The FTSE 100 may have rebounded from its recent lows, but it may yet experience another market crash over the coming months. A number of risks could cause investor sentiment to weaken. And a challenging economic outlook may not currently be priced into some company valuations.
Despite this, now could be the right time to buy undervalued FTSE 100 stocks for the long term. Their recovery prospects, growth potential and wide margins of safety could enhance your financial outlook.
The FTSE 100’s uncertain future
The FTSE 100’s future is always uncertain. But it is perhaps more difficult to call at the present time due to the unprecedented events of recent months. Many major economies, including the UK, are set to gradually reopen over the coming months. But there is still a risk that a second wave of coronavirus will appear later in the year.
This may cause a return to containment measures currently in place. And it may act as a second ‘blow’ to struggling companies that have seen their sales and profitability decline over recent months.
Other risks include potential geopolitical challenges between the US and China. Tariffs on billions of dollars of goods traded between the two countries remain in place. And continued trade disputes between them may lead to slower global economic growth.
Therefore, investing in FTSE 100 stocks today carries a clear risk of paper loss over the short run. While that is always the case, at the present time there are major risks facing investors that may be difficult to accurately quantify.
Growth potential
Yet despite its short-term risks, investing in the FTSE 100 right now could prove to be a sound move. The index has faced numerous challenges in its past, yet it has been able to produce annualised total returns in excess of 8% since its inception over 36 years ago.
Therefore, investors who have a long-term time horizon may be able to generate high returns from the index – even if its near-term performance disappoints. It has the capacity to deliver a strong rebound from any future market crash that takes place.
Furthermore, with many of the index’s members currently trading on low valuations, it could be argued that some of the uncertainty facing the economy is already priced in. Many sectors that have uncertain futures currently offer valuations that are lower than they have been for a number of years. This may allow investors to purchase companies while they offer favourable risk/reward ratios that can make a positive impact on their portfolio’s performance over the coming years.
As such, now could be the right time to buy a diverse range of cheap FTSE 100 stocks. Investors hoping for continued growth in the short run may be disappointed due to the prospect of another market crash. But, over the long run, the index has the potential to deliver relatively high returns.