Why UK equities are turning heads again

UK equities have performed exceptionally well this year, with the FTSE 100 hitting new all-time highs. While the market’s optimism and rise in valuations should warrant caution, this marks a significant milestone in what has been a genuine revival in UK equities. It comes against a backdrop of the market consensus at the end of 2024 overwhelmingly expecting US dominance to persist.

However, US trade policy announcements and concerns surrounding the US exceptionalism narrative have led to the dollar weakening and thus the US underperforming other major indices. This turnaround highlights the benefits of a contrarian investment approach, going against prevailing market trends, and the importance of exercising caution in areas with excessive optimism and heightened valuations.

More broadly, we are starting to see buying interest returning to the UK market, particularly from international investors. While the valuation gap has narrowed slightly between UK and global markets, the UK continues to trade at a meaningful discount to other regions, both on an absolute basis and when adjusting for sectoral differences in markets. 

We maintain a structural bias towards mid- and small-cap companies, as these businesses are typically less well known to investors and often poorly covered by the sell side. This allows us to gain an analytical edge, supported by Fidelity’s extensive analyst network, helping us to explore unloved areas of the market and uncover hidden investment gems.

Since Fidelity Special Values launched in 1994, it has consistently followed a contrarian-style investment approach. We look for unloved companies with the potential for positive change that the market has not yet recognised. We follow a disciplined investment process that focuses first on evaluating downside risk and then on identifying positive change and potential upside. The focus is first and foremost on downside protection.

Our philosophy is to primarily base investment decisions on company fundamentals rather than top-down or macro-economic factors. This contrarian approach is research intensive. The insight and expertise of our large team of analysts have been central to the long-term success of our approach. As at the end of September 2025, the trust has generated a NAV total return of c.18% per annum over five years and 10% over ten years, significantly outperforming its benchmark, the FTSE All-Share index.

Compelling opportunities

The UK’s unpopularity in recent years has prompted frequent questions around what catalyst is needed to improve domestic performance and close the valuation gap. My response continues to be that nothing needs to change. We don’t require a re-rating to deliver attractive returns. Forecasts for company earnings across our holdings remain strong and we work closely with Fidelity’s analyst team to assess the likelihood of these earnings being delivered.

Overall, we remain happy with the performance environment and it remains a fertile hunting ground for contrarian stock-pickers. Within the UK, value is being found further down the market cap spectrum. Large-cap companies are trading close to their long-term average price/earnings ratios, whereas mid- and small-cap companies present a more pronounced valuation opportunity.

12-month forward price/earnings ratio

Source: Fidelity International, LSEG Workspace / Bloomberg, 30 September 2025. Data for FTSE 250 and FTSE Small Cap not available pre-1998.

We believe that 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.

Despite turbulent markets and sharp currency moves, there has been no pause in takeover activity this year. Mergers and acquisitions (M&A) have largely accelerated in the UK compared to the rest of the world. The value of deals in the UK rose by 120% in 2024, outpacing the European average growth of 16%.1 The increase in M&A activity for the UK market began in 2021 and has continued since.

We have also seen consolidation within the investment trust sector, with vehicles of all sizes subject to a higher level of corporate activity including mergers and windups.

There are economies of scale to be made by larger trusts, resulting in lower charges, an improvement in liquidity and a route to unlocking shareholder value for trusts with high persistent discounts. Given its brand, scale and size, Fidelity Special Values is well placed to be a beneficiary in this environment.

M&A activity has been underpinned by companies, private equity firms, and other corporates taking a longer-term perspective, seeking to capitalise on value through share buybacks, asset purchases, or outright takeovers. Domestic investors are often too close to appreciate the hidden value in their own market, while overseas investors can see it more clearly, helping to close the valuation gap.

The UK remains a preferred destination for US investors, given the highly international nature of UK companies. They can see that many domestic companies trade at substantial valuation discounts to US and global peers. The valuation gap means that takeovers, particularly by private equity companies, can anchor on US valuations, offering shareholders a significant premium.

UK market’s future

Takeover activity and shareholder activism have long been important features of the UK equity market, helping to unlock shareholder value. However, the number of bids, a slowdown in UK initial public offerings (IPOs) and some companies opting for US listings have raised fears among some market participants that the UK equity market is set to shrink.

We feel these concerns are overdone. It wasn’t long ago, in 2020 and 2021, that the UK enjoyed a strong wave of IPOs. While some high-profile companies have switched exchanges, they are relatively few in number. We would have to experience several consecutive years of high takeover activity, combined with few new listings, to create legitimate concerns. There have been three recent IPOs that highlight a renewed interest in companies choosing to list in the UK.

In any event, these issues are not unique to the UK. Equity markets outside of the US face similar challenges, largely because US stocks have been trading at substantial premiums when compared to the rest of the world and there are clear signs that IPO activity is starting to rise globally. For us, the UK offers an attractive and deep investable universe, offering plenty of choice and investment opportunities.

Over the past year, UK equities have staged a resurgence, but they have actually performed well for several years. The return of overseas investors is an encouraging trend, as they capitalise on the relative value available in the UK market. Given that the UK represents only a small share of global indices, less than 4%, even a modest pickup in allocations from abroad can have a meaningful positive impact.

Encouragingly, despite subdued domestic economic data and political uncertainty, UK market performance has remained positive. This highlights that attractive returns are available in an uncertain environment, which can in fact act as a driver of investment opportunities. We remain excited in the prospects of our holdings and in the UK market’s ability to generate long-term performance.

¹Data from Refinitiv and analysis by BCG as at 8 January 2025, for more details visit ‘M&A Outlook 2025: Expectations Are High’, BCG.

Alex Wright has been manager of Fidelity Special Values since 2012. The trust is the largest and best performing trust in the UK All Companies sector.