This year has seen active recycling of capital from areas that have performed well. We have modestly reduced our financials exposure, particularly within banks, exiting Barclays and reducing stakes in AIB Group following their strong performance. We have re-deployed some of this into a new position in Lloyds. Within the resources sector, we retain an underweight position in oil due to the challenging demand and supply backdrop. Despite an underweight position in large-cap miners due to a cautious view on iron ore, a small position in Glencore is held, given its attractive commodity exposure and constructive outlook on copper.
The strategy has been increasing exposure to domestically focused businesses, particularly within UK consumption. This includes positions in retailers such as Frasers Group, housing-related stocks like Genuit and Travis Perkins. Consumers have been saving heavily over the last two years, with consumption levels historically low due to concerns about inflation, interest rates, and ongoing geopolitical conflict. Although these issues persist, recent positive profit upgrades from retailers like Halfords and DFS have been encouraging.
Compelling opportunities remain
The UK’ s unpopularity has prompted frequent questions around what catalyst is needed to improve domestic performance. We believe that nothing necessarily needs to change. The UK has been performing well over the past five years and remains a fertile hunting ground for contrarian stock pickers.
However, the fact that UK shares have performed solidly over the last five years has largely gone unnoticed, particularly among domestic investors who continue to withdraw money to allocate overseas. These outflows have characterised the market over the past decade, initially spurred by Brexit-related uncertainty and more recently accelerated by the pursuit of high growth US companies. This created a situation where investors were withdrawing capital precisely when performance improved.
Notably, strong returns are available outside of the US. While there has been some narrowing in regional valuations following the strong year-to-date performance, the UK has room to run further, continuing to trade at a meaningful discount to other regions.
Within the UK, value is being found further down the market cap spectrum. Large-cap companies are trading close to their long-term averages, with the FTSE 100 on 12.8x forward price to earnings 1. Whereas mid-cap and smallcap companies present a more pronounced valuation opportunity, trading at 12.5x and 11.7x forward earnings 2 respectively.
The current market conditions continue to favour our contrarian-value investment style. While it’ s still a developing trend, it’ s encouraging to see other market participants showing increasing interest in UK equities. The UK market offers a rich pool of investment opportunities for diligent investors, combining strong earnings growth, high dividend yields and low valuations.
A market revival underway
The combination of attractive valuations, particularly in small and mid-cap stocks, improving sentiment, and a broadening rally beyond large caps creates a compelling investment case.
While the economic environment remains uncertain, the UK is a large and diverse market, and there are numerous overlooked companies across the market cap spectrum with good upside potential.
For value investors willing to look beyond the popular narratives and crowded trades, the UK continues to offer a fertile hunting ground. The recent resurgence in buying interest, combined with persistently attractive valuations, suggests this rally may indeed have further to run.
Sources
1 2
LSEG Workplace, July 30 2025 Important information
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. The Fidelity Special Situations Fund and Fidelity Special Values PLC can use financial derivative instruments for investment purposes, which may expose them to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Investments in smaller companies can carry a higher risk because their share prices may be more volatile than those of larger companies. The shares in the investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trusts can gain additional exposure to the market, known as gearing, potentially increasing volatility. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority and Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited.
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