Some cheap UK shares have failed to make successful recoveries following this year’s market crash. Even though the wider stock market has rebounded sharply, a number of companies continue to face difficult operating conditions that are reflected in weak investor sentiment.
While they may take time to deliver a recovery, now could be the right time to buy them. Their low valuations are unlikely to remain in place over the long run. This could translate into high capital returns for new investors that improves their prospects of retiring early.
Some cheap UK shares are priced at low levels for good reason. For example, they may have weak balance sheets. Some may have strategies that can’t be adapted to a changing economic outlook.
However, other companies are suffering from weak investor sentiment because of challenging industry conditions that are likely to be temporary in nature.
For example, the banking sector is currently viewed unfavourably by investors due to low interest rates and an uncertain economic outlook. Yes, both of those factors may remain in place for some time. But over the long run, the profitability of banks is likely to improve.
Therefore, buying banks that have solid financial positions and strategies to cut costs in response to a weak short-term outlook could lead to impressive capital gains in the long run.
A temporary opportunity
Cheap UK shares may continue to be available to buy over the coming months. But the past performance of the stock market suggests they may not be on offer in perpetuity. For example, sectors that struggled heavily in previous bear markets and global economic downturns have generally recovered to post impressive capital returns.
Investors who purchased companies operating within them at low prices may, therefore, have experienced high capital returns.
The long-term prospects for the economy may be more upbeat than investors are pricing in. Fiscal policy changes and major monetary policy stimulus across major economies has the potential to catalyse the global economy in the coming years.
This may lead to improving trading conditions that result in growing profitability for sectors currently experiencing difficult near-term outlooks.
A rare opportunity
Some cheap UK shares are trading at price levels significantly below their historic averages. A number of them are currently priced at levels not seen since the previous major global economic downturn over a decade ago.
Major recessions and bear markets occur relatively infrequently. So now may be a rare opportunity to buy undervalued shares for the long run. They may not produce impressive returns in the short run, due to the existence of ongoing economic uncertainty.
However, their low valuations and the economy’s recovery potential suggest they could help to bring forward your retirement date.
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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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