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Stock market crash 2020: a rare chance to buy cheap UK shares ahead of a recovery?

The Motley Fool logo The Motley Fool 11/12/2020 Peter Stephens
a close up of a logo: Chart showing an upwards trend, possibly in the FTSE 100 © Provided by The Motley Fool Chart showing an upwards trend, possibly in the FTSE 100

Despite a recent rebound after the 2020 stock market crash, there are a wide range of cheap UK shares available to buy. In fact, indexes such as the FTSE 100 and FTSE 250 continue to trade significantly below their levels from the start of the year. Within them, some sectors remain unpopular among investors due to the uncertainty they currently face.

Therefore, now could be a rare opportunity to buy high-quality companies while they offer wide margins of safety. Certainly, short-term risks are likely to persist at high levels. But, over the coming years, a stock market recovery could lead to impressive capital gains across the equity market.

A rare opportunity to buy cheap UK shares

As mentioned, the 2020 stock market crash has left many cheap UK shares available to purchase. Such events don’t happen all that frequently. For example, this year’s bear market was the first decline of such a size in indexes such as the FTSE 100 and FTSE 250 for over a decade. Therefore, while today’s low share prices may return in future, such a situation may not take place for a number of years.

In some cases, FTSE 100 and FTSE 250 shares are trading at extremely low valuations. Sectors that are relatively cyclical, in terms of being reliant on the economic outlook to a large extent, are currently very unpopular among investors.

They include companies trading in industries such as banking, energy, travel & leisure and some retailers. As such, some businesses are trading at prices significantly below their long-term averages following the stock market crash. This may mean their valuations include wide margins of safety that account for the risks they face in the coming months.

Video: Buy, sell or hold: Coronavirus-related stocks (Fox Business)

A recovery after the stock market crash

Of course, a recovery that pushes the values of cheap UK shares higher may currently seem unlikely. Especially after the 2020 stock market crash that caused significant disappointment. Certainly, excitement among investors has risen recently due to encouraging news regarding vaccine development.

However, the process of vaccinating the population en masse is likely to take a considerable amount of time. Meanwhile, risks such as Brexit and a weak economic outlook are set to remain in place in the coming months. They could cause investor sentiment to remain very volatile.

Despite this, the stock market has a long track record of recovering from even its very worst declines. For example, the last major bear market prior to the 2020 stock market crash saw over 50% wiped off the value of the FTSE 100.

However, within a few years the market had doubled to fully recover, before pushing on to new record highs. Therefore, purchasing high-quality businesses likely to survive short-term challenges to benefit from a long-term recovery after the stock market crash may prove to be a profitable strategy.

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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