Investor confidence continued to improve in Thursday business and UK share markets have hit some significant new highs. Take the FTSE 100 for instance. Britain’s blue-chip index has just barged through 6,450 points again and is a whisker off nine-month highs.
The recovery in market sentiment is welcome following a nightmare year for UK share investors. But it’s still too early to conclude that the new bull market has finally arrived.
4 reasons why stock prices might reverse
There are a number of reasons why UK share prices could decline at the end of 2020 and in early 2021:
- Stock investors reacted positively to news that a Covid-19 vaccine rollout in Britain is imminent. But UK share prices would take an almighty whack if overseas regulators fail to follow suit. Worries about how these ‘magic bullets’ would be rolled out across the globe could also smack stock prices.
- Investor sentiment has suffered in recent hours as tension surrounding Brexit negotiations has increased. There’s less than a month for UK and EU negotiators to surmount significant disagreements and hammer out a deal. And any accord has to be signed off by sceptical EU members such as France.
- Resurgent fears that central banks are running out of ammunition to fight the global downturn. The Bank of England’s fresh £150bn quantitative easing programme in November has brought it close to its buying limits, for example.
- The threat of a US government shutdown also casts a pall over stock markets this winter. A fresh shutdown would be the third under the watch of outgoing President Donald Trump and the fourth in seven years. It likely wouldn’t have a devastating effect on UK share prices. But it could exacerbate existing weakness caused by those other issues.
UK shares to protect your wealth
I’m not concerned about how UK share prices will move in the short term. I buy stocks with a view to holding them for a minimum of a decade. Over this sort of timescale the impact of temporary share price volatility has a minimal effect on total returns.
But let’s say that an investor wants to avoid seeing the value of their shares plummet. Or that they buy UK shares with a view to holding them for a much shorter duration. Well I can purchase companies that have classic defensive operations to protect against further stock market volatility.
Profits at these companies remain stable whatever broader economic conditions are like. And there are plenty of stocks like this for UK share investors to choose from. I can buy FTSE 100 royalty like defence colossus BAE Systems, electricity generator SSE or car insurance colossus Admiral Group, for example. Or I can plump for other Footsie stocks like medicines maker GlaxoSmithKline or telecoms provider Vodafone Group. I’d happily buy any of these shares for my own Stocks and Shares ISA today.