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.

PROMOTED VIDEO
Sport
Luis Suarez looks towards the crowd during the 2-1 victory over England
sport
Life and Style
Cheesecake frozen yoghurt by Constance and Mathilde Lorenzi
food + drinkThink outside the cool box for this summer’s frozen treats
News
John Barrowman kisses his male “bride” at a mock Gretna Green during the Commonwealth Games opening ceremony
peopleBarrowman's opening ceremony message to Commonwealth countries where he would be sent to prison for being gay
Sport
Sir Bradley Wiggins removes his silver medal after the podium ceremony for the men’s 4,000m team pursuit in Glasgow yesterday
Commonwealth games Disappointment for Sir Bradley in team pursuit final as England are forced to settle for silver
Sport
Alistair Brownlee (right) celebrates with his gold medal after winning the men’s triathlon alongside brother Jonny (left), who got silver
England's Jodie Stimpson won the women’s triathlon in the morning
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

    Trade Desk Specialist (Linux, Windows, FIX, Finance, Networks)

    £60000 per annum: Harrington Starr: Trade Desk Specialist (Linux, Windows, FIX...

    Associate CXL Consultant

    £40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

    Project Manager - ETRM/CTRM

    £70000 - £90000 per annum + Job Satisfaction: Harrington Starr: Project Manage...

    C#.NET Developer

    £300 - £350 per day: Harrington Starr: C#.NET Developer C#, WPF,BLL,MVVM, SOA...

    Day In a Page

    Backhanders, bribery and abuses of power have soared in China as economy surges

    Bribery and abuses of power soar in China

    The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
    Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

    Highland terriers steal the show at opening ceremony

    Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
    German art world rocked as artists use renowned fat sculpture to distil schnapps

    Brewing the fat from artwork angers widow of sculptor

    Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
    BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

    BBC takes viewers back down memory lane

    The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
    Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

    Nicolas Cage shines in low-budget drama Joe

    Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
    How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

    Make your own ice lollies and frozen yoghurt

    Think outside the cool box for this summer's tempting frozen treats
    Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

    Fiesta is UK's most popular car of all-time

    Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
    10 best reed diffusers

    Heaven scent: 10 best reed diffusers

    Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
    Commonwealth Games 2014: Female boxers set to compete for first time

    Female boxers set to compete at Commonwealth Games for first time

    There’s no favourites and with no headguards anything could happen
    Five things we’ve learned so far about Manchester United under Louis van Gaal

    Five things we’ve learned so far about United under Van Gaal

    It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
    Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

    Screwing your way to the top?

    Good for Lana Del Rey for helping kill that myth, says Grace Dent
    Will the young Britons fighting in Syria be allowed to return home and resume their lives?

    Will Britons fighting in Syria be able to resume their lives?

    Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
    Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

    Beyoncé poses as Rosie the Riveter

    The wartime poster girl became the ultimate American symbol of female empowerment
    The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

    The quest to find the perfect pair of earphones

    Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
    US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

    Meet the US Army's shooting star

    Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform