Global stock markets have been surprisingly resilient of late. Despite conflict in the Middle East and elevated oil prices, major indexes are near all-time highs.
I wouldn’t rule out a sharp fall in the near future though. Because right now, there are some risks on the horizon.
AI could create problems
I was never too worried about the impact of the Middle East conflict on the markets. Because history shows that geopolitical-related downturns tend to be short-lived.
I’m a little bit concerned about another issue however, and that’s artificial intelligence (AI). The way I see it, there are two ways AI could fuel a market meltdown. One’s a sharp drop in all the AI infrastructure stocks that have soared recently. Moves in this area of this market have been crazy.
For example, AMD, Micron, and SanDisk are all up more than 50% over the last month. If these names were to come crashing down, it could have implications for the broader market.
Perhaps the bigger AI-related risk though is white collar job losses. This scenario was highlighted in a recent research report from Citrini Research. Right now, firms are laying off workers due to tech efficiencies at an unprecedented rate. For example, tech giant Meta Platforms just announced that one in 10 staff will be laid off.
What if we were looking at unemployment levels of 10%-15% in the next few years? Would the stock market still sit at high levels?
I doubt it.
What I’m doing now
Now, I’m not saying that it’s time to get out of stocks. I’ve actually been buying shares for my portfolio in recent weeks because I’ve spotted some great opportunities.
But I do think it’s worth preparing for a meltdown just in case. That means having the right asset allocation for your risk tolerance, diversifying across different sectors, and having a strategic plan for a market pullback.
That’s what I’ve been doing recently. I’ve been adjusting my asset mix so that it’s more in line with my risk tolerance (which isn’t as high as it used to be) and diversifying into defensive sectors such as healthcare and defence.
I’ve also been updating the list of stocks that I’d like to buy if the market falls. That way, if compelling opportunities emerge, I’ll be ready to strike.
What’s on my Buy list?
One name on that list is Rolls-Royce (LSE: RR.). This is a stock I’d be keen to snap up at a discount. It could face a few challenges in the near term as airlines cut back on flights to conserve fuel (this could impact its engine servicing revenues). But in the long run, there’s plenty of growth potential due to the company’s exposure to the defence and nuclear markets.
On the defence front, NATO countries are set to ramp up their spending on defence significantly between now and 2035. This should provide strong tailwinds for the engine maker.
As for nuclear, it’s the growth of the small modular reactor (SMR) market that excites me here. It’s worth noting that last month, the company signed a major SMR deal with CEZ Group to build a unit in the Czech Republic.
Overall, the long-term growth story looks very attractive, in my view. So I’d love to be able to buy the stock during a period of market weakness.
