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If the stock market drops, here’s what I’d snap up with £400

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Volatility in the stock market has picked up again. Within the past month, the FTSE 100 has fallen below 6,900 points. Yet in the space of the past week, it has also popped up to 7,200 points. With the Bank of England (BoE) meeting tomorrow and upcoming government fiscal plans, I think there’s a chance we could get a short drop in coming weeks. In that case, here’s what I’d buy.

Interest rate moves spooking the stock market

One reason for a fall could come tomorrow if the BoE hikes interest rates aggressively. There’s some chatter that we could be in for a 0.75% increase tomorrow, taking the base rate to 3%. Certainly, this would be a negative surprise for stocks.

If we did see such a large move, I’d want to increase my exposure to the banking sector. I imagine the central bank would justify the rate increase to try and get inflation under control. As it’s still above 10% (well ahead of the 2% target), the message could be that rates will continue to move up until inflation falls.

Continued rate hikes next year would help banks to make more money. They will be able to charge a higher rate on loans, but only increase the rate paid on deposits slightly. As a result, the net interest margin (the difference between the two) should increase.

Even though any bank with exposure to the UK should benefit, I’d lean towards buying Lloyds Banking Group and NatWest Group as both have a large proportion of revenue linked to the UK. I think I’d invest £100 in each.

Waiting for the opportunities

With my remaining £200 I’d be watching to see if we get a slump following any fiscal announcements regarding tax or related measures. The new prime minister could look to distance himself from the policies of his predecessor. This might include income and corporate tax increases.

Yet with the economy still fragile, I think there could be some pockets of opportunity from any announcement. For example, continued support on energy bills for both businesses and consumers. In this case, I’d consider putting £100 in one of the large utility companies such as SSE or National Grid. This is because any government aid will reduce the risk of defaults and bad debt for the business.

Even if the stock market falls due to higher taxes, I think it could be a long-term buying opportunity for a property stock with £100. I find it surprising that a homebuilder such as Barratt Developments has lost a whopping 40% in value in the past year. Some of this is justified, due to recession fears and higher interest rates. But I think the size of the move (compounded if the stock market falls again) could push the stock into undervalued territory.

As a long-term investor, buying during the trough makes sense. In years to come, when the economic cycle flips to a recovery, I’ll be thankful I used any market falls to buy on the cheap with that £400.

The post If the stock market drops, here’s what I’d snap up with £400 appeared first on The Motley Fool UK.

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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.