While investor sentiment towards the FTSE 100 may be currently at a low ebb, this could prove to be a good time to invest. After all, the index has fallen by around 13% from its all-time high. This suggests there may be a number of value-investing opportunities on offer which could lead to high returns in the long run.
Clearly, though, there are risks such as Brexit and a full-scale trade war facing the FTSE 100’s outlook. They could cause further volatility and uncertainty for the index in the near term. With that in mind, here’s how I’d try to take advantage of the recent decline in the stock market.
Fundamentals
As ever, buying high-quality shares is a good place to start when it comes to investing. Now, though, this could be more relevant than ever, with a number of risks facing the economy. Companies which have high debt levels or narrow interest cover, for example, may find it increasingly difficult to service and repay their borrowings as interest rates are forecast to rise over the next few years. This could cause them to become less popular among investors at a time when the general consensus is moving towards increased risk aversion.
Since there’s been a decade of improving performance for the FTSE 100, a period of volatility, and even a bear market, may be ahead. As such, focusing on stocks which not only have strong fundamentals, but also business models which can perform well in a variety of economic circumstances, could be worthwhile. In contrast, cyclical shares may need to trade at very appealing prices in order for them to have investment appeal.
Valuations
With the FTSE 100 having fallen 13% since May, it’s tempting to wait for even lower valuations before buying. After all, the index seems to be on a downtrend, and investor sentiment is weak. A variety of risks face the world economy, with potential threats such as Brexit, a weaker Chinese economy, and a rising US interest rate, all having the potential to negatively impact on GDP growth over future quarters. As such, a case for waiting for a lower price level from the UK’s main index could be fairly easy to argue.
The reality, though, is that the future prospects for the UK and world economies are highly changeable. They could easily improve over a short time period, and this could cause investors to miss out on what may prove to be a sound buying opportunity at the present time. As such, it may be prudent to find stocks that are trading at fair values and invest in them. Although they may deliver paper losses in the near term, in the long run they could generate impressive returns given the successful track record of the FTSE 100 when it comes to recovering from downturns.
