The FTSE 100’s long-term recovery prospects could be stronger than many investors realise. Certainly, more challenging trading conditions could be ahead that cause a period of uncertainty or even a market crash. But the index’s past performance shows that it has always been able to recover from its very worst periods to post new record highs.
Therefore, buying financially sound growth businesses at low prices could be a means of capitalising on the market crash to position your portfolio for a long-term recovery.
The financial strength of businesses has arguably been overlooked by some investors over recent years. A period of encouraging growth for the world economy has papered over risks such as high debt levels on company balance sheets. However, with GDP growth expected to decline rapidly over the short term, those risks could come to the fore and leave many companies in weak financial positions.
As such, it may be of high importance for investors to focus their capital on businesses with low debt levels and access to cash to overcome the difficult operating conditions faced by many sectors. They may have a much higher chance of surviving what looks set to be among the worst recessions faced by the world economy since the 1930s. By surviving the short run, you can potentially benefit from a FTSE 100 recovery over the long term.
FTSE 100 growth potential
Identifying businesses with growth potential at the present time is a relatively challenging task. Some companies, though, have reported that coronavirus has not caused a major decline in their financial performance. As such, they may be able to strengthen their market positions in the coming months to generate higher returns in the long run.
Other businesses may be able to capitalise on changing consumer behaviour. For example, online retailers may see a quickening in the pace of consumers shifting their spending away from physical stores and towards the internet. Likewise, companies that can more easily adapt to an evolving economy that is becoming increasingly flexible could be in a stronger position to generate higher levels of profitability in the coming years.
As well as buying financially-sound businesses with growth potential, purchasing cheap stocks could be a sound move. They may offer the greatest recovery potential, since their valuations may already include a margin of safety as investors prepare for a prolonged period of weak economic growth.
With the FTSE 100 trading at a relatively low level, and many of its members having valuations that are below their historic averages, now could be the right time to buy a number of stocks for the long run. The FTSE 100’s crash may or may not be over. But its long-term recovery prospects seem to be strong judging by its past performance.
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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.