The likelihood of an Australian recession has subsided over the past six months with Australia’s property market rising again.
But, at some point Australia will face economic worries whether that’s in six years or in six months. Maybe it will be brought on by the US, maybe it will brought on by China, maybe will be related to bushfires.
I’d just want to make sure I was invested in shares that can withstand a recession already before trouble actually hits. Here are three ideas for a recession:
Magellan Global Trust (ASX: MGG)
Magellan Global Trust is a listed investment trust (LIT) that only invests in the best global businesses such as Visa, MasterCard, Alphabet, Microsoft, LVMH and Alibaba. These businesses have the best economic moats, are valuable to their customers and have the best chance of riding through any trouble.
If Australia had a recession but not the rest of the world then I’d expect these businesses to be unaffected. If the whole world had a recession then these shares may fall less because of their industries, their growth and their relatively defensive earnings.
Magellan Global Trust is building a reputation of falling less than the market when there are declines across the board, which is another good protection against recession.
It also aims to pay a 4% distribution yield.
Duxton Water Ltd (ASX: D2O)
If you don’t want to invest in international shares and want to stick to Australian businesses then you need to find companies that wouldn’t see a change in demand in their products or services even during a recession. In other words, you need to find shares offering uncorrelated returns.
Demand for water doesn’t really have anything to do with economic cycles, it’s obviously going to be related to how much it rains.
Duxton Water owns water entitlements which gives it water from various water systems such as the Murray River which it leases to agricultural providers.
The recent drought has increased water values, but when there’s a year that it rains a lot the water values will likely fall somewhat.
It currently has a grossed-up dividend yield of 5.7%.
InvoCare Limited (ASX: IVC)
Another business that would have uncorrelated demand for its services is InvoCare, the largest funeral provider in Australia and New Zealand.
Sadly, there is a certain amount of people that pass away each year and InvoCare generally receives around a third of that business. Afterall, as the saying goes – there’s only two things certain in life, death and taxes.
Over the long-term, death volumes are expected to grow by 1.4% per annum between 2016 to 2025 and then increase by 2.2% per annum from 2025 to 2050. There’s long-term growth expected and InvoCare has low-cost brands if there’s an increase in demand for a cheaper service in recession.
It currently has a grossed-up dividend yield of 3.9%.
Each of these shares have very defensive characteristics. At the current prices I’m drawn to Duxton Water because of the large discount between the share price and the worth of its net assets, but Magellan Global Trust would be an excellent long-term pick.
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Motley Fool contributor Tristan Harrison owns shares of DUXTON FPO and MAGLOBTRST UNITS. The Motley Fool Australia has recommended DUXTON FPO and InvoCare Limited. 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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