The FTSE 100 has marked new all-time highs this year, yet there is a growing apprehension regarding the potential risks associated with artificial intelligence (AI) affecting the stock market. This underlying concern has contributed to declines in the stock prices of numerous high-quality British companies, including software supplier Sage, which has dropped 38% in the past year, and publishing and exhibition firm RELX, whose shares have fallen by 48%.
In the United States, leading technology stocks are also experiencing swift declines, adding to a broader atmosphere of uncertainty. Predicting the timing of the next stock market crash remains elusive, yet the current fluctuations in the market raise questions about whether this could be the onset of a downturn.
During such volatile times, it is essential for investors to approach the market calmly. Panic can lead to hasty and potentially costly decisions, and it is crucial to remember that any losses reflected in a portfolio are only paper losses until shares are actually sold. This crucial distinction highlights that a decline in share value does not necessitate an immediate action unless investors choose to realize those losses.
Investors often find themselves fully invested, with no liquid cash available to take advantage of potential buying opportunities during market turmoil. Strategies to fund new investments may include selling existing shares or injecting additional capital into the portfolio; however, both approaches come with risks. Selling shares for liquidity can create an unstable investment strategy, while additional investments using funds that could affect financial security can lead to precarious situations. Moreover, leveraging debt for investments is generally discouraged due to the high risks involved.
The disparity between price and value becomes evident when examining companies like RELX. Despite a nearly 50% decline in its share price, recent financial reports revealed a 2% increase in revenue year-on-year and a 9% growth in earnings per share, suggesting that the underlying business remains robust. The current downturn in valuation may be influenced by fears regarding the potential impact of AI on business profitability, yet if AI can enhance operational efficiencies without diminishing customer demand, it may not be detrimental to the company.
Indeed, RELX, with its well-established assets such as the widely-used legal database LexisNexis, seems to be an attractive prospect at its reduced share price. However, at 21 times earnings, it is still above the acceptable price point for many investors.
Thus, while the market faces undeniable challenges, including concerns surrounding AI, prudent investment strategies and a level-headed approach can help navigate periods of volatility and potentially uncover opportunities for savvy investors.
