Market Crash Fears Rise: Experts Share Strategies to Protect and Grow Your Wealth

Warren Buffett’s famous advice is to be fearful when others are greedy and greedy when others are fearful. With investors facing a fresh wave of uncertainty, some may now be wondering whether the time has come to follow that principle.

Higher interest rates, persistent inflation, geopolitical conflicts and renewed concerns over an artificial intelligence bubble are weighing heavily on financial markets.

Technology shares around the world have come under particular pressure as investors question how much money major companies are pouring into AI.

Since reaching a peak on October 6, the tech-heavy Nasdaq index in New York has lost around £3trillion in value.

Shares in Google owner Alphabet plunged 13 per cent in a single Thursday session, erasing almost £400billion from its market value. The Magnificent Seven stock is now roughly a third below its May high.

Analysts have described the sell-off as ‘tech carnage’. Amazon and Intel were among the US giants to suffer steep falls, wiping tens of billions of pounds from their combined value. Yet sharp declines can also create opportunities for investors prepared to look beyond the turmoil and remain invested for the long term.

‘It feels as though there is an enormous amount that could go wrong at the moment,’ says David Coombs, head of multi-asset investments at Rathbones. ‘There is no asset that can protect you from every risk, but it is worth considering what might happen, which investments could benefit and what might offer some protection.’

The ground rules

Investors hoping to build a portfolio that can withstand market shocks should keep two basic principles in mind.

The first is diversification. Spreading money across different asset classes, industries and countries reduces the danger of relying too heavily on any single investment. Markets do not all move in the same direction, so weakness in one area may be balanced by strength elsewhere.

The second is to stay invested for the long term. Selling in panic during a period of volatility turns temporary, paper losses into permanent ones. Remaining invested — and, for those who can afford it, adding to holdings when prices are lower — allows investors to participate when markets eventually recover.

Holding your nerve is easier when a portfolio contains investments capable of cushioning some of the damage. These are some of the areas investors may wish to consider.

Commodities

Commodities are among the main forces behind rising inflation, which is one reason some investors consider them as a hedge. If everyday costs climb, the value of certain commodity-related investments may rise too.

Oil has gained 87 per cent over the past year, while copper is up 31 per cent. Investors can use a tracker fund that follows a commodity’s price or gain exposure through shares in companies that extract and produce it.

Coombs favours Freeport, a major copper producer, and Rio Tinto, the world’s largest iron ore producer.

Gold is traditionally viewed as a safe-haven asset during periods of uncertainty because it is a tangible store of value. However, it does not generate an income, meaning investors depend on the price holding steady or rising to preserve or increase their wealth.

Gold has climbed 82 per cent over three years, although it is down 8 per cent over the past 12 months.

Greg Eckel of Canadian General Investments says: ‘Gold has had a turbulent run, but that does not alter its value as a diversifier within a portfolio.’

He highlights Franco-Nevada, which finances mining companies in return for a proportion of their revenue.

‘The company pays a dividend and has increased it for 19 years in a row,’ Eckel adds. ‘Franco-Nevada will not rise as quickly as the miners when gold is climbing, but it generally holds up much better when the metal falls.’

Utilities

Water, electricity, waste collection and telecommunications are essential services, regardless of whether the economy is booming or struggling.

Many utility businesses operate in markets with limited competition, says Coombs. That can provide a reliable customer base and allow them to pass some rising costs on to the people and businesses they serve.

His preferred names include Wisconsin Energy in the US, along with National Grid and SSE in the UK. ‘We also own Waste Management, an American company that collects rubbish,’ he says. ‘It is not an exciting business, but these are services people continue to need in every environment.’

Investors seeking exposure to this theme could consider the Regnan Sustainable Water And Waste Fund, according to Juliet Schooling Latter, research director at FundCalibre. Its holdings include United Utilities, Severn Trent and Veolia.

‘The fund benefits from long-term trends including urban growth, ageing infrastructure, more efficient use of resources and tougher regulation. Since these companies generally operate in local markets, they are also less vulnerable to geopolitical disruption,’ she says.

Coombs also points to ‘modern’ utilities — companies delivering essential digital services that consumers and businesses are reluctant to abandon, including Microsoft, Alphabet and Amazon.

Healthcare

Demand for medical treatment, medicines, diagnostic services and devices continues regardless of the economic cycle, says Trevor M Polischuk, portfolio manager at the Worldwide Healthcare Trust. That is why ‘healthcare has historically been a more secure area’.

His preferred companies include AbbVie, a major immunology specialist, and Gilead Sciences, which is known for its HIV treatments. He also names Merck, a cancer-treatment specialist, because of both its existing medicines and its promising pipeline of future therapies.

Polar Capital Global Healthcare is one fund offering broad exposure to the sector across multiple healthcare industries.

Its leading holdings include Abbott Laboratories, the US medical-device company, AstraZeneca, the UK pharmaceutical group developing treatments for cancer and other serious conditions, and health insurer United Health. The fund has returned 57.8 per cent over five years.

Emerging markets

A large number of companies in emerging markets across Europe, the Middle East and Africa — known collectively as EMEA — generate most of their sales in their domestic markets.

That local focus can offer a degree of protection from global shocks because these economies are often influenced by different forces from those affecting developed markets, says Adnan El-Araby of the Barings Emerging EMEA Opportunities Trust.

Among his favoured companies are BIM, a Turkish discount retailer, South African financial group Capitec and Allegro, a Polish online marketplace.

El-Araby also seeks out businesses positioned to benefit from long-term themes such as increased defence budgets and infrastructure spending. Examples in the portfolio include Czech defence company CSG and Etihad Etisalat, a Saudi Arabian telecommunications operator.

Financials

Market turmoil often prompts investors to trade more frequently and adjust their portfolios. That can work in favour of companies such as Deutsche Borse, the German exchange operator, and CME Group, which runs a major trading platform.

‘Because processing extra trades costs relatively little, a significant proportion of that additional revenue can flow directly into profits,’ says Matthew Page, manager of the Guinness Global Equity Income Fund. ‘As a result, these companies can see their underlying performance improve while wider markets are under pressure.’

These businesses should also be capable of growing in calmer conditions. They tend to benefit from dominant market positions, high profit margins and strong balance sheets.

Page says: ‘They are attractive companies in their own right, but market volatility can provide an additional boost to their earnings rather than damaging them.’

Technology

Although technology shares have been hit by the recent sell-off, Mark Peden, co-manager of the Aegon Global Equity Income fund, believes certain companies in the sector still deserve attention.

‘Some of the biggest technology companies could be viewed as defensive stocks,’ he says. ‘In an economic downturn, businesses are no more likely to cancel Office 365 or cybersecurity subscriptions than consumers are to stop buying essentials such as bread and toothpaste.’

Peden points to chipmaker Taiwan Semiconductor Manufacturing Company. Its roughly 70 per cent market share, long-standing customers and strong balance sheet give it a significant advantage, as well as a dependable flow of future business.

‘If you believe the global economy is slowing, finding a company with durable customer relationships, production capacity already booked for the next few years, high margins, no net debt and a rapidly growing dividend should be encouraging,’ Peden says.

Catastrophe bonds

This specialist investment is designed to perform in response to natural disasters rather than stock market movements.

Paul O’Neill, chief investment officer at wealth manager Bentley Reid, says catastrophe bonds can provide genuine diversification because their returns are not directly tied to share prices, economic growth or technological developments.

A catastrophe bond allows an insurer to transfer some of the risk of a major payout — following events such as a hurricane or earthquake — to investors.

Investors can consider the active GAM Swiss Re Cat Bond Institutional fund, which is up 55 per cent over five years, or the KRC Cat Bond UCITS ETF tracker fund.

Cash

Keeping some money in cash gives investors the flexibility to buy when markets fall — much like shopping for bargains during a sale.

‘Cash may be the most overlooked defensive asset,’ says O’Neill. ‘It is the only holding that allows you to buy assets when other investors are being forced to sell them.’

Cash is not without drawbacks. Inflation reduces its spending power, while currency movements can affect the value of money used to invest in overseas markets.

For the long term, cash is therefore generally unsuitable for anything beyond an emergency reserve. In the short term, however, an account paying more than the inflation rate can provide a useful shelter from market turbulence.

Coombs says: ‘Cash is a poor performer when inflation is rising, but it gives you options when other investors are panicking. If volatility is making you nervous, it can also provide reassurance.’

Another possibility is an absolute return fund, which aims to produce a positive return in different market conditions. Such funds may lag during a bull market, when asset prices are rising broadly, but can offer a measure of protection during more difficult periods.

Around 85 per cent of the BlackRock European Absolute Alpha Fund is held in money market funds, which behave in a similar way to cash. Schooling Latter says: ‘The fund also invests in companies of different sizes across the UK and Europe, giving investors a source of balance and stability that is unlikely to move in exactly the same way as the rest of their portfolio.’