High interest rates and global volatility means the outlook for UK equities is uncertain, according to Fidelity fund manager Alex Wright.
The portfolio manager of Fidelity Special Values said the challenging environment is likely to continue into the new year.
He said: “UK equities are currently pricing in extreme pessimism and, as a result, trade at a significant discount to other markets.
“While the outlook is uncertain and corporate earnings could disappoint in the near-term, this is also true of other markets such as the US, where valuations are meaningfully more expensive.”
Wright said while value stocks have outperformed growth stocks in the past three years they still have “significant ground to catch up”.
He added: “The current market environment of stickier inflation, higher interest rates and economic volatility is more aligned to the long-term pattern seen over the last 100 years.
"History suggests that over the long-term value tends to outperform, given generally higher discount rates and a reversion to the mean.
“The combination of higher rates and a weaker economic environment is likely to remain challenging in the near term for corporates and consumers who need to refinance their debts."
The result of this, said Wright, is that Fidelity remains selective with a preference for companies with lower debt levels and has balanced its portfolios sector-wise.
He concluded: "While valuations are attractive and we are finding new ideas, we are conscious of the near-term uncertainty and want to retain some dry powder to take advantage of any forced sellers.
"Prior periods of uncertainty have in retrospect turned out to be great buying opportunities.”
tara.o'connor@ft.com
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