The beginning of a New Year is often an opportunity for shoppers who are ready for some retail therapy courtesy of the January (investment) sales.
Stores everywhere will be looking to cut prices across everything from clothing to technology, and consumers are more than happy to splurge, as they seek solutions to the post-Christmas January blues.
The sales can last a few weeks and are often a great time to find goods that perhaps didn’t look so attractive prior to Christmas.
There’s a bit of that going on in the investment world at the moment. With interest rate rises appearing to have drawn to a close and inflationary pressures ebbing, some of the doomsday scenarios envisaged at the start of last year now seem less likely. We’ve even started to see a bit of an improvement in performance across markets.
We are by no means out of the woods, but the hope is that market returns will be broader than we saw in 2023, when the mega-cap technology stocks dominated returns.
With this in mind, I thought I’d look at a few sectors where I feel there may be opportunities for long-term investors – given the significant challenges they have faced in recent times.
UK Smaller Companies
The UK is fundamentally unloved and therefore cheap to invest in versus many other parts of the globe. UK small-cap stocks, in particular, are trading at multi-year lows.
They’ve seen a significant correction over the past couple of years, particularly relative to larger companies, and look very attractively valued. UK small caps trade on 8x forward price to earnings versus their 1998-2023 average of 14x. Price-to-earnings measures how much investors are willing to pay for a company relative to its current earnings, which reflects investors’ expectations of future earnings growth.
There are plenty of excellent active managers we believe can tap into a market full of opportunities at depressed prices. Examples include the Liontrust UK Smaller Companies or Unicorn Smaller Companies funds.
Infrastructure
The average fund in the Investment Association infrastructure sector fell almost 5% in the past 12 months as rising yields put pressure on the asset class. But if we are at the end of a rate-hiking cycle I’d expect the sector to perform better in 2024 – while its ability to pass on the cost inflation must not be ignored.
Here I’d look at the M&G Global Listed Infrastructure fund, managed by Alex Araujo, which can include anything from utilities and toll roads to health, education and civil buildings, as well as mobile towers, data centres, payment companies and royalties.
An alternative would be the Schroder Digital Infrastructure fund, which invests in macro towers, fibre optic cables and data centres amid the wider trend of the world’s sustainable transition to a digital economy.
Commodities
Commodities were one of the big losers in 2023. Base metals suffered from rising interest rates, with aluminium, nickel, lead, and zinc prices all falling. Nickel fell the most, with a loss of over 40% for the year, and zinc posted a double-digit percentage loss.
Two exceptions were oil and uranium. The former shined amid fears of production cuts by OPEC and new conflicts in the Middle East. The latter was driven by an acceleration of nuclear programs by many countries around the world.
But the sector’s strength long-term is as strong as ever, particularly as many of these metals are needed in the quest for decarbonisation. Here I’d consider the WS Amati Strategic Metals fund – a high conviction portfolio with an experienced management team who use their global network of CEOs, brokers, commodity traders, mining engineers and geologists to unearth the best opportunities in the sector.
Fixed income
Plenty of asset allocators are forecasting a bumper year for fixed income as interest rates fall and inflation is tamed. However, there are nuances.
Spreads for corporate bonds over government bonds are low, and leave little margin for error should the economic climate worsen (spreads are the difference in the yield on two different bonds or two classes of bonds). There are also risks in government bond markets, particularly around the level of debt developed market countries have built up over the pandemic.
Here I’d look for an experienced manager like Artemis Corporate Bond fund manager Stephen Snowden, whose fund currently distributes a yield of 5.3%, or a strategic bond, which has the flexibility to invest across various types of bonds. A good example here might be Jupiter Strategic Bond, yielding 5.5%.
China
The final choice is perhaps the most controversial. The Chinese economy has had a wretched three years as government intervention, geopolitical instability and a debt bubble in the property sector have all combined to paint a pretty unpleasant picture for the economy.
However, investors have started to become increasingly hopeful that the Chinese government will overcome its reluctance and announce new measures in the face of weakening economic growth.
Ultimately it may become too cheap to ignore, with the average fund in the Investment Association China sector down 46% in the past three years. There are still plenty of reasons not to invest in China. However, bull markets seldom start when the environment looks rosy.
Here I would consider the FSSA Greater China Growth fund as a good starting point, having consistently performed over a long period. The fund focuses on individual company research, with manager Martin Lau investing in quality companies with barriers to entry, pricing power and sustainable growth.
Darius McDermott is managing director of Chelsea Financial Services and FundCalibre
