* Special Situations fund sees market stabilising
* Sanjeev Shah buying UK banks, retailers, housebuilders
* Underweight mining, energy, utilities, industrials (Adds details)
By James Molony
LONDON, Dec 2 (Reuters) - The UK equity market is showing signs of bottoming out and stabilising as a range of key indicators reach historic levels, the manager of Fidelity's Special Situations Fund said.
"Everything I look at in terms of valuations, sentiment indicators, directors' dealings, indicate to me that we are now going to go through a bottoming pattern in the market," Sanjeev Shah told Reuters in an interview on Tuesday.
"Although I am in no way thinking that we're off to the races and we're going to have a v-shaped recovery, I do think markets are going to stabilise and there will be increasing opportunities to make some good investments," he said.
Shah, who took over the 2 billion pound ($2.97 billion) Special Situations Fund from Anthony Bolton in January, said the current bear market ranks among the worst ever.
But indicators such as the scale of the declines and buying among company directors has led Shah to become more positive.
He said he has been increasing exposure to "bombed out" UK banks even though his fund has seen relative performance suffer due to stakes in HBOS, the fund's fourteenth-largest holding and in Royal Bank of Scotland.
"Financials are showing increasing value and could be the first to stabilise," he said.
"There have been some major steps taken in terms of recapitalisation and on a Tier 1 basis UK banks look fairly well capitalised even relative to Europe now," he said.
FUNDAMENTALS
Shah points to the dramatically increased spread in valuations between different sectors and between companies within sectors -- in some cases at 50-year highs.
"From a fundamentalist point of view you're not going to get a much better opportunity than you have today, I suspect, in your entire career," Shah said.
"Late 2002 and early 2003 was a good opportunity to stock pick and there was a lot of opportunity in small- and midcap-land however given the extent of this crisis and its spread through the real economy the opportunities arising are probably greater," Shah said.
Under Bolton, the Special Situations fund invested in equities across the globe. On his retirement it was split into a UK fund managed by Shah and a global fund managed by Jorma Korhonen.
The UK fund is down over 30 percent since end-2007, with assets having fallen from 2.93 billion pounds during the period.
Shah said he is heavily underweight in global cyclical sectors like mining, energy, utilities, and industrial where he believes there is earnings risk.
"If you adjust the earnings to a 10-15 year average and then compute a PE ratio based on that adjusted earnings level you still come out to a valuation which is significantly above the 10-15 year history," Shah said.
VALUE
Conversely, Shah sees value in domestic cyclical companies and interest-rate sensitive stocks such as retailers, housebuilders, and leisure companies, which have been harder hit than global cyclicals.
He also says companies with strong franchises stand to gain market share from companies going out of business and picks out Kingfisher Plc, which has 40-50 percent of the UK home improvement market.
"Media continues to be a very strong overweight in the fund, it's about 14-15 percent," Shah said. "That includes structural growth stories in the sector such as Reed Elsevier and Pearson but then also some more cyclical names, like some of the advertising companies as well as pay TV companies like BSkyB."
Shah said defensives such as utilities, tobacco, and food and beverages, which many funds moved into during the crisis, look expensive relative to historical prices.
Shah said he still has significant holdings in pharmaceutical and healthcare stocks - GlaxoSmithKline is the fund's largest position - though he is starting to cut them back.
(Editing by Joel Dimmock and Erica Billingham)