The gold price has risen by 20% in the last year. An uncertain economic outlook may persuade some investors it can deliver further capital growth, as well as an outperformance of UK shares.
However, a likely economic recovery and the potential for improving performance from many FTSE 350 stocks could mean they offer higher rewards than the precious metal. Its price may also factor in low interest rates and a weak short-term economic outlook, which could limit its growth prospects.
With that in mind, here are five stocks that could be worth buying now for the long term. They face uncertain near-term futures, but could produce high returns as part of a diverse portfolio.
Cheap UK shares
Some FTSE 350 stocks have valuations that could suggest they offer wide margins of safety at the present time. For example, UK shares such as Barclays and Aviva trade on forward price-to-earnings (P/E) ratios of 11 and 7 respectively. Although they face uncertain operating conditions that may not be conducive to high profits in 2021, they may benefit from an improving economic outlook in the coming years.
Similarly, stocks such as IAG and Whitbread could offer recovery potential after their share price falls. Their stock prices are down by 40% and 25% respectively in the last year, as disruption caused by coronavirus has negatively impacted on their financial situations. However, capital raisings and cost reductions, as well as a likely recovery in their markets, could lead to turnarounds for their share prices over the long run.
Meanwhile, UK shares such as housebuilder Persimmon could enjoy stronger operating conditions than market sentiment suggests. The company could benefit from low interest rates and a high demand for new homes due to a lack of supply. This may counter threats such as a weak economic outlook to provide improving profitability that catalyses share prices within the sector.
Avoiding gold in the long run
The gold price could realistically move higher in the coming months. The world economic outlook could deteriorate based on coronavirus, political uncertainty, or any number of risks that cause growth to slow. In such a situation, gold may become even more highly-valued among risk averse investors who seek defensive assets that act as a store of wealth during a volatile economic period.
However, many threats facing the world economy may be priced in to the precious metal’s price. Therefore, with a number of UK shares appearing to offer scope for a recovery, they may deliver higher returns in the long run. This means investing in a diverse range of them now, and holding them through a likely stock market rally, could be a profitable move.
As such, now may be the right time to pivot from gold to undervalued shares ahead of an improving economic outlook.
Peter Stephens owns shares of Aviva, Barclays, Persimmon, and Whitbread. The Motley Fool UK has recommended Barclays. 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.