There’s only one certainty about the FTSE 100. It goes up and down. But, this reality doesn’t stop many people speculating about its potential movements. No one really knows what it’ll do. However, because of this, I think it’s always good to be prepared for the worst-case scenario, a stock market crash, just in case.
Stock market crash history
The worst-case scenario for many people is obviously a stock market collapse. The market for shares crashed in 1929 because of an unsustainable share price boom. In 2008, many people took loans they couldn’t afford. And the last stock market crash in 2020 was due to a global economic shock, meaning share prices were highly inflated relative to predicted future earnings. Consequently, stock prices dropped fast.
Whatever the reason for a crash, I think how well our portfolios recover afterwards is as much about the shares we’ve avoided buying as it is about shares we’ve bought. After all, investing is as much about avoiding losses as it is about making gains.
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On that note, I think these are the last two shares I’d want to own if there’s another stock market crash around the corner.
AstraZeneca
Big biopharmaceutical firm AstraZeneca is overpriced, in my opinion. Its share price has risen steeply since mid-2018, and it received an extra boost early this year due to investor optimism about its potential Covid-19 vaccine. Even if this is successful, AstraZeneca has agreed not to profit from a vaccine during the pandemic. Although, what this means in practice is anybody’s guess.
However, my concern is more with the firm’s balance sheet, which doesn’t appear to reflect the positive share price trend. A gearing ratio of 108% means the company’s debt is higher than its shareholders’ capital, despite an extortionately high share price, of around 8,614p. Moreover, high gearing has been the case for at least the last four years. To add to the money worries, it’s funding many of its dividend payments from reserves, not operational profits. Unless AstraZeneca has some serious profits in the pipeline, this doesn’t bode well for shareholders for the future. And the higher the share price goes, the harder it falls.
HSBC
HSBC is a big bank. This is a statement of the obvious but its large market capitalisation, as the consequence of its share price, has implications for the FTSE 100. HSBC is one of only five companies that make up about 32% of the index. This means that if the Footsie is undergoing a stock market crash, then HSBC is likely driving it. To illustrate the point, over the last six months, HSBC has lost 16% of its value when compared with the Footsie’s 3%.
In addition, lower interest rates and adverse market conditions are impeding growth for many banks. But, HSBC also has to contend with additional operational burdens in Hong Kong and the apparently deteriorating relationship between the US and China. The lack of a dividend on offer from the bank wouldn’t help an investor’s portfolio recovery either.
I think it’s always wise to ensure one’s portfolio can receiver from the worst-case scenario of a stock market crash. I like to do that by avoiding expensive shares and diversifying away from those that have a heavy index weighting. There are many great options out there.
