Here’s how to prepare your portfolio for a recession and the top 4 ASX stocks for a recession

How to prepare your portfolio for a recession? While we cannot comment on individual investors’ portfolio, there are some strategies that all investors can employ to mitigate risks. Preparing your stock portfolio for a recession involves strategic adjustments to mitigate risk and safeguard your investments. Many of these should be employed in good economic times too, so even if a recession does not eventuate in the next couple of years, we don’t imagine any of these will hurt. We will also identify stocks that would be ideal to hold in a recessionary environment.

How to prepare your portfolio for a recession

First, diversify your holdings beyond stocks, including assets like bonds or precious metals, which often perform differently under economic stress – specifically they won’t be as volatile. While real estate can fall in recessionary environments, they are not as liquid and so do not fluctuate year to year. Secondly, consider reallocating your investments towards sectors traditionally more resilient during downturns, such as utilities, healthcare, and consumer staples. Thirdly, bolster your position in high-quality, blue-chip companies with strong balance sheets and a consistent dividend-paying history. We will recommend some specific stocks later in this article. Lastly, maintain a long-term perspective, resisting the temptation to make impulsive decisions based on short-term market fluctuations. By taking these steps, you can enhance your portfolio’s resilience against recessionary pressures.

2 important steps

Of course, it is important to do two things. First, consider the current economic climate and how certain industries or companies may be affected. Some sectors may actually benefit from a recession, such as healthcare and consumer staples, while others may struggle, such as retail and travel. Others may not necessarily have higher revenues or profits, but may derive other benefits. CSL for instance may find more volunteers to donate blood plasma in the US during tough economic times. Understanding the broader economic landscape can help inform your decisions when adjusting your portfolio. Secondly, do not ignore internal factors with any of your investments. These include the company’s financials, the trends in the market and how the company is responding to them.

The top 4 ASX stocks for a recession

Wesfarmers (ASX:WES)

Wesfarmers (ASX:WES) is a conglomerate company with interests in retail, industrials and even resources. The main reason we are putting the company in its basket is because of its interests in discount retailers Kmart, Target and Priceline which are likely to appeal to consumers in difficult economic times. The latter only came into Wesfarmers’ portfolio in 2022 when it bought then owner Australian Pharmaceutical Industries (ASX:API).

It also hosts a chemicals and fertilisers business, an industrial and safety products business, a joint-venture mining operation at the Mt Holland lithium project in WA. It closed FY23, a period with the highest inflation in 40 years, with $43.6bn in revenue, an impressive 18% higher than the year before. Granted, this was driven to some extent by Wesfarmers Health, although taking this out of the picture still shows 7% growth. The company’s profit came in at $2.5bn, up 5% from the year before, and it paid $1.91 per share in dividends.

CSL (ASX:CSL)

CSL has not been the best performing stock in recent months, but has an unparalleled record of long-term success. The company is best known for its blood plasma and flu vaccine businesses, but has other products too and undertakes major R&D work.

We noted below that during tough economic times, it is easier to attract blood plasma donors to its clinics in the US. But flu vaccines are recession-proof, and often government funded.

Xero (ASX:XRO)

If you run a business, you need services such as accounting, invoice creation, bill tracking, currency conversion, inventory record keeping…Xero (ASX:XRO) does all this anymore to the extent no other company does. This is why it has recorded continual growth in its subscribers ever since it was founded in 2006.

At the same time, there is still growth ahead of it, with a TAM of at least NZ$100bn and the company expected to record its first bottom line profit at its upcoming results in May 2024.

Collins Foods (ASX:CKF)

Fast food has a reputation as being recession-proof and Collins Foods is one stock in this space, as a franchisor of KFC and Taco Bell outlets. In 1HY24, it recorded $697m in revenue and a $50.5m profit.

This company has not had the easiest run on the ASX, first joining the bourse being sold from private equity and spending a couple of years in the cellar after missing its first prospectus forecasts. However, its sales have grown as the company expanded its profitable franchises and got out of the unprofitable Sizzler outlets.

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