The chances of a bumper recovery for UK shares may seem slim at present. Although indexes, such as the FTSE 100 and FTSE 250, have rebounded strongly over recent months, many stocks continue to trade significantly below their previous highs. And risks, such as rising coronavirus cases, are set to persist over coming months.
However, buying bargain stocks now for the long term could be a better idea than purchasing other assets, such as Bitcoin and gold. Undervalued shares have the potential to produce high capital returns as the wider stock market recovers.
Stock market recovery after its crash
The recent market crash, and the potential for a second decline this year, is contributing to bargain valuations among many UK shares. Many investors feel that wide margins of safety are currently required due to heightened risks. And, while there could yet be more volatility and even declines ahead, the reality is that a long-term recovery is very likely.
Fiscal and monetary policy stimulus enacted by policymakers in the UK, and in other major economies, could boost asset prices and the wider economy. Although this process may take time, previous economic downturns have always been followed by a return to strong growth.
This time may feel different, due to an unprecedented scenario that’s not been experienced for many years, if ever. But major stimulus programmes are already in place and the stock market has a solid track record of recovery. So a return to growth for UK shares is likely to occur in the coming years.
Buying bargain UK shares
Therefore, continuing to invest in UK shares while they offer bargain valuations in some cases could prove to be a profitable move. It may allow you to reduce overall risks through obtaining a wide margin of safety. Potentially, you may also benefit from relatively high capital returns as the wider stock market recovers.
This means that shares could offer a more favourable outlook than other assets, such as gold and Bitcoin. Certainly, they’ve enjoyed sharp growth of late. However, gold’s price rise may be inhibited by a likely return to more bullish investor sentiment. That makes defensive assets seem less appealing. Furthermore, its price is currently close to a record high, which is in contrast to the low valuations on offer among UK shares.
Meanwhile, Bitcoin’s role in the world economy continues to be difficult to predict. Its limited size means it may fail to replace traditional currencies. Meanwhile, regulatory concerns could weigh on its performance in the long run.
Therefore, building a portfolio of high-quality stocks while their valuations are low could be a more profitable move for investors. They may yet experience further volatility. But they’re likely to deliver impressive capital returns as the world economy recovers.