Is Australia headed for a recession?
I don't think anyone knows for sure.
But as long-term investors, you should be prepared for one. Yes, Australia hasn't had a recession for donkey's years, I know. But that does not mean we are immune from them.
Yesterday, gross domestic product (GDP) dropped 0.5% — the largest fall since the global financial crisis (GFC).
Some economists have leapt into the recession camp, while others think the press is making a meal of something unlikely to happen. Note: a technical recession is defined as two consecutive falls in quarterly GDP.
4 shares to own in an Australian recession
Like market crashes, recessions are an unavoidable fact of life for long-term sharemarket investors. You can try to time your buys and sells in-and-out of the market, but it won't work over the long term, in my opinion. That takes luck — not skill.
What investors should instead be doing is buying shares which offer downside protection. This can come about as a product of an attractive business model.
For example, during a recession, people will still be buying products from companies like Cochlear Limited (ASX: COH). This will protect sales revenue in tough times. The world class hearing aid developer also offers geographical diversification, with a bulk of its profits coming from outside Australia.
Freedom Foods Group Limited (ASX: FNP) arguably provides less protection, but subtly does something similar. Freedom Foods sells 'growth' products like organic foods, but it is also a leader in foods for sufferers of diseases like coeliac (severe gluten intolerance), or for those suffering from lactose intolerance. These are prevalent conditions, and people with them have no choice but to buy the products.
Class Ltd (ASX: CL1) is different again. It is a software provider for Self Managed Superannuation Funds (SMSFs). In the event of a market collapse, SMSFs are unlikely to cancel their software subscription. Anyone who has been through the SMSF process will know why.
Bapcor Ltd (ASX: BAP) is an auto parts dealer with names such as Burson and Autobarn. In a recession, people are more likely to fix their existing car than buy a brand new one — increasing demand for aftermarket parts.
Foolish takeaway
I think all of these businesses look like good long-term prospects — not because the economy could enter a recession — but because each of them offer great products and are well run. Ultimately, they are more likely to survive and thrive under any market conditions.
