The FTSE 100 ended the previous week on a high, comfortably above the 7,000 mark. This week so far has been a different story, however, and the index of the 100 largest UK publicly listed companies is currently trading around the 6,800 mark.
What has caused this slide? Well, there’s some debate about that, and you can take your pick from various competing explanations. Some analysts point to the dramatic rise in Covid cases in the UK, coming at the same time as the long-anticipated final ‘unlocking’. Others point to more long-term factors, like the fact that stock markets globally have been poised to correct downwards for quite a while now. Finally, another group sees the gradual withdrawal of central bank and fiscal support as the key factor.
The key point is this: as an investor, you don’t need to know exactly why the things that are happening are happening. You will have your own view, as we all do, but you can’t ever know for sure that your understanding is the right one.
What you do need to do, however, is to think about how your portfolio is positioned, and check you are ready for what may be ahead. What you are holding, what are you selling, and what stocks will you add to your portfolio? Shares that have underperformed up to the present may start to look much more attractive once the whole market is falling! Here we take you through our top 3 UK shares to buy as the market melts down.
Best UK Shares to Buy as The Market Melts Down
Here are three examples of the best UK shares to buy now.
BP hasn’t had a great year from any perspective! The lockdowns and the transport disruption have meant revenues plummeted for the oil major.
The bad news carries on though, as looking further ahead the increasing adoption of electric vehicles will inevitably mean the decline of what used to be called ‘Big Oil’. However, in a short-term and medium-term sense, BP and some other oil producers look very tempting! For starters, BP shares currently change hands at roughly half what they did before the pandemic.
Secondly, as legendary investor Warren Buffet has pointed out, mankind’s reliance on oil isn’t going to disappear in the next 5 years, or even the next 10 years (maybe!). The switch to renewable energy and new green tech will take quite a while to happen, and in the meantime, oil companies will be essential to keep the lights on the transport network moving.
Finally, there is a big case to be made for ‘buying the dip’ with BP – things simply cannot get any worse for this multinational, and so long as investors see it as a play for the next few years only, BP could well be worth adding to your portfolio.
Importantly, BP has already lost so much market value that it would be unlikely to be hit too hard in another downwards correction. If a major market meltdown is ahead, the brunt of the damage will be born by other stocks; the energy sector has already taken its punishment!
Following on the theme that the best way to position a portfolio for the next market meltdown may be to look at the current set of under-performers, our next pick is banking giant Barclays.
Barclays share price has slid nearly 7% over June, but there are good reasons to see the bank as something that would hold up well over the next meltdown. Demand for consumer credit is understandably weak in the UK right now, but this should be set to change over the summer and more and more normality returns to daily life.
However, the reason we really like Barclays right now and see it as a potentially good buy before the next market meltdown is that Barclays has successfully cut costs while simultaneously expanding in targeted areas.
As anyone with any experience in management will know, these two things are very, very hard to achieve at the same time! Barclays has been quick to take advantage of cost-cutting measures made possible by the pandemic.
For example, they recently declared that they were merging their investment banking staff offices into their main HQ, citing reduced need for office space due to many staff working from home.
These and other savvy savings will soon be stretching their margins. At the same time, they are expanding their EMEA investment banking division in an attempt to boost one of their most profitable areas of business. Barclays, therefore, look cheap right now, as well as being resilient and ready for the future.
A market meltdown would be unlikely to trash Barclays and more than any other cyclical stock, and maybe Barclays would hold up better than other less cost-efficient UK banks.
3. Rio Tinto
Finally, where else to look to park some cash before a possible market meltdown but a global mining and commodities giant? Rio Tinto has several things going for them right now, and there is a strong argument that their shares could provide a great hedge against a coming market correction.
Talk about a so-called commodities “super-cycle” may have cooled recently, but the fact is the world’s thirst for commodities is only going to grow over the coming years.
Firstly, the switch to renewables already mentioned above has something in common with the drive to make industrial processes more sustainable – both require large amounts of metals and other commodities to make these dreams a reality. As such, long term demand for Rio Tinto’s services seems to be beyond doubt, so the business model is looking solid above and beyond the next cycle. The same can’t be said for the various growth stocks that rise on every upswing, but crash and burn when things turn south.
Secondly, Rio Tinto is a famed dividend payer, and again this bodes well for the stock ahead of the next market meltdown. In such times, investors tend to sell out of risky growth stocks and into dividend aristocrats like Rio Tinto. 2020 saw the shares yield a dividend of 6.2%, and dividends have increased 7 times in the last 10 years. As such, Rio Tinto stockholders have little to fear from the next market meltdown.
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