Despite the recent market rebound, there are still a relatively large number of cheap shares that could deliver high returns in the long run.
Certainly, their prices could fall further in the short run due to risks such as a continued rise in global coronavirus cases. However, the recovery potential of the stock market suggests that buying undervalued companies today can lead to high returns compared to other assets.
Moreover, some share prices are rarely as cheap as they are at the moment. Grabbing wide margins of safety that may be temporary in nature could, therefore, be a logical move.
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A rare opportunity to buy cheap shares
The last time there were so many cheap shares available to buy was probably during the global financial crisis in 2008/09. Although the recent market rebound means that some sectors now appear to be fully valued, other industries continue to have extremely undervalued shares on offer. In some cases, they trade well below their historic average valuations. This could indicate that they offer good value for money, and that investors have priced in many of the risks they face.
Such opportunities are generally rare. Over a decade has elapsed since the last global bear market and recession, and many investors are likely to be able to count on one hand how many times they have experienced such periods in their own lives. Therefore, taking advantage of the opportunities available today could be a sound move that allows you to buy stocks when they are unusually low, and sell them at a later date when they are relatively likely to trade at higher prices.
Recovery potential
Buying cheap shares today could allow investors to capitalise on a sustained recovery over the long term. As per the global financial crisis, and other past bear markets, a recovery in the stock market's price level seems likely. Even though there are risks facing the world economy, the impact of stimulus packages such as quantitative easing and tax changes in many major economies could lead to a strong recovery over the coming years.
As such, focusing your capital on undervalued shares could be a more profitable strategy than buying other assets such as cash and bonds. Although less risky assets may offer a higher chance of a return of capital, their profit potential may be very limited in an era when interest rates look set to persist at low levels. In fact, fixed-income securities and cash savings accounts may erode your spending power if monetary policy measures such as quantitative easing prompt a period of higher inflation.
While buying cheap shares today may not necessarily feel like a natural move for any investor to make, history suggests that it is a logical step for those individuals with long-term horizons. Some stocks are rarely this cheap, and could offer high total returns in the coming years.
