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Could the collapse in Evergrande shares really cause a UK stock market crash?

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On Monday, stock markets around the world experienced a massive sell-off. Investors were nervous about the future for Evergrande shares. The Hong Kong-listed property firm is the most indebted real estate developer in the world and could be heading for complete collapse. There are fears that this could have implications for Chinese banks, the wider Chinese economy and therefore global stock markets.

If things go very wrong, it could perhaps precipitate a UK stock market crash. Especially as it’s not the only challenge stock markets face, with inflation, truck driver shortages, semiconductor shortages, shipping prices rocketing and more all in the mix as well. 

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It’s worth saying though that on Tuesday, the market made back much of the ground lost the previous day, so it’s not all gloom and doom. We’ll have to see what the rest of September and then the coming months bring. Then again, the story isn’t finished just yet. 

More on Evergrande shares and what’s happening

Evergrande’s shares have been falling for most of this year. Its huge debt, combined with a Beijing crackdown on highly leveraged developers, has really hurt the share price. It now brings the future of the developer into question and there’s the potential that it could default on debt repayments. 

It’s likely Beijing won’t want the problem to get out of hand and impact the wider economy. So while this is something to keep an eye on and could make the markets volatile, I expect it’s just another risk to be aware of rather than overreact to.

However, even if Evergrande doesn’t start a stock market crash, there are actions worth taking in case there is one. Inflation, stock market highs, low global growth, the possibility of interest rates rises, all could cause markets to contract sharply.

What to do if a stock market crash is coming

As stock markets have bounced back strongly from the 2020 crash that was caused by Covid, I still need to be aware of how best to prepare for any future stock market crash. As already noted, there are plenty of potential triggers, many of which have been stored up by over a decade of easy money from central banks.

I think one of the ways to prepare for any stock market crash is to keep some cash aside. For each investor, the amount will be different, depending on individual circumstances, risk tolerance and assessment of when there might be a crash. I’d look personally to keep at least 5%-10% of my portfolio as cash so I can buy bargain stocks.

Alongside that cash buffer, the other big consideration I think is to invest now in high-quality companies. Many companies can make money in good times but when markets crash that’s when bad companies get exposed.

So how do I find these high-quality companies? I think it pays to focus on high returns on capital employed, high margins, low debt and growing revenue. Any company that can combine these and also be in an industry with good growth prospects ought to come through any stock market crash.

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Andy Ross owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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