There are numerous risks facing investors after the recent market crash. For example, an ongoing rise in the number of coronavirus cases, Brexit and the upcoming US election could mean that the prospects for many businesses are challenging.
Although this situation may dissuade some investors from buying UK shares, it could provide a long-term buying opportunity. Investors may have already factored in such difficulties, which could provide wide margins of safety.
As such, now could be the right time to build a portfolio of cheap UK shares while they appear to be very undervalued in some cases.
A plethora of risks
While the recent market crash may have been prompted by the coronavirus pandemic and its impact on the world economy, other risks appear to be contributing to low valuations among many UK shares.
For example, Brexit may not be the news item of the day at the present time. However, investors have long been very concerned about the performance of the UK economy following the end of the transition period. Therefore, it could be causing investors to demand wider margins of safety across companies that operate in the UK. Similarly, the upcoming US election may be leading many investors to buy less risky assets than equities in case the prospects for the US economy come under pressure as a result of a changing fiscal policy.
As such, the recent market crash could have prompted a very attractive buying opportunity for investors that occurs with extreme rarity. Certainly, some UK shares have recovered from their 2020 lows. However, many others have not. This could be due to the plethora of risks that currently face the world economy, all of which appear to be causing weak investor sentiment towards a variety of stocks.
Long-term recovery after a market crash
While a second market crash cannot be ruled out, the valuations of many UK shares suggest that they are cheap. As such, now could be the right time to buy them while investors are pricing in a period of intense challenges for the UK, and world, economies.
Clearly, it is imperative to select high-quality businesses for your portfolio. They may, for example, have dominant positions in sectors that are due to struggle in the coming months. Similarly, they are likely to have solid balance sheets and sound growth strategies that could lead to improving financial performances in the coming years.
By taking advantage of low valuations across the FTSE 100 and FTSE 250 following the market crash, you could capitalise on the stock market’s long-term recovery potential. This may improve your portfolio’s performance in the coming years as investor sentiment improves and valuations return to levels that are more in keeping with their historic averages. In doing so, your financial position could improve significantly.
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.