I am not so foolish as to expect anything from any asset class in 2011. All markets are unpredictable, especially in the short-term.
That said, a money blogger is duty bound to make a stab on the outlook for asset classes, however futile. Otherwise he risks losing all his readers to more excitable blogs that promise gold will hit $10,000.
Also, while expensive looking assets can always get more expensive and cheap ones even cheaper, in the medium term these things tend to revert to the mean.
Mechanically rebalancing your portfolio is a sensible way to take advantage of this. If you’re a more active investor though, you’re forced to employ your judgment. So with all these caveats in mind, here’s some thoughts:
- UK shares look reasonable value, with the FTSE 100 on a forward P/E of about 13, and not too pricey on a longer-term basis. I’m worried by growing fund manager optimism, rising gilt yields, and potential sterling strength. Set against that there’s clearly plenty of retail money sat on the sidelines, and corporate earnings are strong.
- Overseas shares are a mixed bag. US shares have done well in 2010 – they’re more expensive than the FTSE 100, but arguably more exposed to mid-cycle growth. European shares might be a decent contrarian bet; Germany has done very well, but Spain and Italy have slumped. Japan looks cheap as ever. Please do remember currency risk if you invest abroad.
- Emerging markets are starting to look frothy, but as I wrote in my article on emerging market funds, such trends can take years to play out. I’m not chasing performance, but I’m not selling the exposure I’ve got, either. Beyond that I think buying the likes of Diageo and Caterpillar offer a cheaper way to benefit from global growth.
- Government bonds have looked expensive for two years: I was right in 2009, and wrong for most of 2010. With the 10-year UK gilt yield now up to 3.6%, they’re becoming better value. I’d probably have a nibble at 4% (previously I wanted 5%, which incidentally you can now get on perpetual Consols).
- Corporate bonds don’t offer much appeal – I’d rather buy shares. Some of the bank preference shares may still be bargains, if you’re after long-term income, but make sure you know the company-specific risks you’re taking on.
- Cash isn’t returning much compared to inflation; even Zopa interest rates have crashed. Nevertheless I can see myself saving more cash in 2011, particularly as I’m over-invested in shares. Cash is the king of asset classes.
- Gold fans talk a great game, but it’s a complete wild card. I wish I hadn’t sold my Gold and General Fund back in 2007 – not so much for the performance since then, but so I wouldn’t have to worry about whether I should buy some now to protect me from the indisputable currency games going on. There’s a lot of fear and momentum in the gold price, in my view.
- Commercial property didn’t do much in 2010; bellwether Land Securities is flat on the year, though some of the smaller outfits have done better. I continue to think the big REITs are an attractive asset class that offer some protection from inflation, plus an income, for a fair price. The headwind is fears that banks will dump their written-down property at bargain levels, but I think that’s probably in the price.
- Residential property remains my bête noire, with the London bubble seemingly immune to even global recession. If I was buying a home outside London, I’d probably buy now on a ten-year fix to lock-in low rates. But whereas the froth has come off in the provinces, prices in London are already back to 2007 levels. It seems unsustainable, but I’ve been wrong about that for years. I wouldn’t buy an investment property anywhere in the UK at current yields, but parts of the US might get attractive if the pound strengthens.
For me then it’s a murkier picture than at the start of 2010, in that the big fears are still around, but it’s harder to buy cheap assets that reflect those uncertainties in their price.
Personally, I’m minded to stay near-fully invested, but to save new money and dividends into cash and to possibly rebalance my portfolio towards more sensible asset allocation as the year progresses.
As ever, Monevator house policy is that the average investor will do better with a cheap and largely passive diversified portfolio from day one. Please take all this speculation therefore with a pinch of salt, wherever you might read it.