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Here’s how I’d invest £1,000 if the FTSE 100 keeps crashing

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The FTSE 100 dropped below 7,000 points last Friday. Yesterday afternoon it traded as low at 6,825 points. Fortunately, we have seen a relief rally this morning, but the index is still below the 7,000 level. Now that it has been broken, it will likely act as resistance instead of it being a support level previously. If the FTSE 100 keeps crashing and I had spare cash, here’s how I’d look to invest.

Noting reasons for the FTSE 100 crash

To understand where I would allocate my £1,000, I first need to think about the reasons why the FTSE 100 has been crashing. After all, I want to steer away from stocks that are in areas linked to the fall.

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In my opinion, there are three main reasons for the slump. Firstly, rising inflation expectations. Higher inflation will likely be tempered by higher interest rates. This will make it more expensive for FTSE 100 stocks to refinance and issue new debt.

Second, rising concerns over Covid-19. This is both at a global scale, but also in the UK. Despite high vaccination rates, a lack of restrictions could see millions having to self-isolate over the summer.

Finally, the UK economic recovery could be showing signs of stalling. If this is the case, then the FTSE 100 is likely a first mover to reflect this, as it’s historically been a leading indicator.

Where I’d look to invest

Based on the above, what should I note about investing my £1,000? Given the concern of Covid-19, I’d probably look to stay away from sensitive stocks in this area. This would include airlines, tourism and retailers. On the flipside, I’d consider buying healthcare stocks.

When looking at higher inflation expectations, I’d try to avoid buying shares in companies that have high debt, particularly a high debt ratio (total debt vs total assets).

There are some firms that could do well from higher interest rates though. The main group that stands out to me is banks. Higher interest rates allow the banks to make a higher margin between the lending rate and the borrowing rate. So any banks that have seen a slump following the FTSE 100 crash would be a good buy in my opinion.

A stalling economic recovery is a harder scenario around which to build my share buying. This is because most stocks struggle in a downturn. However, I can look to protect myself to some extent through buying defensive stocks. These include supermarkets. After all, the products sold in supermarkets are mostly necessities. So demand should be fairly consistent regardless of the state of the broader economy.

Despite the FTSE 100 crash and unknown future, I can still find stocks to invest in that can help generate me potential profits. By thinking about the underlying reasons for the fall, I can tweak my stock selection accordingly.

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jonathansmith1 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.

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