For many investors, buying shares at the moment may seem like a bad idea. After all, the UK is around 10 weeks away from leaving the EU, while the world economy faces a variety of risks. They include rising US interest rates, which could choke-off economic growth; slowing Chinese GDP growth; and the possibility of a full-scale trade war between the US and China.
In spite of these risks, I think that there are a number of potential buying opportunities on offer at the moment. For many shares, their market valuations reflect the potential for difficulties which may be ahead in the near term. With stock markets moving in cycles, buying during a downturn may prove to be a good idea in my view.
Risks
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In the short run, there is the potential for shares across the FTSE 350 to fall in value. Brexit could cause disruption for a variety of industries, as well as uncertainty among investors. This may lead to volatile performances from companies that have exposure to the UK economy in particular.
As well as Brexit risks, the US is set to raise interest rates further in 2019. They could cause a slowdown in economic growth not only in the US, but across the world economy as dollar-denominated debt may become more difficult to service. This comes at a time when China’s growth rate is showing signs of moving lower, which has been anticipated for some time. And since tariffs on imports are coming into effect among major economies, global GDP growth could suffer. In fact, the IMF estimates that previously-announced tariffs are due to reduce global GDP by 0.5% by 2020.
Returns
As ever, greater risks can lead to higher returns. Many of the aforementioned risks may have been factored into stock prices to at least some degree. This could mean that there are buying opportunities for the long term. For example, the FTSE 100 has a dividend yield of around 4.7%, while the FTSE 250’s yield is 3.2%. Both of these figures are relatively high compared to their historic levels.
Although there is a potential risk of loss by investing at the moment, an investor with a long-term time horizon may benefit in my opinion from taking that risk. The historic charts of the FTSE 100 and FTSE 250 show that every recession or bear market has been followed by a recovery where the index has reached new highs. Although at times it has taken a number of years to achieve this, even investors who buy towards the top of market cycles have been rewarded for doing so in the long run.
Since stock markets move in cycles, the unfortunate fact is that to buy at the most opportune moments from a reward perspective requires one to buy at moments of elevated uncertainty. This year may be no different, with numerous risks having the potential to cause significant challenges in the short run. But with share prices having already fallen since their 2018 highs, being a buyer of stocks this year could be a shrewd move in the long run.