Buying FTSE 100 shares following the index’s recent crash may seem to be an unwise move. Risks such as the spread of the coronavirus could, for example, cause investor sentiment to further weaken.
As such, many investors may decide that buy-to-let investments are less risky and offer higher potential returns.
However, tax changes, high house prices and the value opportunities in the FTSE 100 mean that buying shares rather than property could be a much better move.
Undervalued shares
The FTSE 100’s recent fall is now classed as a ‘correction’. This very dry term actually means it has declined by over 10% from its recent high, with the index currently down by around 15% from its highest level over the past few months.
The drop in price means that many of its members now trade on low valuations. Investors appear to have factored-in the potential for a continued spread of the coronavirus, and its negative impact on production and demand across many major economies, as well as the threat of political uncertainty in the US and UK.
Many stocks trade on valuations that are significantly below their historic averages. The FTSE 100, meanwhile, has a dividend yield of around 5% at the present time. This suggests that the index is seriously undervalued and so it could provide significant capital growth potential over the long run. After all, it has always recovered from its previous corrections and from bear markets.
High house prices
By contrast, house prices in the UK continue to be relatively high. Compared to average incomes, for example, they are close to record highs. This suggests that if interest rates rise over the medium term, demand for houses could be hit as a result of them becoming less affordable.
Furthermore, with Brexit talks having the potential to hit an uncertain period given what both the UK government and EU are saying, many potential homebuyers may delay their purchase until there is greater clarity regarding the UK’s economic outlook. This could lead to a slower rate of growth in house prices at the same time as tax changes are set to negatively impact on the cash flow of a wide range of landlords.
Long-term approach
Of course, the short-term outlook for the FTSE 100 is very uncertain too. It may offer good value for money today, but it could yet experience a further decline that turns its correction into a real bear market (which would require a 20% fall from its recent high).
However, long-term investors could capitalise over the coming years on the low valuations on offer in the index today. For investors who wish to ‘buy low’ and ‘sell high’, buying opportunities rarely come along without substantial short-term risk. However, the track record of the index and its success in recovering from previous downturns mean that now could be the right time to buy large-cap shares and hold them over the long run.