2 'recession-resistant' ASX 200 shares to start a strong portfolio: expert

If you started a portfolio from scratch, this pair of stocks could well be the first ones you buy.

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While it's all good and well to pick ASX shares on a "bottom up" basis, no investor can afford to entirely ignore economic conditions.

After all, no business operates in a complete vacuum. External forces will have a bearing on the success of any company.

And with ten consecutive months of interest rate rises burdening both consumers and businesses, the looming economic downturn cannot be discounted when currently deciding on shares to buy.

As such, finance expert John-Louis Judges this week set out to find a pair of S&P/ASX 200 Index (ASX: XJO) stocks that might make the perfect base for a portfolio starting from scratch:

'A solid foundation for any portfolio'

The insurance industry is seen by many investors as one that can thrive through tougher parts of the economic cycle.

That's because the sector provides a service that's seen as essential. Plus higher interest rates mean better returns on the premiums that insurance companies invest in.

So it's not a long bow to draw that a business that has insurance companies as its clients might also do okay.

That's the enviable position claims repairer Johns Lyng Group Ltd (ASX: JLG) finds itself in.

Created with Highcharts 11.4.3Johns Lyng Group PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

"Johns Lyng's strong financial results, opportunities for growth through acquisitions, relatively recession-resistant industries, and paid dividends make this stock a solid foundation for any portfolio," Judges said on The Bull.

"JLG has a highly experienced management team with a proven track record of successfully growing and managing businesses. The team has demonstrated the ability to execute its growth strategy while maintaining strong financial discipline."

With the share price 26.7% lower than it was 12 months ago, there is arguably a buying window open now as well.

Judges acknowledged the building industry is under pressure with supply cost inflation and a declining economy. But Johns Lyng's business model seems to shield it from the stress.

"At least 20 large construction companies folded in 2022. More closures are expected in 2023. Contractually agreed rates were not enough to offset the sharp rises in prices and wages following COVID, sending many to the wall," he said.

"Johns Lyng's focus on shorter-duration projects in the renovation and reconstruction sector has shielded its balance sheet from the worst price hikes."

'Ample opportunities for growth'

On the other end of the supply chain is Steadfast Group Ltd (ASX: SDF), which is an insurance broker network that's enjoyed a 17% rise in its share price over the past year.

Created with Highcharts 11.4.3Steadfast Group PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

Judges sees Steadfast as "an attractive investment", operating in a recession-resistant industry and a "robust regulatory environment".

"Insurance is an essential industry that is unlikely to be significantly impacted by economic downturns," he said.

"Rising interest rates provide an opportunity for higher returns on their collected premiums."

The last financial year saw a 20% increase in revenue, according to Judges. 

"And the present trailing twelve-month [period] has a climb of 9% in revenues."

The dynamics of the brokerage market is also alluring for Steadfast investors.

"Steadfast Group operates in a highly fragmented market, which provides the company with ample opportunities for growth through acquisitions," said Judges.

"Its history of successful acquisitions has allowed the company to expand its customer base and geographical reach."

According to CMC Markets, seven out of 12 analysts currently rate Steadfast shares as a strong buy.

Motley Fool contributor Tony Yoo has positions in Johns Lyng Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Johns Lyng Group and Steadfast Group. The Motley Fool Australia has positions in and has recommended Steadfast Group. The Motley Fool Australia has recommended Johns Lyng Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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