Since the 2020 market crash, a stock market rally has pushed the valuations of many UK shares to significantly higher levels. For example, the FTSE 100 is trading around 30% higher than it was at its lowest point during the crash.
Despite this, many shares continue to trade at low prices versus their historic averages and when compared to other companies in the same index. This could present an opportunity to buy undervalued shares and hold them for the long run. They could benefit from a further market rise in the coming years.
Undervalued shares after the stock market rally
The recent stock market rally has left many shares trading at higher prices versus a number of months ago. But there could still be opportunities to access high-quality companies at low prices. Sectors such as financial services, housebuilding and media continue to contain a wide range of businesses that, in some cases, are a long way from fully recovering from the 2020 market crash.
Some of those businesses may be trading at low prices because they have weak financial positions or strategies that may not be easily adapted to a changing world economy. However, in other cases low share prices are currently on offer for financially solid companies with good growth prospects. They could prove to be worthwhile buying opportunities on a long-term basis. Such firms may be able to capitalise on the potential for a stock market rally provided by the world economy.
Further growth potential after the 2020 crash
While many UK shares have made gains since the 2020 market crash, history suggests the stock market rally could have further to run. Clearly, no stock performance is ever guaranteed and the past is never repeated exactly the same way in future. However, indexes such as the FTSE 100 have always recovered from their declines to post new record highs. It currently trades around 10% on its price level from a year ago. This could mean there are further gains on offer over the long run.
Monetary policy indicates that conditions for equity markets could remain favourable over the coming years. Interest rates are forecast to remain at or close to historic lows over the next few years. Meanwhile, negative interest rates have not yet been ruled out by the Bank of England, while further quantitative easing could be put in place should the economic recovery stall after coronavirus containment measures come to an end.
Capitalising on the prospects for equity markets
Therefore, the prospect of a further stock market rally could be relatively high. Through buying a diverse range of undervalued stocks, it may be possible to capitalise on it. Certainly, volatility and risks remain elevated – and are likely to continue to be high in the coming years. But, from a risk/reward perspective, a number of UK shares could offer appeal at the present time.
