Should I prepare my portfolio for a stock market crash?

A tanker is coming to dock with calm water and bright sunset.

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When will the next stock market crash occur? It’s anyone’s guess. It can be around the corner or it can be years.

Crashes normally have clear triggers. And now, against a tense geopolitical backdrop and an uncertain economic climate, risks seem high.

So let’s take a closer look at the market, including challenges and opportunities, and see what I should do with my portfolio.

Geopolitical challenges

Russia’s war with Ukraine led to a short-lived stock market crash. The market has recovered, albeit unevenly. Some stocks, particularly those weighted to Eastern Europe and dependent on gas supplies, have struggled.

Concerns over Moscow’s gas supply have also weighed heavily on the market. But now that pipelines to Europe are gone, there isn’t much Putin can do to hurt Europe with this much-needed resource.

Meanwhile, tensions between the West and China have escalated in 2022. Will something happen to Taiwan? That’s anyone’s guess, but it certainly won’t bode well for the markets.

Economic problems

Although closely linked to geopolitical challenges, there are several economic challenges that could wreak havoc as the year progresses. For example, gas shortages across Europe could lead to outages and loss of working hours. While rising global inflation can pose challenges for developing countries with high credit pressures – we have seen these issues play out in Sri Lanka.

Places of optimism

I appreciate that some stocks will be tested by the current conditions, but many companies have shown reasonable resilience so far. And while there are predictions of recession around the world, we are not looking at a deep recession.

There are certain shopping areas that I avoid. Typically, recessions are bad news for cyclical stocks, such as energy, oil, homemakers, retail and even banks. However, I don’t think all these areas will suffer.

One of the areas I am very good at is banking. The downturn will not bode well for credit quality, but as mentioned, we are not looking at a deep recession. But we are seeing interest rates rise around the world, and this is pushing up net interest margins (NIMs). Currently, banks are earning more interest on the money they release with their central banks.

I am also seeing that it is a good time to buy defensive stocks, that is, those that can continue to perform even if the economic conditions are difficult. Companies love it Hallion. And Unilever Their own house brands, and this gives them pricing power. Consumers are more likely to buy branded goods even when their pockets are tight.

As a UK investor, I’m looking at companies that denominate a large proportion of their revenue in USD as it increases their earnings when converted to GBP. Diageo It’s a great example, and one I’d like to add to my portfolio.

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