According to just about everyone, Australia and indeed the world economy is going into recession. While there may be a few factors contributing to the global recession, it is clear that the coronavirus pandemic is the primary cause.
While a recession is not good for most businesses, there are some companies that may fare well and even improve their earnings during a time of economic downturn. This is because their business model allows them to benefit from some of the economic phenomenon occurring around them. For example, during a recession an increase in people not paying their bills can be a boon for debt collection companies.
If the recession is prolonged, investors may get some security from holding assets that can thrive in a market downturn while other companies suffer.
Here are 3 ASX companies that are counter-cyclical and could do very well through the pending recession.
Credit Corp Group Limited (ASX: CCP)
Credit Corp buys and collects non-performing debts owed by consumers in both Australia and the US. It is the largest debt purchase and collection company in Australia and has been listed on the ASX since 2000.
The company has announced a capital raising of $150 million in order to take advantage of increased supply of the debts which it purchases and collects, brought about by the coronavirus. It has also announced that its balance sheet will remain secure in a variety of scenarios.
Credit Corp has cut costs significantly since the onset of the COVID-19 crisis, and its CEO and directors fees have been reduced by 50%. This helps in positioning it well to take advantage of the current situation. The increases in provisions for bad debts recently announced by National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) will provide ample business for Credit Corp as it picks up the scraps of Australia’s bad debts.
As part of its capital raising, Credit Corp also announced its interest in purchasing competitors’ books. This could provide an opportunity for a significant boost to earnings as it acquires cheap assets brought on by the COVID-19 recession. Credit Corp could also consider expanding into new markets as it finds itself facing a recession with significant cash on hand.
Cash Converters International Ltd (ASX: CCV)
Cash Converters is an international personal finance and pawnbroking business, mainly operating in Australia with franchises around the world. The business has a loan book of $224.2 million and achieved $42.4 million in retail sales in the first half of the 2020 financial year.
The types of personal loans that Cash Converters specialises in, known as payday loans, are likely to be in high demand during a recession as people find themselves short on cash. Payday loans are short term loans of as little as a few weeks, usually with a high interest rate. This type of lending has proven highly profitable for Cash Converters over many years. Additionally, during times of hardship people are likely to hunt for bargains rather than pay full price for retail goods. While this may be bad news for retailers like Harvey Norman Holdings Limited (ASX: HVN), it could provide a boost to Cash Converters.
Cash Converters has remained quiet about the effects of the coronavirus lockdowns on its business. However, as last reported, 53.9% of its loans originated online. This means that it is likely that the company has seen continued demand for loans during lockdowns.
While the recession could mean an increase in defaults on existing loans, people are likely to need additional cash while economic times are tough. In the US for example, a report by the Chicago Federal Reserve observed a sharp increase in payday loans during the GFC. If there is a sharp increase in demand for new payday loans in Australia through the pending recession, Cash Converters is likely to have a highly profitable few years ahead.
Betashares U.S Strong Bear Hedge Fund ETF (ASX: BBUS)
This exchange-traded fund (ETF) is an interesting one. It aims to provide returns that are negatively correlated to the US S&P 500. This means that as the US enters a bear market, returns will be positive. When the US starts to recover and the S&P 500 rises, returns will be negative. In this way, this ETF is like betting against the S&P 500 index of the 500 biggest US companies.
During a recession this could be an effective strategy, particularly if share prices drop further. In the long term, however, this is probably not a great strategy and holders will need to consider when a recovery in the S&P 500 is coming to close out their position. Historically, the S&P 500 index has eventually recovered through difficult times.
During March this year when world financial markets were crashing, this ETF rose from a low of $2.61 to $6.80. That’s a return of 160.53%. It currently sits back at $3.19 due to the recovery in share prices. However, this is one to hold if you believe that this will be a prolonged bear market with further dips in financial markets.
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Motley Fool contributor Chris Chitty has no position in any of the stocks mentioned. 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 Scott Phillips.
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