The FTSE 100 has slumped in early deals today. It seems as if investors are fleeing equities, due to the emergence of a new coronavirus variant in South Africa. This variant has been described as “concerning” by several health bodies. While I cannot yet call the decline a stock market crash, if the slump continues, it may become one.
Understandably, travel stocks are feeling the most pain. Companies like IAG and easyJet are the most exposed to any travel restrictions. Therefore, it is easy to see why investors have been selling these corporations today.
However, here at The Motley Fool, we are long-term investors. We do not try and time the market on a daily or weekly basis. Instead, we are searching for high-quality companies we can buy for our portfolios to own for the next five to 10 years.
And with that in mind, here is the approach I plan to use to invest in the FTSE 100 if the current slump grows into a full-blown stock market crash.
There are plenty of risks on the horizon for investors to consider. These challenges extend far beyond the coronavirus pandemic. Political factors, such as a potential trade war between China and the US, ongoing rumblings between the UK and Europe, and Chinese regulatory concerns, are all weighing on investor sentiment.
Analysts are also becoming concerned about the impact withdrawing coronavirus-induced monetary stimulus will have on the economy. Higher interest rates could have a significant impact on some sectors, especially indebted companies.
Put simply, I have to navigate a bit of a minefield to find attractive long-term investments. But they do exist.
FTSE 100 opportunities
I will start by outlining the sectors I want to avoid. A couple stand out. Until the pandemic is over, I will be avoiding travel and tourism.
With the prospect of interest increases on the horizon, I will also be avoiding any companies with a lot of debt. And considering the simmering trade uncertainties, I think it may also be sensible to avoid businesses with too much exposure to China.
This will include commodity businesses. China is the world’s largest consumer of commodities such as copper and iron ore. If the country’s economy starts to struggle, demand for these critical resources could plunge.
Stock market crash protection
So I have a road map of the businesses I want to avoid. However, it may be harder to find companies that will benefit from growing uncertainty. As such, I plan to focus on defensive sectors such as healthcare and companies that may have qualities that will enable them to take advantage of current market conditions.
One example is Hargreaves Lansdown (LSE: HL). This online stock broker reported a surge in business last year as stuck-at-home consumers took to the trading market to pass their time.
The company earns a commission on every trade, and investors tend to trade more in periods of market volatility, such as a stock market crash. Some analysts have speculated that this boom in business would not last.
Nevertheless, according to the group’s latest trading updates, it has. As volatility and uncertainty grow, I think Hargreaves can repeat the same playbook. That is why I would buy the stock for my FTSE 100 portfolio, although I should note there is no guarantee the business will be able to repeat last year’s performance. Consumers may find other ways to pass the time in another pandemic lockdown.
If I had to pick just one healthcare stock in the FTSE 100, I would buy Hikma (LSE: HIK). Other investors might choose GlaxoSmithKline or AstraZeneca. After all, the latter produces one of the world’s top-selling coronavirus vaccines.
However, Hikma manufactures the generic drugs used to treat patients who end up in hospital. I think this is a far bigger market with potentially more room for growth over the next five or 10 years. Treating coronavirus patients is not the only use these drugs have, which suggests demand will continue to increase even after the pandemic.
As well as its existing portfolio of treatments, Hikma is also working to develop new products for its pipeline. This should keep the company moving and revenues growing.
That said, as a generic drug producer, there is a lot of competition in the market. As such, Hikma may see growth stagnate if competitors start to attack its market share aggressively.
FTSE 100 consumer goods champion
I already own Reckitt (LSE: RKT) in my portfolio and would not hesitate to buy more of the stock today. I think this company is perfectly positioned to navigate any headwinds that may emerge over the next couple of years. Its cleaning products business has reported a surge in demand during the pandemic. This trend may continue as long as coronavirus remains a threat.
Meanwhile, the company’s consumer healthcare business is reporting strong growth due to the emergence of seasonal colds and flu.
I think the company has a strong presence in these two highly defensive markets. These qualities should help it push through any challenges the world throws at it.
One challenge the group may face going forward is higher prices. This cost inflation could have a significant impact on profit margins and potentially consumer demand.
With uncertainty building, I would also acquire BP (LSE: BP). This is a bit of a contrarian bet. If economic growth suddenly slams to a halt, global energy demand could fall. That would have an impact on oil prices and, as a result, the oil producer.
However, over the past two years, BP has shown its resilience. The company emerged from the first stage of the pandemic in a robust financial position. Profits have since rebounded to pre-pandemic levels.
This is the main reason why I would buy the stock. In an uncertain world, BP offers a level of certainty. What’s more, the company is investing heavily in its renewable energy division, which should prepare the business for the energy transition.
That is why I think the stock is an excellent investment for uncertain times.
Rupert Hargreaves owns shares of Reckitt plc. The Motley Fool UK has recommended GlaxoSmithKline, Hargreaves Lansdown, Hikma Pharmaceuticals, and Reckitt plc. 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.