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.
"New management, better balance sheets, improved regulation and the payment of fines has led to them becoming profitable institutions.
"There are also some compelling opportunities to be found amongst retailers, a sector which many investors wouldn’t touch with a bargepole at the moment.
"The rise in online shopping and some of the valuations of these stocks would suggest it’s the end of the UK high street – but we think that this has created buying opportunities in stocks like Next and M&S."
Adrian Lowcock, head of personal investing at Willis Owen, agreed that opportunities exist with UK equities.
He said: "Areas of the UK stockmarket which are more domestically focused have been hit hard by Brexit uncertainty what has added to their woes is further concerns on the health of the global economy.
"The housebuilders and banks are very much shunned due to Brexit and their domestic focus.
"While property prices have come off their peaks in certain parts of the market we have yet to see a collapse or indeed this trend spreading across the rest of country.
"Property could rebound strongly if we get past Brexit. Banks are in a similar position, a successful solution to Brexit could easily lead to a rise in interest rates which would boost margins."
He added that the retail sector is interesting, as its woes are not specifically Brexit-related.
Mr Lowcock said: "The sector is hugely competitive and has been struggling against the big on retailers for the past few years as well as changes to shoppers behaviours.
"The survivors are able to gain market share but until the bloodletting is complete investors often just adopt a wait and see approach to the sector."
The latest Quarterly Brexometer Index from State Street, which looks at investor sentiment towards Brexit, found that appetite for holdings of UK assets has polarised during the first quarter of 2019.
Investors looking to increase allocations to UK equities rise to 19 per cent, the second highest figure since the third quarter of 2018, while those planning to decrease their exposure to the asset class rose to 22 per cent.
Neil Mumford, chartered financial planner and director of Milestone Wealth Management, said: "With the uncertainty of Brexit still hanging over us, the UK is the worst performing developed market over the last three years. It has been shunned by overseas investors and many multi-managers are underweight the UK.
"However, it is home to some of the world’s biggest names and once we have a resolution to our exit from the EU, I feel that over a reasonable time horizon we will see a significant rally in UK equities."
Mr Lowcock added: "We do like the value areas of the markets, however growth still seems to be holding the upper hand for the time being as any value rallies haven't lasted long in recent years.
"That said they are becoming increasingly attractive and if investors are willing to hold their nerve I think it will be a rewarding area to invest in the medium and longer term."
Jenny Turton is a freelance journalist
