UK share prices are still straining to gain ground as the Covid-19 crisis rolls on. The FTSE 100, at 6,500 points, has made little progress since last summer and just closed at its cheapest since early December.
This smacks of a wasted opportunity, in my opinion. There are stacks of quality UK shares out there going at what I consider to be bargain-basement prices following the 2020 stock market crash. Compare the Footsie’s performance to those of other major global share bourses like the Dow Jones and the Nikkei. These two particular indexes are, as I type, moving northwards and approaching their respective record January highs.
Why I’m still buying UK shares
It could be argued that UK share investors are being overly cautious. I’ve certainly continued building my Stocks and Shares ISA since the public health emergency began last winter.
Now I won’t downplay the possibility that the economic rebound could be lumpy and take longer than anticipated. It’s not just hiccups regarding the fight against Covid-19 that could hamper the recovery. Other issues like Brexit, the impact of soaring sovereign debt levels, and renewed trade wars could hamper corporate profits in the short to medium term too.
But I also see reasons to be optimistic. The British economy has been hardest hit of all developed economies from the coronavirus crisis, sure. And a lot of UK shares face further profits upheaval in 2021. However, I believe the outlook for the global economy is a lot rosier, helped by the huge stimulus measures of governments and central banks. The future therefore appears very bright for London-quoted companies that have large exposure to foreign markets.
Just £400 a month could help me build a big ISA
Besides, I don’t buy UK shares based on the expected level of shareholder returns in the near future. Of course I make an effort to avoid stocks whose profits could fall off a cliff, or whose balance sheets might come under significant pressure, in 2021. But I invest based on the returns a share is likely to generate over a decade, perhaps longer.
Over an extended time frame UK share investors make an average annual return of 8%, studies show. The negative impact of stock market volatility and temporary profits hiccups tend to be greatly diluted over time. This is why I’d drip-feed £400 into my Stocks and Shares ISA each month. Using that return estimate of 8%, a total investment of £144,000, and a 30-year time frame, the sums work out to £563,420.
There’s no guarantee, of course, and it’s important to have a well diversified portfolio of good quality shares. But that’s the sort of figure that can help Britons like me to head off the rising dangers to the State Pension. And I think now is a particularly great time to start building a UK shares portfolio too. This is because plenty of top-quality companies are still trading at rock-bottom prices following the 2020 stock market crash.
