Buying cheap FTSE 100 stocks today may not seem like a sensible investment strategy. Many countries around the world still have lockdowns in place to try to control the coronavirus outbreak. These efforts may lead to severe declines in global GDP.
This economic pain may continue to weigh on investor sentiment for the rest of the year. As such, cheap FTSE 100 stocks may not yield high returns for investors in the short run.
However, over the long run, economic growth is highly likely to return.
Therefore, now could be the right time to buy a selection of high-quality businesses while they offer wide margins of safety and hold them for the long term.
FTSE 100 recovery
The coronavirus crisis hit the global economy like a sledgehammer. To try to cushion the economic fallout from the crisis, policymakers around the world acted quickly to established major economic stimulus plans. These plans have helped support the global economy, and it now looks as if we will avoid the worst.
Although the crisis is not over yet, financial markets around the world have unfrozen, allowing companies to raise capital. This has helped many businesses pull back from the brink. Job retention and creation schemes are also being considered in the UK and across Europe.
These efforts suggest that while the near-term outlook for the global economy is highly uncertain, growth should pick up over the next few years.
The FTSE 100 should benefit from this recovery. As one of the world’s largest stock indexes, the performance of the blue-chip index tends to mirror global economic growth.
This may mean that the FTSE 100 remains volatile throughout the rest of 2020, but its performance could pick up substantially in 2021.
Buy cheap and hold
Considering all of the above, now seems to be a great time to buy cheap FTSE 100 stocks. Buying stocks cheap could protect investors from further uncertainty as they may not fall further if economic performance continues to deteriorate throughout 2020.
Research shows that investors who follow this strategy of buying stocks while valuations are low have often made the most attractive returns in subsequent bull markets.
It is also crucial to consider other factors before buying cheap FTSE 100 stocks. These include the quality of the company and its balance sheet.
FTSE 100 companies with strong balance sheets and fat profit margins may be better placed to weather further economic uncertainty and market turbulence. Finding these companies may require additional research, but this extra effort may be worth it over the long run.
Buying a basket of these FTSE 100 companies could be the best way to profit from the market recovery. A diversified basket of blue-chip companies would allow you to benefit from any potential upside while minimising downside risk if one, or several, of the businesses run into problems over the next few years.
If you are looking for FTSE 100 companies to start building your portfolio, we have some ideas here at the Motley Fool.
Don’t miss our special stock presentation.
It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.
They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.
That’s why they’re referring to it as the FTSE’s ‘double agent’.
Because they believe it’s working both with the market… And against it.
To find out why we think you should add it to your portfolio today…
Rupert Hargreaves 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.