A stock market recovery that pushes the prices of UK shares higher may seem somewhat distant at the present time. Risks to the economy’s future performance and investor sentiment are currently high. They may yet mean there is a second market crash later this year.
However, long-term investors who are able to look beyond the current crisis may be able to capitalise on bargain valuations across the FTSE 100 and FTSE 250. Over time, they may return to their average valuations, and produce impressive returns for your portfolio.
A second market crash
A second stock market crash that pushes the prices of UK shares lower cannot currently be ruled out. On the one hand, a number of risks such as Brexit, coronavirus and rising unemployment could cause investor sentiment to weaken. However, on the other hand, many of those risks may be factored-in to valuations. Furthermore, some of those risks may prove to be less challenging than some investors are currently expecting.
Therefore, investors should adopt a long-term view of the stock market and plan for a recovery to take years, rather than months. Past bear markets have often included periods of volatility, and have sometimes displayed short-lived bull runs that ultimately fail to be sustained. However, over the long term, indexes such as the FTSE 100 and FTSE 250 have solid track records of reaching new record highs after even the most severe bear markets.
Buying bargain UK shares today
Assessing which UK shares are bargains today can be a difficult task. Some companies have low valuations that are merited due to their weak financial positions or challenging operating outlooks.
However, other businesses are being penalised by weak investor sentiment towards riskier assets. Therefore, they could offer the greatest investment appeal at the present time. How so? Their valuations may not fully reflect their capacity to survive the current economic challenges, nor their ability to benefit from a likely stock market recovery.
Therefore, now (as always) it is crucial to analyse UK shares before purchasing them. That is because some businesses may fare better than others in what could be an uncertain economic period. This may mean that you do not end up buying the cheapest shares in the FTSE 100 or FTSE 250. But it could mean that you find the best bargains based on price and quality.
Awaiting a stock market recovery
Waiting for the prices of UK shares to recover may prove to be a challenging process for many investors. They may even experience paper losses along the way should a second market crash occur.
However, by taking a long-term view after purchasing high-quality stocks, you can benefit from a very likely stock market recovery that is set to occur in the coming years – just as it has done following every other period of economic decline in history.
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.