The FTSE 100 recorded its best quarter since 2010 in the three months to 30 June. And yet it is still hostage to the coronavirus, which is dictating investors’ mood. I think the bounce back from the March lows shows why shares still have such good potential as a long-term investment. And it is why I’d buy cheap FTSE 100 shares to make money from the undervalued UK stock market.
I think FTSE 100 companies have plenty to offer investors looking for a bargain. In my view, they have a lot of potential upside that could make investors richer in the future.
Ways to make money from the stock market
One easy way to tap into the potential of the FTSE 100, which is still down 20% so far this year, is to buy an ETF that tracks the market. This type of investment is passive and mirrors the performance of the market. Although there are many different types – some track commodities, for example – the best known track large indexes like the FTSE 100. With little to no ‘active’ management, the fees are very low.
However, if you want to outperform the market you should either back yourself to pick winners or let a professional do it. Both come with risks and neither guarantees you’ll outperform a tracker. However, I think private investors have every chance of making money from the stock market, if they invest for the long term and keep learning.
Cheap FTSE 100 shares which could be winners
In the short term, and with the potential for the market to be dragged down again by the coronavirus, I’d stick with defensive shares. Shares like Tesco, National Grid, and Reckitt Benckiser should hold their value regardless of the economy and unemployment levels, as people will still need food and electricity. Both businesses are continuing to pay a dividend as well. This is more than can be said for more cyclical businesses such as banks and leisure.
Tesco in particular is cheap with a price-to-earnings ratio of 12. National Grid is a little more expensive with a P/E of 18, so I’d wait for its shares to fall before buying. Same with Reckitt’s shares, which have a P/E of 21.
On the other side of the coin, I think there are some cheap shares that have longer-term potential – but are at more risk if the market falls in the near term. These include housebuilders such as Redrow and Barratt Developments. The whole industry looks cheap. It could be very profitable in the future because of the UK’s large imbalance between housing supply and demand.
Although very risky, it’s hard to imagine that if easyJet makes it through this crisis, its shares won’t fly up. Similarly, Intercontinental Hotels has been hammered by the fallout from Covid-19, but was performing well before the virus. In my opinion it should be able to recover and reward shareholders, in time.