The unemployment rate has been forecast to hit 10% in the June quarter, but would be much worse were it not for the Federal Government's JobKeeper package. The package pays workers in coronavirus-impacted businesses a $750 a fortnight wage subsidy. According to the Australian Financial Review (AFR), analysis shows that without the package, the unemployment rate would peak at around 15%.
Double-digit unemployment figures have not been seen in Australia since the early 1990s recession. The Australian economy is predicted to tip into a recession shortly, with negative growth in the March and June quarters. It's not just coronavirus which is to blame – the economy was already slowing prior to the outbreak. Consumer spending was soft, and the ongoing drought and summer bushfires were also exacting a toll.
What will a recession look like?
A recession is defined as two consecutive quarters of negative GDP growth. We are all part of the economy. When people stop spending, such as due to the coronavirus outbreak, businesses receive less income. Businesses with less income are less able to spend themselves, so may need to lay off staff, or even close.
As unemployment rises, more people have less money to spend. This leads to a vicious cycle in which more businesses receive less income, slow spending, and possibly lay off more staff. The RBA has done its bit to soften the blow by cutting the cash rate to a record low of 0.25%. This means businesses and households with debt will pay lower interest rates, leaving them with more disposable income.
The Federal Government is also working to bolster the economy with multiple stimulus packages designed to keep businesses afloat and shore up consumer spending. Even if a recession is inevitable, it should not be cause for panic – the economy operates in cycles and even severe recessions do not last forever.
While the recession is ongoing, however, we can expect to see a drop in consumer spending as households tighten their belts. Discretionary spending especially will fall as consumers avoid purchasing clothes, cars, and electronics while the outlook remains bleak. Business spending will also slow as revenues drop and businesses put expansion plans on ice.
So, what type of companies provide an investment safe harbour during a recession?
ASX consumer staples shares
Consumer staples are things that people need, not just want. Products like foods, beverages, household goods, and hygiene products are necessary even when incomes are reduced. Demand for consumer staples tends to remain relatively steady, regardless of the stage of the economic cycle.
Supermarkets are a prime example of consumer staples shares. The population will continue to spend at supermarkets even in the depths of a recession – after all, everyone needs to eat. ASX supermarket shares have been doing particularly well out of the coronavirus pandemic due to associated panic buying which has seen shelves stripped bare and buying limits introduced.
As reported by the AFR, UBS estimated supermarket sales were up more than 25% in March. UBS is expecting supermarket sales to rise 9.5% year-on-year in the March quarter and 6.1% in the June quarter, before moderating to around 5% in the September and December quarters.
Gross margins are also expected to increase due to reduced wastage and promotions, although the cost of doing business is expected to increase due to higher supply chain and staffing costs. Nonetheless, there is no doubt that ASX supermarket shares are benefitting from the current environment. Shares in Coles Group Ltd (ASX: COL) are up 10% this year while Metcash Limited (ASX: MTS) shares are up 14%. The defensive nature of the shares means they are also likely to weather future storms.
ASX healthcare shares
Healthcare shares are a classic defensive play. Regardless of the state of the share market or overall economy, people will continue to access healthcare. As a result, ASX healthcare shares often tend to have stable earnings and consistent dividends throughout the economic cycle.
Due to constant demand for healthcare products, healthcare shares tend to be more stable during various phases of the business cycle. Healthcare shares can offer an attractive dividend yield in low rate environments, but are also often less risky – it would take a significant catastrophe to derail their business models.
Of course, not all ASX healthcare shares are created equal. Early-stage companies with experimental products and therapies, and those that are yet to turn a profit, are likely to be more volatile than large, well-established healthcare providers.
CSL Limited (ASX: CSL)
CSL is the largest share on the ASX by market capitalisation and has proven resilient during the current downturn – CSL shares are up 18% this year.
CSL is a biotechnology company that develops influenza vaccines as well as therapies used in the treatment of rare and serious diseases. Australians are being urged to ensure they get their flu vaccine this year to reduce the strain on the health system caused by coronavirus. The Federal Government has advised Australians to get their flu shot as soon as possible, with chemists reporting strong demand.
Ramsay Health Care Limited (ASX: RHC)
Ramsay Health Care is one of the largest hospital operators in Australia. The company operates 489 facilities across 11 countries and maintains a market leadership position in Australia with strategically located hospitals. Ramsay Health Care shares were hurt by the cancellation of non-urgent elective surgeries due to the coronavirus pandemic, but have risen 27% from March lows.
Ramsay Health Care stands to benefit from government backing for the private hospital sector with private hospitals drafted into the coronavirus response. The Australian Government has agreed to underwrite the viability of private hospitals, which in return will make staff available for deployment across the health system.
Government funding will be used to meet operational costs, thus ensuring deferred activities, such as non-urgent elective surgeries, can be resumed and accelerated when appropriate. Ramsay Health Care withdrew its full-year guidance last month as the global impacts of coronavirus affected its volumes and casemix.
Nonetheless, Ramsay Health Care has delivered consistent results in the past, with revenue growing 22.5% in 1H20. Core net profit after tax grew to $273.6 million and an interim fully franked dividend of 62.5 cents per share was declared, up 4.2% on the prior corresponding period.
