A new bull market that causes cheap UK shares to surge in price may not seem all that likely right now. After all, the FTSE 100 and FTSE 250 are still over 20% down on their 2020 starting prices after the market crash.
However, the past performance of the stock market suggests a sustained bull market will lead both indexes to new record highs. Therefore, buying cheap stocks today could prove to be a profitable move for long-term investors.
Market crash: buying cheap UK shares today
In many cases, today’s cheap UK shares reflect the difficult near-term prospects facing many industries. In that sense, they may be appropriately priced. However, on a long-term basis, today’s low share prices across the FTSE 100 and FTSE 250 after the market crash may significantly undervalue the potential for a long-term economic recovery.
Indeed, the past performance of the global economy shows that it has always bounced back from any crisis that has caused a temporary fall in GDP.
Certainly, the coronavirus pandemic is a highly exceptional circumstance that has not been experienced for many years. However, previous crises were also unforeseen and posed significant challenges to policymakers when they occurred.
Despite this, the world economy has always returned to positive growth and cheap UK shares have generally produced impressive returns. For example, the FTSE 250 has delivered annualised returns of around 8% over the past 20 years. Therefore, a new bull market that lifts the stock market to a new record high seems likely to take place over the coming years.
Managing expectations in the new bull market
Clearly, many cheap UK shares could fall further in price in the short run. The economic outlook may worsen before it improves. However, investing money in undervalued shares has generally been a sound strategy in the past.
For example, buying cheap stocks at the lowest ebb of the global financial crisis would have allowed an investor to benefit from the FTSE 100’s 100%+ returns over the following years.
Therefore, now could be the right time to invest money in a diverse range of undervalued shares. Not all companies will produce a full recovery from present challenges.
Some may find their business models become obsolete as technology evolves, or that they lack the right strategy to adapt to changing consumer tastes, for example.
However, cheap UK shares with sound balance sheets and a competitive advantage may be more likely to return to previous levels of sales and profitability.
In doing so, they could become more attractive to investors. This may act as a catalyst on their share prices over the long run.
This could provide a boost to the portfolios of investors who used the 2020 market crash to their advantage through buying high-quality companies at low prices.