Would UK shares recover after a stock market crash?

If a stock market crash happens, could UK share prices recover? Christopher Ruane considers the possibilities – and the impact on his portfolio.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

One of the worrying things about a stock market crash for many investors is what happens afterwards. If the market crashes and soon regains its losses, as we saw last March, a stock market crash can represent a buying opportunity. But if the market falls and stays low, it can inflict a stinging loss on one’s portfolio.

That’s what has happened in Japan in recent decades. Its stock market index still hasn’t recovered to where it was in the late 1980s. So investors who held shares then have either had the choice of selling at a loss, or hanging onto their shares for over 30 years. That imposes a high opportunity cost.

If there was a stock market crash now, would UK shares bounce back like last March – or stay at deflated prices for decades like Japan? Let’s look at both scenarios.

Quick bounce back

Last year’s crash was quite unusual because the stock market tanked and then regained a lot of lost ground almost immediately. I think that reflects the source of the crash. Rather than being the sudden release of slow-building economic pressure, it reflected panic about the unknown potential impact of the first global pandemic in generations.

If there is a stock market crash in coming months, I think it is more likely to reflect deteriorating confidence in economic prospects and fears about market overvaluation. Loose monetary policy has seen lots of spare cash sloshing around the stock markets. If policy tightens and investors start to sell, that could trigger a market correction or crash.

In those circumstances, it could take months or years for confidence to return. While the UK market is not currently as richly valued as the US market, that doesn’t mean it couldn’t also feel the impact of such a crash. So while a quick bounce back is an option, I wouldn’t expect it to happen.

A stock market crash and the long game

By the same measure, I wouldn’t expect a decades-long market weakness like we’ve seen in Japan. A key reason for the Japanese market’s slow recovery has been the unwillingness of policy makers there to let zombie companies fail. I wouldn’t expect that to happen in the UK and so would expect a quicker recovery.

That doesn’t mean that recovery would necessarily be fast, though. A stock market crash is often just one part of a wider chain of events, including for example economic downturn and tightening money availability. It can take years for investors to return and reflate asset prices to where they stood previously. Older UK investors remember bear markets that went on for years. Such markets could easily come back and ultimately there is always a risk prices may never recover.

My stock market crash strategy

What does this mean for my portfolio?

First, I generally don’t try to time the market. I focus on buying quality companies I’d be happy to hold for years. So a stock market crash could present a buying opportunity for me.

Secondly, it is why my portfolio includes dividend shares like British American Tobacco and Exxon. I don’t rely just on capital growth for my investment return. So, if there is a stock market crash, I will still hopefully receive dividend income no matter what happens to share prices in the short term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Christopher Ruane owns shares in British American Tobacco and Exxon. The Motley Fool UK has recommended British American Tobacco. 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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »