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Here’s what I’d do in a stock market crash in 2020

While the FTSE 100 index hasn’t shown sustained increases in the few past years, 2020 began on a hopeful note. With a spike in mid-December last year, it was off to a good start. It’s still 3.4% higher than in 2019. But recent global uncertainties, especially the ongoing struggle to contain the coronavirus, have weakened equity markets in recent days.

Weakening economy 

Based on the IMF’s last forecasts, global growth was expected to quicken its pace in 2020. But I suspect these forecasts will be downgraded. Life in China and the economy have already been impacted. Rating agency Moody’s has lowered Chinese growth by 0.6 percentage points to 5.2% due to the spread of the coronavirus, which has infected 72,000 people so far.

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China is the second largest economy in the world, after the US. But strong trade and investment ties between the two countries means that if the Chinese economy suffers, it will have ripple effects on the US as well. It’s unsurprising then, that US tech giant, Apple, has just said that it won’t be able to meet its sales guidance for the quarter because Chinese factories aren’t operational.

Preparing for worst case 

Not to completely give in to morbid thoughts, but with this as the backdrop, I think it’s a good idea to consider the worst-case investing scenario. And by worst-case scenario, I mean a stock market crash, which is a sharp, sustained fall in share prices, driven by recessionary conditions. A good example is the financial crisis in 2008, which saw the FTSE 100 lose over 31% of its value at the start of the year.  

Steer clear 

In making investing decisions with a crash in mind, I’d start by avoiding banks. If a next crash were to occur, it might not originate with financials, like the last one. But I think it’s important to keep two things in mind. One, a FTSE 100 bank like Lloyds Bank, has never seen share prices go back anywhere close to the boom years of the mid-2000s. It’s been over a decade since the crisis hit. It even took a few years for it to start paying dividends again.  

Two, banks are vulnerable to recessions, irrespective of which sector triggers them. The next recession might not be the worst one ever for banks, in fact the bounce-back may even be a quick one. But going by the share’s past performance, I wouldn’t want to take any chances just yet.  

Get defensive 

That said, Warren Buffett’s sage advice that encourages us to be greedy and buy when others are fearful still holds. But we still need to make investment choices carefully. Typically, consumer defensives are good choices during such times. Their performance is less likely to be impacted during recessions because they provide essential goods and services. They may not always be the fastest-growing, but there are a number of FTSE 100 stocks to choose from in this segment, which can provide good returns even in hard times. 

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.