According to one piece of analysis I’ve seen, there’s been 19 US stock market crashes over the past 150 years. Even those investors predominantly exposed to UK shares should take note. After all, as we’re regularly reminded, when America sneezes, the rest of the world catches a cold.
However, while it’s impossible to predict when the next crash will occur, there’s some evidence to suggest that market valuations are becoming stretched. But what can be done to prepare for the next big drop? Let’s take a closer look.
Getting jittery
We’ve seen in recent weeks a degree of nervousness among investors about the potential impact of artificial intelligence (AI) on software companies, data providers, and wealth managers. The possibility that cheap AI tools will reduce the scope for these businesses to charge premium prices for their services is clearly playing on people’s minds.
Indeed, the Financial Times reported on Wednesday (25 February), that “asset-heavy” stocks are becoming fashionable again. The rationale is that it’s harder to disrupt these types of businesses.
Taking two FTSE 100 companies an as example, both easyJet and Rightmove currently (27 February) have similar market-caps of over £3bn. But their latest balance sheets disclose net assets of £3.5bn and less than £100m respectively.
I can’t see AI disrupting easyJet’s business model that involves flying 355 aircraft on 1,207 routes to 164 different airports in 38 countries. However, Rightmove’s website looks vulnerable to me.
Patience is key
Another lesson of history is that even after the most severe of crashes, the market will eventually recover. It might take a decade or more – as with the Great Depression and the bursting of the dotcom bubble – but taking a long-term view is likely to yield better results than trying to time the market.
What I’m doing
With this in mind, I’ve recently taken a position in Airtel Africa (LSE:AAF). It’s invested heavily in telecoms infrastructure, which should give it some protection against newcomers.
And it’s 100% exposed to a continent that, according to the World Bank, will see its population grow by 1bn by 2050. This can only be a good thing for the group’s telecoms and mobile money services.
But Africa’s currencies can be highly volatile and its significant debt pile will become more expensive to service should interest rates rise.
However, on balance, I think Airtel Africa’s the sort of stock that could emerge relatively unscathed from a stock market crash. It’s the second largest telecoms operator on the continent and it’s active in 14 markets. And since the end of 2020, the group’s increased its customer numbers by 51%. It’s also looking to list its money business separately, which could be worth more than $4bn.
A final thought
Of course, a stock market crash could be bad news for many investors. Some may never recover the losses they suffer, especially those that have invested heavily in some pre-revenue US tech startups.
That’s why it’s important to hold a diversified portfolio with exposure to different sectors. However, a crash also presents opportunities for those with some spare cash. As billionaire investor Warren Buffett wrote in 1986: “Be fearful when others are greedy, and greedy when others are fearful“.
In other words, it could be a chance to buy some great companies at bargain prices.
