The prospects for many cheap shares continue to be relatively uncertain. The coronavirus pandemic has continued over recent months, and may persist over the short run.
While this may mean that investors experience paper losses in the coming months, buying undervalued shares now could be a shrewd move.
Their low prices, track record of recovery and the presence of major stimulus packages may boost their returns in a post-pandemic world.
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Buying cheap shares today
The ongoing threat of a second share market crash means that there are many cheap shares available to buy today. Investor risk aversion has continued to be relatively high of late, with many sectors facing a continued period of weak sales and profit growth.
Buying such companies now may be viewed as a risky move by some investors. And, while there is scope for paper losses in the short run, their long-term prospects appear to be bright. Low share prices mean that a wide margin of safety may be included in their valuation. This may provide greater scope for capital growth, which could catalyse your portfolio in the long run.
Furthermore, many cheap shares are undervalued because of weak investor sentiment towards the wider equity market. Therefore, some high-quality businesses may be trading on unjustly low valuations that do not reflect their future potential. They may offer scope for high capital returns as the economy recovers.
Track record of recovery
Even though cheap shares may deliver disappointing performances in the short run, their long-term prospects appear to be sound. The share market has a strong track record of recovering from even its very worst downturns to post new record highs. Therefore, investors who purchase shares when they are trading at a low ebb can benefit from its turnaround prospects.
For example, indexes such as the FTSE 100 Index (INDEXFTSE: UKX) and S&P 500 Index (INDEXSP: .INX) have experienced numerous bear markets over recent decades. They include the dot com crash, the global financial crisis and the 2020 market crash. They have still been able to produce high single-digit annualised returns that appear to be very achievable over the coming years.
Stimulus packages
Another reason why cheap shares can surge in the next decade is the stimulus packages being implemented in major economies across the world. Policymakers across North America, Europe and many other parts of the world are seeking to support the economy through a variety of measures, including low interest rates and asset purchase programmes.
Such programs have a solid track record of stimulating asset prices, as was evidenced in the decade-long bull market that followed the global financial crisis. Therefore, even if the economic outlook is tough at the present time, buying undervalued shares today could be a means of benefitting from favourable policy action over the long run.
