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Fidelity’s Shah: small correction looks imminent for UK equities
Citywire's Selection team give their verdict on the latest update from Fidelity Special Situations fund manager Sanjeev Shah.
Despite this, Shah told investors he expects the market to tick up subsequently as it 'climbed the wall of worry' for much of the remainder of the year. He added that a more significant correction was likely in 2013, affording a number of significant value opportunities for his fund, which features in Citywire Selection.
'I'm still positive on equities as an asset class, but expect that over the next couple of weeks there will be a 3-5% correction. In 2013 I expect a more significant correction, but see that as a buying opportunity,' he said.
He also believes mergers and acquisitions could become a significant factor for his £2.4 billion portfolio, with Logica (0LOG.L) already sold at a 60% premium earlier in the year. Although he does not invest on the likelihood of corporate action alone, he tipped holdings such as Talk Talk (TALK.L) and Ladbrokes (LAD.L) as future targets for potential takeovers.
After a difficult couple of years in which Shah's contrarian value approach has been generally out of favour, the fund has seen a turnaround so far in 2012, gaining 15.7% compared with the FTSE All Share's 7% since the start of the year to 31 August.
'2010 and 2011 were difficult, but I have not changed my approach to running money, and at the back end of 2011 I aggressively added to my positions. Valuations are not a challenge as most stocks are trading at the lower end of their historical range and margin profitability and returns on equity (ROE) are at multi-year highs,' he said.
Some shorts are still in place on miners as Shah believes the sector is still in a strong earnings downgrade cycle. He expects them to be worth revisiting in six to 12 months' time.
Backing Lloyds and RBS
Although Shah continues to have concerns about sectors such as industrial cyclicals, chemicals, basic materials and engineers, he continues to be overweight general financials with key bets on London Stock Exchange (LSE.L) and Lloyds (LLOY.L). He also has a smaller 1% holding in RBS (RBS.L).
'I’ve recently met three people in Lloyds in its key management team – Mark Fisher in charge of integration of HBOS and Lloyds, the head of retail and its CEO, Antonio Horta-Osorio. All the things they are doing operationally and strategically has led me to conclude that things are getting significantly better.'
He said the bank is taking a significant market share in deposit gathering, while provisioning ratios continue to come down, which serves as a decent tailwind for earnings. ‘In funding, they are ahead of the curve and capital ratios have improved dramatically from levels in 2008,’ he said.
Shah has stress-tested Lloyds' capital ratios in the 'unlikely scenario where unemployment goes above 10% and house prices fall by 18%'.
‘Even in that scenario fair value for that company is 38p, so the downside risks are very well underpinned.’
More about this:
Look up the funds
Look up the shares
- Logica PLC (0LOG.L)
- Talktalk Telecom Group PLC (TALK.L)
- Ladbrokes PLC (LAD.L)
- London Stock Exchange Group PLC (LSE.L)
- Lloyds Banking Group PLC (LLOY.L)
- Royal Bank of Scotland Group PLC (RBS.L)
- Barclays PLC (BARC.L)
- Kingfisher PLC (KGF.L)
- Halfords Group PLC (HFD.L)
- Home Retail Group PLC (HOME.L)
Look up the fund managers
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