Markets are down some 40 per cent from their peak and investor sentiment is at rock bottom. These are perfect conditions for a lucrative stock picking environment in 2009, according to Sanjeev Shah, Special Situations Fund manager at Fidelity International.

Mr Shah has positioned his fund to benefit from what he sees as likely gains in consumer services and consumer cyclicals.  “The rising spread in valuations between sectors and within sectors is creating a great bottom up stock picking environment. We may not have passed the trough for stocks yet and the economy is likely to be in recession for some time but analysis of fundamentals leads me to be more optimistic about stock market opportunities than I have for a while,” he said.

He also has confidence in the response of international governments to the economic crisis. “The authorities have realised the extent of the problems facing consumers, business and the financial system and are developing responses which are more far reaching than have been seen in previous crises.  These should start to have a meaningful impact in 2009.  I expect we will see plenty more surprises next year but I also anticipate that they will have less detrimental effect on investor sentiment which is already at extremely low levels,” he said.

Mr Shah is optimistic that confidence is returning to the markets. “More directors have recently been buying their own companies’ shares than at any time in the last year – that they have been doing so in a falling market is doubly significant. Analysts are becoming more realistic and lowering their forecasts. Valuations on many stocks and sectors are looking attractive when compared to those in the 1993 bear market especially on a price-to-book basis,” he said.

“In this environment, I’m increasing my exposure to financials with a basket of banking stocks to spread the risk.  I also like other non-bank financials such as Provident Financial and I am overweight financials overall.

“I have also increased my exposure significantly to consumer cyclicals particularly media, leisure and retail stocks which look very attractive versus history and are under-owned.  British Sky Broadcasting and Pearson are large positions in the fund. 

“I continue to have large exposure to structural growth stories which look good value such as the business services company Xchanging, which benefits from business process outsourcing trends.  I am also overweight technology stocks.   I am always attracted to potential bid targets and it is likely that merger and acquisition activity will pick up in 2009.”

The £2 billion Special Situations Fund remains a first quartile performer over every time period and is first decile during Mr Shah’s 11 month tenure to end of November 2008, the fund managers said in a statement.

Fidelity International’s assets under management as at 30 September 2008 are $197.9 billion.