The ongoing coronavirus pandemic and general economic weakness have provided an extended opportunity to buy cheap UK shares. And it could be a good idea to load up with stocks now because they are likely to recover over the long term and power your investment returns.
Why I’d buy cheap UK shares now
The strategy is well proven. Investors such as Warren Buffett have made fortunes by buying the shares of companies with good-quality businesses. But he only buys when the price is right. And that means paying a fair price for his stocks and not a high price.
And it’s at times like these that we are more likely to find cheap shares. Indeed, the general economic outlook is uncertain. Covid-19 has devastated some sectors such as tourism, travel, casual dining, hospitality and others. And uncertainty about the course of the pandemic and its effects on the economy persist. It’s just the kind of environment that causes share valuations to shrink.
One interesting example is the housebuilding sector. The low-interest-rate environment and the UK government’s apparent determination to stimulate the sector augur well for the long-term prospects of housebuilding companies. Yet share prices languish for firms such as the FTSE 100’s Persimmon, Barratt Developments and Taylor Wimpey. And for smaller housebuilding outfits such as the FTSE 250’s Bellway, Redrow and Vistry.
In some ways, I reckon the housebuilder shares have been behaving like proxies for the UK economy recently, along with the shares of banks such as Lloyds, Natwest, Standard Chartered and Barclays. Indeed, when the general economic news is good, banks and housebuilders tend to rise on the stock market. When the news is bad, uncertain or worrying, those shares tend to fall back.
There’s no doubt that both sectors are cyclical through and through. But cyclicality brings with it an opportunity as well as threat. From their depressed positions now, I reckon bank and housebuilder shares could do well over the medium-to-long terms as the economy recovers from the coronavirus crisis. As such, bank and housebuilder shares could be worth buying within a Stocks and Shares ISA with a long-term holding period in mind.
Diversification and minimising transaction costs
But they are not the only shares I’d buy. Several sectors contain some compelling investment opportunities right now. And it’s a good idea to diversify your holdings across several sectors. However to me, it doesn’t make much sense to invest in the shares of an individual company unless you can spend about £1,000. That’s because the transaction costs would likely be too high to make the share purchase economic.
Don’t let that put you off though. Investing £300 a month is a great idea and could be the beginning of your journey to compounding your way to a million. One neat solution is to invest in funds such as trackers or those managed by a fund manager. You could also go for investment trusts. Those vehicles often allow minimum regular investments as low as £25 with economical transaction costs. And the other great advantage of collective investment vehicles like those is that you’ll get instant diversification across many underlying companies and sectors.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Barclays, Lloyds Banking Group, Redrow, and Standard Chartered. 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.