Charles Stanley’s three underrated sectors for investors who like a bargain

Investors have benefited from several rallies since the start of the year, with a number of indexes hitting all-time highs, including the S&P 500, Nikkei 225 and even the FTSE 100. This has left some investors feeling concerned about high valuations.

For investors looking for more attractive pricing opportunities, Rob Morgan, chief investment analyst at Charles Stanley, pointed to three undervalued sectors.

In first place is the UK, which despite recent growth remains cheap compared to overseas peers and its own historical valuations.

While Morgan believes UK shares are attractive overall, smid stocks are even cheaper than blue chips in the FTSE 100 and should benefit from an improving economy as well as renewed buyer interest private equity, he said. .

What’s more, the liquidity profile of UK stocks, particularly mid-caps, has deteriorated significantly, meaning that, according to Morgan, “it doesn’t take much for them to rise”.

For investors looking to benefit from the re-rating of cheap UK shares, he suggested Fidelity Special Values ​​and Man GLG Undervalued Assets.

“Fidelity Special Values ​​focuses on finding undervalued opportunities in an already cheap market,” he said.

“Man GLG Undervalued Assets also takes a values-centric approach while also aiming to deliver good quality.”

Fund performance over 10 years compared to the benchmark

Source: FE Analytics

While Morgan favors UK mid-caps, she also expects the FTSE 100 to perform well. Given its large holdings in banks, oil companies and commodities, persistent inflation should be a tailwind for the blue-chip index.

Mining is another underappreciated area that Morgan has highlighted.

While mining companies have historically struggled with issues such as poor capital discipline, lack of cost control and excessive financial leverage, they are now benefiting from the transition to a low-carbon economy.

Morgan said: “This will require a lot of raw materials, especially metals, and we are currently seeing competition for raw materials. Yet mining companies are underdeveloped because their growth potential is underestimated.”

Miners tend to pay dividends, although these may be lump sums. Morgan also warned that mining is a highly volatile sector and that investors should take a five- to 10-year view.

For investors who can tolerate this volatility, Morgan recommended WS Amati Strategic Metals.

Fund performance over 10 years compared to benchmark and sector

Source: FE Analytics

“The fund takes a very active approach to investing in the mining sector, seeking to actively manage the optimal mix of precious, specialty and base metals at any given time,” he explained.

“It has a concentrated portfolio of 35 to 45 companies, including smaller, higher risk companies, so the individual choices made by its managers will have a significant impact on returns. In particular, it targets companies dealing in specialty metals that will play a future role in the global energy transition, such as battery metals such as lithium, which is essential in electric car batteries.

“It’s definitely not for the faint of heart, but it could be an interesting satellite in your portfolio in the long run.”

Finally, Morgan also believes that Japanese small-cap growth stocks are attractive because they are still attractively valued relative to the rest of the market.

Japan’s large-cap exporters have made significant progress in a short period of time as the corporate reform narrative develops, with a weak yen providing additional growth tailwinds. That’s why they’re not as cheap as they used to be.

However, Japanese companies focusing on the domestic market have not benefited significantly from these favorable conditions, especially in the small-cap growth space, where valuations have fallen as global interest rates rise and the yen falls.

As a result, they are currently much cheaper and widely overlooked, but could benefit over time from global interest rate cuts as well as their own organic growth.

To gain exposure to this space, Morgan looked to Baillie Gifford’s Shin Nippon fund, which has been struggling since late 2021.

Mutual fund performance over 10 years compared to benchmark and sector

Source: FE Analytics

“Shin Nippon’s collection of small, more growth-oriented companies had little interest from their traditional domestic buyers, who favored dollar-earning exporters or simply invested abroad.

“However, after the brutal price cut, it appears that growth companies have value to offer at undemanding valuations. This may be a slow process, but as sentiment improves and, ideally, the yen stabilizes, this could be a profitable area to focus on,” Morgan explained.

“This trust carries more risk in an already specialized area because it has leverage of around 20% and the share NAV discount is variable. “It is currently around 15%, but has recently been as high as 20% after a very small premium in early 2022.”