The stock market crash in March was dramatic. And the recovery has been quite impressive. However, I believe that there will be another stock market crash this year. Here’s how I’d prepare for it.
Reasons for another stock market crash
The coronavirus restrictions have led to an unprecedented drop in economic activity. Because the UK’s economy relies heavily on the services sector, it has suffered more than many European countries. However, the contraction is certainly global. Furthermore, the second Covid-19 wave has started too. For example, the US is seeing a rise in coronavirus hospitalisations, in Texas and California in particular.
Apart from the Covid-19 downturn, there are many other political and macroeconomic factors that investors have to consider. First of all, the risks of a no-deal Brexit are extremely high now. The Government seems to be taking a hard stance towards negotiations with the EU. The main emphasis is on executing Brexit before the December deadline. But it looks like agreement on many issues, including business regulations and fishing rights, is a long way off.
There is another risk that could lead to a stock market crash in 2020. This is the political situation in the US. The Covid-19 downturn and current protests are taking place just before the presidential elections. This could lead to higher market volatility, not just in America but all over the world. The UK’s markets are at risk as well because many Footsie companies are multinationals and heavily depend on the US.
This is what I’d do
First of all, investors should stop worrying and start preparing. Even though a stock market crash can heavily impact most firms, large companies are highly likely to survive. For example, the oil industry is heavily impacted by the current downturn but companies such as Shell and BP will most probably do well in the long run. This is because of their cash holdings, high credit ratings, and market leading positions.
However, many of the risks mentioned above are global. The political situation in the US and a hard Brexit would be much more harmful for firms that have close links with the US and Europe. Investors who would like to hedge their portfolios against such risks might do well by considering large domestic companies. What are they? Well, the most obvious example is Tesco.
It enjoys a really good competitive position in the UK and seems to benefit from its economies of scale. It seems to me that even if the whole world sinks into a Great Depression, which I do not think is most likely, UK consumers will still go shopping there. Why? Because Tesco sells groceries as well as other essentials. Regardless of their incomes, consumers still have to eat and drink, and these are the last things they will reduce their spending on.
However, Tesco is not the only company for conservative investors to buy. There are many UK companies that are large, stable, and paying good dividends.