I think UK shares might offer investors decent protection in a stock market crash. But that’s not the reason I’ve been buying them recently.
My view is that valuations are more attractive in the FTSE 100 and the FTSE 250 than elsewhere. And for those who haven’t already, now might be a good time to take a look.
Artificial intelligence
The main risk with the stock market right now is artificial intelligence (AI). The big question is whether the investments the likes of Meta Platforms are making will ultimately pay off.
There are concerns they won’t. And Mark Zuckerberg saying that the firm is spending because it’s concerned about the risk of being left behind (rather than because it wants to) alarms me.
If the rate of AI investment slows, this would be a bad thing for Nvidia, since the share price reflects much higher expectations. But the effects are likely to be much wider than this.
Passive funds tracking the S&P 500 or the global stock market are very popular right now. And this means the effect of larger companies falling could cause share prices to fall more broadly.
Out-of-favour
Michael Burry has been making this argument. And in a recent interview, his advice was to think about buying US healthcare stocks that have been out-of-favour with investors lately.
I get the rationale, but I’m hesitant. With Johnson & Johnson at all-time highs and Danaher trading at a price-to-earnings (P/E) ratio of 46, there’s not a huge amount I like that’s on sale.
Moreover, those stocks are still part of the S&P 500, making them vulnerable to the knock-on effects on passive funds. With my own investing, I think the UK is a better place to look.
The FTSE 100 and the FTSE 250 have received much less attention than the S&P 500 in recent years. And while that’s justified to an extent, my view is that it makes for better opportunities.
Long-term value
I’ve written a lot this year about Greggs (LSE:GRG) and how investors haven’t been paying attention to its long-term prospects. But my view on this is starting to change.
I still think future growth is likely to be limited. The firm probably has scope to increase its store count by not much more than 15% and weak like-for-like sales growth this year is a risk.
The stock, though, is down 43% since the start of the year. And I think a price-to-earnings (P/E) ratio of 11 is a much more reasonable valuation for the company’s future prospects.
Increasing the store count by 15% should create slightly more than this in net income. And in that case, the firm probably doesn’t need to achieve much more to justify the current price.
Crash protection
My reasons for looking at Greggs shares don’t really have anything to do with anticipating a stock market crash. They’re about the firm’s prospects relative to its current valuation.
I do think, though, that there’s a chance stocks like Greggs could offer some protection if AI losing momentum causes share prices to fall across the board. And that’s worth considering.
I’m not entirely out on the US – a couple of specific stocks look attractive to me. But in general terms, I think there are good reasons for investors to look at UK shares right now.
