While the mood among most investors is relatively upbeat at the moment, it is almost inevitable that there will be a stock market crash in future. This may sound pessimistic, but history shows that asset prices have never risen in perpetuity. This means that while a bull market is currently in its pomp, bear markets are not yet extinct.
Clearly, predicting when the next downturn will occur and what could prompt it is intensely challenging. However, now could be a good time to start planning for it, with various defensive shares seeming to offer good value for money for the long term.
In terms of what could cause a fall in the value of shares across the globe, an obvious catalyst could be the situation in North Korea. While it has not been headline news of late, the country is still apparently seeking to develop a nuclear weapon capable of striking the US. This could mean that the risk of military action increases over the medium term. This may cause investor sentiment to decline and could mean that share prices suffer.
Other political risks also remain high. In Europe, Brexit continues to dominate the political landscape. Should a deal fail to be done with the EU, it could mean an uncertain and potentially challenging period for not only the UK, but also for the Eurozone. Alongside this, the effectiveness of President Trump’s tax and spending plans in the US may have been overstated by investors. Again, this could be a catalyst for share price falls.
While it is always easy with hindsight to see when a bear market will take place, doing so in ‘real time’ is hugely challenging. There are so many unknown factors that it may be prudent to simply focus on valuations. On that front, defensive shares now seem to offer a compelling investment proposition, with the likes of Imperial Brands (LON:IMB) and GlaxoSmithKline (LON:GSK) trading on relatively low valuations.
For example, Imperial Brands has a P/E of 11.9. The company may be forecast to increase its EPS by 1% this year, but in the long run it could deliver higher levels of growth. The investment it is making in next generation products could provide it with a strong competitive position, while pricing power in tobacco products may mean that its bottom line rises at a faster pace over the medium term. With a 5.9% prospective dividend yield, it also offers a high income return at a time when inflation is edging higher.
It’s a similar story with GlaxoSmithKline. It too has a 5.9% dividend yield and trades on a P/E of only 12. As a diverse healthcare/consumer goods company, it may have a more stable business model than other pure play pharma stocks. A focus on a smaller number of more favourable pipeline opportunities by its current management team may also help it to grow EPS at a faster pace over the medium term.
With neither stock being particularly popular among investors at the moment, now could be an opportunity to buy them in advance of what history shows will be an almost inevitable bear market.
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