Why I’d buy Lloyds and other cheap UK shares today

I think buying cheap UK shares right now could provide scope for impressive returns in a long-term stock market recovery.

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Despite the recent stock market rally, it’s currently possible to buy cheap UK shares such as Lloyds. The FTSE 100 bank is trading 35% down on its price from a year ago. This could indicate it offers a wide margin of safety. And potentially has scope for a long-term recovery.

Building a portfolio of such shares could prove to be a sound move. There are a wide range of bullish forecasts for the UK economy. Meanwhile, the stock market itself has always rallied to new record highs following every previous crash.

Through buying today’s undervalued shares, it may be possible for an investor to use the market cycle to their advantage in the coming years.

Cheap UK shares with recovery potential

A key reason why cheap UK shares such as Lloyds exist is the challenging outlook for the UK economy. The bank currently has a price-to-earnings (P/E) ratio of around 10 at the present time. This suggests investors may be pricing in further difficulties in its end markets that could have a negative impact on its performance.

While that may be the case, the long-term potential for many undervalued UK stocks could be more positive. The scale of fiscal and monetary policy stimulus previously announced in response to coronavirus could deliver an improving economic outlook.

Meanwhile, rising consumer saving during lockdown may be unleashed as a return to normality becomes clearer. This may lead to improving operating conditions for companies such as Lloyds that means they can command higher share price valuations.

Risk management in an uncertain period

Clearly, just buying a small number of cheap UK shares such as Lloyds would lead to a concentrated portfolio. This is where an investor relies on a small number of holdings for their returns. This could mean higher risks, as well as lower returns should one or more holdings experience poor performance and low profitability.

As such, it’s prudent to buy a wide range of companies at the present time instead of holding a small number. Doing so doesn’t have to cost vast amounts of money, since regular sharedealing services can be used on a one-off basis for a relatively low fee. Furthermore, with indexes such as the FTSE 100 and FTSE 250 trading lower than they did a year ago, there may now be a wide range of opportunities to buy cheap UK shares.

Taking a long-term view

Of course, it could take a very long time for cheap UK shares to produce recoveries. In fact, some companies may never recover from their present challenges. However, as is the case with Lloyds, when such businesses have low valuations and appear to have a solid market position that could be re-energised by a recovering economy, they may offer investment appeal over the long run.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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