The FTSE 100 has a long history of experiencing market crashes, before recording successful recoveries. Therefore, buying cheap FTSE 100 shares prior to their recovery has been a relatively successful strategy in generating high returns over the long run.
With the index currently offering a wide range of undervalued businesses, now could be an opportune moment to acquire high-quality stocks. They could deliver strong returns as the prospects for an improving world economy causes investor sentiment to strengthen.
FTSE 100 past recoveries
When looking back at previous FTSE 100 bear markets, it’s easy to overlook how uncertain they were for investors at the time. For example, a brief glance at a long-term chart of the index suggests the 1987 crash was a mere blip on its growth trajectory. However, at the time, there were daily double-digit moves down for the index. And there were genuine concerns about whether many of its members would ever recover to produce high levels of profitability.
It was the same story in other market crashes, such as the tech bubble and the financial crisis. However, the index went on to produce new record highs following each of those challenging periods. Therefore, investors who bought cheap FTSE 100 shares when their outlooks were challenging were able to position their portfolios for long-term growth.
Financial strength
Buying cheap shares during economic crises may enable you to take part in a long-term recovery. However, surviving the short-term difficulties that have caused an uncertain period is arguably of even greater importance.
As such, buying FTSE 100 companies with strong balance sheets that can survive a period of lower sales could be a worthwhile move. They may be more likely to maintain their dominant market position and enjoy a period of improving operating conditions over the following years.
Fortunately, all of the information required for an investor to judge the financial strength of a business is freely available online. By accessing a company’s annual report, it’s possible to ascertain its balance sheet strength and capacity to survive the likely upcoming recession. This process may reduce your overall risks, and boost your long-term reward prospects.
Business quality
Beyond surviving the short-term challenges facing the world economy, companies with competitive advantages may be in strong positions to generate high returns in the long run. They may experience a faster return to improving financial performance than their peers. They may even be less impacted by weak economic performance.
Such companies may not necessarily be among the cheapest shares on offer in the FTSE 100 at the present time. But it may be worth paying a higher price for them relative to their peers. That’s because they could survive a prolonged economic downturn. They may also benefit to a greater extent from the global economy’s likely long-term recovery.
