Despite the FTSE 100’s 13% rally since the start of the month, there are still a number of cheap UK shares available to buy.
Certainly, their prices are likely to have risen in many cases from their levels earlier this year. However, they could offer wide margins of safety that translate into impressive capital returns in the coming years.
The track record of the FTSE 100 shows that a buy-and-hold strategy can be effective in capitalising on its growth prospects. As such, now could be an opportunity to invest money in a diverse range of companies for long-term growth.
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Investing money in cheap UK shares after the FTSE 100’s rally
The FTSE 100’s rally has lifted the valuations of many cheap UK shares. Investor sentiment has improved after positive drug trials for a coronavirus vaccine. However, many sectors are still unpopular among investors. They include businesses that operate in industries facing challenging near-term operating conditions. As such, they may experience weak sales and profit growth over the coming months.
However, over the long run, they could deliver impressive returns. History shows the economy’s performance has always improved after its difficult periods. And, with vast amounts of fiscal and monetary policy stimulus already announced, their operating conditions and share prices could improve significantly over the coming years.
As such, buying cheap UK shares could be a profitable move. In many cases, they trade at discounts to their FTSE 100 index peers. They also have valuations lower than their historic averages. Since stock market valuations are likely to revert to their long-term averages over time, there could be scope for upward reratings as investor sentiment improves.
Building a portfolio of FTSE 100 shares
Clearly, the near-term prospects for the FTSE 100 and cheap UK shares are somewhat precarious. Investor sentiment may have improved of late, but risks such as the ongoing pandemic and Brexit may hold back the performances of companies and the stock market in the short run.
Therefore, it could be logical for an investor to purchase shares on a regular basis over the coming months. This may allow them to keep some powder dry in case there are more attractive buying opportunities in the FTSE 100 further down the line.
Furthermore, building a diverse portfolio of cheap UK shares could lessen overall risk. A diverse portfolio may be less susceptible to challenges in a specific industry or region. This may provide greater stability in the near term, as well as higher returns in the long run.
Scope for further price gains
With the stock market having a track record of delivering sound recoveries from its bear markets, a further rise in the FTSE 100’s price level seems likely in the coming years. As such, buying today’s cheap UK stocks and holding them for the long run could be a means of capitalising on it.
