Do I need to ready my portfolio for a stock market crash?

When will the next stock market crash occur? That’s anyone’s guess. It could be round the corner or it could be years away.

Crashes normally have fairly clear catalysts. And right now, with a tense geopolitical backdrop and an uncertain economic environment, risks do seem heightened.

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

Geopolitical challenges

Russia’s war with Ukraine engendered a short-lived stock market crash. The market did recover, albeit not uniformly. Some stocks, especially those with a weighting towards Eastern Europe and those with a reliance on gas access, have struggled.

Moscow’s threats relating to gas supply have also had a profound impact on the market. But now, with the taps to Europe turned off, there’s not too much more Putin can do to harm Europe with this much-needed resource.

Meanwhile, tensions between the West and China have been heightened in 2022. Will anything happen over Taiwan? That’s anyone’s guess, but it certainly wouldn’t be good for markets.

Economic challenges

While closely linked to geopolitical challenges, there are several economic challenges that could cause havoc as the year progresses. For example, gas shortages across Europe could lead to blackouts and lost working hours. While rising global inflation could present challenges for developing nations with high debt burdens — we’ve already seen these issues boil over in Sri Lanka.

Areas for optimism

I appreciate some stocks will be challenged by the current conditions, but many companies have demonstrated a fair amount of resilience so far. And while we’ve got recession forecasts around the world, we’re not looking at deep downturns.

There are some areas of the market that I’m staying away from. Normally, recessions are bad news for cyclical stocks, such as energy, oil, housebuilders, retail, and even banks. However, I don’t think all these areas will suffer.

Banks are one area in which I’m pretty bullish. Recessions won’t be good for credit quality, but as mentioned, we’re not looking at deep recessions. But we’re also seeing interest rates rise around the world, and this is pushing net interest margins (NIMs) way up. Right now, banks are even earning more interest on the money they leave with their central banks.

I’m also seeing now as a good time to buy defensive stocks, namely those that are likely to continue performing even when economic conditions are hard. Companies like Haleon and Unilever own household brands, and this gives them pricing power. Consumers are also more likely to buy branded goods even when their pockets are being squeezed.

As a UK investor, I’m also looking at companies making a large proportion of their earnings in dollars as this inflates the income when converted back in GBP. Diageo is a good example, and one which I’m looking to add to my portfolio.