The outbreak of Covid-19 has rattled stock markets around the world. The UK’s FTSE 100 index is down by over 20% since the start of 2020. As a result, many top UK shares are trading below their average historic valuations. As such, now may be an ideal time for investors to grab a selection of cheap FTSE 100 shares and hold them for the long term.
An opportunity to buy FTSE 100 shares
A word of caution though, share prices may still have further to fall. On top of this, a steady flow of economic data is painting a rather ominous picture for the global economy.
In fact, last week the Bank of England forecast a 30% drop in output in the first half of 2020. That would result in the UK economy entering its deepest recession in 300 years!
Analysts diverge over the degree to which they believe output and GDP will fall, but they all agree that the damage will be substantial, albeit short-lived. What’s more, it’s worth noting that the Office for Budget Responsibility predicts a quick bounce-back in the economy as a whole, presuming a three-month lockdown.
With that in mind, as long as lockdown restrictions are lifted in the near future, the economic damage looks to be sharp but short-lived. In my view, this scenario offers an opportunity to buy cheap FTSE 100 shares ahead of a stock market recovery.
Active vs passive
You may be thinking that the improving economic outlook presents an ideal opportunity to invest in the entire FTSE 100 index. For example, through a tracker fund. That may be true, but personally, I’m favouring individual shares over index funds at the moment.
There are a few reasons for this. Firstly, I believe that through carefully selecting a diversified basket of individual UK shares, you greatly boost your chances of outperforming the index over the long term, receiving attractive returns for doing so.
Secondly, in a worse-case scenario, if the recession turns out to be deep and prolonged, buying individual shares (that have the potential to perform well in times of economic downturn) minimises losses over buying an index fund. Think about it, a FTSE 100 tracker fund will closely mirror the performance of the economy. So, when the economy performs poorly, the entire index will suffer too.
In it for the long run
Finally, I see it as important to stress that if you’re buying cheap FTSE 100 shares today, you must be prepared to be in it for the long run. That way, you’ll ride out the highs and lows of the stock market, avoiding the temptation to time your investments.
Moreover, many cheap FTSE 100 shares boast attractive dividend yields. With that in mind, you’ll have ample time to reinvest those dividends and allow your returns to compound over time.
If you’re struggling for inspiration, I particularly like the look of GlaxoSmithKline, Vodafone, Taylor Wimpey and Aviva at the moment. I believe these companies have good earnings growth potential and I like their solid market positions.
Ultimately, as a result of the stock market crash, I think it’s an ideal time to buy a selection of cheap FTSE 100 shares with bright prospects and strong balance sheets to build wealth over the long term.
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Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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.