Despite a number of bargain UK shares currently being available following the recent market crash, some investors may be feeling cautious about buying them.
However, in many cases, their low valuations appear to factor in the risks they face. And, through purchasing dominant businesses in sectors with long-term growth potential, it is possible to generate high returns as the stock market recovers.
Therefore, now could be the right time to invest £10k, or any other amount, in a diverse selection of businesses in a tax-efficient account such as a Stocks and Shares ISA.
Bargain UK shares
While many UK shares currently trade at low prices compared to their historic averages, in some cases they may be merited. Some sectors face hugely challenging outlooks, with there being the potential for a permanent change in consumer behaviour that makes the business models of their incumbents obsolete.
However, in other cases, stock prices represent exceptionally good value for money. Some businesses have solid balance sheets and the financial firepower to make the necessary adjustments to their business models in order to adapt to changing consumer trends. Therefore, they could deliver improving financial performance that makes their current share prices difficult to justify from a long-term investment perspective.
Dominant businesses
The biggest bargains among UK shares may be found among dominant businesses within a specific sector. They may have a relatively large market share, as well as a significant economic moat. For example, they may benefit from a lower cost base, a unique product, or strong customer loyalty that can help them to survive in what could be a period of slower sales growth in the coming months.
Furthermore, dominant businesses within a specific sector may be able to extend their strong positions over rivals in the long run. In doing so, they may become more profitable and be able to justify higher valuations. Therefore, as well as focusing on high-quality companies in sectors that have long-term growth prospects, buying the industry leaders may be a means of obtaining a more attractive risk/reward investing opportunity.
Diversification
Even though many UK shares appear to offer long-term recovery potential, the unclear economic outlook means that holding a wide range of companies is more important than ever. A diversified portfolio offers less company-specific risk, as well as the opportunity to access high rates of growth in the coming years. This could lead to stronger, and more robust, portfolio growth.
While undervalued shares may become even more attractively priced should there be a second market crash, investing today through a tax-efficient account such as a Stocks and Shares ISA appears to be a logical move. Investor sentiment towards the stock market is weak, which means that many strong, dominant businesses in attractive sectors offer good value for money. Buying them now, and holding them over the long run, could be a very profitable strategy.
