MoneyWeek portfolio: The assets to buy into now
Feb 05, 2013
Asset allocation is at least as important as individual share selection. So where should you be putting your money? We give our monthly view on the major asset classes.
Demand from China can’t last for much longer
Despite the apparent rebound in activity in China, Edward Chancellor and Mike Monnelly of US fund manager GMO remain bearish. In short, “too much credit has been created too quickly” in the country, leaving it in a state of “acute financial fragility”.
As we’ve mentioned before, even if China manages to avoid a hard landing – which is a big ‘if’, given the scale of its credit bubble – it needs to rebalance its economy away from its dependence on building more and more stuff. That means the quantity of industrial commodities it consumes will fall, which is bad news for prices.
We’re more comfortable with agricultural, or ‘soft’ commodities, given the growing global population, but as we always say, we’d play this sector by investing in producers, not trying to predict the movements of the underlying commodities themselves.
Stick with Japan and Europe
As our cover story this week notes, we remain keen on Japanese and European equities. Japanese stocks have looked cheap for some time, and we’ve been fans of them for most of that period – but what they’ve really needed is a catalyst to get them going.
New prime minister Shinzo Abe is providing that catalyst by hammering the value of the yen. Meanwhile, European stocks, despite their rapid run-up since summer 2012, still look cheap on a historical basis.
The shale gas revolution continues
We favour investing in natural gas over oil, partly because the gap between the two in terms of price (in America at least) is so large. With natural gas driving many structural changes in the US economy – including the return of certain types of manufacturing – it seems almost certain that demand for gas will go up, pushing prices higher. As for oil – it has benefited from the rush to ‘risk’ assets in recent weeks. But if the price rises too high it will start to stifle any recovery in the global economy, in turn choking off any rally in oil prices.
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There is so much bullish talk around of a ‘Great Rotation’ from bonds into equities that it’s very difficult for die-hard contrarians like ourselves not to feel that the bond bubble might have some room left to inflate before it finally blows. However, we still can’t bring ourselves to invest in bonds in general, and particularly not developed-world government bonds, such as gilts in Britain or Treasuries in the US.
As RiverFront Investment Group puts it, such bonds now represent “an expensive insurance policy against deflation and economic depression... in any other scenario we can imagine, longer-term Treasuries and other high-quality bonds have poor risk reward”. David C Stevenson looks at better options for getting an income in the face of a potential bond collapse here: Where to hide in the coming bond rout .
We’re still not buying buy-to-let
At the end of 2012, mortgage approvals picked up in Britain, with loans for house purchase rising to their highest level since 2008. But with credit still tight and house prices in many parts of the country still far above average earnings, we suspect it will be a long time before the heady days of the boom years return, particularly if ‘safe haven’ seeking activity by investors fleeing Europe slows down.
Other parts of the world, including America, Japan, and Germany, look more attractive bets on property – we’ll be looking at the best ways to invest in a future issue of MoneyWeek.
In our cover story, we look at the ‘currency wars’ and how best to protect your portfolio from the fallout as central banks around the world race to devalue their nations’ money. One key way to protect your portfolio is, of course, to hold some gold, which can’t be printed by any central banker (although most of them have been buying rather a lot recently).
At current levels of around $1,650 an ounce, gold can hardly be described as cheap compared to its history. But unlike government bonds, which – as noted above – can now be classed as a very expensive insurance policy against an extreme event (rampant deflation), we’d suggest that gold is a reasonably priced insurance policy against a rather more likely event: rising, and potentially very damaging, inflation, caused by central banks keeping monetary policy too loose for too long.
For the average investor, 10% seems a good amount to hold in your portfolio as insurance. As Mohammed el-Erian of US bond fund giant Pimco points out, it doesn’t take an economist to figure out that, while not all currencies can weaken against each other, they can all get weaker against real assets, such as gold.