The prospect of a second stock market crash continues to be relatively high. The ongoing rise in coronavirus cases means that the prospects for the world economy could prove to be very challenging.
Despite this, now could be an opportune moment to buy a diverse range of cheap UK shares. In many cases, they appear to offer wide margins of safety that may take into account the risks faced by the world economy.
Although they may not produce high returns in the short run, due to a weak economic outlook, over the long run they could outperform other mainstream assets.
A second stock market crash
The prospects for a second stock market crash seem to have increased over recent weeks. Continued growth in the number of coronavirus cases in major economies such as the US means that a return to more widespread containment measures may be ahead. This could slow economic growth and lead to more difficult operating conditions for many businesses.
However, in many cases, UK shares appear to offer very good value for money. Certainly, some sectors such as online retailing and healthcare have rebounded strongly. However, other industries such as banking and energy continue to trade on low valuations. In fact, in some cases, the valuations of large-cap shares are significantly below their long-term average.
Therefore, investors who take a long-term view of their portfolio may be able to buy high-quality stocks at the present time while they offer wide margins of safety. They may not produce strong returns in the short run due to the prospect of a second stock market crash. But over the coming years they may be very profitable holdings.
Relative return potential of UK shares
The potential for another stock market crash means that some investors may look to assets other than shares at the present time. For example, they may seek lower-risk opportunities such as cash and bonds, or they may decide to purchase buy-to-let property as government support impacts positively on buyer demand.
However, cheap UK shares could be a more attractive option from a risk/reward standpoint than other mainstream assets. Their returns are likely to be significantly higher than those of cash and bonds in a low-interest-rate environment that may last for many years. Similarly, with buy-to-let properties being priced at high levels, UK shares could offer much better value for money and greater capital return prospects.
As such, now could be the right time to buy cheap UK shares, despite the risk of a second market crash. Their valuations and track record of recovery suggest that long-term investors could generate high returns in the coming years as the world economy recovers and the operating conditions for FTSE 100 and FTSE 250 companies improve.
