Equity Market Vs Economic Charter: Strategies to Build Recession-Proof Portfolio

  • Jun 16, 2020 AEST
  • Team Kalkine
Equity Market Vs Economic Charter: Strategies to Build Recession-Proof Portfolio


  • Economic parameters along with international market volatility are closely monitored by analysts to gauge stock market scenario.
  • While job market and growth scenario raise concerns, some emerging trends in terms of consumer confidence and payroll jobs shed positive light on economic recovery scenario.
  • While markets bounced back post March dip, building sound and resilient portfolio is pivotal here to evade downside risks inherent with the equity portfolio. 

There is a growing debate around Australia witnessing its first recession in 29 years as COVID-19 pandemic disrupted businesses and economy. Although gradual opening seems to be fostering economic recovery prospects, Prime Minister Scott Morrison indicated of “mountain yet to climb” for Australia as he hinted on the loss of more than $100 billion economic activity. 

While Australian GDP for March 2020 quarter contracted by 0.3%, Treasurer Josh Frydenberg indicated that the impact in June quarter would be “even more severe”.

Mr Frydenberg, who indicated that the country is in recession, however also stressed on “remarkable resilience” of the economy, contracting below 0.4% expectation. 

With job layoffs happening around, and many sectors still striving to reach pre-Covid revenue volumes, the road ahead for the Australian economy can be “very hard” as pointed by the Prime Minister.

Scott Morrison, on 15 June 2020, highlighted that around 1.6 million Australians are currently supported by JobSeeker program, which is debated to be withdrawn gradually. Meanwhile, OECD has urged Morrison Government for extending the JobKeeper scheme, that may aid consumer confidence and job levels.

The aftereffects of COVID induced restrictions are supposedly inevitable, already projected to affect economic functioning in the short to medium term. However, if economic troubles continue for long in the Australian landscape, the country might bear a deep scar shaking the financial security of its citizens. 

Upbeat Stock Market Trend: Portfolio Construction

While the job market and GDP predictions paint uncertain environment, however, with controlled infection numbers and financial markets healing thick and fast in the past few weeks, the recovery scenario deserves closer attention. Many companies in the newfound freedom post the lockdown have kickstarted their activities in full force, transpiring hopes to the nation.  

The stock market has emanated upbeat momentum, with S&P/ASX200 giving the Quarter-to-date return of 12.67% as on 15 June 2020. 

Among such scenario, the budding bullish phase lures to take opportunistic investment options. Meanwhile, volatile economic conditions pose many doubts due to which the dilemma of the already apprehensive investor grows tenfold. The objective remains to savour opportunities in the promising bullish phase while evading downturn risks. 

The recession-proof portfolio- the seeming answer to investor’s dilemma, could be used to sail smoothly across the turbulence. As one put their time and efforts into fundamental and technical analysis of different stocks, here are some underlying considerations that would guide to forge a recession-proof portfolio:

ALSO READ: Guide to Portfolio Strategies and Investment Avenues to Wade Through COVID-19 Crisis

Revenue Matters

Revenue is an initial sign hinting on the extent of success and growth prospects of any organisation. The growth trend in a company’s sales figures and revenue often signals further stock movement. It also pinpoints consumers’ inclination towards the firm’s offerings. 

Before making the investment choice in any stock, the understanding of revenue and income in terms of analysing past trends and future projections should be important. At the same time, substantial overseas revenue also indicates firm’s exposure to capitalise on growing international demands or towards external market shocks. 

For instance, The a2 Milk Company Limited (ASX: A2M) has been under investors’ radar, witnessing an increase of 31.6% in the total revenue to $806.7 million during its Half Year Interim Results for the six months ending 31 December 2019. Meanwhile, EBITDA and Net Profit increased by 20.5% and 21.1%, respectively. The latest addition to the ASX50 index anticipates the revenue between $1700 million to $1750 million. 

Analysing Market Opportunities 

Shifting trends of consumers’ needs and tastes, in general, points at the change in lucrative landscape for any product or service. Identification of opportunities from the perspective of markets, products or industry can significantly assist in avoiding the repercussion of recession. 

The pandemic has brought a significant shift in people’s style of living, with technological adoptions getting more inherent. Meanwhile, the tourism sector which faced severe headwinds owing to health crisis is slowly gaining popularity, amidst expected travel bubble scenario with selected nations including New Zealand and Thailand.

Moreover, Buy-Now-Pay-Later service provider, Afterpay Limited (ASX: APT) saw a significant increase in digital payments not only concerning the domestic market but also overseas growth. Reaching over five million active US customers significantly highlights its expansion potential in the international markets. Besides, Hong Kong-listed Tencent Holdings Limited became a substantial holder in the company. 

Smart Diversification

While the recession is depressing for the market, it affects some industry more than the others. Investors can take exposure to different defensive and growth industries to build the portfolio with less inherent risks, as per risk appetite and risk expectations.

However, the process of diversification can sometimes be a costly affair and pose a threat to draw upon substantial savings.

Maintaining a Margin of Safety

Benjamin Graham, ‘the father of value investing’ who advised on looking at the stock market as an imaginary “Mr Market” has asserted to ensure a margin of safety to safeguard the actual investments. 

As a principle of investing, the margin of safety implies purchasing stocks whose market value is less than the estimation of its intrinsic value. It would assist in avoiding downside risks inherent to the portfolio, conspicuously aiding in smoothly gliding through the dips. 

Several stocks that declined as market reaction to the lockdown news have recovered differently hinting at their tensile strength. 

As on 15 June 2020, Qantas Airways Limited (ASX: QAN) which gained around 27% in the past one-month on hopes of economic reopening, has suffered a stock decline ~37% on the Year-to-date basis. The company has secured additional debt funding of $550 million while reducing expenditures to survive through the crisis. 


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