In the second instalment of a short series, managers tell Investment Week which value plays still look attractive this year after a strong run.
Alex Wright, portfolio manager, Fidelity Special Values trust
Given the extreme starting point, it is certainly possible the value rally we have seen in recent months could have further to go, particularly if inflation and growth expectations continue to find a new base. In this environment, investors would be wise to take a diversified approach that includes some value sectors of the market.
Infrastructure is a good example, and a sector I have increased exposure to across my portfolios. US President Donald Trump's election has kick-started renewed appetite for infrastructure investment in the West, albeit from an extremely low base.
Big infrastructure companies such as CRH should benefit from this investment. The company and its peers stand ready to supply the materials necessary for major work on highways, bridges and other infrastructure.
Meanwhile, operating margins at CRH are still well below previous cyclical peaks and the company has improved its market share considerably in recent years.
Ross Brookes, head of collectives research, Charles Stanley
Since the global financial crisis, investors have correctly favoured quality businesses over more cyclically-exposed companies.
The performance of the high-quality sub-set has been exceptional as the market was willing to pay ever higher multiples for quality as interest rates fell. So is it time for value investors to get excited?
Funds with a strong value bias have rebounded post-Brexit, buoyed further by a victory for Trump and the perceived reflationary effect. This may have resulted in a sharp turnaround in sector favouritism towards miners (stronger growth), energy companies (higher inflation) and banks (higher interest rates).
We like Alastair Mundy, manager of the Temple Bar investment trust. Mundy feels most comfortable investing in out-of-favour companies trading on depressed valuations, believing that this approach, if applied correctly, will produce returns in excess of the market over the long term.
His portfolio contains plenty of energy and financials exposure, primarily taken through large caps including Royal Dutch Shell, BP and HSBC.
Ed Park, investment director, Brooks Macdonald
After a long period of underperformance since the financial crisis, many bank shares are trading below their book values and could be classified as 'deep value' stocks.
US average hourly earnings have been ticking up, indicating building cost-push inflationary pressures, while US President Donald Trump's fiscal policies, if delivered, could increase demand-pull inflation via higher consumption and government spending.
Inflation expectations are a major input into the Federal Reserve's rate decisions, and as they have accelerated, investors have anticipated higher US interest rates.
This has been positive for earnings expectations in the financial sector, as bank profits are largely a function of the difference between the rates at which they can borrow and lend.
Furthermore, the sector finally seems to be emerging from a sustained period of litigation pressure, with PPI fines having largely been paid off. There is also the potential for a relaxation of US financial regulations, with Trump having pledged to cut red tape within the sector.
Richard Marwood, senior fund manager, Royal London AM
A group of stocks that remains friendless are those that are exposed to the UK consumer. For example retailers, leisure stocks and builders merchants were all sold off following the Brexit vote.
The trading backdrop for these companies is not an easy one. The companies themselves face rising operating costs from the living wage, the apprenticeship levy and a higher cost of imported goods, due to the impact of sterling's weakness.
Furthermore, the outlook for customers of these companies is also uncertain, with many seeing their household incomes squeezed as the pound's weakness feeds through into higher inflation.
It would be imprudent to make a macro-economic call that these conditions are going to ease significantly - the proverbial rising tide floating all boats - but we are seeing some opportunities in well run businesses, with strong market positions and resilient balance sheets.
In the retail sector we like Dunelm; in leisure Greene King; and in building Travis Perkins.
Stephen Williams, co-manager, Guinness Oil and Gas Exploration trust
Oil companies re-rate
Junior oil companies with high quality growth assets are currently trading at heavily depressed valuations. Meanwhile, large oil companies are in need of these assets and actively refilling their project hoppers through asset level M&A with select junior oil companies.
When such a transaction occurs, the junior company's share price substantially re-rates upwards because the dislocation between the depressed equity market valuation and the much higher industry valuation closes.
Large companies continue to need high quality projects, and so this trend is accelerating today and looks set to continue over coming years.
For big energy companies, it is about return on capital as much as it is the oil price. Underlying profitability is starting to improve as a result of cyclical cost deflation in part coming from M&A activity in the junior oil sector.
For investors, this means access to the junior companies today will offer high returns without reliance on a rising oil price.