Global stock markets appear to have enjoyed a strong recovery since the start of last year.
But, if you look closer, you can see just how diverse the fortunes of different parts of the market have been: while the giant US tech companies have powered ahead once more, valuations in other areas have stayed historically low.
So, the big question for canny investors is where to find robust but unloved investments with a good chance of gains in the coming months. And on that question, I’ve got a few ideas.
UK stocks are cheap as chips, as they say in London.
There are several obvious candidates for value-focused stock investors to consider – one being the UK market itself. It currently trades at a discount of more than 40% to its global counterparts – well beyond its long-term average discount of 17%, according to Redwheel Asset Management.
And that’s despite the fact that 70% of FTSE earnings come from overseas places, says Darius McDermott, managing director of fund research agency FundCalibre.
Not only is the UK cheap, but its dividend credentials are impressive. That makes it hugely attractive for income investors, sure, but those reinvested dividends can also provide useful compounding compensation for growth investors until sentiment improves.
Gavin Haynes, investment consultant at Fairview Investing, says he likes the Temple Bar Ord investment trust for exposure to dividend stocks. It’s turned out some impressive returns with a value-based investing approach. It currently yields 4.1%, in line with savings account returns.
McDermott picks out a couple of more growth-oriented open-ended funds. He says the ES R&M UK Recovery fund is worth a look if you’re hoping to find a value manager with a long track record.
But there’s value to be found beyond the FTSE 100.
The Liontrust Special Situations fund invests across companies of all sizes, and can therefore tap into the even more undervalued pickings available among high-quality mid and small-cap companies.
And that’s grabbed McDermott’s attention lately. He notes that the FTSE mid-cap index is currently on a price-to-earnings (P/E) ratio of 10.8x, compared to its long-term average of 13.9x, making it more attractive at today’s prices.
Those shares could see a sharp rebound, but they could also run into some challenges – with the Bank of England’s inflation battle still not won and plenty of geopolitical risks still circling the globe. Nonetheless, McDermott says global investors are likely to return to the UK’s stock market as the country’s economic data picks back up.
Britain’s very cheapest stocks are found at the lower, more volatile end of the market cap range – meaning they’re the relative runts of the litter. Companies worth less than £250 million are trading at an average P/E ratio of just 9.3x, according to fund firm Amati.
What’s more, the value opportunity is like an archeological dig, existing in layers, among closed-ended funds in this part of the market, with an even deeper discount on UK smaller company investment trusts, says Andrew McHattie, publisher of the monthly Investment Trust Newsletter.
He likes the Aberforth Smaller Companies Ord trust, whose managers embrace a value style that has historically helped performance.
David Holder, senior research analyst at investment consultancy Square Mile, likes abrdn UK Smaller Companies Growth Ord trust’s focus on higher-quality and faster-growing UK small caps.
Now, the pros generally say that economic recovery will be crucial in turning around sentiment in the UK market, especially for the country’s smaller cap firms, but Holder says a change of government could also kickstart that switch. Mergers and acquisitions, especially from overseas and private buyers, already are throwing a spotlight on the bargains the market has to offer. And for that matter, the scale of share buybacks is too. And both activities are generally expected to pick up even more.
Of course, China’s cheap too.
The other ultra-cheap regional market worth considering is China. There, economic and geopolitical concerns, from rising authoritarianism to a stagnant property market and slowing growth, have dented investors’ confidence.
McDermott notes that funds in the sector are down more than 50% over the past three years, with China on a forward P/E ratio of 8.9x – well below the historical average of 11.7x. That said, he says ow could be a good entry point for long-term investors. The Chinese economy has seen some normalization after pent-up demand for goods and services started filtering through to the economy last year, and targeted government stimulus is also helping.
McDermott says you could consider the FSSA Greater China Growth fund to gain exposure to the Chinese market.
Or, Haynes says, you could also consider the Fidelity China Special Ord, which invests in “out of favor, misplaced companies”, and was trading at a 9% discount in early April. Haynes also likes the Fidelity Asia Pacific Opportunities, which offers exposure to China and other out-of-favor Asian stock markets.
Alternative assets harmed by rate rises
There have also been painful selloffs in many investment trusts that focus on alternative assets, including renewable energy, infrastructure, and private equity.
The recent rise in interest rates crippled assets that depend heavily on loans. It also seriously impacted trusts that invest in longer-duration and higher-yielding assets, as investors realized that fixed-interest investments yielded almost as much income but involved less risk.
Nonetheless, says McHattie, for investors who believe the economic outlook is bound to improve, there could well be some bargains to be had. He sees good opportunities among the chunky discounts in the mainstream global infrastructure sector, for example, the BBGI Global Infrastructure Ord, on a discount of 10.8% and yielding 6.5%.
The trust’s dividend and net asset value have grown every year since its launch, and it has delivered 8.8% annual total returns since its inception.
Private equity – investment into companies that aren’t publicly traded – has also been widely unloved lately, thanks to lingering concerns over the validity of published net asset values.
Some of the widest discounts in the private equity sector may be excessive however, says McHattie, singling out HarbourVest Global Private Equity Ord as a prime example.
The trust has an excellent track record, he says, and delivered net asset value per share growth of 261% from 2013-23. Compare that to the FTSE All World Total Return Index, which was up just 127% over the same period. At the fund’s most recent reporting date, its asset value was at a record high, but its shares were changing hands at a discount of around 40% – just about the widest in its peer group, he notes, and with “considerable scope to narrow”.
To explore whether alternative assets are a good entry point or a potential value trap check out interactive investor’s recent On The Money podcast, which covered the topic.