Since the stock market crash in March, investors have been wondering if another one is imminent. The rebound in equity markets lately does not match with the economic fallout of the Covid-19 pandemic, and this is making shareholders nervous.
Stock market crash or correction
A market correction differs slightly from a crash. A crash is a dramatic decline of stock prices on a single day, whereas a correction is when a financial index falls over 10% below its most recent high and can last days, weeks, or months.
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The European Union’s securities watchdog warns a sustained correction is likely. This is because recovery, and a bounce back to a pre-pandemic economy, is likely to take a very long time. The International Monetary Fund expects the eurozone GDP to fall over 10% this year, with slow recovery next year. For this reason, a September stock market crash is not out of the question, but I’m no psychic, so will have to wait and see. I think it’s best to prepare for every eventuality, and as a long-term value investor, keeping core principles in mind is a good place to start.
I want to benefit from the power of dividend compounding and long-term growth. To do this I search for stocks that are likely to go the distance and make a sustained recovery from market lows. Companies falling into this category, in my view, include BAE Systems (LSE:BA), GlaxoSmithKline, and Royal Dutch Shell.
As geopolitical tensions rise and technology advances, cyber-crime is an increasing threat. This makes me think defence is a good sector to invest in. BAE Systems regularly wins international government contracts, and I think this will continue. Concern surrounding government defence spending has been suppressing the BAE share price in recent months, but in the long term I think spending will increase. The UK is already looking at ways to divert budgets to defence and intelligence, and other governments may follow suit.
BAE’s technological advancements are not only impressive but vital in ensuring high-calibre solutions for aerospace, defence, and security markets. Interpol recently released a report warning that cybercriminal activity has increased amid Covid-19. Russia and China have been accused of hacking, and fake news is on the rise. All this points to a need for continued investment in national security. BAE recently reinstated its dividend which has a yield of 4.5%. Earnings per share are 46.4p and its price-to-earnings ratio (P/E) is 11.
GlaxoSmithKline is a science-led pharmaceutical giant creating medicines and vaccines, including a Covid-19 vaccine in partnership with Sanofi. It’s a £75bn company that continues to pay a dividend with a current yield of 5.4%. Earnings per share for the trailing 12 months sit at £1.32 and, based on this, GSK’s P/E is 11.
Now, we all know renewables are the future of energy, but oil remains indispensable in reaching that eventuality. Royal Dutch Shell has been around for decades and I believe it has the knowledge, experience, and budgets to continue to profit and adapt in this changing environment. I think it’s a sensible long-term buy and at 4.6%, it offers a decent dividend yield.
There are many companies that have thrived since the last stock market crash and I would begin my research by looking to those as potential buys in the next one.