Is an Australian recession on the way?

Is Australia headed towards a recession?

| More on:
construction, building, commericial

Some investors seem to think that Australia is getting closer to a recession.

You may have already seen that the Adelaide Brighton Ltd (ASX: ABC) share price is down almost 8% in reaction to a market update. The construction materials business said it expects its underlying net profit after tax (NPAT), excluding property, will be down 10% to 15% for FY19.

One of the key factors for the downgrade was “further softening of demand for construction materials in the residential market”. The use of the word “further” doesn’t sound like things are improving – quite the opposite.

Perhaps unsurprisingly this has sent the share prices of several of the biggest construction businesses downwards. The Boral Limited (ASX: BLD) share price is down 1.3% and the Fletcher Building Limited (ASX: FBU) share price is down 3.4%.

Construction is an important sector because it employs a sizeable chunk of the national workforce and there are number of indirect industries that it helps, whether it’s carpet businesses, tile businesses, lighting businesses and so on.

We have already heard that growth is significantly slowing with some economically cyclical ASX shares like Nick Scali Limited (ASX: NCK) and JB Hi-Fi Limited (ASX: JBH) reporting much lower same store sales.

House prices continue to fall each month, so that’s not helping things. In April 2019 national dwelling prices declined by 0.5%, over the past year the national house price is showing a decline of 7.2% according to CoreLogic.

Foolish takeaway

I do think some construction businesses can do better than others in this environment. If I had to pick one to invest in it would be Brickworks Limited (ASX: BKW) because of its expansion into the US and its large investment holding of Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).

Either way, I certainly hope a recession is not on the way, but I would want to make sure my portfolio is positioned so that it can do well regardless of whether Australia has a recession or not.

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Motley Fool contributor Tristan Harrison owns shares of Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Brickworks. 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 Scott Phillips.

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