Despite the uncertainty and risk surrounding the pandemic, I would use any share price weakness as the perfect opportunity to buy cheap FTSE 100 shares.
It is now clear that the pandemic (or at least its after-effects) will be around for a while. There will be casualties. Some businesses will fail, others will be severely damaged. In these cases, shareholders will suffer. But there will also be businesses that are positively affected by the affects of the pandemic and the subsequent social distancing. The virus has inadvertently separated stocks into winner and losers. Investors that are able to separate the two, will be rewarded.
It is easy to identify the losers. Airlines and leisure companies have been among the hardest hit. So too have gyms, restaurants, theme parks and hotels. Virtually their entire operations have come to a halt, in many cases eliminating revenues completely. Huge multi-billion-pound losses await, with the possibility of equity raisings diluting investor ownership. It could be years before these companies get back to where they were before the virus, let alone having the chance to grow further. The worst-case scenario is that the pandemic brings about a permanent change to consumer behaviour, affecting the future viability of these businesses.
Recession-proof cheap FTSE 100 shares
Thankfully, there are many recession-proof, resilient companies that have seen their operations largely continuing through the crisis. They will still suffer from lower revenues and profitability, but less so. These are companies that represent safe investments in any climate and are currently cheap FTSE 100 dividend shares. I’m thinking about sectors that provide critical solutions, such as engineering, defence, utilities and power. They’re especially safe when their end client is the government, which effectively provides a backstop.
Of these resilient companies, there are some that haven’t just been surviving, but have been flourishing. Makers of bleach, hand sanitisers and other cleaning products have seen their sales boom. Manufacturers and sellers of staple and long-life foods will also have benefited from lockdown and panic-buying. Supermarkets, convenience stores and corner shops will all have seen a marked improvement. These companies produce goods that will be needed no matter what’s happening. I would be very surprised if investors in these companies lost money in the long term.
Finally, there are sectors that have benefited enormously. The biggest beneficiary seems to be the tech sector. As the world has been kept indoors, we’ve invariably gone online, whether that’s through social media, telecommunications, or ordering food. As well as facilitating business and social interactions, it’s also keeping us safe and entertained.
Of course, the other big winner is the pharmaceutical industry, from testing laboratories to huge drugs companies. Investors have started to bet on who’s going to come up with a vaccine/treatment first.
Undoubtedly, the best opportunities for superior returns lie within this final group. But this group also carries the most risk. These shares are likely to be expensive already and may not live up to expectations. For that reason, I would only look at the cheaper end of this group. That might be like to trying to find a needle in a haystack, though. I think we’re better off buying the second group of cheap FTSE 100 shares, which should also bring a lot less risk.
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Thomas 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.