One man's rubbish can be another's profit

Contrarian investors put their cash where others dodge, says Rob Griffin

They are the areas that have fallen from favour; the countries, regions and sectors ravaged by economic and political problems over the last few years. However, they are also the places that could provide the key to bumper returns for contrarian investors.

While many of them will certainly not be for the faint-hearted because they remain vulnerable to shocks and uncertainty, individuals brave enough to take a chance could enjoy decent rewards, according to Jason Hollands, a managing director at Bestinvest.

"The essence of successful investing is to buy low and sell high, yet many private investors do the opposite and chase recent performance," he says. "It takes nerves to back a market or asset class when it is deeply out of favour, but the results can be rewarding."

Investors who kept faith with Europe have already experienced this phenomenon in the last few years, points out Jason Witcombe, director of Evolve Financial Planning, who suggests it might be an idea to work on the basis of "reversion to mean" when it comes to making such decisions.

"European equities fell more than most other developed market equities in 2009-11 on the back of political and economic uncertainties, but have since bounced more than most," he says. "Those people who held their nerve and increased their European equity weightings to bring their allocation back to their original target, will have done very well."

So where do the most attractive opportunities exist? We quizzed a number of financial advisers, company analysts, investment officers and fund managers to highlight which countries, regions, sectors and stocks were worthy of consideration by contrarian investors.

India

The first stop on our international tour of troubled areas is India. Although racked with poverty and overwhelming bureaucracy, it is set to be the world's largest nation by population, and that brings significant opportunities, according to Brian Dennehy, managing director of fundexpert.co.uk.

"It is a very young nation compared to China, Europe and the US, and this creates huge potential dynamism," he says. "The potential will only be realised through many years of reform. As India is 10 years behind China, it won't happen quickly but there are signs of long-term commitment."

Patrick Connolly at AWD Chase de Vere believes India is likely to perform well over the long term, and warrants a place in client portfolios, but points out that infrastructure deficiencies, inadequate economic reforms and political issues remain problematic.

"Because of the high risks, we don't recommend that clients buy funds investing specifically in India but rather get exposure through broad-based emerging markets funds such as JPM Emerging Markets, which currently has 12 per cent invested in India," he says.

Japan

Next is Japan. Investors have been waiting patiently for the land of the rising sun to "turn the corner" for more years than they care to remember, but there has been a surge of optimism over the last few months thanks to a strong stock market rally.

That apparent uptick in fortunes has been prompted by a faltering yen and the Bank of Japan's massive stimulus package, the scale of which has stunned investors, according to Mark Burgess, Threadneedle's chief investment officer.

"The intention of the BoJ is to end 20 years of deflation and get inflation up to 2 per cent [a year] by forcing investors out of bonds and into riskier assets," he says. "Faced with a decline in the domestic population of 30 per cent, I suspect the reflationary policies will ultimately fail, but at least the authorities are giving it their best shot."

It's risky, but Japan will offer potential for investors until it goes wrong, suggests Brian Dennehy. "Until that final cut, the yen will fall sharply, which should push their market higher," he says. "Their market is cheap, but usually things are cheap for a reason – so you can have a punt, but take care."

Russia

On the face of it, things look bleak for Russia, concedes Patrick Connolly at AWD Chase de Vere, with its stock market trading at a 50 per cent discount to some of its emerging market peers and economic growth forecasts cut, meaning there is a risk it could move into recession later in the year.

However, the economy has undergone a significant transformation over the last decade. "It has virtually no sovereign debt, large foreign exchange reserves, low inflation rates and an increasing dispersion of wealth," he says. "It also remains one of the world's largest commodity producers."

Russia's economic rise was born out of its enormous natural resources, and Mr Connolly believes demand is set to remain as other fast-growing economies, most notably China, continue to need what Russia produces.

"Financial market reform is opening up in Russia to greater foreign and domestic investment," he adds. "Reforms are being introduced to allow domestic pension funds access to the equity market, while constraints on foreign investors are being lifted. This should support Russian equities."

Europe

Since 2008 investors have viewed Europe as being in a long-running crisis, but now might be the time for a re-think, according to Andy Gadd, head of research at Lighthouse Group. "Many investors have responded by pulling their money out of European stock and bond markets, or simply not investing new money," he says. "Nevertheless there are some very attractively priced investments in Europe at the current time, and the fact is that Europe boasts a host of globally renowned companies that are performing well, making profits and have significant levels of cash on their balance sheets."

However, the underlying problems in Europe are yet to be resolved, so there could be more painful times to come. "Eur-ope therefore remains a higher risk investment, and investors should be cautious, as any unexpected shocks or setbacks, or any country leaving the euro, could be very detrimental across the board in the short term," he adds.

Frontier markets

Geoff Penrice, a charted financial planner at Astute Financial Management, believes that many under-developed countries have enormous potential in terms of natural resources and young populations, and says that these can provide tempting opportunities for investors. In particular, he cites Nigeria, Egypt, Saudi Arabia, United Arab Emirates, Ukraine, Kazakhstan and Vietnam.

"Nigeria not only has oil but also a thriving banking, cement and telecoms sector, while Egypt has started to recover since the revolution and has given some fantastic returns," he says. "The easiest way to access some of these investment opportunities is to consider some of the frontier funds, such as Templeton Frontier Markets, BlackRock Frontiers, and Schroder ISF Frontier Markets Equity."

Stocks and sectors

Nick Kirrage, co-manager of the Schroder Recovery fund, suggests the pharmaceuticals sector is also worth a look, as it feels like the tobacco sector did 15 years ago. In particular, he suggests AstraZeneca could do well as expectations are currently so low.

"It's an area that is unloved and undervalued with everyone feeling very glass-half-empty and worried about pricing power," he says. "However, they ignore the high barriers to entry, the strong cash flows, and the fact that you will ultimately pay a very low price." It's also worth looking at sectors whose fortunes are tied in with the prospects for different regions, points out Julian Chillingworth, chief investment officer at Rathbones. If the lack of enthusiasm towards China continues, for example, this could throw up opportunities in a number of areas.

"If we have further setbacks, it could be interesting to look at some of the mining companies, because we think the market might get over-bearish on them," he says. "It's a way of playing by developed markets a pick-up in growth in China which will obviously help the rest of the emerging markets."

Helal Miah, investment research manager at The Share Centre, agrees. He points out that recent commodity price falls have had a negative impact on the mining sector, but argues that it offers investors strong opportunities over the longer term, particularly BHP Billiton and Randgold Resources.

"We recommend BHP Billiton as we believe that in the longer term the company remains in a strong position to grow its profits as sentiment becomes more positive," he says. "We would suggest investors seeking growth opportunities drip feed into the stock on any weakness in the share price."

Randgold's share price will always be linked to a certain extent to the underlying price of gold, although over the past year it has also been influenced by stock-specific issues such as production and its exposure to Mali, which has been going through political turmoil.

Although confidence in Mali and the stock has taken a tumble, the actual operations of Randgold have remained largely unaffected, with record production and profit levels during 2012. However, it would be foolish to rule out the possibility of further turmoil affecting the company.

"We therefore consider this as a high-risk investment and recommend the stock for investors considering exposure to gold and a company that is expanding its resource base, operations and production," he adds.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

PROMOTED VIDEO
News
Rob Lowe
peopleRob Lowe hits out at Obama's snub of Benjamin Netanyahu
News
Davies (let) says: 'Everybody thought we were having an affair. It was never true!'
people'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'
Arts and Entertainment
Over their 20 years, the band has built a community of dedicated followers the world over
music
News
Staff assemble outside the old City Road offices in London
mediaThe stories, the writers and the changes over the last quarter of a century at Britain's youngest paper
Life and Style
The Oliver twins, Philip and Andrew, at work creating the 'Dizzy' arcade-adventure games in 1988
techDocumentary looks back at origins of the computer-games industry
Arts and Entertainment
Krall says: 'My hero player-singer is Elton John I used to listen to him as a child, every single record
music
News
Friends for life … some professionals think loneliness is more worrying than obesity
scienceSocial contact is good for our sense of wellbeing - but it's a myth that loneliness kills, say researchers
Arts and Entertainment
The Wu-Tang Clan will sell only one copy of their album Once Upon A Time In Shaolin
musicWu-Tang Clan and The Sexual Objects offer fans a chance to own only copies of their latest albums
News
i100
Environment
Number so freshwater mussels in Cumbria have plummeted from up to three million in the 20th century to 500,000
environment
Life and Style
Models – and musicians – on the catwalk in Dior Homme for the men’s 2015/16 fashion show in Paris
fashionAt this season's Paris shows, various labels played with the city boys' favourite
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Tax Assistant

    Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

    Recruitment Genius: Outbound Sales Executive - OTE £25,000

    £16000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...

    Ashdown Group: Java Developer / J2EE Developer - Watford - £45,000 - £47,000

    £45000 - £47000 per annum + bonus + benefits: Ashdown Group: Java Developer / ...

    Ashdown Group: Marketing Product Manager - (Financial Services) - SW London

    £35000 - £38000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

    Day In a Page

    Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

    What the six wise men told Tony Blair

    Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
    25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

    25 years of The Independent on Sunday

    The stories, the writers and the changes over the last quarter of a century
    Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

    Homeless Veterans appeal

    As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
    Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

    Smash hit go under the hammer

    It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
    Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

    The geeks who rocked the world

    A new documentary looks back at origins of the computer-games industry
    Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

    Belle & Sebastian is taking a new direction

    Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea
    America: Land of the free, home of the political dynasty

    America: Land of the free, home of the political dynasty

    These days in the US things are pretty much stuck where they are, both in politics and society at large, says Rupert Cornwell
    A graphic history of US civil rights – in comic book form

    A graphic history of US civil rights – in comic book form

    A veteran of the Fifties campaigns is inspiring a new generation of activists
    Winston Churchill: the enigma of a British hero

    Winston Churchill: the enigma of a British hero

    A C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
    Growing mussels: Precious freshwater shellfish are thriving in a unique green project

    Growing mussels

    Precious freshwater shellfish are thriving in a unique green project
    Diana Krall: The jazz singer on being friends with Elton John, outer space and skiing in Dubai

    Diana Krall interview

    The jazz singer on being friends with Elton John, outer space and skiing in Dubai
    Pinstriped for action: A glimpse of what the very rich man will be wearing this winter

    Pinstriped for action

    A glimpse of what the very rich man will be wearing this winter
    Russell T Davies & Ben Cook: 'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'

    Russell T Davies & Ben Cook: How we met

    'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'
    Bill Granger recipes: Our chef serves up his favourite Japanese dishes

    Bill Granger's Japanese recipes

    Stock up on mirin, soy and miso and you have the makings of everyday Japanese cuisine
    Michael Calvin: How we need more Eric Cantonas to knock some sense into us

    Michael Calvin's Last Word

    How we need more Eric Cantonas to knock some sense into us