4 Best ASX Stock Sectors for a Recession

With recession concerns looming, many investors want to know where to put their money. These four ASX stock sectors tend to perform well during recessionary periods.

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When an economic downturn is on the horizon, investors look for recession-proof stocks that won’t lose value. Some sectors on the Australian Stock Exchange (ASX) perform better than others during a recession, but which ones?

Recessions are considered a normal part of the ebbs and flows of the business cycle, but they can last for prolonged periods of time, leading to major stock market sell offs across a wide range of economic sectors. Usually, it's the retail, manufacturing, restaurants, technology, travel and entertainment industries that feel the most pain during a recession.

Unsurprisingly, recessions can wreak havoc on investment portfolios. While there are no entirely recession-proof stocks, there are quality defensive stocks in certain sectors that have historically outperformed the rest of the market during economic uncertainty.

Typically, stocks in the non-discretionary sectors of consumer staples, healthcare, telecommunications and utilities tend to outperform in recessionary environments as demand for these goods and services remains strong even in the face of market volatility. This is particularly so if they are quality companies with a strong cash position, reliable earnings and good governance.

“The ideal companies to hold in a portfolio in an environment of weaker growth and higher rates are firms with strong balance sheets, pricing power and a growth-resilient operating model,” according to Matthew Sherwood, head of investment strategy at Australian investment firm Perpetual.

Here the Investing News Network (INN) looks deeper into which ASX stock sectors do well during a recession.

1. Consumer staples

During a recession, consumers cut back on discretionary spending, which typically means no more luxury purchases, dining out and entertainment. Most need to save their money for the everyday necessities such as food and beverages, household goods and personal care products. These products, along with tobacco and alcohol, make up the consumer staples sector.

The companies in this sector, from distributors and processing plants to discount retailers and supermarket chains, often remain resilient in the face of a recession as they benefit from a reliable revenue stream.

According to Australian global financial services firm Macquarie Group (ASX:MQG,OTC Pink:MCQEF), consumer staples have outperformed in 13 of the last 15 “early contraction” phases of a recession.

ASX-listed consumer staples stocks include Coles Group (ASX:COL,OTC Pink:CLEGF), Endeavour Group (ASX:EDV,OTC Pink:EDVGF), Woolworth’s Group (ASX:WOW,OTC Pink:WOLWF), Metcash (ASX:MTS,OTC Pink:MCSHF), Amcor (ASX:AMC,NYSE:AMCR), Orora (ASX:ORA,OTC Pink:ORRAF), Graincorp (ASX:GNC,OTC Pink:GRCLF), and the A2 Milk Company (ASX:A2M,OTC Pink:ACOPF).

In lieu of individual stocks, investors might consider exchange-traded funds (ETFs) and index funds that track the consumer staples sector, which have also historically outperformed during economic downturns. The iShares Global Consumer Staples ETF (ASX:IXI), which tracks the S&P Global 1200 Consumer Staples Sector Index, is one example.

2. Healthcare

As with consumer staples, healthcare services and products are critical necessities that consumers cannot do without. This sector of the economy includes pharmaceutical, biotech, medical device and healthcare services stocks.

In times of recession, it's best if investors forego early clinical-stage companies in favor of mature revenue-generating healthcare stocks. Fortunately for investors, Australia’s healthcare sector boasts some of the largest blue-chip stocks on the ASX.

Macquarie reports that the healthcare sector has outperformed in 12 of the last 15 “early contraction” phases of a recession.

ASX stocks in this sector include the third largest company on the ASX, biotechnology firm CSL (ASX:CSL,OTC Pink:CMXHF), as well as ResMed (ASX:RMD,NYSE:RMD), Sonic Healthcare (ASX:SHL,OTC Pink:SKHCF), Cochlear (ASX:COH,OTC Pink:CHEOF) and Ramsay Health Care (ASX:RHC,OTC Pink:RMSYF).

There are also a number of ASX-listed healthcare ETFs, such as the iShares Global Healthcare ETF (ASX:IXJ); the BetaShares Global Healthcare ETF (ASX:DRUG) and the BetaShares Digital Health and Telemedicine ETF (ASX:EDOC).

3. Telecommunications

Telecommunications is another defensive stock sector that tends to hold its own during recessions as customers can’t just “cut the cord” or find cheaper alternatives.

When times are tough, phone and internet services that provide everyday communications are still essential costs for both consumers and businesses. In addition, due to the high barriers of entry, the revenue-generating companies in this sector of the economy face little competition.

Valued at AU$24.8 billion in 2021, Australia’s telecom industry is a mature market that has outperformed other economic sectors in 12 of the last 15 economic downturns, according to Macquarie’s stats.

ASX stocks in this sector include industry leader Telstra (ASX:TLS,OTC Pink:TTRAF) and its biggest competitor TPG Telecom (ASX:TPG,OTC Pink:TPGTF), as well as smaller companies such as Aussie Broadband (ASX:ABB) and Superloop (ASX:SLC).

Telstra announced in February 2022 that it will spend up to AU$1.6 billion on new infrastructure intended to improve connectivity and internet speeds as part of its response to the overall need to accommodate rising consumer demand.

Want to learn more about Australia’s telecom industry and mobile investment opportunities? Check out this INN article:

Mobile Investing in Australia

4. Utilities

Utilities companies provide essential infrastructure services, including the delivery of electricity and natural gas to homes, businesses and government offices. Demand for utilities services is typically not dramatically impacted by recessions, and their predictable recurring earnings are attractive to investors. As an added bonus, many publicly listed utilities companies deliver dividends that provide a regular stream of income for investors.

“The fact that utilities are part of the nation's daily activity means they're a good investment for those who want recession-proof stocks in their portfolio and high dividend yields,” Forbes says.

Total revenue for Australia’s utilities sector reached AU$166.7 billion in 2020. The country has an abundance of natural gas resources and is on track to become the world’s leading exporter of liquefied natural gas. As with consumer staples, the utilities sector has outperformed in 13 of the last 15 “early contraction” phases of a recession.

Some of the major players in Australia’s utility industry are Origin Energy (ASX:ORG,OTC Pink:OGFGF), AGL Energy (ASX:AGL,OTC Pink:AGLNF) and APA Group (ASX:APA).

Want to learn more about Australia’s utilities and energy sector opportunities? Check out these INN articles:

ASX dividend stocks provide income during a recession

Dividend stocks offer investors another route to recession-proofing their portfolio. “Dividends are a defensive strategy in a volatile market,” states Chris Senyak, chief investment strategist at Wolfe Research. “In a volatile environment, with the threat of a recession looming large, investors will continue to invest in these stocks.”

The ASX has a number of dividend stocks, including those discussed in INN’s 5 Top ASX Dividend Stocks.

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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.