Relative values for UK equities plummeting close to 30-year lows versus global peers has created a hunting ground of investment opportunities, according to fund managers and advisers.
UK equities fell sharply at the end of last year, with the FTSE All Share index posting a negative return of 9.5 per cent and a 23.6 per cent fall in price to earnings ratios (P/E)
According to Henry Dixon, manager of the Man GLG UK Income fund, the derating of share prices by 23.6 per cent is the third worst in percentage terms over a 28-year period.
He said: "The key question now is whether this derating and starting valuation provides us with enough of a margin of safety for the year ahead.
"Firstly, as we look at the major deratings since 1990, we would note that all have been greeted by a rerating of 18 per cent on average in the following year, and an average total return of 24 per cent."
The Man GLG UK Income fund is currently overweight in sectors including real estate, insurance and materials and Mr Dixon said the statistics for this year remain strong.
He said: "Housebuilders, for example, are almost all in strong net cash positions and while we acknowledge the more opaque nature of the banking sector’s balance sheet, we take great comfort from the fact that the loan to deposit ratio is at levels not seen since the mid-1980s.
"The bond portion of the fund is also trading at a meaningful discount to par which has the potential to add pleasing capital upside to what is an attractive running yield."
Alex Wright, manager of the Fidelity Special Values fund, agrees that the deeply unloved status of the UK equity market has created an exceptionally fertile period for contrarian stock picking.
He said: "In today's environment I am struck by the sheer number of stocks across different sectors whose valuations suggest significant asymmetry of risk and reward over the next two to three years.
"Among the sectors where I see considerable opportunities is financials. I now own three UK life insurers - Phoenix Group, Aviva and L&G - where the average dividend yield for 2019 is well over 7 per cent.
"This is well above historic averages, reflecting the market's concerns around asset quality and the effect of widening credit spreads on life insurer balance sheets.
"The work done by Fidelity's insurance specialist suggests that the assets held by UK life insurers are significantly higher quality and more internationally diversified than the market is discounting.
"The dividends should be payable even in a downturn, and the long-term growth opportunities for the life insurance sector remain attractive, both in terms of organic growth and consolidation."
Alastair Mundy, manager of Temple Bar Investment Trust, has also considered cyclical sectors and financials as areas offering attractive opportunities.
He said: "UK banks have become something of a pariah sector but we have seen significant changes and improvements over the past decade and yet they remain on undemanding valuations.