The recent fall in the FTSE 100 may cause some investors to question whether they should go ahead with their Stocks and Shares ISA investments. They may be of the view that things could get worse for the stock market in the near term, and a cautious attitude is the best approach.
Of course, further losses could be ahead and investing today may lead to paper losses for investors. However, the recovery potential of the FTSE 100, its low valuation and the long-term growth prospects for the world economy mean that now could be a logical time to invest in a diverse range of companies.
Low valuations
Investors who are seeking to buy stocks when they are low may find that the FTSE 100 has greater appeal now than it did prior to its recent decline. The index itself has a dividend yield of around 5%, which is among its highest-ever levels and suggests that it offers a wide margin of safety.
Clearly, there is scope for valuations to move even lower in the near term. However, for valuations to stand at attractive levels there usually must be an unclear outlook. For example, during the global financial crisis there were fears that the world economy would experience a prolonged depression. Similarly, other crises such as the 1987 crash and the tech bubble included periods when it seemed that the world economy would take many, many years to recover.
However, the FTSE 100 and the world economy subsequently recovered from those challenging periods to post strong growth. Investors who bought when the outlook seemed at its most challenging are likely to have benefited from their actions. This could mean that low valuations today are a reason to buy and hold for the long term.
Growth opportunities
While the near-term growth prospects for the world economy are very challenging, over the long run, the prospects for major economies such as the US, China and India continue to be upbeat. They have strong fundamentals, while recent interest rate cuts in the US and other nations could lead to greater support for the macroeconomic outlook.
Therefore, buying high-quality stocks with strong balance sheets, solid cash flow and that have exposure to fast-growing markets could lead to impressive returns in the long run. Their growth rates may be weaker over the coming quarters than those that were expected by investors earlier in the year prior to the spread of coronavirus, but their valuations appear to adequately factor this in across many of the FTSE 100’s members.
Buying those companies today in a Stocks and Shares ISA may not produce high returns in the short run. But it could lead to an impressive total return in the coming years that improves your financial outlook.
