Occasionally the FTSE 100 and other major indices endure a stock market crash. And there are fears that another one is looming. There’s alarm about a new Covid variant detected in South Africa. At the time of writing, global stock markets are falling and there’s a sense that any more bad news could lead to a crash.
The UK imposed travel restrictions on six African countries over the new variant. In particular, travel and leisure stocks were hit hard this morning. For example, easyJet shares were trading 14% lower.
What to do in a stock market crash?
The natural instinct in a stock market crash is to panic. But as a long-term investor, I try to sit back and analyse the facts and the potential effects on my portfolio. It’s important that I try to keep a clear head.
What does that mean? Well, I’d need to remind myself why I own a particular share and if the recent concerns could be temporary. If I think the worries will soon pass, a stock market tumble could be an opportunity to buy quality shares at a discount.
I love a discount. Especially when it comes to shares. In times like this I like to have a stock watchlist ready. The list includes high-quality shares that I’d like to own for the long term. In a market tumble, even shares that are unrelated to recent concerns can take a hit. This can provide excellent opportunities, in my opinion.
So what’s on my watchlist and which shares should I avoid? Well, I’m avoiding any travel shares right now. The sector is too precarious, at the moment. It’s too vulnerable to new variants and government restrictions that can change at short notice.
On my watchlist, I’ve added three quality shares with strong brands. These are resilient companies with defensive characteristics. My picks are Diageo, Relx and Yougov.
Each offers a return on capital employed of at least 15%. I like this measure of quality. It’s also a strategy used by popular investor Terry Smith. All three are profitable and have double-digit profit margins. Looking to the future, analysts expect double-digit earnings growth for all three companies. This is encouraging and I like what I see.
Diageo, Relx and Yougov have demonstrated great resilience throughout the pandemic. I’d love to add these shares to my Stocks and Shares ISA if share prices fall further.
More weakness to come?
There are some things to bear in mind, however. A stock market crash doesn’t always end in one day. There are several reasons why share prices could tumble further. The new variant could spread globally and be more resistant to current vaccines. Further government restrictions could delay the economic recovery. There are still questions regarding the new variant and until there are clearer answers, uncertainty could cause stock markets to remain weaker in the short term, even for strong companies.
Overall, despite short-term concerns, the long-term history of the stock market is encouraging. And if the stock market crash gets deeper, I’m ready with my watchlist.
Harshil Patel owns shares of YouGov. The Motley Fool UK has recommended Diageo and RELX. 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.