The last couple of months have been a nice change of pace in the stock market. Both the FTSE 100 and FTSE 250 have been on an upward trend since late 2022 on the back of improving economic conditions that have re-sparked some confidence among investors.
However, we’re not out of the woods yet. And these latest gains could very well reverse should the worse come to pass. So the question is, what are the best UK shares to buy if the markets decide to jump off a cliff again. Let’s take a look.
A ticking time bomb?
Despite the cost-of-living crisis, many businesses are still managing to eke out growth. And this appears to be accelerating as energy price inflation cools.
That’s terrific news for companies and their shareholders, as earnings are always a welcome sight. But there’s a glaring problem when looking closer at consumer finances. While spending may be on the rise, it seems a large chunk of it originates from credit cards.
Credit card borrowing soared to its highest point since 2004 earlier this year, placing countless households in new and, more importantly, expensive debt. And with the Bank of England still busy hiking interest rates, these short-term loans are getting even more costly to service.
If credit card debt puts even more pressure on households, it could trigger a nationwide event of defaults that would grind economic recovery progress to a halt. And subsequently, the International Monetary Fund’s forecast for economic growth in 2023 will likely reverse to the previous expectation of a contraction, triggering a recession.
Needless to say, that’s pretty alarming. Of course, this is the worst-case scenario, and these concerns may prove unnecessary in the long run. But let’s assume a credit crunch does trigger a recession that sends the stock market plummeting. What would be the best shares to buy in this scenario?
Cash is king
Investing during times of volatility and uncertainty can be a tricky endeavour. After all, emotions are running high and seemingly solid businesses can see their valuations tank on the slightest bit of bad news. Capitalising on such volatility can pave the way for superior long-term returns for patient investors. But to reap the rewards, the underlying company has to actually survive.
Therefore, when investing during a stock market downturn, particular attention needs to be paid to a firm’s financial health. Profitability is nice to have, but what ultimately matters is cash flow. So long as an enterprise can continue to generate sufficient cash or has enough liquidity in the bank to keep growth projects alive, surviving the storm becomes far easier.
Maintaining, or even expanding, cash flow during economic wobbles is challenging for some industries. But companies operating in defensive sectors such as healthcare, utilities, and consumer staples have a far easier time. Why? Because regardless of what the economy is doing, people still need to eat, brush their teeth, have access to electricity, and take their medicines.
Defensive stocks aren’t known for delivering stellar growth in the long run. However they can add significant stability to an investment portfolio. And that’s why many professional investors see them as some of the best shares to buy when the stock market decides to take a nose dive.
