Why the UK is a fount of Special Value

Bashing the UK market has become fashionable. After five years of post-Brexit underperformance and a tech surge that left the FTSE 100 behind, some view the UK stock market as a supermarket bargain bin, full of cheap but outdated companies.

Just as one person’s old green beans are someone else’s nutritious side dish, so the undervalued companies that make up the UK stock market are becoming a feast for some overseas investors and venture capitalists.

Fidelity Special Values invests in unloved companies with the potential for positive change. These are often growing companies that are under the radar or have been through a temporary period of difficulty. Our investment process relies on extensive due diligence and leverages the breadth and depth of Fidelity’s research team, which comprises 174 buy-side analysts, with 40 covering the UK and European markets.¹

With their help, my aim is to outperform the UK market – not every year but over a three- to five-year period. We look to do this by putting together an exceptionally diversified portfolio focused on overlooked companies across sectors and sizes, drawing on the expertise of our analyst team.

Why the UK right now?

It’s easy to come up with reasons why the UK is underperforming – including an anaemic economy, house prices in the doldrums and a stock market stuffed full of unfashionable companies focused on banking and mining rather than cutting-edge technologies.

Positive points in the UK’s favour include its robust regulatory framework and good corporate governance, while its size ensures a broad spread of companies and industries. Because so many UK companies are mature businesses with generous capital return strategies, it is one of the highest-yielding markets in the world.

For UK naysayers, there is plenty of global exposure in UK markets to balance things out. Less than a quarter of the revenues of UK-listed companies are generated in the UK, so there is a surprising amount of global exposure. Buying UK stocks does not necessarily mean buying the UK economy.

Compared with its own historic averages, as well as stock markets across the globe, UK shares are cheap. If you value stock markets on their share prices compared with expected earnings, the UK trades at around 11 times 2024 earnings, with the US on 21, the rest of Europe on 15 and Japan on 16, according to analyst consensus estimates. UK equities are trading at their lowest level compared to global peers in the past 20 years, and we are seeing value across the market cap spectrum.

Despite these depressed valuations, I believe there’s evidence the tide is turning. After five years of structural underperformance, the UK has been holding its own for the past three years, without many even noticing.

I have also been encouraged by the performance of our holdings in the recent reporting season. We saw strong full year results in 2023, particularly from some of our financials. With the exception of high-end and big-ticket consumer goods, where spend is under pressure, the results season has painted a fairly robust economic picture.

Important information - The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Past performance is not a reliable indicator of future returns. Tax treatment depends on individual circumstances and all tax rules may change in the future. Overseas investments are subject to currency fluctuations. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. The trust invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies and the securities are often less liquid. This trust uses financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Reference in this article to specific securities should not be interpreted as a recommendation to buy or sell these securities and is only included for illustration purposes. Investors should note that the views expressed may no longer be current and may have already been acted upon. The latest annual reports, key information document (KID) and factsheets can be obtained from our website or by calling 0800 41 41 10. The full prospectus may also be obtained from Fidelity. This information is not a personal recommendation for any particular investment.  If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.