What to buy – and what to sell
Nov 01, 2012
Asset allocation is as important as individual share selection. So where should you have your money? In the first of a monthly series, we give our view of the major asset classes.
Avoid industrial metals miners and commodity-dependent markets like Brazil and Australia.
The main force that drove up the prices of raw materials in the last decade was China’s huge infrastructure boom. Now the Chinese economy is slowing and demand for raw materials has dropped off. That demand is unlikely to be reignited soon.
For one thing, miners have ramped up production, so supply is more capable of meeting demand. For another, if China’s economy is to avoid crashing entirely, it needs to shift focus to being more consumer-led. That means its growth will be less commodity-intensive whatever happens.
On the plus side
Agricultural commodities are a different story: with the global population growing and generally becoming more wealthy, we can see that there’s an argument for investing in food producers and companies that try to make food production more efficient. But we’d avoid products that play agricultural commodities directly – they are for short-term traders, not long-term investors.
We’re not keen on them. They are heavily reliant on China and commodity markets. There are a few areas of potential interest – troubled India is trying to improve its economy, and is one of the few emerging markets that would benefit from lower raw materials prices. But overall we’d keep emerging-market exposure to a minimum just now.
These face various threats, such as the US fiscal cliff and the situation in Europe. Inflation will also hurt shares if it rises too far. So buy stocks priced for bad news.
On the plus side
Markets in Europe and Japan look cheap compared to America. And we’d also continue to invest in ‘quality’ companies with solid balance sheets and decent dividend yields – have a watch list of stocks you like, and buy them when prices drop back.
Gold is still a winner
Given that every major central bank in the world is printing money, fiat currency in general can only lose value compared to gold. Have some in your portfolio as insurance against a financial disaster or out-of-control inflation.
Silver is riskier
It’s a metal we were keen on as a ‘buy and hold’ when it was below $10 an ounce a few years ago. It still has a lot of potential, but you can expect a much wilder ride than with gold.
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Oil is a bad bet
We’re bears on oil at MoneyWeek. Of course, there’s the danger of disruption in the Middle East (if war erupts between Israel and Iran, for example). However, a slowing global economy, and a general move towards more fuel efficiency and other sources of energy, are bad for oil in the long term.
On the plus side
As we noted two weeks ago, natural gas has real potential for investors.
We don’t buy the argument that you should have wine and art in your portfolio to protect against growth in the money supply. And we think the slowdown in China is likely to hurt demand for luxury goods. These markets are also ripe with fraudsters. So unless you’re an avid collector, give art and wine a miss. Buy gold if you’re worried about money-supply growth.
Developed-world government bonds are at or near record highs (ie, yields are at record lows). They’re too costly. They might rise further but the chances are they won’t – even our regular contributor James Ferguson, who rightly said bond prices would keep rising after the financial crisis, now thinks it’s time to sell.
They’re popular but they make us nervous too. There are some interesting opportunities, but overall we’d have minimal exposure to corporate bonds.
Look at Germany and America
The biggest problem with property is getting diversified exposure. If you’re looking for an investment property, think about Germany – it’s where all the loose money in the eurozone is flowing – and the US, where the housing market is now cheap. We still aren’t keen on British property.
Have cash in your portfolio
This gives you ‘optionality’ – you can buy assets you have your eye on when the opportunity arises to buy them cheap. With markets swinging between despair and euphoria, there’ll be lots of those opportunities ahead.