Seven stocks to recession proof your portfolio

Consumer staples, toll roads and even a global blood products group are among experts’ top stock tips to safeguard your portfolio if the economy tanks and times get tough.

Here are seven stocks you could add to a portfolio to safeguard it if the economy turns sour. Photo: Johannes EISELE / AFP

Recessions are bad news for stockmarkets. So investors worried that a string of interest rate hikes here and overseas could spark a downturn are right about now weighing up how defensively they’re positioned.

The good news is there are a handful of sectors that tend to outperform and offer some protection even when times are tough.

Here are seven standouts worth a look.

Woolworths

Unsurprisingly, consumer staples tend to fare better than most in a recession: after all, people still need to eat, even when money is tight.

For veteran stockpicker and Airlie Funds Management head of Australian equities Matt Williams, Woolworths is top of the list.

“Woolworths would have to be the granddaddy of recession-proof stocks, the absolute pinnacle,” he says.

Indeed, Woolworths boss Brad Banducci last month handed down a half-year result that showed a near 25 per cent jump in profit from continuing operations, as he revealed the impact of consumer belt-tightening.

The supermarket chain’s private label groceries saw explosive growth in the first six months of the year, with some grocery categories up more than 20 per cent, led by value-focused lines such as canned tuna, tinned tomatoes and pasta.

With a price/earnings ratio of 27 times, the main factor to consider is whether it’s a buy at the current price, according to Mr Williams.

“If you look at its performance over the past 12 months, particularly the last quarter and the last month, it has outperformed. You might want to be in safety but you’ve got to consider the price you pay for that safety,” he said.

CSL

Just like consumer staples, healthcare stocks tend to be a safer bet in downturns.

CSL is Williams’ second pick in the recession-proof category. Unlike Woolworths, CSL is trading “on the cheapest multiple in a long time”, he says.

“During Covid, the cost of collecting plasma went up significantly. Those costs are now reducing and in fact, a recession should actually lead to lower collection costs because they won‘t have to pay their blood donors as much,” he predicts.

This is because during a recession there are more donors, more people looking to earn extra income by being a blood donor.

“CSL is absolutely in that basket of recession-proof stocks. It‘s trading on a similar multiple to Woolworths but it’s actually the cheapest multiple I’ve seen it for a long time,” Williams points out.

Transurban

Infrastructure stocks are another segment that tends to outperform in recessions. For Forager Funds management CIO Steve Johnson, Transurban is a top pick.

“Infrastructure is the obvious recession-proof and inflation-proof place to hide, companies like Transurban,” he says.

“They’ve inflation-linked all the tolls, so when inflation goes up 7 per cent, the tolls go up 7 per cent. It’s a very nice hedge against that and though there’s some correlation between traffic and recession, in that traffic goes down in a recession, it’s still pretty reliable, predictable revenue.”

This is another stock that is not cheap right now – its share price is up 10 per cent since the start of the year – but the old world roads operator was also WaveStone Capital portfolio manager Catherine Allfrey’s top pick at the Sohn Hearts & Minds investment conference in November.

Woolworths is a top stock pick to recession-proof your portfolio. Picture NCA NewsWire / Ian Currie

The Lottery Corp

When you can’t afford to splash out on a holiday or a fancy dinner, there’s always the chance of winning big on the lottery.

That’s what makes The Lottery Corp one of the top recession-proof stocks, Airlie’s Williams says.

“People have that mentality of ‘why not give it a go, it’s only a few dollars’. Historically, if you look back over the long term, lotteries have been incredibly resilient, with steady growth throughout all economic cycles.”

Again this is another one that isn’t trading cheaply at the moment, so might be one to watch for an opportunity to get in at a decent price.

Woodside

A commodities play that provides exposure away from any looming Australian recession and a currency benefit, Woodside rewarded shareholders last month with a bumper dividend following a record full-year result.

While some analysts are cautious on the outlook, tipping the last payout as “peak dividend” for the energy giant, there is still the prospect of a decent yield going forward.

Macquarie analysts “expect investors should be able to access Woodside at cheaper levels”, with Woodside outperformance versus Santos set to at least partially unwind in the current half.

And UBS analysts are tipping Woodside “can continue to payout 80 per cent of underlying net profit as dividends, supporting dividend yields of 6-7.5 per cent over 2023-25.

“However, we remain cautious that capex overruns and/or Woodside’s pursuit of additional

offshore growth opportunities may add further capital demands on the business moderating

shareholder returns.”

Integral Diagnostics

Another healthcare stock here, but this is one whose share price has lost a quarter of its value over the past year.

Integral Diagnostics, according to Johnson, will be very resilient to the revenue line regardless of the economic environment, but the margin side hasn’t held up as well over the past year amid labour availability and wage inflation challenges.

“Their margins have been terrible because costs just keep going up and people are not yet going back to hospitals and getting treatments at the rate that they were (pre-Covid).

“I think to the extent we get a recession and people get more worried about their jobs, it‘s probably a positive for those businesses (like Integral) that there’s more availability.”

QBE

Higher interest rates are good for insurers as they earn a lot more money on the premiums they invest, known as the float.

They’re cyclical businesses that run to their own cycle and aren’t as economically dependent as most, Johnson says. And with QBE you get international exposure along with the US dollar benefit.

“You might get a cyclone or a flood season or bushfire season or whatever it is that significantly crimps their profitability here, but it‘s not going to be economically sensitive.

“If you’re trying to diversify a portfolio (for protection) then I think it’s a very sensible allocation to have something in that sector, which is not going to not going to suffer because the consumer is hurting.”

But on all recession proof stocks that issue will always be price: “Keep in mind that the market does a pretty good job of pricing in a recession,’ says Johnson.