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Fidelity’s Alex Wright reveals his UK stock picks for 2022


Top fund manager Alex Wright said UK stocks remain “cheap and unloved” as investors pull £ 1.33bn out of the sector, but suggests more opportunities may arise in this. which has been a sluggish market.

The FTSE All Share Index has returned 13% this year, but investors have generally been turned off from the domestic market due to the double blow of the entry into force of Brexit and the uncertainty surrounding the pandemic.

Wright, who manages the £ 3bn Loyalty Specials and the £ 935m Loyalty Specials, is convinced that 2022 could represent an opportunity for the ‘considerably undervalued’ UK stock market which is’ reasonably valued in absolute terms ”now that the headwinds have largely passed.

UK stocks are ‘cheap and unloved’, but could offer value opportunities in 2022

Indeed, analysts at Liberum recently noted: “It is rare to find a market that is both cheap and growing rapidly, yet when we look at global stock markets right now, the UK stock market is offering just that.

Wright believes this is in large part due to the faster-than-expected recovery and the significant increase in M&A activity which has been a “key contributor to performance.”

“We’ll likely see more deals if the valuation discounts to foreign companies don’t close.”

Fidelity Special Solutions and Fidelity Special Values ​​both focus on long-term capital by investing in companies listed in the UK.

We take a look at possible tailwinds and headwinds for the UK market and Wright’s top picks for 2022.

Supply constraints hit construction

Alex Wright handles special loyalty situations and special loyalty values

Alex Wright handles special loyalty situations and special loyalty values

While the UK is expected to avoid the worst of the pandemic by 2022, the emergence of the Omicron variant has rocked markets, suggesting it could hamper growth.

But it will be the challenges of supply chains and inflation that should dominate in 2022, especially for construction.

Fidelity Special Situations has minimal exposure to the industry – around 3 percent of the portfolio according to Hargreaves Lansdown – and that is likely to be further reduced as costs rise.

“This is a key topic in our conversations with businesses as we try to assess how they are affected and their ability to pass the additional costs on to their customers. We favor companies with strong supply chains and those that are well positioned to take advantage of shortages in areas such as building materials and distribution and car rental, ”says Wright.

“We have reduced our exposure to areas facing significant increases in input costs, such as UK home builders. “

While activity increased after restrictions were lifted, demand for building materials also increased. Trade barriers resulting from Brexit have resulted in price increases as well as increased lead times in the supply chain.

The industry is also reportedly struggling to cope as the number of migrant workers drops 8.3 percent, according to the construction industry training body.

WHAT DO THE FUNDS INVEST IN?

Fidelity Special Situations and Fidelity Special Values ​​both invest primarily in UK listed companies and have a strong focus on industrial and financial services.

Fidelity Special Situations has returned 21.7% year-to-date, while investment trust Fidelity Special Values ​​has returned 25.6% year-to-date.

The main holdings of the two funds include Legal & General, Aviva, Shell, Inchcape, Phoenix Group, Serco and DCC.

Wright points to Travis Perkins’ latest update in which he says building material costs rose 11% in the third quarter alone.

However, the fund manager is bullish on other sectors facing supply challenges, including auto dealers. Inchcape – one of the top 10 positions of the fund – and Halford.

‘We believe [they] are well positioned to take advantage of car and bicycle supply constraints (given superior supply chains), as are vehicle rental businesses Redde Northgate.

“We are also exposed to shortage building materials such as bricks through a brick distributor Brickwork and also own Norcros, which makes showers and tiles. ‘

Other consumer-oriented businesses may have more difficulty given the recent increase in the cost of living.

Fidelity Special Situations recently sold its small position in Wagamama’s owner, Restaurant Group, because “consumers weren’t as numerous as expected.

“The company will likely find it difficult to pass on increasing cost pressures in an environment of weaker demand. “

“Our preference is for specialist distributors operating in areas where supply has decreased, as they can take advantage of higher prices but are less affected by rising input costs.

“Conversely, we remain significantly underweight consumer staples, which remain dearly valued, and global mining stocks, many of which are trading on peak earnings amid worsening supply / demand dynamics. “

Inflation could boost financial stocks

Having suffered since 2009 from lowest interest rates and tight monetary policy, banks and other financial services companies are eagerly awaiting the rejuvenation of economies and the possibility of higher rates.

For banks, low interest rates are reducing credit margins and uncertain labor markets lead to the prospect of bad debt write-downs. For financial services, customers who are confident about their finances are more likely to purchase savings, investment, and insurance products.

The MSCI World Financials Index is up 22.62% in terms of total return since the start of the year, outperforming the MSCI World Index which returned 16.82%.

Fidelity Special Situations is already well oriented towards financial stocks; Legal & General, Aviva and Phoenix Group are among its top 10 holdings.

“Our largest sector exposure is to life insurers, which remain valued at low prices, despite strong balance sheets, positive earnings prospects (thanks to strong demand for protection products, block annuities and risk reduction. retirement) and attractive dividends, ”Wright said.

Away from immediate supply constraints and inflation, the pandemic has accelerated change in most industries, especially where competitors have emerged.

“The lockdowns allowed for faster restructuring, as companies used downtime to speed up changes (for example, renovating premises or digitizing their business) and saved money,” says Wright.

“A reduction in the number of competitors in areas such as specialty retailers, travel and leisure, banking in Ireland and beverage distribution should translate into improved profitability going forward.

“Our holdings in M&S, Ryanair, AIB and CC should benefit directly from these capacity exits.

SPECIAL SITUATION FUND
Funds Yield 1 year return 5 years back Ongoing charges
Loyalty Special situations 1.40% 24.77% 35.05% 0.91%
Special situations Jupiter United Kingdom 2.4% 17.06% 22.01% 0.76%
Blackrock United Kingdom Special Situations 1.3% 23.17 63.38 0.91%
Liontrust special situations 1.00% 19.11 N / A 0.82%
Artemis United Kingdom Special situations 1.40% 14.40 38.21 0.86%

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