The UK stock market has been performing well since October 2023. Financial markets have been steadily recovering from the effects of inflation. And, FTSE 100 and FTSE 250 As economic conditions improve, the major stock indexes are seeing double-digit gains. In fact, over the past nine months, these indexes are up 14.9% and 24.6%, respectively, including dividends.
However, despite this impressive performance, the Bank of England (BoE) recently made an interesting announcement: in its Financial Stability Report, the central bank highlighted the risk of a looming crisis. “A sharp correction in asset prices”Does this mean the stock market is heading for another correction?
Risk of recession
Reading the report, the Bank of England’s concerns are justified. Improved investor sentiment has seen share prices soar in a relatively short space of time. It’s important to remember that both the FTSE 100 and FTSE 250 have only generated average annual returns of around 5-6% over the past decade. Generating double-digit returns in just nine months is therefore staggering.
But such a remarkable rise shouldn’t really be all that surprising – after all, the UK stock market has an impeccable track record of recovering quickly from even the worst of recessions once the worst is over. But the Bank of England doesn’t seem convinced it’s over the crisis yet.
Specifically, they noted that investors do not appear to be properly factoring in the risks of continued high inflation or geopolitical conflict, the latter of which poses enormous challenges for international trade and could jeopardize supply chains through significant delays in international shipping.
When it comes to inflation, things may be improving at home, but the same is not true across the world, and British businesses trading in overseas markets may continue to feel pressured by inflation.
So, what does this mean for investors?
Continue quietly
Central bank predictions shouldn’t be ignored, but they shouldn’t be treated as absolute truth either. Like many investors, the Bank of England has made many predictions in the past that ultimately didn’t come to fruition. And it’s entirely possible that recent fears aren’t worth the worry, especially for those with a long-term perspective.
Recent history has shown that sharp economic downturns create great buying opportunities, which is why I focus on FTSE companies in my portfolio. Alpha Group International (LSE:ALPH), and would be happy to buy more shares if the price falls.
The financial services company is working to evolve from currency risk management to a full-fledged alternative banking solution for small and medium-sized businesses — types of services traditionally provided by corporate banks. But Alpha’s platform has proven to be far more efficient and cost-effective, and it has steadily gained market share — clearly reflected in its share price, which has risen more than 200% in the past five years.
The company is certainly not risk-free: Banks are not unaware of the threat posed by fintechs, and many have already begun to take action against them. Moreover, Alpha’s current valuation is a bit high, which could lead to volatility.
However, if the stock market decline predictions are accurate, these risks may still create buying opportunities in my portfolio.
The post Bank of England Predicts Further Stock Market Correction! Who Cares? appeared first on The Motley Fool UK.
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Zaven Boyrazian has invested in Alpha Group International. The Motley Fool UK recommends Alpha Group International. Views expressed on companies mentioned in this article are those of the author and may differ from official recommendations we make in subscription services such as Share Advisor, Hidden Winners or Pro. At The Motley Fool we believe considering a diverse range of insights makes us better investors.
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