In the UK, the stock market hasn’t done too well over the past month after a new government leadership spooked investors. But what’s the chance of a stock market crash? Maybe I should be gearing my portfolio for the worst. Let’s explore.
What could cause a crash?
We’re experiencing a global economic downturn. Inflation was pushing higher around the world even before Russia’s invasion of Ukraine. While this is having a particularly unpleasant effect in the UK and other developed nations, the impact in the developing world is disastrous. After all, poorer nations just can’t absorb the cost increases that we’re seeing.
This isn’t good for markets however, looking at the FTSE 100 and, on a very basic level, it’s clear that companies are still making money. It’s a tougher operating environment, but not one that can’t be navigated. Plus, valuations are pretty low on the index. So I don’t see this causing a stock market crash.
However, as US President Joe Biden said on Thursday, the threat of nuclear “Armageddon” is closer today than anytime since the Cuban Missile Crisis — 1962. With the Kremlin threatening to use tactical nuclear weapons to protect what it now claims is its territory, the risk appears very real.
The use of a tactical nuclear strike in Ukraine will bring death and destruction on an unimaginable scale. And it would also likely bring about a stock market crash as investors fear a further escalation.
Here’s what I’m doing
Let’s be honest, in the case of a nuclear Armageddon, my portfolio is the least of my worries. But I’m not really preparing for that, despite President Biden’s comments. In fact, if I was really preparing, I’d have sold all of my positions. Instead, I’m focusing on defensive stocks and those that will benefit from the weakness of the pound right now.
One of my top picks, which I’ve been buying more of, is Unilever. The London-based, fast-moving consumer goods giant sells in 190 countries and claims that 3.4bn people use its products every day. It also earns 58% of its income in emerging markets. Approximately 17% of the company’s revenue comes from the US — with a strong dollar, this should be good for Unilever.
Unilever also has defensive qualities due to the strength of the brands it owns, such as Hellmann’s, Marmite, Heinz, Persil, and Lifebuoy.
Diageo is another company with these characteristic. A large proportion of its sales are made in the US, and it’s growing considerably in developing economies. But it also owns internationally known drinks and spirits brands — strong brands tend to do well even when pockets get squeezed.
Despite recessions not being good for credit quality, banks should be doing well right now as interest margins rise. In fact, interest rates have been near zero for over a decade. So with the base rate set to near 6% next year, we’re looking at a new period of enhanced profitability for banks. And that’s why I’ve recently bought more shares in Lloyds.
