Market Extra: Embrace These 5 Unloved Investments, Says Morningstar

Russian stocks anyone? Or how about the underperforming European telecom sector? Maybe even some U.S. Treasurys?

With investors shaken after weeks of geopolitical uncertainty, Morningstar Investment Management has compiled a list of unloved investments, including the ones above, that could deliver profits in the long run to traders able to tune out the noise.

Here’s a rundown of the five ideas:

1. Russian equities

Russian assets have taken a beating this month, hit by news of U.S. sanctions. This week brought reports that the U.S. was planning to slap another round of sanctions on Russia, targeting companies tied to the Syrian regime and its chemical weapons. No additional sanctions have been announced yet, but uncertainty still hangs over the country’s stock market. However, that could turn out to be your big opportunity, according to Dan Kemp, chief investment officer of EMEA at Morningstar Investment Management.

“Societal concerns aside, we see an opportunity to benefit from Russian anxiety. Specifically, we continue to look favorably on Russian equities, especially relative to many of the expensive developed market peers. We have witnessed a gradual improvement in earnings, cash flows and dividends — all growing faster than western peers in nominal terms,” he said.

The VanEck Vectors Russia ETF RSX, +2.83%  has lost 9.3% over the last month, while the RTS Index — a gauge tracking Moscow-listed stocks — is down 8.6%.

2. U.K.’s FTSE 100

U.K. stocks have been whipped around by uncertainty over Brexit and the recent rally in the pound GBPUSD, -0.4689%  , with Britain now the least-popular country market for European investors, according to the most recent Bank of America Merrill Lynch fund manager survey.

Kemp from Morningstar, however, pointed out that the uncertainty is overhyped, “creating the cornerstone of a contrarian opportunity” for the FTSE 100 UKX, +1.13%  .

“The first thing to acknowledge is that the U.K. economy is not the U.K. equity market. For example, approximately 70% of the FTSE 100’s earnings come from overseas, and one must appreciate that the fundamentals of corporate Britain have been reasonably resilient,” he said.

“If anything, earnings of the FTSE 100 have actually started to rebound through 2017 and early 2018 after steadily falling by as much as 20% in the five years prior. This is a long-term development that must be reinforced.”

The British blue-chip has regained some vigor in recent days, rallying after disappointing U.K. inflation and wage data yanked the pound lower.

Read: U.K. stocks rise as disappointing inflation eases pressure on BOE to hike

3. U.S. Treasurys

Rising U.S. inflation has triggered expectations the Federal Reserve could speed up its rate hikes, in turn prompting a selloff on the American bond market. For example, the yield on 2-year TMUBMUSD02Y, +0.87%  jumped to its highest level in almost 10 years this week.

“Investors need to put this into perspective. Specifically, the link between short-term inflation data and the long-term returns on assets tends to be weak,” said Morningstar’s Kemp.

“Investors should instead anchor to the fundamental value of U.S. Treasurys. This means they look favorable over the likes of U.K. Gilts, especially for shorter-dated issuance, primarily due to a combination of a higher yield and lower duration,” he added.

iShares 1-3 Year Treasury Bond ETF SHY, -0.07%  has lost 0.1% over the past month and is down 0.6% year-to-date.

4. European energy companies

With crude prices dancing to the unpredictable tune of Trump tweets and Middle East tensions, traders could be forgiven for shying away from oil companies. And coupled with lingering political uncertainty across Europe, the European oil majors in particular are unlikely to make a best-sellers list, Kemp noted.

However, throwing his support behind the sector, he pointed out that the continent’s energy stocks make a ”relatively attractive investment proposition.”

“Naturally, care needs to be taken when using it in a portfolio with correlated assets (for example, emerging-market equities), and patience is a prerequisite. However, investors should not be overly fearful of the oscillating sentiment in recent years, as the long-term fundamentals remain intact,” he said.

5. European telecom stocks

Telecom is among the worst-performing equity sectors in Europe in 2018 so far, but don’t that let scare you, Kemp advises.

Yes, it’s a troubled industry saddled with elevated debt, but for investors with a longer-term view that can stomach the short-term noise, there is sufficient reward for risk, he said.

“Telecommunication exposure also brings diversification benefits to a portfolio. Specifically, the sector carries a low correlation to many of the other targeted opportunities in our portfolios and thus can offer an alternative performance driver, potentially reducing the risk of a permanent loss of capital,” Kemp added.

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