A stock market rally isn’t guaranteed to take place over the coming years. Risks such as ongoing coronavirus disruption, political challenges and weak economic data could hold back company performance and investor sentiment.
However, the track record of indexes such as the FTSE 100 suggests a market rise is likely to take place over the long run. As such, with many UK shares trading at prices below their historic averages, now could be an opportune moment to invest £20k, or any other amount, in a Stocks and Shares ISA.
Buying undervalued shares ahead of a stock market rally
Although a stock market rally could have a positive impact on many company valuations, today’s undervalued shares could stand to benefit the most. For example, they may currently be trading at a price below their long-term average. Or that represents a discount to their intrinsic value. As such, they may have greater scope to make capital gains in a rising stock market.
Clearly, some cheaper shares are priced at lower levels because they have higher risks than other stocks. For example, they may lack a competitive advantage versus peers. Or they could have a weak balance sheet. Therefore, it’s important to always analyse potential purchases through assessing their annual reports and recent results. Doing so could help avoid low-quality businesses that may fail to deliver impressive returns. Even in a stock market rally.
Growth opportunities within specific industries
It’s difficult at the present time to assess which companies could grow their earnings at a relatively fast pace in the long run. However, such companies could also be major beneficiaries of a stock market rally that’s based on an improving economic outlook. They may also benefit from improving investor sentiment, as companies with high earnings growth rates can command premium valuations.
Therefore, it may be logical to seek to identify industries that could benefit from long-term growth trends. For example, demographic changes may have a positive impact on levels of demand within the healthcare sector. Meanwhile, one effect of the coronavirus over the long run could be higher demand for online retailing. These forces may make it easier for companies operating in those spaces to generate high profit growth relative to the wider stock market.
Risk management when investing in shares
As mentioned, there’s no guarantee that a stock market rally will take place in future. However, history suggests that it’s likely to take place over the long run. Through buying high-quality companies with encouraging industry growth prospects while they trade at low prices, it may be possible to maximise returns in a rising stock market. Over the long run, this could lead to impressive returns for a £20k Stocks and Shares ISA investment.
