Australia’s rising delta recession risk could hit these ASX 200 shares badly

Don’t underestimate the risk of a recession in fortress Australia, which could leave many ASX 200 shares vulnerable in its…

| More on:
Australia recession ASX 200 shares street sign saying recession ahead with dark clouds looming

Image source: Getty Images

Don’t underestimate the risk of a recession in fortress Australia, which could leave many ASX 200 shares vulnerable in its wake.

The fact is, the S&P/ASX 200 Index (Index:^AXJO) is not pricing in any chance of a recession here. Otherwise, it won’t be trading this close to its record high.

But we could get our first taste of a recession as early as Wednesday. That’s when the government’s June quarter GDP figures are released.

Economic hit in the June quarter

Economists at Citigroup and AMP Ltd (ASX: AMP) are warning that our economy may have slightly contracted in the latest quarter, reported Bloomberg.

The period is before the full impact of the COVID-19 lockdowns in Victoria and New South Wales is felt.

The harsh lockdowns brought on by the highly virulent delta-strain is almost certain to cause the economy to contract in the September quarter.

ASX 200 shares could get rocked by a recession

If the GDP figures are negative in the three months to end of June, we are almost certain to be in a technical recession. That’s defined as two consecutive quarters of negative growth.

However, if the June quarter figure can keep its head above breakeven, there is a good chance Australia can avoid a recession.

This is because many are expecting a big bounce back in the December quarter as vaccination rates increase and the states loosen restrictions.

Uncertain outlook not priced into ASX shares

The jury is still out on Wednesday’s GDP release though. A survey of economists conducted by Bloomberg runs from the -0.1% forecast by Citi and AMP to up to more than +1%.

It’s highly unusual for such a wide range of responses, which underscores how volatile and difficult it is to read the economy at this point.

The more important question is whether ASX 200 share investors should care.

How ASX 200 shares could hold up in a recession

Many of our large cap shares generate a good proportion of their income from overseas. The economic outlook for the rest of the world is rosier than ours.

Further, GDP reports are backward looking. By the time we get a firmer read on a recession, the December recovery party could already be in full swing.

And in case you haven’t noticed, any dip in the market has been short-lived. The amount of cheap money that’s pumped into the system by dovish central bankers is floating all boats, even leaky ones!

ASX banks in the firing line

On the other hand, there is one very large sector on the ASX 200 that could take a big hit if we do slip into a recession.

This is the ASX banking sector where many retail investors hold significant holdings in, according to Citi. The Commonwealth Bank of Australia (ASX: CBA) share price did well through the August reporting season.

Its peers have also outperformed the ASX 200 this month. These include the Westpac Banking Corp (ASX: WBC) share price, Australia and New Zealand Banking GrpLtd (ASX: ANZ) share price and National Australia Bank Ltd. (ASX: NAB) share price.

ASX bank profit growth at risk

“Like many investors, we were unsurprised by reporting season’s low bad debts,” said Citi.

“We were, however, taken back by the second order of low rates, with NIM compression and markets revenues hitting core profits. Despite core profit concerns and a growing delta outbreak, the Majors’ share prices outperformed over the month.”

No leaving record low rates

Further bank profit growth will have to rely on interest rate hikes. That’s looking less likely anytime soon due to the economic weakness.

“With low rates set to continue to weigh on core profits, but share prices at or around 2-year highs, we turn more bearish with consensus seemingly pricing in little for the risks around the delta variant,” added Citi.

If the broker is right, this might not be a bad time to be thinking of taking some profit.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of August 16th 2021

Motley Fool contributor Brendon Lau owns shares of AMP Limited, Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking Corporation. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Bank Shares