Once a month, National Australia Bank (ASX: NAB) releases the results of its Business Survey. Results from the June survey show that business conditions and capacity utilisation have slumped to a four-year low, and the outlook for forward orders and employment is “very poor”.
As NAB’s release stated, the survey “paints a worrying picture of the Australian economy”. It’s amazing to consider that the domestic economy which has enjoyed a resource boom over the past few years now has business conditions which are at similar levels to those at the tail end of the Global Financial Crisis (GFC). Sectors particularly struggling from weak conditions include retail, mining and manufacturing “with retail activity deteriorating to its weakest level in the history of the monthly survey (since 1997)”!
This week the market is also digesting news that China’s trade volumes fell in June. Total trade volumes reportedly fell by 2%, which included a fall in exports of 3.1%. A spokesman for the Chinese administration described the contraction, which was the first fall for exports in 17 months, as “not promising” and a “severe challenge”.
All in all, the survey plus the weak Chinese trade figures adds to the increasing body of data that suggests Australia might be headed for a recession and that another interest rate cut is not far off.
Source: Google Finance
So what is an investor to do?
Some businesses are largely ‘recession proof’, such as healthcare companies. Other businesses have the potential to actually do better in a tough economic environment than in a booming economic environment.
The following four companies (as the chart above shows) have all massively outperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) over the past five years and could continue to do well should Australia’s economic outlook deteriorate further. All four have business models whose services experience higher demand in a weaker economic environment. Cash Converters (ASX: CCV) and Thorn Group (ASX: TGA) both provide personal loans to customers which more people are forced to draw upon in hard economic times. While Credit Corp (ASX: CCP) and Collection House (ASX: CLH) run debt collection services, which generally experience higher volumes when an economy contracts, causing personal debt default rates to rise.
Foolish investors know not to get too caught up in trying to predict macroeconomic factors, however identifying firms that are currently growing their earnings and which stand to benefit should the economy weaken, could well be worth further investigation.
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Motley Fool contributor Tim McArthur owns a share in Collection House and Credit Corp.
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