INVESTORS are being urged to pick up stocks in unloved sectors that are set to rebound following a rally on global markets last week.
Experts are tipping Japanese equities for the first time in a year, and undervalued companies in Britain, Europe and America.
The FTSE 100 hit an eight-month high last week and the S&P 500 index of top American shares rose above 1,400 for the first time since 2008 while the Dow Jones Industrial Average rose above 13,000, hitting its highest point since December 2007.
Markets were boosted by figures from America showing that unemployment claims were at a four-year low, fuelling optimism about a recovery in the economy.
However, investors remain nervous about putting money into stocks. Fears of a disorderly default by Greece and stagnant economic growth in the UK and Europe saw more than £4 billion withdrawn from developed market funds this year, according to EPFR, an analyst.
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Max King, a multi-asset portfolio manager at Investec, said this was a signal to buy. “Investors remain nervous about the eurozone crisis and a slowing global economy, so strong markets this year have not been led by a significant flow of new money into funds,” he said.
“Instead, markets are being driven by growth in company earnings and dividends. It is unusual for such a rally to be treated with such scepticism by retail investors, but markets are likely to rise further.”
Some of the money being withdrawn from developed markets has flown into emerging markets, which have seen a net increase of £12.2 billion this year. But analysts say investors should not abandon developed markets. King forecast the S&P 500 will hit 1,500 this year from its current level of about 1,400. The FTSE 100 is expected to rise to 6,700 within 18 months. Last week it closed at 5,965.
Japan
Investors have withdrawn more than £1 billion from Japanese funds this year, according to EPFR. In the week ending March 7 alone, £283m was pulled out — the highest weekly figure since mid-December.
The Japanese stock market, though, has risen 20% this year, beating America (9.4%), Britain (5.6%) and Germany (16.4%), according to MSCI, the data company. Despite this, it remains about 50% below its pre-credit crunch peak.
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JP Morgan, the investment bank, turned bullish on Japan for the first time in a year last week, while Schroders Private Banking said the economic recovery since the tsunami, boosted by a weaker currency, had improved long-term prospects.
James Maltin at Rathbones, the adviser, said: “If you compare share prices to the value of companies’ underlying balance sheets, Japanese equities appear to offer relatively good value.” He likes the GLG Japan Core Alpha fund, up 12% over a year.
James Butterfill, equity strategist at Coutts, the private bank, likes Japanese technology companies that have underperformed relative to the Japanese market. He tips Canon, up 16% this year.
Britain
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The country’s economy was put on negative watch last week by Fitch, the second rating agency to warn that Britain may lose its top-notch credit rating.
However, experts say Britain presents one of the best buying opportunities for investors. It is one of the cheapest markets on a price to earnings (p/e) ratio basis trading at 10.2 times earnings against 10.7 for Europe and 12.8 for America. The long-term average for Britain is 13.8.
James Smith of the Ignis Global Growth fund has started buying Tesco despite the supermarket’s recent poor sales performance and the departure of its UK chief executive. The stock is down 19.3% this year.
Simon James of Gore Browne, the investment manager, likes Kier, the engineering and construction group. It is down 10% this year. For a fund, Adrian Lowcock at Bestinvest, the adviser, likes M&G Recovery, which is up 10% this year.
Europe
The Greek debt crisis has kept investors out of Europe, but experts say there are opportunities as many stocks generate profits from outside the eurozone.
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Patrick Connolly at AWD Chase de Vere, the adviser, said: “The prices of good-quality profitable firms have been pushed down because of the general negative sentiment in the region.” He likes the JP Morgan Europe Dynamic fund, up 13% this year.
Mick Gilligan at Killik, the broker, likes the Schroder European Alpha Plus fund, which is down 0.7% this year. Thomas Becket at Psigma Asset Management likes Novartis, the Swiss pharmaceutical company, down 5.8%.
Becket also tips Total, the French oil company. “With the amount of cash it holds, we expect it to continue paying high dividends and potentially make sensible acquisitions,” he said. Total is up 7% this year with a yield of 5.4%.
America
Despite the recent rally, Becket says there are opportunities. Though the market is more expensive than other developed markets, trading at a p/e of 12.8, it is still trading below its long-term average of 15.5.
He likes UPS, the delivery company, up 7.9% this year. For a fund, he tips Legg Mason US Equity Income, up 10% this year.