Proactive Investors - London stocks, REITs, emerging markets, biotechs and China, and a US semiconductor sleeping giant - all overlooked or unloved according to fund managers who suggest 2024 could be the year that sees an uptick in their fortunes.
1. Undervalued UK's perception could change
The UK is more economically resilient than most investors seem to think, says Mark Barnett from TM Tellworth: "Honestly, it is hard to see exactly where the loathing comes from. When you look at the hard data, the UK economy is doing OK. The UK economy is doing OK. It’s not great, but nor is it collapsing."
He suggests that political stability and moderate policies could shift perceptions, making the UK an unappreciated haven for investors.
"We are often asked what the catalyst is to correct the discount for UK assets. The underlying state of the UK economy might be the factor that makes the difference," he says, as inflation continues to recede and wage growth remains supportive.
With an election due by this time next year, a change of government could make the UK "a beacon of political stability with a moderate centre-left government with a decent working majority.
"There could be a significant change in external perception given the starting point today," he says, which could lead to "some light at the end of this long, dark tunnel".
2. UK income but multinational origin
Ben Peters, manager of the Evenlode Global Income Fund, notes a shift towards the UK market, with multinational businesses like Diageo PLC (LON:DGE) and Experian (LON:EXPN) offering attractive valuations.
"These companies all happen to be UK-listed... trading at very attractive valuations," he says.
3. Real estate's great consolidation
Rick Romano, manager of PGIM Global Select Real Estate Securities Fund observes a sell-off in real estate is creating a "great consolidation" opportunity as the potential rate of return for properties based on their market value is near the highest levels in recent years.
He forecasts a rebound driven by well-capitalised firms buying undervalued properties.
"We believe we are in the early stages of a ‘great consolidation’ in the real estate market. Well-capitalised firms have a long shopping list of attractive properties, which they can now buy for steep discounts," he says.
"While consolidation has already started in many areas, we expect to see increased M&A activity and strong privatisation trends in the REIT sector as the macro environment stabilises and credit markets open up, which should raise REIT asset prices and fuel a strong rebound."
He also sees investment opportunities being driven by structural shifts in occupier trends, including digitalisation, demographics, and decarbonisation.
4. A world-class but overlooked US stock
Contrarian opportunities are highlighted by Neil Denman of Sarasin & Partners, who sees an opportunity in world-class companies undervalued by market trends.
Texas Instruments Inc (NASDAQ:TXN), with its growth in semiconductor manufacturing, exemplifies this potential.
TI is currently adding to its entirely US-based semiconductor manufacturing capacity in Texas and Utah as part of US turning away from China, meaning its chipsets are "likely to be in demand as we see increased utilisation through automation, connected equipment, and energy saving device management".
TI also offers a 3.4% dividend yield, which has grown by a compound rate of 13.8% over the past five years.
"We are extremely happy to collect this attractive dividend and wait for the longer-term thematic thesis to play out," Denman says.
5. Renewables: yield and opportunity
Charlotte Cuthbertson from MIGO Global Opportunities Trust highlights renewables as a sector ripe with opportunity, offering yields up to 7%.
Investments in trusts like rooftop solar specialist trust Atrato Onsite Energy PLC (LON:ROOFA), she notes, offer less risk and solid returns.
"Unlike some of its peers, its revenue is nearly all contracted, so it is less risky than those that sell power at market – or merchant – prices. Atrato Onsite Energy trades on a similar discount to other trusts, but without that power price uncertainty."
6. Biotech: Ripe for M&A
Ailsa Craig, co-lead manager of the International Biotechnology Trust, flags potential in small and mid-cap segments of biotech for M&A.
She predicts a rebound in the sector, fueled by pharmaceutical firms seeking acquisitions.
"The biotech sector has historically been through cycles of favourability for investors. Rises in interest rates since 2022 have pushed down valuations, with the sector lagging the wider market during this period.
"The companies that have been most impacted are the younger, development-stage businesses that are yet to achieve profitability and will be relying on external financing in the next five to ten years."
Large pharmaceutical firms looking to acquire cheap biotech companies to fill clinical pipelines as existing drugs’ patents expire has historically been a precursor to a wider rebound in biotech, she notes.
8. Europe Small Caps: turning point?
Hywel Franklin of Mirabaud Asset Management points to European small caps nearing a turning point after the historical drawdown that we have seen in the past year.
As economic pressures recede, he sees these firms as agile and capable of self-driven improvement.
"Many of the factors which hit smaller companies hard, such as higher borrowing costs, higher wage bills and sharp increases in raw material costs, are now going into retreat, giving companies an opportunity to rebuild their margins."
9. China and EMs: tailwinds and targeting
Anh Lu, portfolio manager of the T. Rowe Price Asia ex-Japan Equity strategy, highlights China, where she sees tailwinds returning, including undervalued sectors stabilising and a renewed push for industrial self-sufficiency.
"Going forward, we expect fundamental factors to reassert themselves once more and an environment that is more conducive to bottom-up stock selection."
On the self-sufficiency point, she says: "Geopolitical tensions have forced China to rely less on imports and to become more self-sufficient via accelerated innovation, especially when it comes to making semiconductors, software, autos, and a host of industrial products."
Alison Savas, investment director at Antipodes Partners, points to other emerging markets, even though EM equities as a whole have disappointed.
"This is why we believe investors should take a highly targeted approach to the region," she said, with confidence building in emerging economies like Indonesia, Brazil and Mexico, "where valuations are cheap and economic fundamentals are improving".
10. Preferred security discounts
Bill Scapell of Cohen & Steers finds high-quality preferred securities appealing, with yields of 7-9% on offer.
He sees potential for capital appreciation in addition to attractive income rates.
11. Canada: overlooked stability
Greg Eckel from Canadian General Investments PLC (TSX:CGI) champions Canada for its stable financial system and diverse opportunities.
"Canada is often overlooked as an investment opportunity by foreign investors but has shown itself to be a rewarding experience for those willing to participate in the offering," he says.
"In these days of heightened geopolitical risks, Canada also offers a relative calm and does not have the level of internal political polarisation that can disrupt the investment opportunity.
"The main benchmark for Canadian equities, the S&P/TSX Composite Index ranks very well in terms of performance over the long term relative to its global peers and offers not only a diversification factor for foreign investors in the theoretical model but does so with the added potential for adding absolute return."