The FTSE 100’s market crash of 2020 has been exceptionally fast-paced. A wide range of companies have suspended operations and look set to post disappointing financial performances in the current year. As such, investor sentiment has weakened to a point where many large-cap shares trade at significant discounts to their historic average valuations.
While this situation may persist in the short run, over the long run the FTSE 100 offers recovery potential. Its past performance shows it’s been able to overcome every previous bear market. As such, now could be the right time to buy undervalued FTSE 100 stocks prior to their likely recovery.
A challenging future
The impact of coronavirus on the economy has been unprecedented. Entire industries have shut down, while demand for sectors that are still operating has slumped at a pace that may never have been seen previously.
At the present time, the prospect of lockdown restrictions being lifted seems to be some weeks away. As such, the near-term outlook for the FTSE 100 could be highly uncertain. Investors may decide to focus on the financial challenges posed by coronavirus. Or they could begin to look ahead to a recovery. Either way, further instability for FTSE 100 share prices seems highly likely. This could mean that investors experience further paper losses in the coming weeks.
Beyond the short run, a FTSE 100 recovery seems to be highly likely. The index has been able to eventually recover from every previous bear market it has faced. Sometimes it has taken a matter of months to achieve this goal while, on other occasions, it has taken several years.
However, investors who buy stocks during bear markets, such as those experienced in 1987, the early 2000s and in the financial crisis, are likely to have generated high returns.
Therefore, buying high-quality FTSE 100 shares today could be a shrewd move. They may fail to deliver recoveries in the remainder of 2020. But, over the coming years, the FTSE 100’s current price level and its track record suggest that there is significant scope for capital gains across its variety of sectors.
Of course, to take part in any economic recovery a company must have the financial strength to survive the present challenges. As such, focusing your capital on businesses with modest debt levels, strong market positions, and access to substantial amounts of cash, could reduce your overall risks.
Likewise, diversifying across a variety of industries and geographies could be a sound move. Some countries may return to economic normality faster than others in the coming months, and companies operating in those areas may make stronger gains versus their industry peers.
Clearly, the present time is an uncertain period for FTSE 100 shares. But it could also be the right time to buy high-quality shares while they are trading at low prices. Just as it was during previous bear markets prior to their eventual recoveries.
Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.