Cheap bets for the next decade

Picking the star investment of the next ten years can’t be done without getting some tricky calls right. If we have runaway inflation, gold may do very well. If not, it probably won’t be spectacular. Which industries boom will depend on how the economy evolves, but also on political decisions (eg, big tech firms may run foul of regulators). As for individual stocks – the biggest winners may well be companies that change the world in a way most of us can’t yet foresee (perhaps in healthcare or green energy).

In this week's magazine, we’ve got some of your suggestions about what looks most exciting. But more prosaically, we can also consider which asset classes simply look cheap given what we’ve learned in MoneyWeek’s first 20 years and before. If the future is vaguely like the past and present, they should stand a good chance of doing well. The one caveat, of course, is that we are not heading into a decade of complete despair. If we are, cash, gold and perhaps long-term US Treasury bonds (I’d assume yields would go deeply negative, at least initially), would probably be all that you’ll want to hold.

Growth, inflation and income

If you’re looking for stockmarket growth, emerging Asia appears cheaper than other major regions. The price/book ratio for the MSCI Asia ex Japan index has been a strong predictor of returns in the past: a value below 1.5 has been consistent with double-digit annualised returns on average. Currently it stands at 1.47. An exchange-traded fund (ETF) such as Xtrackers MSCI AC Asia ex Japan (LSE: XAXJ) is a simple way to invest.

Resources stocks look like a bargain in their own right: the MSCI ACWI Commodity Producers index yields twice as much as the wider market (although dividends are uncertain right now). Even more interestingly, they should offer a decent hedge against high inflation. I’m not fond of this sector most of the time, but it increasingly looks like time to buy. There’s no all-in-one ETF, but the SSGA SPDR MSCI World Energy (LSE: WNRG) and the Vaneck Vectors Global Mining (LSE: GDIG) could be a good combination.

Income will be even harder to find, since interest rates will surely fall further. Everything is pricey, but there may be some (risky) mileage in fallen angels (investment grade bonds downgraded to junk). Spreads to government bonds (ie, the difference in yield between corporate bonds and government bonds) are twice what they were (although down from March) and the US Federal Reserve has made it clear that it will prop up the market. The 4.8% yield on the iShares Fallen Angels High Yield Corp Bond GBP Hedged (LSE: WIGG) could be appealing while inflation stays low.

I wish I knew what a bond was but I'm to embarrassed to ask

When governments or large companies want to borrow money, they can do so by issuing bonds to investors. Sovereign bonds are issued by governments, while one from a company is a corporate bond.

The bond issuer receives a loan from the bond investors, on which it must pay interest at set intervals – typically annually or semi-annually. The annual rate of interest is known as the coupon. This is normally fixed for the life of the bond, and so the bond market is also known as the fixed-income market. The amount borrowed – known as the principal – must usually be repaid on a specified date (the maturity date). 

Bonds are typically tradeable instruments, so the investors can then sell them on to other people. A bond is issued with a face value (or a par value) – eg, £100 – and this is the amount that all holders will get paid at maturity. But the market price of the bond will fluctuate, and may be less or more than par value.

Bond investors tend to think in yields rather than prices. The “current yield” is the coupon as a percentage of the price. So if our bond pays 5% interest (£5 a year) and the market price is £105, the current yield is 4.76%. The “yield to maturity” is the return for an investor who holds the bond until it matures. While our bond sells for £105, when it matures it will return its par value of £100 – so the yield to maturity here is less than the current yield. How much less depends on when it matures – if that’s in six months, rather than six years, the difference will be greater. 

A highly trusted nation – eg, the US – or a highly rated company – such as Apple – will be able to pay a low coupon. Less reliable nations, such as Argentina, or small firms will pay more.

Rising interest rates are bad for bond prices. As the rates available elsewhere go up, yields on existing bonds must rise to compete, so their prices must fall. Inflation is also a problem because the coupon and principal is usually fixed, so inflation erodes their real value.