The FTSE 100’s recent market rally has propelled the index from its March lows. However, many of its members continue to face highly uncertain operating conditions that could lead to a pullback for the FTSE 100 over the near term.
Despite this risk, the valuations on offer across the index suggest that now could be the right time to buy a range of high-quality stocks for the long term. Their wide margins of safety and recovery potential could mean there are high returns on offer in the coming years.
The lockdown measures put in place in response to coronavirus were an unprecedented action across many of the world’s economies. Although there looks set to be a gradual reopening of sectors, such as retail and travel & leisure, in the coming months, there are still risks facing the world economy. For example, there may be a second wave of the virus in the latter part of the year. Geopolitical risks concerning the US and China could also be magnified by the pandemic.
Therefore, there’s a reasonable chance the FTSE 100’s recent market rally will come to an end in the short run. It may even be replaced by a market crash, resulting in paper losses for investors.
Cheap FTSE 100 stocks
However, the valuations of many FTSE 100 shares suggest that investors may be factoring the prospect of a market pullback in the near term. Many industries contain companies trading on valuations that are significantly below their historic averages.
Even companies relatively less impacted by coronavirus appear to offer wide margins of safety at the present time. Therefore, the risk/reward opportunities on offer across the FTSE 100 seem to be highly appealing.
Furthermore, investors with a long-term investment horizon are likely to have sufficient time available for their holdings to recover from potential short-term challenges.
The FTSE 100 has recorded an annualised total return of over 8% since its inception 36 years ago, despite experiencing numerous downturns in that time. Therefore, adopting a buy-and-hold strategy could yield high returns. Even if it causes paper losses in the short run.
An uncertain outlook
Of course, the FTSE 100’s future is always uncertain. There are a wide range of known unknowns. Thes can impact on share prices – even if investors aren’t all that concerned about them during periods of strong growth. For example, even if the outlook for the economy is positive and risks seem to be low, share prices can come under severe pressure from unforeseen and extreme events.
Therefore, investing is always a risky pursuit. However, by obtaining wide margins of safety from cheap FTSE 100 shares now, you could generate high returns from the index over the long run as it gradually recovers from the recent market crash.
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.