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Right now, you can’t move for headlines of an AI-induced stock market bubble and impending crash. But this has got me thinking: to what extent will UK shares be able to weather the storm?
Not a chance
My initial response is that stocks on this side of the pond will likely sink in tandem with those in the US. After all, many of our biggest companies — those in the FTSE 100 — generate the majority of their money overseas. So, they are heavily exposed to many of the same variables and cycles as stocks elsewhere.
If markets were to tank, all those things that a company relies on would likely encounter issues, regardless of where in the world it was based.
We’re talking demand, financing, and supply chains.
In desperate times, it’s also worth remembering that investors and traders sell what they can in an effort to accumulate cash. So, lots of our firms could be ‘chucked out with the bathwater’, regardless of their quality.
Less exposed
On the other hand, UK shares might not fare too badly.
Our home market is not exactly overburdened with tech companies. Some would argue that this has held the UK back in recent times. But it also means that our businesses don’t carry the same kind of speculative valuations that are seen in, for example, the US.
If the UK economy manages to hold its own and keep inflation and interest rates steady (that’s a big ‘if’), the pain we encounter might be tempered a little.
Go defensive
One way for investors to potentially protect themselves would be to consider buying stakes in companies that operate in more defensive sectors.
An example, at least in my opinion, is consumer goods giant Unilever (LSE: NG).
Now, let me be clear: this company isn’t a magical way of avoiding the hype. The £115bn cap owner of brands like Dove, Ben and Jerry’s, and Persil has already integrated AI across its marketing, supply chains, recruitment processes, and product development.
But the thing I like about Unilever is that is sells relatively inexpensive stuff that people buy through habit and/or consider essential. So, even an economic slowdown probably won’t impact revenue to a massive extent. Interestingly, a good proportion of this now comes from fast-growing emerging markets. Its balance sheet also looks in good shape.
These qualities mean the shares currently change hands at a price-to-earnings (P/E) ratio of 18. But I wonder if that might still be a price worth paying for a company that should, in theory, manage to tread water when those around it might be sinking.
Remember — capital preservation is my goal here, not massive gains.
Here’s what I’m doing
Ultimately, all investment involves risk. No one really knows if we really are on the cusp of a massive crash. Share prices might just continue rising.
All a Fool like me can do is consider whether I’m already overly exposed to a particular market, sector, or theme. If so, I can take appropriate action now, before things (possibly) get messy.
The best portfolio for me is not the one that makes the greatest gains. It’s the one I’d be happy to continue holding if markets were to have an absolute tizzy.
