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3 tips to protect your portfolio in a recession

Research out yesterday from Longview Economics noted that Australia could be in for a recession very very soon! The report found that Australia has set a new record for the longest time without an economic recession (for a major developed country).

Australia’s 104 quarters of continuous economic expansion have overtaken the 103 quarters recorded by the Netherlands between the early 1980s and 2008, Canada’s 82 quarter record and France’s 68 quarters.

Housing Boom to Blame?

An interesting part of the research was the conclusion that the record Dutch economic expansion was primarily as a result of a long-term rising housing market coupled with rising household indebtedness. This has an eerie resemblance to what’s going on in Australia. The housing market, even though the GFC put a slight pause on growth, has had an incredible run and has been largely responsible for the wealth of the baby boomers generation.

Are we in for a recession?

Only time will tell if we see an economic recession. Wikipedia notes that a recession can be defined as when, “GDP (gross domestic product), investment spending, capacity utilisation, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise”.

A recession could have a profound effect on the share market and will most likely be as a result of falling commodities prices or any setbacks in the local housing market.

Stocks to watch out for

If we’re going to have a recession then there are a few things you can do to your share portfolio to make sure you won’t lose your shirt.

  1. Avoid the banks, such as Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB), which are potentially overly exposed to the investor mortgage market.
  2. Watch out for building companies and developers such as Avjennings Ltd (ASX: AVJ), Stockland Corporation Ltd (ASX: SGP) and Lend Lease Group (ASX: LLC), which have residential developments either in progress or set to commence construction.
  3. Watch out for leveraged resources companies. A recession will most likely be brought on by a fall in the iron ore and oil price. Those companies with large debt loads compared to their market cap will see share price falls. Fortescue Metals Group Limited (ASX: FMG) and Santos Ltd (ASX: STO) are two of the riskiest, so beware.

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Motley Fool contributor Andrew Mudie owns shares of Fortescue Metals Group Limited. You can find Andrew on Twitter @andrewmudie

The Motley Fool Australia has no position in any of the stocks mentioned. 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.