Diamonds in the rough – UK stocks offer substantial value

UK stocks are not in a purple patch, and that is being kind. The tumultuous markets of the past few years have forced valuations to dark depths, with only Spanish, Turkish and Russian assets faring worse.

When compared with global peers, UK stocks have plunged to 30-year lows – but every cloud has a silver lining. While rolling in the doldrums, these companies could present an exceptional opportunity for the more contrarian investors out there.

Ongoing Brexit negotiations, quantitative tightening and a rise in bond yields have sent investors running scared. Essentially, central banks have turned off the taps that were keeping markets afloat, just when they might be needed the most.

Towards the end of 2018, the FTSE All Share index posted a loss of 9.5% and a fall of 23.6% in share price-to-earnings ratios.

So what now? Investors face a stark choice: run for the hills or relish the opportunity.

For those willing to don their deerstalker and magnifying glass to begin their Sherlock Holmes-style hunt for clues, portfolio-boosting stocks can be uncovered.

Your capital is at risk.

Domestically focused firms are a good place to start, particularly real estate. Valuations here have been depressed since the EU Referendum in 2016, but with a possible end on the horizon – whether that be crashing out of the European Union with no deal or extending Article 50 – the UK real estate sector could see a turnaround in fortunes.

Financials, particularly life insurers, are also on the radars of the more contrarian stock pickers.

According to Bank of America Merrill Lynch, which analysed forward price-to-earnings and price-to-book ratios, alongside price-to-operating cash flow ratios, financials have an implied upside of 38%.

Using the same valuation metrics, energy stocks are also harbouring opportunity, with an implied upside of 65%.

The demand for energy has been increasing rapidly over the past two years, but as crude oil prices plunged in the final months of 2018, so too did energy stocks.

At the end of last year, Exxon was down just over 8%, while Chevron fell 9.5% and names such as these, that offer a decent yield as well as potential value, could be a good place to dip a toe in.

The most important thing, however, is to ensure every potential opportunity is fully researched. Among the diamonds are also lumps of coal, so it pays to be aware of the traps.

Your capital is at risk.

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