Fidelity Special Situations manager Sanjeev Shah is looking to increase his exposure to Europe as he believes the continent currently offers significantly more value opportunities than his home UK market.
But while he thinks that 'there is a bit more to go' for stock pickers, Shah thinks the best days are now behind us in terms of further strong equities gains that have been experienced over the last year.
A significant correction is on the way for equities, Shah told Citywire Global, and he will use that as an opportunity to increase exposure to his favoured turnaround stocks both in the UK and Europe. He currently has an 8% overweight to banks, with HSBC and Lloyds his key picks.
'For now markets are continuing to climb the wall of worry but there will be a more significant correction at some point this year. We will use any consolidation to add to very early stage cyclicals like banks and retailers because we think we are at a very early stage in the economic recovery.'
He added: 'That will be the final big buying opportunity for the asset class [for some time].'
To match this more relatively cautious mood, Shah has short positions on about 8% of the portfolio, in late cycle sectors such as chemicals, engineers, oil services and miners.
He is also mindful of taking our further options to protect the portfolio from a bigger fall and has been taking profits on some consumer cyclicals and reinvesting in more defensive growth stocks.
The value contrarian manager, who took over the near £3 (€3.5) billion fund from Anthony Bolton five years ago, started to increase his European exposure a year ago, with buys in defensive growth stocks from the telecoms and health care space, and currently has around 9% of the fund in European equities, as well as 3% in US stocks.
He told Citywire Global that he was actively looking to take the weighting higher, eyeing sold off stocks in the European food retailer sector.
Backing European telecoms to rerate
Shah added European holdings in telecom firms Telia Denmark and Telecom Italia last year and is now overweight that sector on the view that it faces an improving regulatory environment as industry regulators allow telco operators to invest in new mobile technologies such as 4G at favourable investment rates.
'Back at the end of 2011 and early 2012 the UK opportunity set was so good, but today we see more opportunities in Europe' said Shah. 'Telecoms were the most unloved area of the market and both [Telia and Telecom Italia] had done very badly but we think regulators will now give them further scope to grow.'
Shah told Citywire Global he would not increase the telecoms overweight further but was looking to add undervalued stocks among European food retailers.
His biggest European equity bets are currently mobile operator Ericsson and French pharma firm Sanofi, which he has been adding to in recent weeks, while in the UK Shah has been adding significantly to core holding GlaxoSmithKline.
Over five years to the end of December, the fund has returned 21.1% compared to the FTSE All Share's 13.2%
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