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Asset class outlook for 2011

Predictions for asset classes in 2011

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.

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{ 10 comments… add one }
  • 1 Alex January 4, 2011, 4:26 pm

    1. As ever, thanks for this article.

    2. I’m intrigued that your analysis of UK shares considers only the FTSE 100. As you know, the FTSE 250 Index performed very well last year – even better indeed than those “frothy” emerging markets (by the MSCI Total Return Net Emerging Markets Index).

    3. Do you have anything to say about the FTSE 250 Index? Or the FTSE Small-Cap, for that matter?

    4. Returning to the MSCI Total Return Net Emerging Markets Index. I’m reassured by the breadth of its diversification by geography: it comprises 25 countries. Hopefully such diversification should help us. Do you agree?

    5. I think that there is a lot of lazy commentary (NOT BY YOU) about the ‘global emerging markets’, as if all of the relevant countries are the ‘same’.

  • 2 ermine January 4, 2011, 9:09 pm

    Much to agree with generally, but as someone who has been sitting on a ugly 42% cash allocation in my financial investments portfolio I’d have to challege that cash is king these days.

    It is a nastily depreciating asset unless you were lucky enough to get into NS&I index-linked certs. Even my decent cash ISA has depreciated in real value by 2% due to the criminal interest rate policy operated by the BofE.

    I’m also interested in the difference between the FTSE250 and 100 – if Britain really is goingto rebalance its economy in making real stuff to sell abroad, there are very few engineering firms in the FTSE100. There again, I don’t think we have the social or educational infrastructure to do that – the emergin markets with their youthful demographics are better placed for that sort of thing nowadays
    .-= ermine on: New Year’s Resolution 2011 – I want to pay less tax =-.

  • 3 The Investor January 5, 2011, 12:27 am

    @Alex

    1. Thanks for stopping by!
    2. Partly laziness, partly not wanting to put too much stock in the micro-analysis of calendar effects. The next bull market will end when big blue chips have played out, in my view, since they nearly always do, so I’m happy to use the FTSE 100 as my quick touchstone. The outperformance you mention is real and valid — particularly marked in the US, where a Russell 2000 surge is often a prelude to a rally by the S&P 500.
    3. As above, but will make a note to return to this in the future.
    4. To an extent. I think all emerging markets are partly being inflated by hot money at the moment which is pretty indiscriminate (but not necessarily wrong) as well as by very valid facts on the ground.
    5. Absolutely.

  • 4 The Investor January 5, 2011, 12:31 am

    @Ermine – On cash, it is the king of asset classes like the Ferrari is the king of cars (I don’t know cars, but I assume that’s a valid metaphor! 😉 ). In other words it’s the best, but you pay a very steep price to enjoy it, and that price is low real returns and the risk of negative ones in excessively inflationary times like now.

    If the various gloomier scenarios had played out in 2010, you’d be very glad of your 42% in cash – indeed, that’s why you’ve got it, non? 😉

    As we’ve discussed before, the UK is much better at manufacturing than most believe: http://monevator.com/2010/02/24/public-love-sweatshops/

    But what we really need to be doing is selling more services and other high-end stuff to the growing emerging markets, rather than boasting that Ireland is as big as the BRICS combined for us. And of course rebalancing by cutting imports of tat over time! 😉

    (Apols for brevity – back from hols to tons to do!)

  • 5 The Investor January 5, 2011, 12:33 am

    p.s. As I think you probably know, I’ve been well over 90% invested in equities since March 2009, so my love of cash is the love that has dared not speak its name recently.

    p.p.s. I was actually scared by the 2%+ leap the FTSE 100 had put on today by lunchtime (I wrote the above article before heading to Barcelona for NYE). The universal bullishness is getting scary, and I will have to start rebalancing sooner rather than later.

    p.p.p.s. Note: None of this as ever is advice, and I strongly urge people take a more passive and at least semi-mechanical approach to rebalancing the bulk of their portfolio, judging on the academic evidence.

  • 6 ermine January 6, 2011, 9:42 pm

    that’s the longest list of pps I’ve seen 😉 It’s a fair cop on cash, though I hadn’t intended it to get quite that extreme…

    Taking a butcher’s hook at the graph on http://monevator.com/2010/02/24/public-love-sweatshops/ I’d say that has flatlined since 2000, and indeed there’s a hint of a downswing. So I don’t feel Worstall’s thesis is carried on that basis, pretty much ever since the late 1990s when I was last employed in actually designing something to get made into a box (as opposed to on a computer).

    That’s why I’d look to the FTSE250 for the up and coming manufacturers the Coalition wants to pump up – analogous to Germany’s Mittelstand, though the financing system is different, they seem to use more family private equity.
    .-= ermine on: The Gold Conundrum =-.

  • 7 Salis Grano January 9, 2011, 11:50 am

    Broadly in agreement, but I would emphasise two points you’ve touched on that are just reflect my personal anxieties.

    The REITs are well off their 2009 lows and I’m not convinced the banking fears are in the price. A reasonable long term bet, but if you have some hold; if you don’t, maybe hold off for now or at least take it slowly.

    I think you are brave remaining so committed to equities. Obviously, we don’t know your cash flow, but I cerainly feel happier taking your advice about the benefits of cash at the moment and I’ve been cashing out over the past 6 months to keep my holdings around the 45% level. There is always regret about foregone gains, but in my experience it’s not as bad as the pain of realised losses.

    A sector that is unloved at the moment is insurance, both general and specialist, with 5-7% yields pretty common and I’m looking to increase my exposure here, so I hope the current market view is overdone.

    Finally, I agree with ermine and Alex: there may be better pickings to be had in the Mid and Small Caps.
    .-= Salis Grano on: Annual Roundup 31-12-10 =-.

  • 8 Financial Samurai January 11, 2011, 4:35 am

    So my condo I bought in Notting Hill 5 years ago is still doing well mate? I’ve lost track .
    .-= Financial Samurai on: Nature vs Nurture- How Important Are Parents To Our Success =-.

  • 9 The Investor January 12, 2011, 10:13 pm

    @FS – Surely some mistake? We don’t do condos or even apartments here in the UK. We do ‘flats’. 😉

  • 10 OldPro January 14, 2011, 2:03 am

    Bravo on your good call on 2010 better than many I read…. cash is a wasting asset Ermine until you need it… whether for buying firesale London companies in a panic (think of 1987) or for health reasons…!

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