As I write, a stock market crash feels quite unlikely. British and American inflation data for December was better than expected, providing embattled chancellor Rachel Reeves with a little bit of breathing space.
Why’s that important? Well, I’d suggest that a stock market crash, in the UK at least, needs a real catalyst. That could be rising inflation, a surge in oil prices, or even a new regional conflict.
However, there’s one thing that’s unlikely to cause UK stocks to rout, and that’s a lack of confidence in the valuation of British stocks. UK-listed firms already trade with significant discounts to their American peers.
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So should I prepare for a stock market crash? Well, on evidence, I’d say ‘no’.
The omens are good
While past performance doesn’t guarantee future returns, there’s a well-defined relationship between FTSE 100 shares and interest rate cycles. Historically, UK stocks have risen in the 12 months following the initiation of rate cuts, and this is particularly relevant as the Bank of England’s currently six months into a rate-cutting cycle.
In fact, UK stocks have typically posted above-average returns in rate-cutting cycles, notably when recessions are avoided. During the 1990-1991 recession, the FTSE 100 climbed over 22% in the year following the first rate reduction. Moreover, returns averaged an impressive 31.5% during the 1996-1997 and 1998-1999 rate-cutting cycles.
Perhaps unsurprisingly, this trend isn’t limited to the UK market. Across major economies, stocks have typically shown strong performance during periods of monetary easing. However, the current scenario presents unique challenges, including increased dependence on China’s growth and persistent equity outflows from the UK market.
Despite these factors, many analysts remain optimistic about the potential for FTSE 100 shares to deliver positive returns in the coming year. That’s particularly so in sectors such as banking, technology and consumer discretionary. As such, I don’t think there’s much need to prepare for a stock market crash by holding back on investments.
One to consider
In a falling interest rate environment, housebuilders are an obvious area of interest. Vistry Group (LSE:VTY) has been catching the attention of analysts in recent months, with some suggesting that it may have been oversold.
Notably, I was one of the investors who sold their Vistry shares last year after the company issued multiple profit warnings and said they had underestimated costs. I actually reached out to Vistry’s investor relations team to ask whether they had misled the market on costs. They haven’t responded to either of my emails.
However, we’re now looking at a stock that trades at 11.6 times forward earnings, 8.2 times projected earnings for 2025, and 6.2 times expected earnings for 2026. This actually puts it at a discount to the likes of Persimmon, which is arguably less diversified than Vistry.
Vistry has an affordable housing division that reduces some of its exposure to volatility of the private market. Personally, I’m not investing in it — my trust’s been eroded. But I appreciate that some analysts will see this slump as an opportunity.
