The stock market crash of 2020 may have dissuaded many investors from purchasing bargain stocks. They may feel that other assets, such as gold, offer a safer outlook that can provide them with more stable returns, as well as scope for capital growth.
However, in the long run, the return prospects for undervalued shares may be greater than that of gold. The track records of indexes such as the FTSE 100 and FTSE 250 indicate that a recovery in share prices is likely, while gold’s defensive appeal may wane as investor sentiment improves.
Recovering after a market crash
Investor sentiment is likely to remain relatively weak in the coming months after the recent stock market crash. An uncertain outlook for the world economy, as well as the potential for further challenges regarding coronavirus, may lead to heightened caution among investors who would normally have purchased risky assets such as equities.
However, history suggests that investor sentiment is very likely to improve over the long run. Even after the most severe declines in share prices, such as during the global financial crisis and the 1987 crash, investors gradually became more optimistic about the economy’s prospects. And, with the vast amounts of fiscal and monetary policy stimulus action already announced in major economies, the potential for a global recovery seems to be high.
This may mean that investor demand for defensive assets such as gold declines in favour of undervalued shares as the memory of the recent market crash gradually fades. Certainly, further declines cannot be ruled out in the short run, and gold’s price may yet move higher. However, over the long run, the appeal of shares may increase relative to less risky assets such as gold.
A record gold price
Buying shares after a market crash is especially attractive because of their low valuations. Since most investors are seeking to buy assets when they are priced at low levels, and sell them when they trade at higher prices, the current stock market landscape of low valuations suggests that there is currently a buying opportunity.
By contrast, the gold price recently reached a record high. Although it may yet move even higher, its price suggests that there may now be more limited scope for capital growth than there was in previous months. As such, investors hoping for a continued rise in the gold price at the same pace as in the first seven months of 2020 may be somewhat disappointed.
Therefore, now may be the right time to avoid gold and instead buy a selection of bargain UK shares. The low valuations on offer across the FTSE 100 and FTSE 250 do not come along very often, and in some cases are extremely rare. As such, through buying a diverse range of undervalued shares, you could generate high returns in the coming years as investor sentiment recovers.
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.