Interest rates have now jumped an astounding 125 basis points in just nine weeks.
In May, many homeowners had never ever seen their home loan repayments rise. But after the Reserve Bank of Australia increased rates on Tuesday for the third consecutive month, there are now plenty of Australians feeling acute financial pain.
The RBA has a job to do in bringing inflation under control. Otherwise the country could find itself in irreparable long-term trouble.
But will the Australian people become collateral damage, with rising rates degrading consumer morale so much that the country slips into recession?
Shaw and Partners portfolio manager James Gerrish said it's certainly not out of the question.
"Arguably the main issue facing everyone today is never before in history has the RBA started hiking rates when consumer confidence was already so depressed."
In normal times, just a slight pullback in real estate prices is enough to curb Australians' enthusiasm.
But 2022 ain't normal.
"This year there's a multitude of factors weighing on us all — including soaring fuel, food and everyday living costs before we even consider lingering COVID & geopolitical tensions," said Gerrish in his Market Matters newsletter.
"Leading economic indicators are already suggesting that the US has entered a recession… Australia feels likely to follow suit, although our strong labour market and commodities exports should help the downturn."
Gerrish's team suspects the RBA will start cutting rates in "late 2023" to give the economy a breath of life. But clearly there's a long way to go before that can happen.
Meanwhile, everyone may have to deal with a recession. And there are certainly some ASX shares to buy that could fare much better than others during such times.
The ASX shares best placed to withstand an economic downturn
According to Gerrish, the sectors that best survive a recession are utilities, consumer staples, telecommunications, health, and gold.
The areas to avoid are industrials, diversified financials, resources, and real estate.
Packaging supplier Orora Ltd (ASX: ORA) is one that Gerrish likes at current prices.
"We believe Orora is reasonable value trading on an estimated PE [price to earnings ratio] of 17.7x for 2022 while its 4.2% unfranked yield is a useful top-up for performance."
The Orora share price has risen more than 3% year-to-date during a period when most stocks have taken a tumble.
"The company is growing in North America while inflation has been navigated by timely price increases — i.e. the business has pricing power," said Gerrish.
"For good measure, sustainability trends are aiding demand for Orora's cans and fibre packaging solutions. While it stays ahead of the curve in this department things look solid for Orora."
Coles Group Ltd (ASX: COL) shares are more expensive, but the supermarket giant is another reliable name to get through tough times, according to Gerrish.
"The stock is not particularly cheap trading on an estimated PE of 23.9x for 2022 but a sustainable 3.4% fully franked yield makes it relatively easy to be patient if concerns are growing towards much of the ASX."
Gerrish added that Coles "delivered a solid result" last quarter with "sales growth driven by accelerating inflation".
"Everything looks solid over the next year or two with Coles but it will need population growth to expand meaningfully moving forward."
His third pick, and perhaps with the least conviction of the three, is alcohol and hospitality provider Endeavour Group Ltd (ASX: EDV).
"Our main concern [is] whether the stock's close to being fully priced," said Gerrish.
"The stock's not cheap, trading on an estimated PE for 2022 of 27.8x — richer than Coles for a similar amount of revenue growth. However, margins are better and profitability is growing at a higher clip which could justify the premium multiple."
The idea here is that demand for alcoholic drinks, whether bought for home or at a pub, is maintained through economic downturns.
"People are partial to a drink during tough times and the owners of Dan Murphy's and BWS are clearly well-positioned for this trend," Gerrish said.
"The group [enjoys] online sales In excess of $1 billion with 40% of its sales now digitally influenced."
One caveat with recession busters
When picking recession-busting defensive ASX shares to purchase, Gerrish cautioned investors to watch the price they pay.
"We must be mindful that investors have been migrating their portfolios towards defensives for many months," he said.
"Hence don't expect any bargains… For example, so far in 2022 the utility stocks are all up while retail is all down."
