The FTSE 100’s performance over recent weeks has been hugely disappointing. The index has fallen by up to 15% from its 2020 starting price, experiencing its third worst week since inception during that time.
Although coronavirus and political risks in the US and Europe could weigh on markets over the short run, in the long term now may prove to be a buying opportunity.
Many stocks appear to be undervalued, the index has a track record of recovery and the return prospects available elsewhere appear to be slim. As such, now could be the right time to buy a wide range of large-cap shares.
Valuations
The FTSE 100 currently yields around 5%. That’s its highest since the financial crisis, significantly higher than its average yield since inception. This suggests the index offers good value for money at the present time, and that many of its members have wide margins of safety.
Certainly, the near-term prospects for many FTSE 100 shares are uncertain. A slowdown in the performance of the world economy now seems inevitable following the spread of coronavirus, and may mean the financial prospects for international companies deteriorate to some degree in the short run.
However, in many cases, those risks seem to have been priced in to valuations by investors who have become increasingly nervous about the outlook for the world economy. New investors may, therefore, be able to buy FTSE 100 shares while they trade at a significant discount to their intrinsic values in many cases.
Recovery potential
It may not be possible at the present time to accurately gauge when the FTSE 100 will recover. It could, for example, experience a tough 2020 following over a decade of growth.
However, its track record shows it has always recovered from corrections and bear markets to post new record highs. Sometimes this process of recovery has taken as little as a few months, while in other cases it has taken a few years. For long-term investors, though, the fact the FTSE 100 has always posted a successful turnaround should provide confidence that the index can do likewise following the outbreak of coronavirus.
Relative appeal
Investors have few attractive options outside of the stock market at present. The returns on cash and bonds are exceptionally low in many cases, while tax changes and high house prices mean that buy-to-let investments have become less appealing over recent years.
As such, on a relative basis, shares appear to be highly attractive at the present time. They may not post a strong recovery in the short run, and there may even be more pain ahead for investors. But over the long run, a recovery seems to be highly likely. Therefore, now may be the right time to purchase a diverse range of FTSE 100 shares.
