The recent stock market crash means many FTSE 100 shares now trade at low levels not seen since 2009. Unfortunately, for some companies, this pessimism is warranted. As the coronavirus crisis continues, many sectors and businesses will experience challenging trading conditions in the near term.
However, in the long run, these companies should be able to return to growth. As such, investors should take a long-term view of the stock market’s prospects and look to capitalise on the low valuations available in the FTSE 100 today.
It’s impossible to tell when the FTSE 100 will stop falling. The market has stabilised over the past week. But we still don’t know how much of an impact the coronavirus crisis will have on the global economy.
Some analysts believe we’re only just starting to see what could be a prolonged economic depression. Others are more upbeat. But most economists agree the global economy will shrink this year.
Nevertheless, the economy has a solid track record of recovering from even the most severe downturns.
Its performance generally lags investor sentiment. It’s often the case that the FTSE 100 has started its recovery long before the economy begins to show signs of improvement. In other words, if you wait for the economic recovery to start before investing, it could be too late.
This means buying stocks when their prospects are uncertain could be the best option.
FTSE 100 diversification
As it’s impossible to tell when the stock market and economy will recover, diversifying across a range of FTSE 100 shares is vital.
Buying and holding a small number of cheap shares may be tempting, but this strategy can be risky. Just one loss could mean a big set-back for your portfolio. Therefore, owning a basket of FTSE 100 shares that operate in varied geographies and industries could improve your risk/reward prospects.
High-quality dividend stocks appear to be the best options in the current market. Companies like Unilever and Reckitt Benckiser, which manufacture and produce essential products for consumers.
Software provider Sage could also be a good option. The company’s subscription business provides a regular income stream and businesses will still need to complete their accounts no matter how bad the crisis.
Rentokil Initial, meanwhile, has seen a rise in demand for its disinfection and deep clean services. This is helping the FTSE 100 constituent pull through the crisis, and management is already planning the group’s exit strategy.
Shares in oil majors BP and Shell are dealing close to the lowest prices of the past decade. However, both companies are still committed to their dividends, are well funded, and have been slashing costs to improve liquidity.
All of these businesses are trading at levels not seen for months. This suggests now could be an excellent time for long-term investors to capitalise on these low valuations.
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Rupert Hargreaves owns shares of Unilever and Royal Dutch Shell. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Sage 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.