According to Wikipedia a contrarian investor is
one who attempts to profit by investing in a manner that differs from the conventional wisdom, when the consensus opinion appears to be wrong. A contrarian believes that certain crowd behavior among investors can lead to exploitable mispricings in securities markets.
So what are the mispriced investment opportunities out there that a contrarian might look to exploit?
Commodities
At the moment there’s not much to like about commodities, whether it’s metals or natural resources or the companies that produce or market them. Oversupply and fears over global growth (particularly in China) plus a strong dollar have hit commodity prices hard this year. And the overriding consensus view is that this will continue. The Bloomberg Commodity Spot price index (a broad measure of commodity prices) is at multi-year lows and could head lower. Opportunities are emerging for the contrarian to start building positions which will benefit if the dollar’s rally falters and global growth & commodity demand picks up. The brave could buy a broad fund such as JPM Natural Resources on a monthly basis ahead of a commodity bull market which may be a few years off.
European Smaller companies
There are fewer markets where investor sentiment is so negative as European equities right now. Concerns about deflation, a renewed recession and a weakening economic outlook in Germany have got investors scared. And that’s before you even talk about the banking system and the possibility of another sovereign debt crisis! Unsurprisingly investors have fled European funds in recent months. Although not the screaming buy it was of a few years ago, valuations are suggesting that there are some opportunities emerging along with a brighter outlook for company earnings, especially in small caps which have been fuelled by the weak Euro. If we do see all out quantitative easing in Europe the boost in liquidity will be most felt in European small and mid caps. A bold contrarian play would be to buy Baring Europe Select which has a small cap focus, the worst performing sector in the last 6 months bar none. The fund remains one of the top performing European funds over the last 3 and 5 years.
Cyclical stocks
The FTSE 100 fell almost 10% from its September highs amid a wave of negative sentiment including doubts over global economic growth prospects. And the investment commentary is largely bearish on the prospects for UK equities as markets struggle to break previous year highs.
But the UK market has not been this cheap for 40 years, based on the cyclically adjusted price-to-earnings ratio (known as cape), which is a positive sign for future equity returns. However, the recent sell off wasn’t universal and stocks from defensive sectors such as tobacco and pharmaceuticals outperformed as their fortunes are not as closely tied to economic growth prospects. Unloved cyclical stocks, which were hit hardest by economic growth fears, are at their cheapest level relative to defensives for nearly 3 years, which makes for an interesting contrarian play.
Standard Life UK Equity Unconstrained is an aggressive fund with 22% of assets in financials and 33% in industrials. This fund tends to strongly outperform in a rising market and underperform in falling markets. If you want an aggressive play on the cheapest areas of the UK market, this is your fund – but hang on as it could be a roller-coaster ride. The fund is up 86% over 3 years versus 30% for the FTSE 100.
(image by pakorn - freedigitalphotos.net)
