Bargain shares could produce impressive returns over the long run. Although they face short-term risks such as Brexit and coronavirus, their low valuations suggest there is significant scope for capital growth in the 2020s.
With past recoveries from economic downturns having led to rising stock prices, the same outcome appears likely in the coming years. Furthermore, the scale of monetary policy stimulus being put in place across major economies could strengthen the outlook for many businesses that currently trade at cheap prices.
Low valuations across the stock market
The capital growth potential of bargain shares appears to be high. Although the share prices of some companies have rebounded following the stock market crash, many other businesses trade at prices that are substantially below their historic values. Investors may be significantly underestimating their capacity to survive a difficult set of trading conditions, as well as their potential to deliver improving profitability in the long run.
This may provide long-term investors with a wide range of buying opportunities today. Those businesses that are trading at low prices because of wider challenges could present particularly attractive buying opportunities. They may even be able to expand their market positions at the expense of weaker rivals. This may put them in a strong position to produce rising profitability, and share prices, in the coming years.
The past recoveries of bargain shares
Bargain shares may struggle to post capital growth in the short run due to an uncertain economic outlook. However, the past performance of the stock market suggests that a return to growth is very likely. Even after the most severe bear markets, such as the global financial crisis, indexes such as the FTSE 100 Index (FTSE: UKX) and S&P 500 Index (SP: .INX) have recovered. This has allowed them to produce annual total returns of around 8% per annum.
Therefore, this level of return seems to be very achievable during the 2020s. Certainly, some years, such as 2020 itself, may lower the average return for the decade. But on a long-term basis, the stock market has the capacity to deliver high single-digit annual returns that catalyse your financial prospects.
Stimulus packages can encourage growth
Many bargain shares recovered after their March lows due in part to the monetary policy stimulus packages announced in major economies in North America and Europe. They have had a positive impact on asset prices this year, just as they did when they were implemented following the global financial crisis over a decade ago.
In fact, a loose monetary policy led to a decade-long bull market following the 2008/09 crash. A period of low interest rates and asset repurchase programmes now looks set to remain in place in the coming years. It could have an equally positive effect on share prices, and cause a boom period that lasts throughout much of the 2020s. As such, now could be the right time to buy undervalued stocks and hold them over the next decade.
