The prospects for a second stock market crash look set to remain high over the coming months. Risks such as Brexit, the US election and coronavirus could cause investor sentiment to be very changeable. This could lead to a return to falling prices for UK shares.
However, a market decline can bring buying opportunities for long-term investors. Through purchasing those businesses with wide economic moats, low debt and long-term growth potential you could survive a short-term crisis and prosper in the long run.
Using company data in a stock market crash
A stock market crash can cause many investors to become worried about their financial prospects. As such, they may become increasingly reliant on emotions when making decisions. This could cloud their judgment and may mean that they miss out on undervalued UK shares that represent long-term buying opportunities.
Therefore, using company data to make decisions about where to invest could be a sound move. For example, checking the balance sheets of prospective purchases before buying them will provide guidance as to their financial strength. Companies with low debt and profit that easily covers their interest payments may be better able to survive a short-term crisis. They may also be more capable of using the weaknesses of their rivals to their advantage in building a larger market share.
Accessing sound business models
A stock market crash can also expose weak business models. Previously, companies that are inefficient or that lack the capacity to adapt to changing operating conditions may have been viewed positively by investors. However, companies that have a competitive advantage may be better able to survive a period of weak economic growth.
Identifying UK shares with a competitive advantage is very subjective. For example, it can mean they have a strong brand, a large number of loyal customers, or a unique product among other attributes. Buying such companies may reduce your overall risks and lead to more positive returns in the long run as they use a weak operating environment to expand their market presence.
Defensive UK shares
A second stock market crash could mean that defensive UK shares become more popular among investors. In the past decade, companies operating in sectors such as tobacco and utilities have been relatively unpopular due to their modest growth rates. However, their solid financial performances in a weak economic environment may attract cautious investors. This could lead to an outperformance of the FTSE 100.
Your financial prospects could be improved through buying companies that have defensive business models, sound finances and a competitive advantage at lower prices during a market downturn. They may not offer high returns in the short run, but they could prove to be the best UK shares to hold in a crisis.
The post Stock market crash part 2: how I’d find the best UK shares to buy in a crisis appeared first on The Motley Fool UK.
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020