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Cheap UK shares may lack appeal compared to rising gold and Bitcoin prices, some investors seem to believe. After all, indexes such as the FTSE 100 and FTSE 250 have fallen heavily during the course of 2020. By contrast, Bitcoin and gold have surged higher as a result of rising investor demand.
However, over the long run, a diverse portfolio of today’s cheap UK shares could offer superior returns compared to the precious metal or virtual currency. Their wide margins of safety, the prospect of an economic recovery and the track record of the stock market could make them relatively attractive.
Some cheap UK shares face extremely difficult operating conditions in the coming months. Risks such as Brexit and coronavirus could mean that their sales and profitability come under severe pressure.
However, in many cases those risks have been factored in via lower share prices. Indeed, some FTSE 100 and FTSE 250 shares are trading 25%+ lower than they were at the start of the year. As a result, they now have valuations that are significantly below their historic averages. This could present an opportunity for investors to benefit from a potential recovery over the long run.
By contrast, Bitcoin and gold’s prices may lack a margin of safety compared to cheap UK shares. Gold’s price rise may factor in a period of low interest rates and short-term economic uncertainty. Meanwhile, Bitcoin’s lack of fundamentals mean it is very difficult to know whether it offers good value for money after its recent rise.
The recovery prospects of FTSE 100 and FTSE 250 stocks
Cheap UK shares could experience a sustained recovery over the long run. Positive news regarding the coronavirus pandemic or in the political sphere could help to shift investor expectations to a more positive stance. And, with both indexes having a solid track record of delivering turnarounds following even their worst bear markets, the prospect of a stock market recovery seems to be very likely.
Gold’s price may not respond positively to an improving economic outlook. Its defensive appeal may be a key reason for its recent surge. Therefore, eventually investor demand may wane as increased risk aversion subsides. Similarly, Bitcoin’s recent appeal may be centred on its possible low correlation with the economic outlook. Its appeal may decline as investor sentiment towards cheap UK shares likely increases.
Investing money ahead of a stock market recovery
Therefore, investing money in a diverse portfolio of cheap UK shares could be a means of benefiting from a likely stock market recovery. The short run may yet include periods of disappointment for equity investors. But, in the long run, the return potential of a diverse portfolio of FTSE 100 and FTSE 250 shares could be relatively high.
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.