A stock market recovery that pushes UK shares to new record highs is likely to take place in the coming years. After all, indexes such as the FTSE 100 and FTSE 250 have always posted new all-time highs following their market declines.
As such, investing in high-quality businesses at low prices today could be a shrewd move. It may allow an investor to take advantage of rising stock prices over the long run that could double their initial investment of £1k, or any other amount.
Benefiting from a stock market recovery
Although a stock market recovery can catalyse a £1k investment, even achieving the same return as the FTSE 100 or FTSE 250 could double an investor’s initial outlay. Both indexes have returned around 8% per annum over the past 20 years, including reinvested dividends. As such, it would take around nine years for an investment today to double in value, assuming the same rate of return in future.
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However, with many UK shares trading at low prices today, it is possible to generate higher returns than the FTSE 100 and FTSE 250 have managed in the past. Low starting prices may mean there is scope for capital appreciation, as company valuations have historically reverted to their averages over the long run. Therefore, focusing on today’s cheap stocks could be a sound means of capitalising on a likely stock market recovery in the coming years.
Buying cheap stocks with recovery potential
Companies such as BP and Shell could be major beneficiaries of a stock market recovery. They have experienced disappointing results due in part to falling oil prices. A stock market rally would normally take place because of improving prospects for the world economy. In such a scenario, the oil price may make gains and lead to improving profitability for both companies.
Furthermore, BP and Shell are implementing new strategies to transform their operational outlooks. They are embracing a green recovery from the 2020 stock market crash. Although it will take time to achieve their carbon-neutral goals, their investment in low-carbon assets may lead to improving profitability in the coming years.
Growth opportunities in a recovering economy
Similarly, shares such as Unilever and Diageo may benefit from a stock market recovery for similar reasons. Their financial performances have been negatively impacted by disruptions this year. An improving economic outlook could lift their profitability and share prices.
Meanwhile, retailers with a dominant online presence such as Next and Tesco could deliver robust sales growth and profit growth that improve an investor’s returns. They may benefit from a continued shift in spending towards online that may be accelerated by this year’s lockdowns in the UK. Over time, this may allow an investor to outperform the FTSE 100 and FTSE 250 to double their initial investment.
