5 hotspots for contrarian investors

Important information: the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

So how do you spot them? Value investors start with the numbers, filtering stocks that look cheap on their favoured metrics. A common one is to compare share prices with each companies known and future estimated profits, known as the price to earnings or p/e ratio.

Cheap UK industries

The contrarian might start by filtering industries. The FTSE 100 is on a forward price-to-earnings ratio of 12, according to Goldman Sachs research (Jan 31). But energy stocks look far cheaper at 9.2, insurance is at 8.9 and banks are at 8.1. Fidelity’s Alex Wright, another notable value investor, backs NatWest and Standard Chartered as well as insurers, including Aviva, Just Group and Phoenix Group. Richard Buxton, a retired fund manager, has recently been vocal in his support for insurers, such as Prudential, Legal & General and Phoenix, highlighting that the dividends keep rising but the price doesn’t, meaning a higher and higher yield. 

Yield, of course, is also a measure of value, albeit a crude one. L&G’s share price implies a yield of 8.5% and Phoenix is at 10.2%. Yields are not a promise of payment; dividends can be cut.

If chasing individual stocks is not your cup of tea, consider value funds. Fidelity’s Select 50 list of favoured funds includes Dodge & Cox Worldwide Global Stock Fund and Schroder Global Recovery for global value plays. Fidelity Special Situations, Alex Wright’s UK value-focused fund, is an option for a UK focus.

Contrarian countries

I have long leaned to value in my portfolio. One top level way to do this is to think about how your money is spread geographically.

If you invest in a global tracker fund, it will likely have around 70% in the US with smaller amounts spread across other countries and regions. It is designed to replicate the performance of those stock markets. The example below is the Legal & General Global Equity Index.

Source: Fidelity International, data as at 31.12.24

I have, for several years, skewed my portfolio toward countries and regions that look cheaper. A good measure is CAPE, a more advanced version of the p/e ratio where the numbers are averaged over 10 years to try and iron out kinks from business cycles. (In the clumsy jargon, it’s the cyclically-adjusted price-to-earnings ratio, hence CAPE).

CAPE is popular because history shows that better returns follow in the decades when the ratio is low, and gains are worse when the ratio is high. There’s no guarantee that pattern will play out in the future, but it’s worth considering.

 The table below sets out ratios for major countries and regions, and the difference from the 15-year median for each area, according to analysis by Schroders.

Source: Datastream, MSCI and Schroders Strategic Research Unit. 31 Jan 2025.

There are always reasons for markets being cheap or expensive. Those ‘stories’ may be that Brexit has permanently lowered the growth potential of the UK; that Europe’s high growth days are over, especially without dominant tech players; that worsening geopolitics and deglobalisation will leave emerging markets languishing. In contrast, American dominance, especially in big tech, will only snowball and that it will permanently justify its high valuation.

The value investor treats each story as just that - a story. They put aside the cognitive biases we all hold, the biases that make a story a fact.

The value investor may seek empirical evidence. For instance, the UK is on a p/e of 12 compared to 21 for the US - and it offers an income yield of 3.6% compared to 1.2% for the US.

This differential spurred me to steadily increase in the proportion of my money invested in the UK in recent years, rising from around 10% to 22%.

My geographical mix

Source: Fidelity X-ray portfolio tool, powered by Morningstar. 28 Feb 2025

• Read: I ‘X-Rayed’ my portfolio - this is what I’m changing

This decision has not paid off so far, with the US continuing to power along. However, the performance of Magnificent 7 stocks - the US super-giants - has wobbled in recent weeks. Meanwhile, the FTSE 100 has been a strong performer in 2025, rising by nearly 8%in the first two months. Perhaps the story is changing.

Among other countries, I sold off my strong performing Indian funds last year and bought the Fidelity China Special Situations investment trust. India’s CAPE ratio reached an alarming 41 last year, according to research by Barclays. China’s CAPE was just 12 last year and has since risen to only 13, despite a powerful rally since the autumn.

On a more day-to-day level, there are all sorts of contrarian observations that could help an investor.

Car contrarianism

There is a potential hotspot of contrarian opportunity among car makers. Most have been a poor investment in modern times bar one: Tesla. Devotees believe the superiority of its electric cars could wipe out old world rivals. Mercedes-Benz, which has made cars for nearly 140 years, a brand so premium that it prompted singer Janis Joplin to ask God for one, is one of those ‘dying’ brands, according to this story. Throw in the threat of US tariffs on German car makers and you have the perfect storm.

The valuations reflect these highly polarised stories. Tesla shares stand on a stratospheric p/e ratio of 133, having recently risen above 200. Mercedes shares trade on p/e of 5.5. Tesla offers no yield; Mercedes is forecast to pay 9%. The valuation inspired me to buy Mercedes shares last year.

Commercial property

The office demand story is, I think, one we all know. Office demand cratered during Covid and has only partially recovered. Likewise, future demand for shopfloor space is weak amid the long-term shift from bricks to clicks. Investment trusts, a popular way to invest in commercial property, have seen their discounts widen. Most trade at historically wide discounts to the estimated value of the properties they own.

But something may be shifting in office demand. A report by agent Knight Frank rents in the City of London surged 16% during 2024 with companies encouraging workers back to the office. Looking at the flow of ‘days in the office’ announcements, the trend may gather pace in 2025.

I have held the UK-focused Schroder Real Estate since late 2023, which today trades on a 25% discount. However, it leans more towards industrial sites and retail warehouses rather than office space in the City. Single stocks offer exposure to different parts of the property sector. Names there include Land Securities, Hammerson and Great Portland Estates, although it is a specialist niche and careful research is advisable.

The commercial property fund pick from our Fidelity Select 50 is iShares Environment & Low Carbon Tilt Real Estate Index fund, an index-tracking fund that invests in property companies listed globally. It includes sustainability considerations, such as reduced emissions, in the investments it selects.

On that note… 

Energy

The story on alternative energies has flipped in recent years. When sustainability concerns soared during Covid, investors believed wind and solar were the future. That enthusiasm has ebbed and taken a particular battering from a political shift in the US - ‘drill baby, drill’!

Shares in Greencoat UK Wind, an investment trust, traded at a premium five years ago. They recently sank to a near-30% discount. The trust made the top 10 of most bought funds in January on the Fidelity Personal Investing website, and on other platforms.

And finally… value or value-lite investor?

To be a pure value investor, you need to keep your head when others lose theirs. This can be hard when sentiment and events lurch against the investments you hold. You need a certain inner belief and calm.

It may be more palatable to be a value-lite investor - to at least tilt and tinker around the edges of your portfolio to increase the chances of buying low and selling high. Surely that should be the aim of any DIY investor, conformist or non-conformist.

• Watch: How to (really) be a contrarian investor

This article was originally published in This is Money.

Past performance is not a reliable indicator of future returns

Source: FE, total returns in GBP from 4.3.20 to 4.3.25