A renaissance underway for UK equities

UK equities continue to be relatively unloved, but their low valuations have rendered them an attractive hunting ground for contrarian value investors. Against this backdrop, Alex Wright, portfolio manager of Fidelity Special Values, examines the recent resurgence of UK equities and outlines why he expects outperformance to continue as buying interest returns to the market.

If we rewind back to the end of last year, the market consensus overwhelmingly expected US dominance to persist, yet the exact opposite has occurred as US trade policy announcements and a reversal of the US exceptionalism narrative led to a weaker dollar. This reversal highlights the benefits of a contrarian investment approach and the importance of exercising caution in areas with excessive optimism and heightened valuations.

Against this backdrop, UK equities have outshone many developed market peers year to date - a very different outcome to what the market expected. Within this, Fidelity Special Values has continued to outperform the FTSE All Share Index, with the latter also delivering c20% relative outperformance against US markets this year¹.

^{Source: Fidelity International, LSEG DataStream, 18 June 2025. Rebased to 100 on 31 December 2024. Total return performance, net of fees for the W-ACC share class, denominated in GBP. 1Performance refers to the investment trust’s share price. The fund’s official benchmark is the FTSE All Share Index (N). The S&P 500 is shown for illustrative purposes.}

We are starting to see a renaissance in UK equities, with buying interest returning to the market. Encouragingly, this has filtered down the market cap spectrum where we have a structural bias toward these smaller companies. This market broadening beyond large caps highlights the superior valuation opportunities available further down the market capitalisation spectrum.

The overlooked outperformance story

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. 

UK shares have outperformed global markets over the last 5 years - a trend that 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 strange situation where investors were withdrawing capital precisely when performance improved.

^{Source: Fidelity International, LSEG Datastream, 31 May 2025. Total shareholder denominated in sterling, net of fees for the W-ACC share class. Performance rebased to 100 on 31 May 2020. The US Nasdaq composite is shown for illustrative purposes.}

Importantly for investors, strong returns are available outside of the US, as demonstrated by the trust’s five-year outperformance compared to the technology-heavy US Nasdaq. 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.

Value found further down the market cap spectrum

Within the UK, we are finding value further down the market cap spectrum. Large-cap companies are trading close to their long-term averages, with the FTSE 100 on 13x forward price to earnings. Whereas mid-cap and small-cap companies present a more pronounced valuation opportunity, trading at 11.7x and 10.7x forward earnings respectively.

The portfolio remains diversified with around 80-90 holdings across multiple sectors, with financials representing the largest sector allocation while maintaining diversification across sub-sectors, geographies and business models. The strategies have always had a structural bias towards these smaller companies, given the lack of institutional coverage and greater likelihood of uncovering hidden gems. We have been actively recycling money from areas that have performed well such as banks, tobacco and defence, and leaning into unloved, domestically focused businesses, with attractive turnaround stories.

In the context of this recycling, this year, we have been reducing our financial exposures, particularly within banks, exiting Barclays and reducing our stake in AIB Group following their strong performance. Within the resources sector, we sustain a meaningful underweight in oil, as we have struggled to find attractive investment opportunities, along with a challenging demand and supply backdrop. Despite our underweight position in large-cap miners due to our cautious view on iron ore, we retain a small position in Glencore, given its attractive commodity exposure and our constructive outlook on copper. Our defensive holdings have generally performed well. We have been taking profits from positions such as Imperial Brands.

We have been increasing our exposure to domestically focused businesses, particularly within UK consumption. This includes positions in retailers such as Frasers Group and DFS, housing-related stocks like Genuit and Travis Perkins, and UK housebuilders. 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 warnings from retailers like Halfords and DFS have been encouraging.

A renaissance is underway

We believe there are numerous attractive opportunities prevailing in the current market, available at low valuations, and we continue to uncover compelling investment ideas, particularly in periods of high market volatility. A renaissance is taking place in the UK market - but many may not notice until it is too late.

We believe that the current market conditions continue to favour our contrarian-value investment style.  While the economic environment remains uncertain, the UK is a large and diverse market, and we see a number of overlooked companies across the market cap spectrum with good upside potential. Within the portfolio, we are confident that our holdings possess the strength and resilience to navigate what remains a challenging macro environment.

Important information

Past performance is not a reliable indicator of future returns. Changes in currency exchange rates may affect the value of investments in overseas markets. This trust 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 article 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. Investors should note that the views expressed may no longer be current and may have already been acted upon. 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 an authorised financial adviser.