02nd December 2020

Better times ahead for UK equities? Fidelity’s Alex Wright outlines his 2021 contrarian convictions

London, 2 December 2020: Both UK equities and value stocks have been out of favour for some time, but could the tide be turning with the conclusion of Brexit negotiations and the roll-out of vaccines. Over the last month, investors have seen some welcome outperformance, but even taking that into account value has underperformed growth in the UK by 30%1 between from July 2018 and November 2020.

Alex Wright, portfolio manager, Fidelity Special Situations and Fidelity Special Values PLC outlines how he plans to navigate the uncertainties ahead and reveals his areas of contrarian conviction for 2021.

  • The conclusion of Brexit negotiations and the roll-out of vaccines should lift some of the uncertainty that has plagued UK equities.
  • Increased exposure to specialist retailers and housing related stocks
  • Sold out of UK oil majors Shell and BP and underweight mainstream banks, which all lack a medium-term catalyst to re-rate


“From a macro and geopolitical perspective, many uncertainties remain from the outcome of Brexit negotiations to the timing of the withdrawal of Covid-19 support measures and likely future tax increases. While a no-deal Brexit scenario would clearly be a negative outcome, the robustness of UK supply chains through the Covid-19 crisis does give us some comfort that companies are better prepared than previously thought. Deal or no deal, the end of negotiations should lift some of the uncertainty that has plagued UK equities for the past five years.


“Both UK equities and value stocks have been out of favour for a prolonged period and their share prices have proved particularly susceptible to the pandemic. While it has proved a challenging backdrop for value investors, this has resulted in an unusually broad choice of attractively valued stocks with good upside potential, including companies whose earnings are already exceeding expectations.



“Improved visibility in respect of the timing of mass vaccine rollouts and in the wake of the conclusion of Brexit negotiations should boost investors’ confidence and lead them to broaden their investment horizons beyond the narrow range of secular growth stocks that have been in favour. While this may well lead them to reassess their expectations in respect of those stocks, UK value stocks remain cheap and offer some upside potential.


“We have recently seen a pick-up in M&A activity, a sign that foreign corporates and private equity investors are recognising the value on offer. While the mass rollout of vaccines will be positive for those businesses most impacted by the pandemic such as travel, leisure and hospitality, many will emerge from the crisis considerably weaker and are likely to need time to fully recover.


“In the portfolios, we have significantly increased our exposure to specialist retailers such as Halfords and Dixons, car distributors, DIY stocks as well as housebuilders. These are all areas that are seeing increased demand as households reassess their priorities in light of the pandemic and have more disposal income, and where we believe the changing dynamics caused by the virus are likely to be longer lasting than currently factored in.


“We continue to favour life insurers such as Aviva and Legal & General, which are well regulated companies with good risk management and are seeing strong demand for bulk annuities and pension de-risking. The sector offers an attractive combination of cheap valuations, strong demand/supply fundamentals and growing earnings.


“Conversely, we are underweight mainstream banks. While cheap, they lack a medium-term catalyst to re-rate given the low-rate environment. Instead, we have bought into UK listed emerging market players Bank of Georgia, TBC Bank and Kaspi, which are able to generate strong returns in the current interest rate environment but have been overlooked or lumped in with the mainstream banks.


“We are also underweight energy and no longer have exposure to UK oil majors Shell and BP, which have cut their dividends and are embarking on a complex and high-risk transition towards a more diverse energy mix.”



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