The next stock market crash could be around the corner, or it could be years away, we just don’t know. But there are some concerning macroeconomic forecasts that are moving markets right now.
So let’s take a closer look at the market and see what I should be doing.
Challenging macroeconomic environment
The forecasts are not overly positive, particularly in the UK. Inflation is into the double digits and is expected to continue rising until 2023.
But we’ve also got recession forecasts. In fact, some groups are suggesting a recession is here already. However, we’re not seeing the unemployment normally associated with an economic downturn.
Thankfully in the UK, we’re not expected to see a deep recession, because that really wouldn’t be good for stocks. Liz Truss (who’s widely tipped to be the new Prime Minister) is promising to cut taxes from day one. That might impact the nature of the recession positively, albeit pushing inflation up.
What does this mean for stocks?
An economic downturn is normally bad news for cyclical stocks, such as energy, oil, housebuilders, retail and even banks. But it’s unlikely that all of these areas of the market will suffer.
Housebuilders will likely be challenged by higher interest rates that will possibly make prospective homebuyers think twice before exploring mortgage options. These companies have sizeable order books and have been making record profits over the past 12 months. But the next year might be trickier.
While banks are often seen as a reflection on the health of the economy, I don’t think that’s the case right now. With interest rates rising, banks are raking in more money than they have done for decades.
Yes, a recession will negatively impact credit quality, and funds will be put aside to deal with that. But the impact of higher interest rates is huge for banks. Net interest margins are rising considerably and I think banks will continue registering big profits for the year to come.
My top picks
I don’t think I need to prepare for a stock market crash right now. I think valuations are pretty attractive in many areas of the market already and I don’t see there being enough macroeconomic concerns to push stocks considerably lower.
As a UK investor, I’m currently looking at banks, like Lloyds, defensives, and companies with international operations, namely those that earn a large proportion of their income in dollars, or other currencies.
Defensive stocks include companies like Unilever which own brands that customers will likely continue buying even when the economy goes into reverse. The London-based company has already demonstrated its ability to pass prices onto its customers having lifted prices by nearly 10% in the first half of the year.
Unilever is also a good example of companies that make a sizeable proportion of their income overseas as it sells in 190 countries. With the pound weakened, the company’s revenues will be inflated when converted back into GBP.
