Having dominated headlines at the start of the year, Brexit and trade negotiations have taken a backseat following the outbreak of the Covid-19 coronavirus as the UK and EU struggled to deal with the fallout from the pandemic. 
Yet this unprecedented pandemic arguably acts as a stress test for what was previously a worst-case scenario, a ‘no deal’ Brexit, according to Fidelity International’s Alex Wright (pictured).
“I think it’s quite interesting because this period where you have lockdowns and you have supply chains being disrupted has given you an idea of just how robust those supply chains are,” he said.
“So, I think some of the incredibly negative things that people were expecting from a ‘no deal’ Brexit have not been that dissimilar to what we’ve just seen with disruption from the virus.”
The UK left the EU on 31 January 2020 following years of uncertainty after a majority ‘Leave’ vote in the 2016 membership referendum. And with a trade deal deadline set for 1 December, the coronavirus has undoubtedly impacted the negotiation progress.
If a deal between the UK and the EU cannot be reached by December then the UK would have to default to the World Trade Organization (WTO) terms from 1 January 2021 , meaning that more expensive tariffs could soon apply to all imports from the bloc, which could be further compounded by any decline in the value of sterling versus the euro.
Wright, manager of the £718.8m Fidelity Special Values closed-ended strategy, said although the economy has taken huge hits during the coronavirus crisis the UK’s supply routes and chains have continued to function thanks to Brexit planning.
“I think actually some of the effects of that is now less than [what] others [had been] fearing, certainly less than what I was fearing,” Wright said.
And having taken a 30 per cent weighting in purely UK-facing stocks for Fidelity Special Values, Wright was not too concerned by the prospect of a ‘no deal’ outcome.
He explained: “Whichever way Brexit goes and whichever way the trade deal goes will have a beneficial or negative affect on one-third or two-thirds of the portfolio.
“But, actually, I think that possibly the effects of a ‘no trade deal’ exit at the end of the year won’t be as large as some people were thinking.”
Currently, the outcome of a Brexit trade deal and the lingering uncertainties around that are not the most prevalent thoughts on Wright’s mind, which is instead focused on navigating the coronavirus uncertainties that the UK market faces.
Going into the crisis, the UK equity manager said Fidelity Special Values was already defensive, but that has been increased significantly as the Covid-19 pandemic persisted.
Wright pointed out that one of the things which actually hurt the trust the most at the start of the March sell-off was being invested in companies – such as aerospace specialist Meggitt – that are, typically, extremely defensive during an economic downturn, but aren’t when their customers’ revenue base has to shut down.
As such the FE fundinfo Alpha Manager had to find other ways of being defensive by investing in companies either not affected or those that had benefitted from the virus. Stocks such as Swedish telecommunications company Ericsson, Vodafone and gold miners which Wright said he had been buying up since March.
Dealing with what he calls “unparalleled times”, Wright said that one of the best decisions he’d made in Fidelity Special Values recently was reducing its oil exposure when the price started to drop, and again when one of the trust’s former biggest holdings – and Royal Dutch Shell – cut its dividend, as well reducing its holding in BP too.
“I think it was probably the best decision in terms of looking at performance saved and selling [and just having] 3 per cent of the trust in oil has helped to be the best decision,” he said.
But, whilst some calls went well for the manager there were others which, admittedly, caused a big hit to the trust’s returns.
“A very bad decision was that we did start selling some of our Halfords position before then having to buy it back again,” Wright said as the auto parts and bicycle retailer has been “one of the clear winners”, in the crisis he said managing to stave off a complete collapse in sales with their ‘click and collect’ service.
Nevertheless, Wright said it is hard to pinpoint individual trades because of the trust’s diversified portfolio.
“It’s really difficult to think about one individual decision because clearly this portfolio has got over 100 names,” said Wright. “So I try and make sure that there’s lots of individual decisions that are powering that performance.
“Whilst clearly we always modelled for a recession and a heavy recession downside we did not model for a period where companies would see large swings of 50 to 60, 70, 100 per cent of their revenue disappear.
“And so, we did start selling out of some of those positions that even in a very short period of time like six weeks we couldn’t afford these liabilities.”
But as the UK government manoeuvred itself very quickly with vast amounts of fiscal spending Wright said it provided the market with enough liquidity to prevent a complete economic breakdown.
As such, running a bottom-up process is more crucial than ever, said the manager, allowing him to stay “nimble and close to companies” and examine how they’re dealing with the crisis.
Fidelity Special Values has made a return of 4.88 per cent over five years, underperforming against the IT UK All Companies peer group (6.61 per cent) and the FTSE All Share index (12.56 per cent).
Performance of trust vs index & sector over 5yrs
Source: FE Analytics
The trust is currently trading at a 7.2 per cent discount to net asset value (NAV), is 7 per cent geared, has a dividend yield of 3 per cent, and ongoing charges of 0.96 per cent as at 4 June.