The track record of UK shares shows that a stock market rally is likely over the coming years. Even though the near-term outlook for many companies is uncertain, over the coming years, they are likely to experience stronger operating conditions that lift their valuations.
As such, buying businesses with sound strategies and solid market positions could be a shrewd move. They may be in a stronger position to take advantage of an economic recovery. And they could have a more positive impact on a £5,000 investment in the coming years.
Buying UK shares with sound strategies ahead of a stock market rally
Companies that can successfully adapt their operations to changing consumer tastes may benefit the most from a long-term stock market rally. For example, they may have the flexibility to close unprofitable stores and switch their focus to online operations. Or they may be able to respond to consumers who are becoming increasingly environmentally and socially aware.
As such, I think companies like Burberry and Unilever could prove to be sound buys. They are investing heavily in increasing their sustainability focus. They also have the capacity to expand online. And that means they can capture a growing market share of the digital consumer goods industry. This may help them to generate higher profitability, and could strengthen their market positions.
Investing money in dominant businesses
Companies with solid market positions may also deliver relatively high returns in a long-term stock market rally. In the short run, UK shares with dominant market positions may be better able to survive a period of weak economic growth. They may be able to expand their presence at the expense of weaker rivals. And they could even move into new market segments that produce greater diversity and profitability in the coming years.
As such, FTSE 100 shares such as British American Tobacco and AstraZeneca could prove to be sound buys today. British American Tobacco is investing in next-generation products that may catalyse its financial performance. Meanwhile, AstraZeneca is engaging in acquisition activity to strengthen its long-term growth prospects. Over time, both companies could outperform other UK shares.
Investing money in UK stocks today
Clearly, investing £5,000, or any other amount, in UK shares today may lead to paper losses in the short run. A stock market rally, although likely, may come with numerous ups and downs along the way.
However, the track record of indexes such as the FTSE 100 show that the stock market has always fully recovered from its difficult periods to post new record highs. Investors who are able to identify companies with solid business models and sound strategies may be able to capitalise on the stock market’s growth prospects. Over time, this could improve their portfolio’s performance and lead to greater financial freedom.
Peter Stephens owns shares of AstraZeneca, British American Tobacco, and Unilever. The Motley Fool UK has recommended Burberry and Unilever. 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.