As we head into a second lockdown, the risks to UK shares are growing. A second stock market crash could be just around the corner, although at this stage, it is impossible to tell.
This is the big problem investors face right now. It is impossible to predict the outlook for UK shares over the medium term.
That’s why I’m preparing for all eventualities. Rather than trying to gamble on what might happen, I’ve positioned my portfolio for the worst. That means I’ve been attempting to divest any shares that might suffer in a second stock market crash or extended economic slump.
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UK shares to avoid
The firms I’ve tried to avoid are those companies with lots of debt and thin profit margins.
A great example is Cineworld. This business built up a tremendous amount of debt before the crisis and was then forced to shut in the pandemic. Even if the company does manage to reopen at the beginning of next year, it will still have more than $8bn of debt to repay. I think the group will find it tough to meet these obligations, even if profits ever return to 2019 levels.
Airline companies are an example of the sorts of UK shares with tight margins that I want to avoid. Most airlines only make money if their flights are fully booked. Profit margins are so slim that even a slight drop in capacity can lead to a significant slump in profitability. That’s why I’ve always tended to avoid airlines like IAG and easyJet. There’s just too much that can go wrong.
It may also be sensible to avoid financial firms, in my opinion. Some initial forecasts suggest that some banks, such as Barclays and Lloyds, may be able to ride out the economic storm, but others may not be so lucky.
Operations like Virgin Money and OneSavings could struggle to continue to attract customers in the current interest rate and economic environment.
That’s why I think the best decision may be to avoid them altogether. In my view, there are plenty of other UK shares that may perform better in another stock market crash.
Companies I’d buy
So, those are the sorts of companies I’m trying to avoid. On the other hand, I’m buying high-quality blue-chip UK shares to hold for the long term. Some organisations, such as Unilever and Diageo, continue to trade at what I believe are highly attractive valuations.
As such, I’ve been focusing on these stocks rather than trying to guess what the future holds for weaker businesses. That’s the great thing about investing, one does not have to own every stock. It’s possible to pick and choose individual equities that appear to have brighter outlooks than the rest of the market.
I’m taking full advantage of this benefit to position myself for a second stock market crash.
