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Forget gold and buy-to-let! I’d buy cheap UK shares in an ISA today

Peter Stephens
·3-min read
Gold bullion on a chart
Gold bullion on a chart

The stock market crash means a number of UK shares now trade at cheap prices. Over the long run, they could offer significant capital return potential as their valuations move towards their historic averages.

At the same time, popular assets such as gold and buy-to-let property may struggle to keep pace with indexes such as the FTSE 100 and FTSE 250. Their high prices may mean they lack a margin of safety.

As such, now could be the right time to buy a range of undervalued British stocks in an ISA. Doing so could lead to impressive returns in the coming years.

Cheap UK shares

While some UK shares have rebounded after the recent market crash, many others continue to trade at low prices relative to their historic averages. Over time, this situation is likely to change. Investor sentiment towards riskier assets, such as equities, is likely to improve as global GDP growth returns to levels more similar to their long-term averages. This could lift valuations across the stock market and allow today’s cheap stocks to experience upward reratings.

Furthermore, the financial performances of many businesses are likely to improve. This year, they have faced hugely challenging operating conditions in many cases. While more pain could yet be ahead, the reality is that a more benign operating environment is likely to emerge. This is due to factors such as fiscal and monetary policy stimulus impact on the economic outlook. This could allow today’s cheap UK shares to merit higher valuations as their profitability gradually improves.

High prices for gold and buy-to-let property

While many UK shares are currently cheap, other assets such as gold and buy-to-let property appear to lack margins of safety. For example, gold’s price has hit a record high this year due to a weak economic outlook and low interest rates. However, investor sentiment towards the precious metal could moderate over time, as an uncertain economic future gives way to a more prosperous outlook.

Meanwhile, high house prices mean investors in buy-to-let property may struggle to obtain a worthwhile long-term return. Factors such as the stamp duty holiday may provide temporary growth for the industry that masks underlying affordability challenges. However, with many first-time buyers struggling to get on the property ladder, a slower pace of house price growth may come into existence further down the line.

As such, on a relative basis, owning a portfolio of UK shares could prove to be a profitable move in the long run. Their track record of recovery and current low prices indicate that now may be the right time to start buying them in a tax-efficient account such as an ISA. They could have a more positive impact on your financial situation than gold or buy-to-let property.

The post Forget gold and buy-to-let! I’d buy cheap UK shares in an ISA today appeared first on The Motley Fool UK.

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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