Which market out of Germany, Japan, the US and UK has performed worst over the past five years? In terms of main the indices it is the UK, where the FTSE 100 has only gained 18.9 per cent (capital return five years to 2 April), although the FTSE All-Share has performed slightly better at 25.6 per cent.
But the German Dax, US S&P 500 and Japanese Nikkei 225 are up 91.9, 75.4 and 71.8 per cent respectively. So should we be looking in our own back garden for bargains?
Of course overseas index performance does not necessarily tell the whole story for sterling investors, because currency will have an impact unless a hedging strategy has been adopted.
The euro has depreciated by 22.5 per cent versus sterling and the US dollar is almost unchanged, while the yen is 29 per cent cheaper over five years. So even with the currency impact, the UK market has underperformed considerably.
UK OUT OF KILTER
This seems out of kilter with relative economic performance, but there may be reasons for it. The FTSE is much more internationally oriented (and mining and oil-heavy) than other developed markets. The starting point and the depth of fall during the recession has also had an impact. But is the UK undervalued?
We would highlight two areas worth examining in the investment trust arena. First, equity income, for so long trading at a premium, is now looking much better value. Possibly this is a response to concerns about interest rate rises.
Temple Bar is on a discount of 4 per cent (in the interests of transparency, I worked with this trust many years ago), and while performance has been lacklustre of late, the company does have plenty of firepower to take advantage of any market setbacks; the dividend should be very secure as well. A very (perhaps overly) conservative board may also be some comfort.
The top 10 holdings include the two oil majors Shell and BP and three banks. There is scope for recovery here - the problem for manager Alastair Mundy is the timing of the setback he expects to enable him to invest his surplus cash. Further market strength will continue to be a drag on yield and relative performance.
The other area we would look at in the UK is the mid-cap sector, which should also give a slightly purer exposure to the UK economy. Perhaps it is wrong to call this contrarian (the performance has been pretty good), but at the end of 2013 Schroder UK Mid Cap was trading at par; now it is on a 14 per cent discount. Admittedly this wider discount is probably closer to the long-term average, but the trust has a good long-term record.
One of the big issues for us as contrarians is how far to ride along with the crowd once they have joined us. We have been pushing the European sector for a while; JPMorgan European Income has been one of our favourite trusts, and is now up 24 per cent excluding the yield since we mentioned it in October last year.
The temptation may be to bank this and move on; however, while Europe as a theme is a lot more popular than it was six months ago, with quantitative easing only just beginning to hit its stride there may be more who want to join the party. Against this, the trust's discount, which for a long time was much wider than many of the income trusts, is now more in line with the equity income sectors.
MINERS IN THE COLD
The other side of the coin for contrarians is how long to stay out in the cold when everyone else is having fun indoors.
BlackRock World Mining is a case in point; we have been too early in to this sector, and the trust is down 22 per cent (to 2 April) since October last year, although that does include going ex of a pretty chunky dividend of 14p (to our relief this was maintained at the same rate as last year), which cushions the blow a bit.
The reasons why this sector may be attractive still persist: strong cash flow even at reasonably depressed prices, the potential recovery of commodity prices and the possibility of some merger and acquisition action. We stay out in the cold for the moment.
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