Property
Residential property remains an unattractive asset class. There have been some signs of life in housing indicators, such as mortgage approvals, but from a very low base. The occasional monthly upticks in house price indices, so enthusiastically seized upon by housing's cheerleaders, are not a reliable guide to recovery. During the last housing downturn, which ended in 1996, there were frequent and sometimes consecutive monthly rises in house price indices, but they didn't arrest the broader trend.
Despite the widely reported "return of the 125 per cent mortgage", lending generally remains very fragile; big deposits are the order of the day, and there is anecdotal evidence that many sales are collapsing before completion as lenders refuse to meet vendors' valuations.
Besides, whereas equities are a leading indicator – they tend to start recovering before the economy does – housing is a lagging indicator. Rarely do house prices recover before economic output does, and in the US they have never risen at a time when unemployment is also rising.
Three-month rolling total property returns
Commercial property is a different matter. Values have already fallen further and faster than residential ones – the IPD's commercial property index is down 44 per cent from its peak. Therefore, it is likely that this sector will bottom out before residential, and may even already have done so. Commercial property funds may yet be rehabilitated.
| Bank/BS | Minimum deposit | Term | Rate |
|---|---|---|---|
| Yorkshire BS | £100 | Sep-14 | 5.40% |
| Barnsley | £100 | Sep-13 | 5.15% |
| Aldermore | £10,000 | 5 years | 5.11% |
| Principality | £5,000 | 5 years | 5.10% |
Source: Moneyfacts.co.uk. As at 17 July | |||
Commodities
We have already expressed the view that oil is too expensive at anything above $70 a barrel (26 June issue), and since that time, commodities generally have drifted lower. We can see few reasons, other than speculative ones, for any major run-up in the prices of industrial raw materials. Demand is subdued and inventories are in most cases ample. The Economist Intelligence Unit, for instance, expects average base metal prices to fall by more than 30 per cent in 2009, with only modest recovery to follow in 2010. However, there is a strong long-term story in many commodities. And a return to the pattern of the early 1990s, where supply was cranked up as soon as prices rose, eventually creating enormous stockpiles of unused metal in bonded warehouses, looks unlikely. Not only is demand structurally higher now, but there is much more discipline on the supply side.
The one commodity where there might be some opportunities is gold. This is often touted as a portfolio diversifier owing to its lack of correlation with just about any other asset class, and it has tended to outperform during periods of economic uncertainty. That said, it isn’t an income-generating asset, and its uses beyond speculation are confined to jewellery and electronics, neither of which is exactly booming.
Cash
Headline base rates are very low and are likely to remain so, but if you're prepared to lock money away for a while, some decent returns are on offer.
For instance, the four best fixed-rate bonds in our online savings tables (see www.investorschronicle.co.uk/researchtools) all offered interest rates in excess of 5 per cent at the time of writing.
The trouble with many of these deals, especially for higher-rate taxpayers, is that they are not available within tax-efficient wrappers like Isas – and that you have no access to your capital for extended periods of time.
Emerging markets
Our long-held view is that talk of a decoupling of emerging markets from developed ones is premature, and that for the foreseeable future, most emerging markets remain turbocharged versions of their OECD equivalents. So it proved in the second quarter; most emerging markets turned in a stellar performance, but the gains soon fizzled out when Wall Street started to falter.
There are lots of compelling longer-term arguments for emerging markets: financial power is shifting Eastward, Asian economies are better managed with lower borrowing and harder-working people; and as a consequence will grow faster for years to come. But stronger economic growth doesn't always equate to better returns for investors; the main beneficiaries of China's rise, for instance, have not been stock market investors, but the hundreds of millions of Chinese lifted out of extreme poverty.
MSCI Emerging Markets Index vs MSCI G7 Index
