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Here’s why a stock market crash could happen again! And this is what I’d buy

There’s something to be said for investor optimism. The FTSE 100 index has closed at 6,000+ levels in the last nine trading sessions. Further, it has crossed the 6,500 mark as I write, in today’s trading. To put this in context, these are pre-pandemic levels. So far, so good. But I’m not ready to throw caution to the winds, at least not yet. I think there are still risks to financial markets. These could trigger another stock market crash.

Easing lockdowns too soon

A key risk is that of easing the lockdown too soon. It’s a catch-22 situation. If the lockdowns aren’t eased, a widespread hit to business and incomes is likely. If they are eased too soon, we run the risk of a second round of coronavirus infections and another stock market crash. Recent experiences from Asia underline the plausibility of this. 

Slow pickup in economy and the risk of a stock market crash

I think it’s also likely that even after the lockdowns are lifted and the world is back to business, there will be slow pickup in economic activity. People may be wary on their own accord, which could slow their return to public activities. Tourism-related companies as well as pubs and restaurants could suffer from this.

Also, businesses may be cautious in hiring and consumers in spending until confidence in economic expansion returns. As a result, the spurt in activity seen as the lockdowns are eased could taper off quite quickly and another stock market crash could happen.

Anti-globalisation wave

Tepid economic activity is especially likely to happen, if globalisation loses even more favour than it already has, after the Covid-19 crisis. Talks have begun again between the UK and the EU, which may well result in a no-deal Brexit. US-China tensions have only escalated because of the pandemic. With the biggest economies in the world at loggerheads, I think it’s very likely that global growth will be negatively impacted in the foreseeable future.

Preparing for another stock market crash

With this risky backdrop, as an investor I’m thinking about where I should put my money if a stock market crash happens. I see two options. The first and most obvious one is to invest in fast-rising healthcare and pharmaceutical stocks. They have run up a lot in the past few months, and their prospects seem bright. AstraZeneca is one example of this. 

At the other end of the spectrum, I’d consider stocks that have been unjustifiably hammered because their business suffered most from lockdowns. These include aviation stocks like easyJet and IAG.They have started rising in the past days, but I wager they’d continue to be volatile in these uncertain times. I’d buy them if and when the stock market crash happens.

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.