Buying shares in the midst of the worst market crash since 1987 may not seem to be a good idea. After all, the FTSE 100 has recorded double-digit percentage daily falls in recent weeks. They could continue if the situation regarding coronavirus persists.
However, the index appears to offer a wide range of companies which trade on low valuations. Moreover, it’s always recovered from its past crisis, including 1987’s crash, to post new record highs. As such, with other asset classes offering paltry return prospects, now could be the right time to buy a range of FTSE 100 stocks and hold them for the long run.
Low valuations
The FTSE 100 is currently trading at a lower level than it was over 20 years ago. Back then, investors were in a much more bullish mood, with the prospect of an internet revolution helping to push stock prices higher.
Clearly, investor sentiment is much weaker today. The FTSE 100 has a dividend yield in excess of 5%. It’s only been higher during the financial crisis, which proved to be a buying opportunity for long-term investors.
Therefore, buying high-quality companies today while they trade on low valuations could prove to be a shrewd move. In many cases, investors appear to be pricing in significant declines in profitability. This could mean it’s possible to buy a diverse range of strong businesses while they offer wide margins of safety.
Recovery potential
The FTSE 100 may yet experience further falls in its price level. So far, it’s down by around 35% since the start of the year, but the full impact of the coronavirus on a variety of industries is probably yet to be felt.
As such, with the number of cases likely to rise, the near-term prospects for the index seem to be relatively downbeat.
However, over the long term, the FTSE 100 is very likely to recover from its present challenges. It has done so in every previous bear market it’s faced. This process of recovery may take a number of months, or even years, but investors who take a long-term view on the index’s performance may be handsomely rewarded.
Relative appeal
The long-term return potential of assets such as cash and bonds continues to be highly unattractive. Interest rate cuts mean in many cases they offer below-inflation returns.
Therefore, while they may seem appealing in the short run, over the coming years they could lag the return prospects of shares. They may even lead to a loss of spending power, which could be detrimental to your financial future.
Now may not seem to be the time to buy FTSE 100 shares. But, with their low valuations and having the potential to recover, they could produce strong returns after the coronavirus outbreak has subsided.
