The prospects for a long-term stock market rally seem to be relatively high. After all, the FTSE 100 has always recovered from its previous downturns to reach new highs. It currently trades lower than it did before the 2020 stock market crash. But there seems to be scope for further growth in the coming years.
As such, now could be the right time to buy cheap shares that may offer scope for large capital gains in the long run. Here are three such companies I think may currently be undervalued by investors ahead of a likely stock market recovery.
FTSE 100 prospects in a stock market rally
A sustained stock market rally over the coming years could benefit FTSE 100 banks such as NatWest. Its share price continues to underperform the index partly as a result of its reliance on wider economic prospects. A rising stock market is usually based on an improving economic performance, or at least the prospect of one. Therefore, buying shares in NatWest while they trade at a significant discount to their long-term average could prove to be a shrewd move. That is especially the case ahead of what could be a more profitable period for the bank.
Similarly, commercial property stocks such as Landsec could be attractive purchases relative to other FTSE 100 shares. The REIT currently trades at a 35% discount to its net asset value. That has happened as investors have become concerned about changes to the office, retail and leisure commercial property markets. However, with a solid balance sheet and the capacity to adapt to a changing marketplace, Landsec could prove to be undervalued at the moment.
BHP could be another FTSE 100 share that benefits from a stock market rally. The diversified miner’s profitability is closely linked to the global economic outlook, which is expected to improve over the coming months. This may lead to higher demand for a range of commodities that could aid BHP due in part to its efficient business model and diverse asset base. Its dividend yield of around 6% suggests to me that it could be undervalued at the present time.
Investing in FTSE 100 shares via a Stocks and Shares ISA
Of course, a simple and effective means of investing in FTSE 100 shares in a long-term stock market rally is through using a Stocks and Shares ISA. It provides tax efficiency and flexibility, in terms of withdrawals being allowed at any time without penalty. It is also cheap to open and administer, which can be done online in a matter of minutes. This could make it accessible to a wide range of investors.
Although ISA investors may experience further challenges in the short run from an unpredictable stock market, over the long run the past performance of the FTSE 100 suggests that it offers recovery potential. As such, now could be the right time to build a diverse portfolio of large-cap shares.
