Stock markets have proved remarkably resilient in spite of a host of challenges. There’s been some share price turbulence along the way, more recently due to the Iran War. But major indices like the FTSE 100 (up 23%) are still significantly higher that they were a year ago.
The question is, could a stock market crash be around the corner? One top economist believes so.
What’s happened?
It’s not often that a central bank official talks about the outlook for financial markets. When they do, it’s worth sitting up and taking notice.
So I’ve been poring over comments made by Bank of England’s deputy governor Sarah Breeden. Her verdict? She told the BBC that “there’s a lot of risk out there and yet asset prices are at all-time highs. We expect there will be an adjustment at some point“.
She warned of the danger of “a number of risks crystallising at the same time — a major macroeconomic shock, confidence in private credit goes, AI and other risky valuations readjust. What happens in that environment and are we prepared for it”?
Here’s what I’m doing
The Iran War has significantly heightened the risk of a market crash, raising inflation and hitting economic growth. Could we see a correction as soon as next month?
Accurately predicting short term price movements is notoriously difficult. However, it pays to be prepared. I’ve increased my holdings in defensive shares such as Primary Health Properties to give my portfolio extra steel. I’ve also built a cash chest to buy quality shares if they slump in value.
Past form isn’t always a reliable guide to the future. But stock markets have always risen over the long term, delivering healthy capital gains and dividends in the process. What’s more, those who buy on the dip tend to be especially well rewarded, as share prices recover from their low base.
A top dip buy to consider?
My own shopping list includes FTSE 100 mining giant Rio Tinto (LSE:RIO). It’s a little too expensive today, with a price-to-earnings (P/E) ratio of 12.2 times. That’s above the 10-year average of 7-8. I’ll seek to buy it more cheaply if markets drop.
So why am I optimistic about Rio’s long-term credentials? Demand in key markets like copper and lithium are tipped to take off, driven by themes like renewable energy, rapid urbanisation and global digitalisation. At the same time, major supply crunches are emerging. It’s a combination I think could supercharge commodity prices.
On the downside, mining stocks do come with some risk. Production trouble can decimate earnings projects and send share prices tumbling. Happily, Rio Tinto’s enormous global portfolio of 100-plus projects helps spread this risk.
Over 10 years, Rio Tinto shares have delivered an average annual return of 17.5%. If this continues, a £10,000 investment today will turn into £56,823 a decade from now. I expect the stock could be in high demand if the market crashes.
