact, they made new highs within two months of the money markets shutting down. Similarly, there's no reason for bond markets to see what's coming, until it's too late.
"A lot of people say there is apparently no inflationary threat from the growing US debt because bond yields are low. But that's not true. Bond yields will only signal that there is a problem when it is too late to fix it."
It's never different this time
When I'm weighing up the investment case for an asset class, one thing I always look for is the this time it's different' arguments. It doesn't matter which side you're on,if you have to reach for new paradigms' to justify your argument, then most of the time you'll be wrong.
Bonds are very expensive both in absolute terms and compared to history. To believe that they're going to stay like this, you have to believe that the US, the UK and Germany are going to end up like Japan.
It might happen, butit probably won't. So in this case, I think the bond bulls are wrong.
The global economy looks rubbish, no doubt about it: China is slowing down, the US faces a fiscal cliff', and Europe could seemingly implode at any moment (yet resolutely refuses to do so).
But none of this bad news is fresh, so the chances of a positive surprise are higher than the chances of a negative one.
So, overall, I'm happy to keep a core portfolio with nice income-producing defensives (Phil talks you through how to put one together here). On top of that, I'm happy to consider dripping a small amount of money into some riskier assets, as long as they look cheap enough.
We've already noted that Italy looks worth investigating. In this week's MoneyWeek magazine, our roundtable experts focus on Europe as a whole and pick the European equities they believe are best placed to thrive and survive through the turmoil. If you're not already a subscriber, you can subscribe to MoneyWeek magazine.
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