November 2018 Key Indicator – investment and asset classes

choosing asset classes is like crystal ball gazingIn such a febrile market it takes nerves to make investment decisions about which asset class to follow when there is the danger that an asset’s value can reduce. At the moment it seems as if choosing between asset classes is a bit like consulting a fortune teller.

Why? Because the global, regional and national economies are beset by influences that are making them very volatile for a variety of reasons.

In October, the IMF (International Monetary Fund) forecast that global growth would remain at its 2017 level but that “expansion has become less balanced and may have peaked in some major economies”. It notes also “the negative effects of the trade measures implemented or approved between April and mid-September”.

However, this is as much political as it is economic, notably, the USA’s imposition of trade tariffs particularly on China, but also its threats of sanctions on Iran.

The prospect of a trade war with China is particularly alarming and has wide-reaching implications in that the Chinese economy has been slowing and its currency, the Yuan, has been devalued substantially over recent months. While this should make Chinese exports more competitive, tariffs might reverse this. It must also be remembered that China holds some $1.2 trillion worth of US government bonds and should it decide to dump them, this would cause a rise in US interest rates triggering a knock on impact on inflation which would reduce the demand for Chinese goods.

Similarly, in the UK as the Brexit negotiations near their endgame with little or no clarity in sight, businesses and investors have been holding back on investment with some setting up outposts in Europe, as a precaution against the absence of any sensible agreement.

Growth and productivity in the UK economy have been anaemic for some time, arguably since the 2008 Great Recession.  In Europe, too, growth is slowing.

The result has been huge volatility in share prices across the world’s stock markets and in exchange rates, not least £Sterling, which has been yo-yoing in response.

What asset classes to invest in?

There are four main asset classes:

* Equities, or shares

* Bonds, debt or fixed-income securities

* Cash, or marketable securities

* Commodities such as agricultural products, metals, including gold, energy supplies such as oil

Alternative asset classes include real estate, or valuable inventory, such as artwork, stamps and other tradable collectibles.

While the advice is always to invest in a range of assets to spread the risk and it is often argued that one investor’s loss is another’s gain, in this climate it is difficult to determine which asset classes are the safer option and which offer growth prospects.

After a long period of share price growth, here in the UK at least, the appetite for buying equity in a business is low. The recent stock market declines and volatility are an indication of the uncertainty investors are currently feeling. Another concern that has been emerging is that businesses in the technology sector have been over-valued or will be unable to sustain their current profit levels in the future.

The equally volatile currency exchange rates has made the buying bonds, debt and fixed-income securities somewhat risky although they are being seen as a medium-term safety investment until the stability and predictability of other asset classes is restored.

With commodities, again there is a political dimension.  Oil prices have been rising, partly out of concern for supply from Iran given Donald Trump’s threatened sanctions, and partly because the Opec countries have been keeping prices high in the light of this. Also, commodities rely on consumption and growth which have stalled.

Gold, on the other hand, has been plummeting since February according to quarterly reports published on the website investingnews.com. it were down by 6% in Q2 this year (April to June) and by a further 5% in Q3 (the three months to August). Their analysis attributed this to investors switching to the $US as a safe haven against geopolitical concerns. This is apparently consistent across the metals and mining sectors, they say.

The underlying theme seems to be that the future income and growth of most asset classes are uncertain, at least for the moment, making it harder to decide what, if anything it is relatively safe to invest in.

STOP PRESS: In the light of the above it is no surprise that the Bank of England today voted unanimously to keep interest rates unchanged at 0.75% “because of rising uncertainty among UK businesses” about the outcome of the Brexit negotiations.

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