The stock market's recent crash means that many companies are trading at price levels that have not been seen since the global financial crisis. In the short term, further declines could be ahead depending on news regarding coronavirus. However, over the coming years a stock market recovery seems likely due to the track record of equities following bear markets.
With other asset classes set to offer relatively unimpressive returns as monetary policy has become more accommodative in response to the economic challenges that are ahead, the relative appeal of undervalued stocks could be high.
Recovery prospects
The chances of a stock market recovery, and bull market, may seem to be low at the present time. The outlook for the economy is highly uncertain, and the financial impact of coronavirus is currently unknown. This could cause investor sentiment to be highly changeable in the short run.
However, over the long run a stock market recovery appears to be highly likely. The track record of global equities shows that even the most severe recessions and crashes have failed to keep stock prices permanently low. After every bear market there has always been a bull market. While the prospect of a sustained rise in stock prices may seem unlikely now, fiscal and monetary policy stimulus across major economies may lead to strong returns for equity investors.
As such, through allocating your capital to stocks at the present time, you can take advantage of a likely recovery over the long run that could boost your portfolio returns.
Low valuations
As mentioned, many stocks are trading at prices last seen during the financial crisis. This may dissuade some investors from buying them, but it could prove to be a logical time to add them to your portfolio.
Most investors seek to buy stocks when they are trading at low prices, and sell them when they trade at higher prices. For them to be cheap, there usually must be a clear reason, such as a recession. While economic challenges can cause some companies to go out of business, buying financially-sound businesses while they offer wide margins of safety can be a shrewd move.
Not only do they have a high chance of surviving the current crisis, they may be able to gain market share and generate higher returns in the long run.
Relative appeal
While equities may offer improving returns in the coming years, other mainstream assets such as cash and bonds could struggle to produce inflation-beating performances. Low interest rates may remain in place for some time, as policymakers seek to boost the economy's prospects. Therefore, on a relative basis the appeal of stocks could be exceptionally high.
Through buying a diverse range of companies, you can reduce your overall risks. They may take time to produce high returns, but in the coming years equities may prove to be a relatively attractive asset class that is worth buying into today.
