Escalating geopolitical tensions are influencing the UK equity market and investor sentiment. Rising energy prices and disrupted supply chains are expected to feed through into inflation and interest rates, creating headwinds for more cyclical areas of the market. FundCalibre spoke to Alex Wright, Manager of Fidelity Special Values Trust, to explore how the portfolio is being adjusted in response, including changes to exposure across sectors such as defence and oil.
In this latest edition of FundCalibre’s podcast, they consider the challenges of navigating markets where traditional defensive assets have already performed strongly and highlight where value opportunities are emerging, particularly within mid and small-cap stocks despite the near-term uncertainty.
Why you should listen to the interview: This episode offers a timely look at how an experienced value investor is navigating uncertain market environments. It provides insights into portfolio positioning, risk management and where opportunities may lie – even when traditional safe havens seem no longer reliable.
This interview was recorded on 13 April2026. Please note, answers are edited and condensed for clarity. To gain a fuller understanding and clearer context, please listen to the full interview.
Interview highlights:
Markets may be underestimating the outlook from here
“The outlook for the stock market is materially worse than it was only sort of a month ago before Iran, and that’s irrespective of what happens from here. I think it’s very difficult to predict exactly how peace talks and deals will go from here, and we’re not trying to do that. But what we are looking at is what’s happened and what it means for the world.
“And I guess particularly here, it’s all about what happens to energy prices, and just the fact that the Strait has been closed for a month — that has materially affected the oil price and will do over the medium term, in terms of 12 to 24 months, because you run down stocks and also you’ve damaged key infrastructure.
“So even if everything went back to how it was a month ago right now, you wouldn’t get back to where we were previously in terms of stocks and production for at least 18 months, if not 24 months. And that’s particularly the case in gas, because unfortunately the damage done to the gas infrastructure at Pearl, the Shell assets in Qatar.
“And so that does mean that energy bills are going to go up for UK consumers, and they’re going to stay up for probably at least 12 to 18 months, which is not good news for the amount of money people have in their pocket, and also for inflation and therefore interest rates.
“So certainly for more cyclical stocks, that is a clear negative, particularly for the smaller part of the market. And so I’ve been surprised, to be honest, especially with the rebounds that we’ve seen more recently, that you haven’t seen a worse market outcome, because these effects are obviously in place now.
“And obviously, if we don’t get a ceasefire or deal, they’ll just get worse. And so there’s clear risk, I think, to stock markets as a whole from current levels, and we have reduced our net exposure because of that.”
There’s nowhere obvious to hide
“I think we need to be honest with investors: we are an equity fund, so you’re going to get equity market exposure here. So if equity markets go down, the fund’s going to go down. And also, because we’re mid and small-cap biased – we’ve got 60% of the fund there – that tends to be more cyclical.
“So actually, in a falling market, we would generally not just go down, but go down more than the market. And indeed that has been the case so far this year. We have gone down more than a falling market, although we’ve actually only really gone down probably in line with other funds, which has been a positive result compared to the shape of the portfolio.
“And I think part of that is actually what investors have done is they’ve sold off some of the positions that had previously done well, even if they were somewhat defensive positions. And so the fact that we’ve exited Rolls Royce, which clearly is a bit of a defence play, people might have thought that would help hold up in this environment. Actually, it’s underperformed because it was so well owned.
“And so actually what we’ve looked to do at the margin is sell some of the stocks that have done well, including some of the gold names, as well as some of the copper names, and reinvest that a bit more into Glencore.
“Which, while it still has copper exposure, also has coal, which obviously is a bit of an energy hedge and also a geopolitical hedge, because coal is produced in many more places than gas in the LNG market.
“I think the challenge is that the traditional defensive assets — utilities, healthcare, defence stocks, even oil — have all done well previously. So there isn’t really a natural place to hide today. So I think it’s quite a tricky market.”
The real opportunity lies in undervalued parts of the market
“The fund’s always overweight mid and small-cap – about 60% there compared to only 20% of the market. So that’s a very substantial overweight and has clearly been a drag to near-term performance – the key reason why we’ve been underperforming year to date.
“Although something that, despite the underperformance of small-caps, last year we managed to counteract through really strong large-cap stock picking. There are good non-cyclical small and mid-caps – DCC, which is a mid-cap, is a really good defensive company. It’s a fuel distribution business, so it’s pretty much non-cyclical.
“But on average, smaller companies are more cyclical, and therefore this turn of events is more negative in terms of softer economic growth, higher interest rates than expected and higher inflation.
“Now, the valuations give you a lot of comfort on the downside because there’s a meaningful difference between large-cap valuations and mid/small-cap valuations.
“I wouldn’t say large-caps are expensive, they were back at long-term averages three months ago, and they’ve come off that now. But when you look at mid and small-caps, they’re on 10 times earnings, so that’s a decent 25% valuation difference.
“And so that is where much more of the value is. But we have to watch earnings estimates more closely there, because there’s more cyclicality, and there will be inevitable downgrades from lower economic growth and lower consumer spending than expected.”
Conclusion:
While the near-term outlook remains uncertain, this conversation reinforces the importance of staying disciplined and focusing on long-term fundamentals. Market dislocations, while uncomfortable, can create compelling opportunities, particularly for value investors.
With careful stock selection and an awareness of risk, investors can still find areas of resilience, even in a challenging environment.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The writer’s views are their own and do not constitute financial advice.
This information should not be relied upon by retail clients or investment professionals. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
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