UK equity markets are on course for their best calendar year since 2013, outpacing the US and other developed markets this year-to-date, according to Fidelity International.

It noted that UK equity markets had staged a resurgence but were still trading at meaningful discounts, despite the strong year.

While this was presenting opportunities for investors, Fidelity Special Situations Fund and Fidelity Special Values PLC portfolio manager, Alex Wright, warned the market’s optimism and rise in valuations should warrant caution.

Wright said that the UK was entering 2026 from a position of strength, trading at a discount both on outright price to earnings multiples and after adjusting for structural sector differences.

“While bullish sentiment has driven valuations to more demanding levels across many global markets, the UK still offers many pockets of value, particularly further down the market cap spectrum,” he stated.

“Our strategies maintain a structural bias towards these smaller and mid-sized businesses, as these businesses are typically less well known to investors and often receive limited and artificial coverage by the sell side.”

Although domestically exposed areas had been ‘weighed down’ by economic and political uncertainty, Wright noted that buying the UK market did not necessarily mean buying the UK, as more than three quarters of revenues generated by UK-listed companies come from overseas.

“The remaining quarter of the market, which is more domestically focused, has generally been held back, yet it offers selective opportunities where valuations more than discount a subdued backdrop,” Wright said.

“These unloved areas present compelling investment prospects and would benefit from a more stable environment in 2026 - though conditions do not need to improve materially for valuations to begin to recover.”

Discussing his portfolio positioning for the coming year, Wright said he had been finding value further down the market cap spectrum as large-cap companies were trading close to their long-term averages.

Financials remained the largest absolute sector weight in the portfolio, with this exposure diversified across sub-sectors, geographies, and business models.

“Our weighting has moderated slightly due to increased takeover activity and profit taking within our insurance holdings,” Wright said. “We continue to hold meaningful exposure across the banking sector.

“We have actively recycled capital from defensive areas that have performed well such as tobacco and defence companies, and leaning into unloved, domestically focused businesses, with attractive turnaround stories.

“Particularly in consumer-related areas such as housing, furnishings, and home improvement, where volumes are depressed versus pre-Covid levels.

“Within resources, our underweight position has narrowed as we have identified selective opportunities. While our oil exposure has fallen over the past twelve months, our exposure to mining has increased.

“We remain underweight large-cap miners, reflecting our cautious view on iron ore, but hold a position in Glencore, supported by its attractive commodity mix and our constructive outlook on copper.

“Our analyst estimates point to an improving earnings backdrop for the UK market in 2026, with an even stronger outlook for our strategies. We remain confident in our holdings and in the UK market’s capacity to deliver attractive long-term returns.”

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