One-off investment opportunities have emerged in a number of unloved areas of the market for investors at this late point in of the cycle, according to River and Mercantile Asset Management’s Hugh Sergeant.
While the low rate environment and quantitative easing have propelled markets forward since the onset of the global financial crisis, not all assets have risen.
Performance of MSCI AC World over 10yrs
Source: FE Analytics
Sergeant (pictured), manager of the £443.6m River and Mercantile Global Recovery fund, said that there are several areas of the market where uncertainty has depressed valuations. 
This, he said, has created valuations at “generational low points” and at extremes as they were during the global financial crisis or TMT (technology, media & telecommunications) bubble.
“We are positioned to exploit these extremes that have arisen over the last few years, namely value, uncertainty and recovery,” he said.
“Add to that a better environment for our small and mid-cap stock picking and, at some point, we will no longer be trying to keep up with a bond-driven equity market.”
Below, the fund manager highlights some of the most extreme valuations currently seen across global equity markets.
The first one-off opportunity identified by Sergeant is equity markets broadly, which he said are now the cheapest they have been in almost 150 years.
“If one looks at the yield gap between equity markets in the UK, Germany, France and Japan – all markets we favour – minus the yields on their respective 10-year government bonds, then the last time you could buy equities so cheaply compared to government bonds was 1872,” he explained.
“This equity yield premium suggests these equity markets are good value; their dividend yields are attractive in absolute terms and generationally good value relative to government bonds.”
Nowhere is this more apparent than in the value area of the equity market, said Sergeant, where stocks are trading at extreme valuations as the out-of-favour style continues to lag their growth counterparts.
Indeed, the fund manager said that on a global and European level value is trading at significantly lower valuations relative to growth stocks.
As the below chart shows, the MSCI The World Growth index has made a total return of 294.60 per cent against a gain of 182.85 per cent for the MSCI World Value index.
Performance of indices over 10yrs
Source: FE Analytics
“At the time when the TMT bubble went pop no one expected us to ever go back to such an extreme relationship but, only 19 years later, here we are again and no one is negative on growth whilst value managers are falling by the wayside,” said Sergeant.
“This has now reached all-time highs, flying past previous dot.com bubble peaks. In other words, value has never been this cheap relative to growth before.”
Another out-of-favour area can be found in banking stocks, which have taken a long time to recover from the fallout of the financial crisis.
As well as the bad debts and government support that weighed heavy on the sector since the global financial crisis, there has also been a significant amount of new regulation implemented to prevent a repeat of the crisis.
As a result, investors have tended to avoid the sector as it continues to restructure.
“Yields on European banks versus bond yields are now trading at a higher yield premium than at the height of the global financial crisis when the financial system was in meltdown,” said Sergeant.
“Whilst one can argue over the financial strength of individual banks it would seem to be factually correct to observe that the European banking collective is in much better shape today than at the height of the crisis. It has much less lending leverage, is better capitalised, and has clearer and lower-risk business models.
“Indeed, it is also generating significant surplus capital that can be distributed back to shareholders.”
Finally, Sergeant said that investors can find extreme valuations among smaller companies that have underperformed as they have been caught up in fears about the global economic outlook.
“The Russell 2000 performance versus the US index, for example, has dropped off as the ISM new orders index weakened,” he explained. “It now trades towards a cyclical low point
“This has left small caps in the US no longer commanding a P/E [price-to-earnings] premium to large caps, with relative valuations at a post TMT bubble low.”
He added: “The same phenomenon can be seen in the UK, with the small-cap index underperforming significantly over the last year, back to the relative low reached in the aftermath of the Brexit referendum.”
Sergeant has managed the R&M Global Recovery fund since launch in March 2013 and invests in international companies that he believes will benefit from a recovery in profitability over the medium and longer term.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
Since launch, it has made a total return of 114.91 per cent, compared with a gain of 103.34 per cent gain for the MSCI AC World index and a return of 89.60 per cent for the average IA Global peer. It has an ongoing charges figure (OCF) of 1.16 per cent.