Crashing stocks and an uncertain economic outlook are likely to dissuade many investors from taking risks at present. That’s a natural response to what is set to be the most challenging period for the economy in many years. It’s one which could prompt a period of weak global growth and even a recession.
Despite this, undervalued stocks can offer long-term growth potential as the world economy recovers. They may also provide greater diversity, and lower risks, than focusing your capital on assets such as Bitcoin and gold. Even though both have seen increased interest among investors of late.
Crashing stocks may not necessarily offer high returns in the short run. But they do have the potential to post strong turnarounds as the world economy recovers. Past economic downturns show it can take time for global GDP growth to return to attractive levels. However, no recession has ever lasted in perpetuity. This means the operating environments for businesses are likely to improve. This could bring to an end their share price declines and allow them to return to growth.
Looking ahead, the speed at which this process takes place could be faster than many investors are currently expecting. Fiscal and monetary policy stimulus in major economies in Europe, and especially in North America, has been significant. It may boost asset prices, which could mean that the outlook for investors improves over the medium term.
Crashing stocks offer, by their very nature, relatively attractive valuations, in many cases. Although further declines in their prices can take place in the short run, they’ve the potential to post improving capital returns in the long run.
In this area, they appear to have greater appeal than assets such as gold and Bitcoin. The precious metal recently reached its highest level since 2011, and is currently close to a record high. This indicates there may be restricted scope for a further price rise. This could lead to less attractive returns than many gold investors are expecting.
Similarly, Bitcoin’s appeal versus crashing stocks could be limited. The virtual currency’s lack of data means valuing it is impossible – especially since its capacity to replace traditional currencies in the long run seems to be questionable.
Diversification among crashing stocks
As well as offering more attractive prices and long-term recovery potential, crashing stocks also provide greater diversification prospects than gold or Bitcoin. This could reduce their overall risks, which may lead to greater returns over the long run.
Since it’s relatively inexpensive to build a diverse portfolio of shares due to online sharedealing’s wide availability, the stock market offers an accessible means to generate high returns for almost any individual over the long run. The market crash may provide opportunities to capitalise on undervalued shares that can improve your financial prospects to a greater extent than Bitcoin or gold.
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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.
Motley Fool UK 2020