The former Chief Economist of ANZ (ASX: ANZ) and now Economist at Bank of America Merrill Lynch, Mr Saul Eslake, has joined the growing list of economic commentators worried that the Australian economy is at risk of recession.
Mr Eslake puts the chances of an Australian recession at 25% and his call comes just days after investment bank Goldman Sachs placed a 20% chance on a recession. A major problem identified by Mr Eslake is that the fading resources investment boom is not being replaced by anything. So while there is still some resource spending occurring, it is at a declining rate and therefore detracting from overall growth. The problem appears to be compounded by a still historically high Australian dollar and low interest rates failing to spur growth.
With this economic picture in mind, it is interesting to consider which companies could still grow their earnings in a recessionary environment.
Sadly, one of the hallmarks of recessions is increased unemployment and people struggling to make ends meet. This situation can lead to more work for debt collectors. Two companies that have become leaders in the debt collection field and would likely perform well during a recession are Credit Corp (ASX: CCP) and Collection House (ASX: CLH).
Likewise, hard economic times mean people look to offload assets to raise cash and are forced to use lower-tiered borrowing options than main street banks and credit unions. For people who need to pawn their assets or secure a small loan, companies including Cash Converters (ASX: CCV) and Money3 Corp (ASX: MNY) have positioned themselves with substantial footprints in this particular market.
A third industry that also has the potential to grow during a recession is gaming. Tatts Group (ASX: TTS) and Tabcorp Holdings (ASX: TAH) offer products including lotteries and betting services and it seems no matter how hard economic times become, people still find the money to have a punt.
Foolish takeaway
Of course identifying stocks that are growing their earnings is only half the battle in investing. The other side of the coin is the importance of accurately valuing the stock and having the patience and temperament to buy at the right time.
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Motley Fool contributor Tim McArthur has no financial interest in any company mentioned in this article.
