The Bank of England predicts another stock market correction! Who cares?

Concerns are on the rise as the UK’s central bank anticipates a sharp correction in asset prices. But can investors just ignore this warning?

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The UK stock market’s been on a roll since October 2023. The financial markets have been steadily recovering from the impact of inflation. And, subsequently, both the FTSE 100 and FTSE 250 have shot up by double digits as economic conditions improve. In fact, over the last nine months, these leading indices are up by 14.9% and 24.6% respectively, after including dividends.

But in spite of this terrific performance, the Bank of England (BoE) recently made an interesting announcement. In its Financial Stability report, the central bank highlighted the risk of a looming “sharp correction in asset prices”. Does this mean we’re about to see another stock market correction?

The risk of a downturn

Reading through the report, there is some valid logic behind the BoE’s concern. Improving investor sentiment has seen stock prices rise rapidly in a relatively short space of time. Don’t forget both the FTSE 100 and FTSE 250 have only generated an average return of around 5-6% a year over the last decade. So delivering double-digit returns in the space of only nine months is extraordinary.

Should you invest £1,000 in BT right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BT made the list?

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However, seeing such impressive gains isn’t all that surprising. After all, the UK stock market has a perfect track record of rapidly bouncing back from even the worst of economic downturns once the worst is over. Yet it seems the BoE is not convinced that we’re out of the woods yet.

Specifically, it cited that investors don’t appear to be properly considering the risks from continued high inflation or geopolitical conflicts. The latter, in particular, is proving immensely problematic for global trading, potentially putting supply chains at risk with massive delays in international shipments.

As for inflation, the situation may be improving here at home. But it’s not the same story worldwide. And British companies that deal in foreign markets may continue to suffer from inflationary pressures.

So what does this all mean for investors?

Keep calm, carry on

Predictions from a central bank shouldn’t be ignored. But they also shouldn’t be treated as gospel. Like many investors, the BoE has made plenty of forecasts in the past that never materialised. And it’s entirely possible its latest concerns aren’t worth losing sleep over, especially for investors focused on the long run.

As history has recently shown, sharp downturns create spectacular buying opportunities. And so I’m looking at FTSE companies from my own portfolio, like Alpha Group International (LSE:ALPH), that I’d happily snap up more shares should prices take a tumble.

The financial services firm has been busy evolving from currency risk management to a full-blown alternative banking solution for small- and medium-sized businesses. These types of services are traditionally offered by corporate banks. Yet Alpha’s platform is proving to be significantly more efficient and cost-effective enabling it to steadily steal market share. And that’s clearly being reflected in its share price which is up over 200% over the last five years.

The firm obviously isn’t risk-free. Banks aren’t oblivious to the threat of fintech companies, and many have already begun making moves to counter them. Moreover, Alpha’s current valuation’s a bit on the pricy side, opening the door to volatility.

But should forecasts of a stock market downturn prove accurate, a buying opportunity may emerge for my portfolio… even with these risks.

Should you buy BT shares today?

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Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.

And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.

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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.

Zaven Boyrazian has positions in Alpha Group International. The Motley Fool UK has recommended Alpha Group International. 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.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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