If you’d told other investors you expected a V-shaped recovery just a couple of weeks ago, you’d have been branded a simpleton. You might just have been hounded off social media as a blinkered optimist.
But the state of the UK stock market means a V-shaped recovery is entirely possible. This scenario suggests we’ve already seen the lowest point of the FTSE 100, below 5,000 points.
In this sequence of events, our portfolios will eventually bounce back to where they were pre-crash. So what would I invest in today?
What a V-shaped recovery is not
We hear today the UK has fallen into the deepest recession in history. That’s a 20.4% hit to GDP from the coronavirus pandemic.
But a V-shaped recovery doesn’t mean an immediate snap back to a rocketing stock market. It’s simply a sustained recovery from the depths of a sharp economic decline.
Central banks and governments desperately want to avoid an L-shaped recovery. That would mean persistently high unemployment over many years. It would mean no return to growth for perhaps half a decade.
Economic stimulus in the form of hundreds of billions of pounds from the Bank of England is all to avoid this state of affairs.
What a V-shaped recovery is
Most investors don’t like to buy undervalued UK shares in a crashing market, even if a V-shaped recovery is on the cards. But this is precisely where you can make the biggest gains of your investing life.
Especially if you can avoid trendy fads and focus on FTSE 100, FTSE 250 and AIM market strength.
Remember Warren Buffett’s mantra: “Be fearful when others are greedy and greedy when others are fearful.”
What if you had bought £10,000 of FTSE 100 insurer Aviva at the bottom of the March crash? You’d be sitting on 27.5% gains in less than six months. That’s a handy capital appreciation of £2,750. Something any private investor would be happy to have essentially for free.
What I’d invest £10k in now
A strong selection of the finest UK shares come to mind when I think about how I’d invest several thousand pounds.
From the FTSE 100, I’d be looking at either BP or Royal Dutch Shell. I think both will gain strongly from this low point as demand for oil returns to the world.
I recommended FTSE 250 B&Q owner Kingfisher as the best share for June 2020 and I think it will continue its stonking 117% rise over the last three months of the year. Home improvements have proved exceedingly popular since lockdown and I see this trend continuing across Europe, where Kingfisher owns top DIY stores.
From among the UK’s smaller companies I’d pick £390m market cap Dotdigital. Its bosses told the market this month that the business would see minimal impact from Covid-19. And its share price has hit recent all-time-highs. Profits, revenues, and earnings per share are all rising year over year. With a price-to-earnings growth ratio of just 0.4, it remains undervalued to my mind. In fact, I see DOTD continuing its stellar rise whether there’s a V-shaped recovery or not.
