As the bull run slows down, what does the contrarian investor do now?

30th April 2013


The FTSE World index is up 13.67% for the year to date, with all the major markets in positive territory. Those investors who prefer a bargain are finding slimmer pickings, with the market in aggregate looking increasingly well-valued. Nevertheless, the rising tide has not floated all boats. Where should those of a contrarian inclination be looking asks investment journalist Cherry Reynard.

A first port of call might be to look at the portfolios of self-proclaimed contrarian investors. And here mining and industrials feature heavily. For example, Paul Mumford, manager of the Cavendish UK Opportunities fund, has recently been buying into the mining sector, which he believes to be extremely cheap. He has bought into stocks such as Antofagasta, Medusa Mining and Philippine Gold Mining. Industrials feature heavily in Investec Special Situations manager Alistair Mundy’s portfolio as he told. This Investment Week piece suggests that the trend may be spreading more widely as fund managers are increasingly tempted by beaten up valuations in the mining sector. It points out that slower-than-expected Chinese growth data and talk of the end of the commodities ‘supercycle’ have pushed the STOXX Europe 600 Basic Resources index into a bear market last week, with a 21% fall since the start of the year.

Mumford cites not only rock bottom valuations, but the increasing potential for merger and acquisition activity in the sector. Smaller groups look vulnerable to larger predators with cash on their balance sheets.

Mark Dampier, head of research at Hargreaves Lansdown, believes that the recent run of poor performance may just be a setback for the sector, which could recover: “Mining, energy and resources funds dominate the bottom of fund performance tables over the year to date. It is a similar picture if you look back over the past one or two years. Prior to this many were performing exceptionally well. Many commentators suggested we were in the midst of a 30-year super-cycle where industrialisation and urbanisation in developing countries was driving demand for, and consequently the prices of, commodities higher. That said, as with most long-term trends there will be setbacks and corrections along the way and perhaps this is just one of them, the previous one being in 2008.” as he told FundWeb.

Geologist Malcolm Shaw highlights some specific stock opportunities among smaller mining companies here on Seeking Alpha.

That said, as with all contrarian calls, investors must decide whether they are catching a falling knife, whether the super-cycle really is at an end and whether valuations fully reflect the new reality.

Another key area for the contrarians is ‘bad’ retail. ‘Good’ retail – i.e. high street names that have been unloved because of the pressure on the consumer, but are decent brands, with decent business models and stand to benefit from their peers going bust – has largely recovered this year. Marks & Spencer, for example, is up 15.32% over the year to 30 April, ahead of the 12.55% rise in the wider FTSE 100. J Sainsbury is up 24.36% over the same period. But bad retail – where there is still a question over the business model, or strategy, or their Internet presence – is still languishing and among these stocks there may be opportunities.

The Motley Fool highlights WM Morrison, saying that the widespread pessimism among analysts towards the stock provides an opportunity for investors. The group grew fast, but neglected its online presence and non-food offerings and has also lost out to budget rivals such as Lidl or Aldi. However, it is addressing these issues, having started to build an online offering with Ocado.  reports. This is not yet reflected in the shares, which have substantially trailed the wider market, up just 3.53% over the past year.

Mumford has had significant holdings in the retail sector over the past year, bought Tesco on its first profits warning. He says that the key is to avoid those sectors where the business model is becoming increasingly obsolete in the face of online competition, such as electrical goods retailers.

Apple has increasingly looked like it has lost its golden touch, but BGC tech analyst Colin Gillis went against the tide of Apple naysayers in the Wall Street Journal recently, suggesting that much of the bad news surrounding the tech juggernaut has already been priced into the stock and the company could benefit from new and refreshed products later this year. Wall Street Journal It is difficult to see Apple as a contrarian play, but sentiment has certainly been against it recently.

Another area for the contrarian’s attention would be the BRIC markets (Brazil, Russia, India and China). The poor performance of the BRIC markets has dragged down the wider emerging market indices for the year to date: This Marketwire piece points to the disparity in performance between the ‘core’ and ‘peripheral’ emerging markets: “The Russell Emerging Markets Index is down (-1.1%) year-to-date as of April 23rd. One contributing factor may be the performance of its BRIC country constituents Brazil, Russia, India & China, all which have had negative year-to-date returns. And all BRIC country constituents except Brazil underperformed the Index for this same time period. Other negative year-to-date country constituents within the Index as of April 23rd included Korea (-6.4%), Colombia (-6.8%), Egypt (-9.0%), South Africa (-9.4%) and Poland (-10.5%).

“On the other side of the spectrum, country constituents the United Arab Emirates (+31.7%), the Philippines (+22.5%) and Thailand (+20.1%) have all enjoyed strong returns year-to-date as of April 23rd relative to the Index.”

The economic outlook for China, Brazil, Russia and India may be no better than it was a year ago, but relative valuations look very much better. Rob Burdett, joint head of multi-manager at F&C Asset Management, says that having been long underweight the sector, valuations are once again tempting him to look at emerging markets.

These areas are likely to be the last to be dragged up as the bull market establishes itself. If it is derailed by, for example, more problems in the Eurozone or weakening economic data, expect these parts of the market to suffer. Cheap shares can always stay cheap, but the rewards can be rich for the brave.

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