The FTSE 100 has crashed by as much as 20% since the start of the year. In the near term, further declines could be possible depending on how the spread of coronavirus impacts on the world economy’s growth rate.
However, even if the index does decline by another 20%, it could offer superior long-term return prospects compared to gold and buy-to-let properties. Low valuations, the index’s past performance and its growth potential could combine to produce impressive returns for investors who ignore short-term uncertainty and buy for the long run.
Valuations
At the present time, the FTSE 100 appears to offer a wide margin of safety. Evidence of this can be seen in its dividend yield, which stands at one of its highest-ever levels of 5%. This suggests that investors are expecting the world economy’s growth rate to significantly decline in the coming months, which could negatively impact on the financial performance of the index’s members.
If the FTSE 100 falls by another 20%, it could become even more attractively priced. This would entail it trading at a level that has not been experienced in around 10 years. As such, investors may be able to buy high-quality companies while they trade on exceptionally low valuations. This could improve their risk/reward ratio, and ultimately lead to higher returns in the long run.
Relative appeal
Of course, the FTSE 100’s recent crash, and the prospect of further falls for the index, may cause investors to focus their capital on other assets. Gold, for example, has become increasingly popular due to its status as a store of wealth. However, it now trades at a seven-year high. This suggests that there may be less capital growth potential than there has been in the past.
Likewise, buy-to-let properties may fail to deliver the high returns investors have come to expect from the property market. Certainly, low interest rates may help to support the market. But since house prices are close to a record high when compared to average incomes, they may become increasingly unaffordable over the medium term.
Buying opportunities
It is difficult to feel comortable about buying shares after they have fallen heavily. It is even more challenging to do so with there being the prospect of further declines.
However, whether the FTSE 100 falls 20%, 40% or any other figure in total in the current crash, its long-term recovery prospects seem to be bright. It has been able to successfully recover from all of its previous crises. Since many of them were exceptionally severe, such as the 1987 crash and the financial crisis, the index has the capacity to deliver a turnaround.
As such, investors may wish to buy high-quality shares while they trade on low valuations. Doing so could lift their returns over the long run, and improve their financial future in the coming years.
