The FTSE 100 continues to trade at a relatively low level following its recent market crash. As a result, many of its members offer low valuations that make them attractive investments in some cases.
Although there are a number of risks facing the world economy that could halt the index’s progress, its past performance suggests that buying cheap shares now could be a profitable move.
Through focusing your capital on high-quality businesses that are experiencing uncertain operating conditions, you could build a surprisingly large portfolio over the long run.
Cheap FTSE 100 shares
Many of the FTSE 100’s sectors contain companies that appear to be cheap at the present time. Investors are understandably cautious about the financial prospects for banks, retailers, housebuilders and a range of other businesses that could experience a sharp fall in demand for their goods and services. Buying such companies even while their share prices are low could lead to disappointing returns in the short run.
However, the presence of risks such as Brexit, the upcoming US election and a continued rise in coronavirus cases worldwide may mean that there are opportunities to generate high returns over the long run.
In other words, investors who are able to take a long-term stance when it comes to their return expectations may find that they can use the FTSE 100’s market crash to their advantage. They may be able to buy stocks when they are priced low, with a view to selling them at a higher price in the coming years.
Risk/reward
Clearly, some FTSE 100 stocks are worthy of their low valuations. For example, they may have weak market positions or poor strategies to adapt to changing consumer trends.
However, other businesses may simply be facing a temporary period of difficult operating conditions. They may have solid balance sheets with modest levels of debt, a sound track record of rising profitability and a clear strategy to grow as the world economy recovers. Such companies may, therefore, trade at prices that are disconnected from their long-term potential.
Through buying the best FTSE 100 shares while they are at cheap price levels, you could capitalise on their likely recovery. Although it may take time for them to return to previous highs, the prospect of improving operating conditions could help them to do so in the long run.
Buying opportunities
The FTSE 100’s track record shows that it does not experience perpetual periods of decline. Therefore, the low price levels currently in existence among UK shares are very unlikely to be available for a sustained period of time.
Although there is scope for share prices to move lower, the current valuations of many high-quality large-cap shares makes them difficult for long-term investors to ignore. The index’s past performance suggests that buying a diverse range of them today could catalyse your portfolio as the world economy, and stock market, gradually recover.