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.
A shaky start to 2014
After rocketing in 2013, stocks have had a wobbly start to the year. The FTSE All-World Index, which tracks developed and developing markets, has risen only a little during the first quarter. However, fears over Ukraine have eased and the slow but steady economic recovery continues. We remain wary of US stocks, which are expensive by any reasonable measure. European shares are far better value even after last year’s surge, while Japan is still a buy.
Emerging markets are grappling with a range of problems, including economic slowdowns, political uncertainty, and slowing commodities exports. But “the good news for investors is that these challenges are increasingly reflected in the price”, as BlackRock’s Russ Koesterich writes in the Financial Times, so “exercise caution, not abstinence”.
Can the rebound continue?
“It will be difficult for commodities to maintain their strong start to the year,” says Barclays. The gradual recovery in America and Europe bodes well for industrial raw materials, but the problem is China. The country accounts for around 40% of demand for many metals, and industrial and infrastructure growth has slowed there amid the government’s crackdown on credit.
Meanwhile, supply looks healthy as mining output has grown, and Chinese stockpiles of iron
ore and copper in particular are high. That said, mining stocks in general are worth considering as they have priced in the weak outlook.
Agricultural commodities have performed strongly due to supply concerns: in some cases crops have been hit by bad weather, or fear of disruption to exports (wheat rose on the back of turmoil in Ukraine). Long term, soft commodities should rise a lot further as population growth squeezes the supply of arable land.
Hang on to your portfolio insurance
Gold has fallen from recent six-month highs of around $1,400 an ounce. The jitters over Ukraine have subsided and ‘tapering’ by the US Federal Reserve remains on track. A drop in quantitative easing and the prospect of higher ‘real’ (after inflation) interest rates one day is not good for gold, as it pays no interest. However, resilient demand from both central banks and investors in emerging markets should mean that prices don’t fall too far. China’s gold appetite is holding up well, as Mineweb.com points out. And just because the unprecedented money printing of recent years hasn’t yet caused a nasty jump in inflation doesn’t mean it never will. So we would keep 5%-10% of our portfolio in gold.
Investors with strong stomachs might want to take a punt on silver, which tends to mimic and magnify gold’s moves. But it’s not just a monetary metal: you also have to consider the outlook for global industry, which accounts for 50% of global silver demand. This extra factor makes the metal even more volatile than gold.
Oil versus natural gas
The US has just experienced its coldest December-February period in 32 years, so it’s no wonder that gas prices there have hit five-year highs and stockpiles have fallen to the lowest level in more than a decade. The gas price will fall back as the weather improves, but long-term demand seems solid as more and more industries switch to this clean(er)-burning fuel. Companies involved in the fracking boom in the US are also worth a look.
Oil’s outlook, by contrast, seems mildly bearish, with rising supplies from Iraq, Iran, Libya and the US (through shale oil) on the one hand, and relatively lacklustre demand growth, notably from China, on the other.
London goes wild
The latest Land Registry figures show that the average house price was up 5.3% year-on-year in February, with London leading the advance and skewing the average. Prices gained 13.8% in London, but fell slightly in north-east England. With affordability in the UK as a whole looking stretched, we would continue to focus on prospects in the US (where, unlike here, the market actually fell to cheap levels before rising again), and Germany. As Wirtschaftswoche notes, the major cities look overheated, but it’s still worth exploring the smaller ones.
Two big problems
There are two big problems with bonds. One, they’re too expensive. Government bonds have enjoyed a 30-year bull market and corporate debt has been pushed up by yield-hungry investors to the point where even junk bond yields have fallen well into single digits. Two, now that liquidity is being withdrawn by central banks, interest-rate rises could be on the horizon, implying lower bond prices.