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Global markets opened on shaky ground this week following renewed tensions in the Middle East. While US markets were hit hardest, the FTSE 100 hasn’t escaped unscathed.
Crude oil jumped 2.78% to $93 a barrel as the Iran conflict prompted fears of further supply disruptions in the Strait of Hormuz.
Could this be the beginning of another market downturn?
The AI bubble
The ongoing geopolitical instability means investors are more wary than ever about risky AI-driven tech hype. On Monday (8 June), the tech-heavy Korean KOSPI index slumped 9% within minutes of opening.
Nasdaq 100 tech giants Apple, Nvidia and Microsoft rely on Korean suppliers Samsung and SK Hynix for memory chips. But the US is not alone in the suffering.
UK-listed stocks like Diploma, Smiths Group and Rolls-Royce also rely on Korean suppliers. Meanwhile, miners such as Rio Tinto and Glencore could be indirectly impacted by a wider decline in Asian markets.
What does this mean for UK investors?
A market downturn could provide a once-in-a-decade opportunity to buy top quality companies at bargain prices.
Naturally, stocks exposed to AI and supply chain disruption remain risky. But the knock-on effect to the overall market makes everything cheaper — even stable, reliable stocks.
Take Legal & General (LSE: LGEN), for example. The major insurer currently offers the highest dividend yield on the FTSE 100. But while the overall index is up 70%, L&G is trading at a price only slightly higher than in 2016.
Logic dictates that when the market bounces back, the shares could make a huge recovery as investors pile back in. But why have they struggled to make gains over the past decade?
Risk factors to consider
Lately, earnings have been choppy as the UK economy faces uncertainty amid geopolitical risk. The result has impacted the insurance sector excessively, leading to a valuation discount.
It still faces risks from tariff-related volatility and the Middle East conflict, which may drag on longer than expected.
Still, its latest results were impressive. Core operating profit grew 6% year-on-year to £1.62bn, while pre-tax profit increased 143% to £807m. It noted particularly strong performance in Institutional Retirement and benefited from asset sales.
And with a Solvency II ratio of 217%, it has a significant cushion for dividends even in downturns. The group’s recent £1.2bn share buyback — the largest in its history — further cements its dedication to shareholder returns.
The bottom line
A stock market crash is looking increasingly likely, faced with a double-whammy from supply chain shocks and a possible AI bubble. But investors shouldn’t panic. Now is the ideal time to look for rare undervalued opportunities, and I think Legal & General is one worth considering.
After the market inevitably recovers, the shares may never trade at such a low price again.
And they’re not alone — a few others I’ve been looking into include M&G, Imperial Brands and Diageo. All three have high yields and solid dividend track records, yet face short-term price depreciation despite strong results.
So as the drama unfolds, consider trimming those riskier tech positions and shifting funds into companies with solid income potential and a more defensive moat.
Then sit back and wait for the storm to pass.
Should you invest £5,000 in Legal & General Group Plc right now?
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Mark Hartley owns shares in Legal & General, Diageo and Diploma.
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