The UK stock market’s been on a roll since October 2023. The financial markets have been steadily recovering from the impact of inflation. And, subsequently, both the FTSE 100 and FTSE 250 have shot up by double digits as economic conditions improve. In fact, over the last nine months, these leading indices are up by 14.9% and 24.6% respectively, after including dividends.
But in spite of this terrific performance, the Bank of England (BoE) recently made an interesting announcement. In its Financial Stability report, the central bank highlighted the risk of a looming “sharp correction in asset prices”. Does this mean we’re about to see another stock market correction?
The risk of a downturn
Reading through the report, there is some valid logic behind the BoE’s concern. Improving investor sentiment has seen stock prices rise rapidly in a relatively short space of time. Don’t forget both the FTSE 100 and FTSE 250 have only generated an average return of around 5-6% a year over the last decade. So delivering double-digit returns in the space of only nine months is extraordinary.
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However, seeing such impressive gains isn’t all that surprising. After all, the UK stock market has a perfect track record of rapidly bouncing back from even the worst of economic downturns once the worst is over. Yet it seems the BoE is not convinced that we’re out of the woods yet.
Specifically, it cited that investors don’t appear to be properly considering the risks from continued high inflation or geopolitical conflicts. The latter, in particular, is proving immensely problematic for global trading, potentially putting supply chains at risk with massive delays in international shipments.
As for inflation, the situation may be improving here at home. But it’s not the same story worldwide. And British companies that deal in foreign markets may continue to suffer from inflationary pressures.
So what does this all mean for investors?
Keep calm, carry on
Predictions from a central bank shouldn’t be ignored. But they also shouldn’t be treated as gospel. Like many investors, the BoE has made plenty of forecasts in the past that never materialised. And it’s entirely possible its latest concerns aren’t worth losing sleep over, especially for investors focused on the long run.
As history has recently shown, sharp downturns create spectacular buying opportunities. And so I’m looking at FTSE companies from my own portfolio, like Alpha Group International (LSE:ALPH), that I’d happily snap up more shares should prices take a tumble.
The financial services firm has been busy evolving from currency risk management to a full-blown alternative banking solution for small- and medium-sized businesses. These types of services are traditionally offered by corporate banks. Yet Alpha’s platform is proving to be significantly more efficient and cost-effective enabling it to steadily steal market share. And that’s clearly being reflected in its share price which is up over 200% over the last five years.
The firm obviously isn’t risk-free. Banks aren’t oblivious to the threat of fintech companies, and many have already begun making moves to counter them. Moreover, Alpha’s current valuation’s a bit on the pricy side, opening the door to volatility.
But should forecasts of a stock market downturn prove accurate, a buying opportunity may emerge for my portfolio… even with these risks.
