The potential for a second stock market crash may mean some investors are currently avoiding buying UK shares. This is natural, since there’s a realistic prospect their prices will come under pressure in the short run, due to risks such as Brexit and coronavirus.
However, many stocks appear to trade on low valuations. This may mean that investors have factored in a second market decline. Furthermore, many high-quality businesses appear to have the financial strength to overcome a further downturn.
Buying such companies now could lead to attractive returns in the long run, albeit with volatility likely to be high in the coming months.
A second stock market crash
UK shares could come under pressure from a second stock market crash. Brexit has been in the headlines much more of late, and is likely to continue to impact investor, business, and consumer confidence over the coming months. Similarly, the coronavirus pandemic is ongoing, and news regarding vaccines and case numbers could have an influence on the performance of indexes such as the FTSE 100.
Of course, there’s no guarantee a second stock market crash will occur in the short run. There may be positive news regarding Brexit, coronavirus and the economic outlook. However, the existence of those risks appears to only increase the chances of a market decline. As such, investing in the right companies at the right prices could improve the prospects for your portfolio.
Buying cheap UK shares
Buying cheap UK shares isn’t only a means of benefitting from a likely long-term recovery. They could also fall to a lesser degree than their peers should a second stock market crash occur. Their valuations may already factor in disappointing news, which may provide greater scope for capital growth in the long run.
As well as buying cheap shares, investors may wish to purchase high-quality businesses. They may have solid balance sheets and strong competitive positions that can help them to not only survive a likely period of economic weakness, but thrive in the subsequent economic recovery that’s very likely to take place.
Even though many UK shares have rebounded after the stock market crash, some high-quality businesses trade at cheap prices. In many cases, they’re in unpopular sectors such as financial services, energy and industrials. Buying those businesses now could be a prudent step to take ahead of a potential downturn in the coming months.
Long-term growth prospects
Although UK shares may experience a difficult period in the coming months, their long-term prospects appear to be sound. The stock market has always recovered from its bear markets to post new record highs.
This outcome may take some time to come to fruition. However, through buying high-quality businesses at cheap prices today, you can benefit from a likely long-term recovery that boosts your portfolio’s performance.
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.