Why UK equities still offer value

As the UK market approaches new highs, Alex Wright, portfolio manager of Fidelity Special Values, outlines why he remains optimistic about the prospects of the UK market. Even after strong returns seen over recent months, the UK remains cheap versus other markets and continues to offer attractive opportunities for value investors.

UK equities have outshone many developed market peers year to date, with the FTSE 100 recently hitting new highs of around 9,000 points. This marks a significant milestone in what many are beginning to recognise as a genuine revival in UK equities.

This outperformance comes against a backdrop where market consensus at the end of last year 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.

More broadly, we are starting to see a resurgence 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 medium and smaller sized companies, highlighting the valuation opportunities available.

Finding value in overlooked areas

Our investment style employs a contrarian-value stock picking approach. We look for investment ideas across sectors and the market cap spectrum, focusing on unloved companies entering a period of positive change. The philosophy recognises that turnarounds take time to bear fruit and requires investors to buy into the story. By building a diversified portfolio of stocks in different stages of their recovery process, the intention is to deliver outperformance across different market environments.

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 investment process is driven by bottom-up stock selection, with the managers dividing the market into four super sectors to translate positioning changes.

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 earnings¹. Whereas mid-cap and small-cap companies present a more pronounced valuation opportunity, trading at 12.5x and 11.7x forward earnings² 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.

¹ LSEG Workplace, July 30, 2025
² LSEG Workplace, July 30, 2025

Past performance is not a reliable indicator of future returns.
Source: Morningstar as at 31.07.2025, bid-bid, net income reinvested.
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