While many UK shares have rallied in recent months, they don’t appear to be overvalued in many cases. For example, it’s possible to purchase FTSE 100 shares with dividend yields significantly above 4%. Meanwhile, many sectors contain companies with single-digit price-to-earnings (P/E) ratios.
This suggests there’s scope for further capital growth over the coming years. At a time when other assets such as cash, buy-to-let and gold may fail to deliver impressive returns, now could be the right moment to purchase a diverse range of stocks for the long run.
The appeal of UK shares
Of course, UK shares have a long history of delivering attractive returns. For example, the FTSE 100 has produced annualised total returns of around 8% since its inception in 1984. Similarly, the FTSE 250 is up by 9% per year on a total return basis over the last 20 years.
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As such, simply buying and holding a range of shares to track the index’s performance could prove to be a very profitable move. That’s because compounding leads to a large nest egg.
However, now may prove to be a relatively opportune time to invest money in UK stocks. As mentioned, in many cases, they appear to offer good value for money. This is likely down to their short-term prospects which, in many cases, are somewhat challenging.
But as the vaccine rollout continues and the economy returns to normal, a wide range of sectors are likely to experience improving operating conditions. This could push their share prices higher and help them to outperform the past returns of UK shares.
The appeal of stocks on a relative basis
While some investors may prefer other assets to UK shares, the reality is that their return prospects may be below those of FTSE 350 stocks. For example, cash is unlikely to offer a generous return due to low interest rates. In fact, cash returns may lag inflation over the coming years as policymakers seek to maintain an economic recovery.
Meanwhile, the price of gold has soared in the last year so it now appears to include investor fears surrounding the outlook for the economy. Similarly, buy-to-let property may fail to deliver impressive returns. House prices have surged to a record high in the last year. This could mean they don’t offer a margin of safety. Moreover, the rising cost of homes may mean that affordability concerns heighten.
Therefore, on a relative basis, UK shares could prove to be a sound investment opportunity. Although further market turbulence cannot be ruled out during a very tough time for the economy, the financial and market positions of many businesses suggest they will survive.
Since they trade on low valuations, they may offer strong capital growth in a stock market rally over the coming years.
