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Stock market crash: 3 reasons why cheap UK shares could soar

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Even though some stocks have recovered after the recent market crash, there are still a wide range of cheap UK shares available to buy. In the long run, they could deliver impressive returns due to their low prices, the stock market’s past performance and their improving financial prospects.

As such, now could be the right time to buy a range of undervalued British stocks from the FTSE 100 and FTSE 250. They could have a positive impact on your financial outlook over the coming years.

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The improving outlook for cheap UK shares

Cheap UK shares could deliver high returns in the long run as the world economy recovers. Fiscal and monetary policy stimulus has the potential to boost the outlook for global GDP. This may lead to improving operating conditions for many companies that are currently struggling to post positive sales and profit growth.

Certainly, this process is unlikely to be a fast one. Some businesses may need to invest heavily today in new technology and in becoming more efficient so they successfully adapt to a changing world economy. However, long-term investors are likely to have sufficient time for this process to take place. As it does, the improving financial performances of currently undervalued businesses may lead to improving investor sentiment that lifts their share prices.

A track record of recovery

While some cheap UK shares recovered fairly quickly after the market crash, others may take a little longer to return to previous highs. This is not uncommon following a bear market, since some sectors will naturally rebound faster than others. For example, financial services businesses took some time to make a comeback after the financial crisis. Similarly, technology companies were unpopular among investors for a number of years after the dotcom bubble burst.

However, over the long run, unpopular sectors and the stocks within them have generally recovered from challenging periods to post sound recoveries. This process may seem unlikely right now, but over the long run, investor sentiment towards currently unpopular sectors could improve significantly.

Low valuations of British stocks

The low valuations of cheap UK shares also makes them appealing at the present time. Buying any asset at a low price is likely to be a better idea than buying it at a high price. It provides greater scope for capital growth over the long run. And, since many British stocks currently have valuations that are substantially below their historic averages, there seems to be scope for them to make considerable gains as they revert to the mean.

Therefore, now could be the right time to build a diverse portfolio of undervalued stocks. Their recovery potential, low prices and likely improving financial performances could catalyse their capital return potential over the long run.

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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.

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