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In October, the FTSE 100 hit fresh record highs. Despite the move over the course of this year, some are concerned the market might be getting ahead of itself. As a result, they feel UK shares could be in for a rocky run through to year-end. I have my own views on what will happen, and decided to check ChatGPT to see if my AI friend agrees or not!
Agreeing on some things
ChatGPT went as far as to say there’s “no clear sign” that UK shares will crash immediately, but caveated this view, saying that the downside risk (ie the risk of a crash) isn’t zero.
I pressed it for more reasoning, and it decided to look to the past. It told me that key market stress signals that have historically preceded crashes aren’t flashing red strongly right now. These include factors like banking sector stress, growth rates and inflation levels.
From my perspective, I agree that the risk of a crash isn’t high. However, unlike ChatGPT, I believe investors could consider positioning their portfolios a bit more defensively for the months ahead. After all, we’ve had a strong rally for much of this year, so instead of buying higher-risk growth stocks right now, I think it makes more sense to look at defensive picks.
The main reason a correction could come is if the Autumn Budget later this month spooks investors. If we see fiscal policy shifting to higher income tax, higher corporate tax, and lower government spending, it could cause the stock market to fall.
Plenty of defensive options
Fortunately, the FTSE 100 has several good defensive shares to consider. For example, National Grid (LSE:NG). The stock is up 16% over the past year, with a dividend yield of 4.08%.
I think it’s a potentially solid pick for a few reasons. To begin with, it offers stable, regulated cash flows. What I mean by this is that as a utility operator in the UK and the US, it has price bands on what it can charge. This ensures revenue remains fairly consistent, allowing the management team to forecast with confidence into the future.
It also appeals due to its income potential. Although the dividend was cut this year, it boasts a track record of paying out dividends for over two decades straight. So even if the market does crash, investors can still look to bank some cash from the dividends.
Finally, National Grid acts to future-proof operations because of large, long-dated capex programmes. It’s focusing on upgrading the network, which should provide more profit in the years to come.
Of course, the company isn’t perfect. Some see the regulatory influence as being a concern, as any changes made by Ofgem have to be obeyed. It’s true that during a market correction, there’s no guarantee National Grid stock might not fall as well.
So I partly agree with ChatGPT, but feel it lacks the gut-feeling investors might have to want to move a little more cautiously for the period to the end of the year.
