The FTSE 100’s stock market crash may not yet be over. Certainly, there have been signs of a recovery in recent trading sessions. But as previous bear markets have shown, mini-rallies can soon end, and the general downward trend may yet continue.
Despite this, the long-term prospects for the FTSE 100 seems to be encouraging. Its members trade on low valuations in many cases, while the index’s track record of recovery suggests that now could be the right time to buy a diverse range of companies for the long run.
An uncertain future
Clearly, the prospects for the world economy are highly uncertain at the present time. The number of coronavirus cases and deaths are, sadly, continuing to rise. Not only is there a huge human cost, the economic impact of coronavirus is set to be vast.
The lockdown is likely to cause many businesses in a wide range of sectors to experience hugely challenging periods. They may take time to recover, while some companies may be unable to survive even with government support programmes. As such, the coming months could prove to be a risky period for investors, with sentiment towards stocks likely to change swiftly without prior warning. This could lead to significant paper losses for many investors.
Low valuations
The valuations on offer across the FTSE 100 suggest that the stock market has priced in many of the risks facing the economy. Some FTSE 100 stocks, for example, trade at prices that have not been lower since the financial crisis. This indicates that they offer wide margins of safety that could provide significant scope for recoveries in the coming years.
For those businesses that have solid balance sheets, in terms of modest debt and large cash positions, the current economic challenges could present an opportunity. They may be more likely to survive than their smaller, less financially-sound peers. They could, therefore, win market share and put themselves in a stronger position to generate rising net profit in the long run.
As such, focusing on stronger businesses could be a sound move at the present time. They may not be the cheapest stocks around, since their risks are relatively low. But in many cases, they still offer exceptionally good value for money.
Recovery potential
The FTSE 100’s recovery may seem to be somewhat unlikely at the present time. The index has a long way back to its record highs, and it is likely to take many months for it to deliver a turnaround.
However, the index has a solid track record of recovery. It has produced new record highs following every one of its past bear markets, and a similar outcome to the current crisis seems likely.
Therefore, buying high-quality stocks now and holding them for the long run could be a profitable move. Paper losses may be ahead in the short run, but the FTSE 100’s recovery prospects in the coming years seem to be high.
