The 2020 stock market crash sent the prices of UK shares on a downward spiral. Since the start of the year, the FTSE 100 index has fallen by around 24%. Many UK stocks are now trading on dirt-cheap valuations. This is evidenced by rock-bottom P/E ratios and share prices that are well below historical averages.
But I think buying cheap UK shares now means you could be well-positioned ahead of a potential stock market recovery.
Picking the winners from the losers
Arguably, it has never been more important for investors to separate the winners from the losers. The enormous economic damage caused by the outbreak of Covid-19 will undoubtedly put many businesses under significant pressure.
In particular, companies saddled with debt prior to the pandemic will have their work cut out. The disruption to business, and a sustained fall in consumer demand, could cause some firms to continue bleeding cash until they go under.
Certain sectors of the economy look to be in big trouble. For example, the future of the travel and tourism industry appears to be uncertain and many companies are in need of government support for survival.
That said, despite the bleak economic outlook, not every company will suffer to the same extent. Buying stock in companies that display solid business fundamentals, strong balance sheets and healthy levels of liquidity could deliver attractive returns over the long term. Additionally, many of these stocks look dirt-cheap in my eyes.
Cheap UK shares
For example, shares in Taylor Wimpey trade at a P/E ratio of around 7, indicating significant value, I feel. The company recently announced a phased return to construction and the sale of new homes during lockdown was strong. Prices were even comparable to those in the first quarter of 2020.
Likewise, BAE Systems is another top FTSE 100 stock that looks ridiculously cheap to me. Given that the firm saw no material impact on business during the first quarter of 2020, I think the aerospace and defence giant will comfortably come out of the other end of the crisis. What’s more, the lucrative defence sector looks relatively future-proof in my view.
Finally, I’m keeping an eye on Imperial Brands Group, whose shares trade at a P/E ratio of 5.9. The company has seen no material impact on trading since the outbreak of Covid-19 and has actually been increasing stocks of core products. The shares look oversold to me in light of a strong performance thus far.
Holding for the long term
Once you’ve picked up a few bargains, the benefits of holding for the long run cannot be overstated, especially in light of the current economic climate. In my opinion, investing for the long term is a superior way to build wealth over time, rather than attempts to time the market and make a quick sale.
Whether the stock market rebounds or crashes in the near future matters less if you have a long-term horizon. Ultimately, short-term fluctuations in share prices are nothing to worry about if you intend to invest for 10+ years.
With that in mind, I’d buy cheap UK shares today and hold them for as long as possible. I expect investors willing to take the plunge to be awarded with attractive returns if these companies can continue to grow earnings and consolidate their market positions post-pandemic.
Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.