In the last three months the FTSE 100 has fallen by over 7%. That’s a hugely disappointing performance that has wiped out all of the gains made during the 2017 calendar year. And with the index recently moving below the psychological 7,000 level, investor sentiment doesn’t seem to be picking up.
Of course, whenever there is a fall in share prices it can present a buying opportunity. The aim for all investors is to buy shares when they’re low and sell when they’re much higher. However, for any stock to trade at a low level, there must be a reason. Without risks or negative news flow, all stocks would be likely to trade at high levels all of the time.
The current scenario facing the stock market is an uncertain future in a number of areas. Inflation continues to be a potential difficulty as the world economy moves from a decade-long deflationary period to one which could be characterised by faster price rises.
There are also concerns surrounding the response of policymakers to the threat of inflation, with interest rate rises having the potential to cool inflation. At the same time though, they could hurt economic growth prospects. And with progress seemingly being made on Brexit talks, a stronger pound could hurt the FTSE 100’s performance over the coming months.
While there are risks facing investors at the present time, the current situation is no different than any other period in that respect. Therefore, utilising investment principles which have been successful in the past could be a sound means of generating relatively strong returns over the long run.
For example, a number of large-caps now offer wide margins of safety. In the tobacco, utility and healthcare sectors there are high yields, low price-to-earnings (P/E) ratios and businesses with strong growth outlooks. They all face uncertain futures and come with various risks But buying them while they’re trading at a low ebb could lead to high returns.
Similarly, the banking sector could offer investment opportunities. With interest rates set to rise, the potential for improved profitability could be high. Yet many of the challenger banks and larger stocks in the sector offer low valuations. And while Brexit is contributing to a squeeze on consumer disposable incomes in real terms, retail stocks with sound balance sheets and innovative strategies could offer high, albeit volatile, returns in the long run.
At the present time, there doesn’t seem to be a ‘magic bullet’ which will ensure high returns for an investor. However, by focusing on valuations, financial strength, dividends and growth potential, it’s possible to generate high returns in the long run. The recent decline in share prices may continue over the course of the year. Therefore, buying opportunities could be plentiful for investors who are happy to take a long-term approach.
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