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Is Australia staring down the barrel of its next recession?

What does a recession look like? I’m betting you don’t remember the last one.

When’s the last time that bank profits didn’t rise? OK, technically it was 2009, when Commonwealth Bank of Australia’s (ASX: CBA) profits declined a whopping 1%. But bank profits have grown rapidly over the past 15 years – when was the last time our financial sector took a real hit? I can’t remember.

When’s the next sharemarket crash going to happen? You got me… I don’t know the answer to that one either. I also don’t know if what we’re seeing right now is the preliminary stages of a weakening economy, or just one of the one-off periods of weaker performance that happen every so often.

You probably already know that retail sales have taken a dive. Myer Holdings Ltd. (ASX: MYR) is getting sold off, but so are more promising businesses like RCG Corporation Ltd (ASX: RCG) and Greencross Limited (ASX: GXL).

Will it end there? One of Australia’s largest employers is the retail sector, with 10.9% of all employment. Lower retail sales could lead to higher unemployment.

Retail’s not the only sector in trouble. Several yellow flags have popped up in the construction industry, with oversupplied apartment markets in some major cities. Banks have reportedly tightened their lending to property developers, who are finding it hard to source finance. Construction is Australia’s 3rd largest employer, with 9.1% of total employment.

And the largest employer? Well that’s healthcare and social services, accounting for 11% of total employment.

Maybe I’m just fear-mongering. But if you’ve seen Standard & Poors downgrade Australian banks credit rating, seen the retail and construction industries slowing down, seen new car sales dive and noted that ~40% of the big bank’s loans in Australia are interest-only, maybe you’ve been taking a nervous look at your portfolio and wondering what’s safe.

I would never advocate selling stocks in the fear that a recession or a market crash is coming. Yet if you’re getting uncomfortable looking at some of the companies you hold – retailers, banks, consumer credit companies – what you can do is either:

  1. Increase the amount of cash you hold in reserve
  2. Look at selling the riskier companies and instead own more defensive businesses like Bapcor Ltd (ASX: BAP) or Hansen Technologies Limited (ASX: HSN)

Bapcor is an automotive parts distributor that is likely to be less affected in a downturn, since people will continue to repair their vehicles. Hansen Technologies and peer Gentrack Group Ltd (ASX: GTK) provide crucial billing software solutions that a requirement for their customers to do business. It’s very hard to cut spending on one of your most important assets in a downturn.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia owns shares of Bapcor, Greencross Limited, and Hansen Technologies. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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