The recent stock market crash means some of the best UK shares are currently trading at exceptionally low prices. They could produce recoveries over the long run that impact positively on the value of your portfolio.
Therefore, now may be the right time to avoid defensive assets such as gold, and buy undervalued shares. The precious metal may provide security in the short run due to its status as a store of wealth. However, its high price and the likely global economic recovery following 2020’s downturn could mean that FTSE 100 and FTSE 250 shares offer greater scope for capital growth.
An uncertain near-term outlook for UK shares
The short-term prospects for UK shares continue to be uncertain. Risks such as Brexit and coronavirus may weigh on their performance, and could even prompt a second market crash.
However, in many cases, those risks appear to have been factored into the valuations of companies in a wide range of sectors. For example, financial services companies, oil and gas businesses and a range of retailers currently trade on low valuations that suggest they offer wide margins of safety.
Therefore, even if there’s a second wave of coronavirus in the UK, or the economy deteriorates sharply, investors may already have factored in the potential challenges faced by UK shares. This could mean that, on a risk/reward basis, they offer significant investment appeal at the present time.
Of course, UK shares have a long track record of delivering high single-digit annual returns. The current economic woes may mean that performance is disrupted. However, it’s very unlikely to mean FTSE 100 and FTSE 250 shares will now produce disappointing returns in future.
After all, the indexes have recovered from greater falls and equally challenging periods of economic weakness in the past to post new record highs.
In fact, buying shares soon after a market crash can be a means of generating market-beating returns. Their low valuations mean there could be scope for significant capital gains. Meanwhile, wide margins of safety may reduce overall risks for investors.
Therefore, investors who have a long-term time horizon may wish to purchase a diverse range of UK shares now and hold them for a number of years. They may experience a significant amount of volatility in the coming months, but their potential to produce capital gains could prove to be relatively high.
Buying gold today
Another reason to avoid gold and purchase UK shares is the precious metal’s current price level. It’s trading close to a record high, which suggests that factors such as a weak economic outlook and monetary policy stimulus have been factored in by investors.
This may limit the growth prospects for gold, which could mean FTSE 100 and FTSE 250 stocks offer an even more attractive outlook on a relative basis.
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.