Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 507

The companies well placed to weather an economic storm

The Australian equity market was almost at an all-time high when the RBA began lifting interest rates a year ago to rein in inflation. While initially falling over 10%, ten hikes and 3.5% later the equity market is once again back near its highs. Such a steep rise in interest rates drives the cost of capital higher for companies and should result in lower valuations for assets such as equities while earnings should be impacted by the resulting slower growth.

However, the market appears to be shrugging this off, focusing on the continued strength of the economy, data suggesting inflation has peaked and the fact the RBA paused raising rates this month. Inflation may have peaked, but the core is elevated well above the RBA target range, meaning that rates are more likely to go up than down, potentially sending the economy into recession.

Inflation remains a major problem globally and as we know, the policy response of higher interest rates operates with long and variable lags. There is likely more economic pain to come, and data releases will continue to be heavily scrutinised and have a larger than usual impact on market direction.

In this environment of heightened uncertainty combined with the market trading near its highs, we believe it’s particularly important to be clear where you can add value when making investment decisions. For stock selection this means focusing on company fundamentals and seeking those that are insulated as much as possible from unpredictable macroeconomic risks and able to weather an economic storm if required.

Companies with the trifecta

Three key factors to focus on in identifying these types of companies are industry structure, competitive advantages, and financial resilience.

Regarding industry structure, it could be a company that operates in an industry with defensive earnings streams such as healthcare, supermarkets or telecommunications. Or it might be in an industry which has cyclical characteristics but is highly fragmented allowing the company to achieve good growth despite a downturn, by taking market share.

The second factor to assess is the company’s competitive advantage. Companies with a strong competitive advantage tend to have pricing power, allowing them to pass on cost increases to protect their profit margin in a high inflation environment.

The third characteristic to seek out is financial resilience. This means little or no debt, good cashflow generation and a return on shareholders capital higher than the cost of capital to create value for shareholders longer term.

CSL remains compelling

An example of a company that ticks these boxes would be CSL Limited (ASX:CSL). Its primary business is the production of life saving plasma derived products to treat rare diseases. The industry does not experience reductions in demand linked to the economy and indications for the use of its products are growing.

Key competitive advantages are its scale and production processes which make it the most efficient and lowest cost producer and the capital investment and FDA approvals required to operate in the industry provide high barriers to entry. Given the relatively niche nature of its products and the diseases they treat, CSL benefits from being a price maker rather than price taker.

On the financial front, debt levels are higher than usual due to the recent acquisition of Vifor but are still moderate and can be paid down quickly from free cashflow. In addition, CSL has consistently earned a return on invested capital well above its cost of capital.

Source: Morningstar

Corporate Travel Management ticks box too

Another perhaps less obvious company that fits the resilient category is Corporate Travel Management Ltd (ASX:CTD). It operates in the business travel industry, which is exposed to economic cycles, however given the fragmented nature of the industry, it has the potential to grow through the cycle by taking share from smaller players and winning new clients, including those whose company travel was previously unmanaged.

It also ticks the financial resilience box. It did not need to raise capital for survival during the Covid-19 period, it generates good cashflow, has no debt and outside of the pandemic, earns a healthy return on capital.

Source: Morningstar

These are just two examples of companies that are likely to be resilient in a downturn. Overall, while macroeconomic noise such as changes in interest rates, geopolitical tensions, or economic slowdowns can create short-term market volatility, it can also provide opportunities for patient investors who are willing to do their research and invest for the long term.

 

Kelli Meagher, CFA is a Portfolio Manager at Sage Capital. This article contains general information only and does not consider the circumstances of any investor.

Sage Capital is an investment manager partner of Channel Capital, a sponsor of Firstlinks. For more articles and papers from Channel Capital and partners, click here.

 

  •   3 May 2023
  • 2
  •      
  •   
2 Comments
Frankly
May 06, 2023

It is remarkable how the stockmarket is ignoring the signs of a coming recession, impact of higher rates on consumers and companies, lower rates priced into bonds but equities rushing ahead, especially tech. Either bonds or stocks are wrong and in my experience, it's usually stocks.

Mark
May 07, 2023

Not really, time in the market is more important than timing the market.

Timing the top and bottom of the market is near in impossible, selling triggers a CGT event so the drop needs to justify this. Selling also resets the 50% CGT exemption after 12 months.

Blue Chip dividend paying stocks may dip but the dividends themselves are generally more stable so if relying on income, one could be better off just holding firm and taking the income.

Not all sectors cop a hiding in recessions either so being invested in more recession resilient stocks is less a concern.

Recessions are typically correlated with high unemployment, Australia's current economic situation does not highlight any impending High Unemployment situation.

We may get the headline 2 negative quarters of growth definition of recession but not the other associated conditions related to recessions.

Then there is if course typical government intervention when recession is confirmed.

USA is likely to fall into recession before Australia and while past performance is no guarantee of future performance, Australia will likely follow 18 months to 2 years later as has been typical of past US recessions.

 

Leave a Comment:

RELATED ARTICLES

Is the market’s recession conviction warranted?

UniSuper CIO shares his reflections on the 2025-2026 financial year

It’s economic reality, not fear-based momentum, driving gold higher

banner

Most viewed in recent weeks

Why have Australian living standards 'fallen' and how do we fix it?

For the last few years there has been much talk of a 'cost-of-living' crisis in Australia and of 'falling living standards'. Lately this has flared up again with the pickup in inflation resulting in a renewed fall in real wages.

Will you run out of money in retirement?

Fear of running out has become a defining retirement anxiety. Why do some retirees die with substantial wealth while others deplete their nest egg? Evidence suggests the answer is more complicated than we think. 

Four options for an income investor’s next dollar

What if Australia’s golden age of dividends is ending? Rather than overhaul your portfolio, it may be worth considering where new capital can work harder. I discuss four income strategies and the trade-offs behind each.

The investment that sidesteps the new tax traps

Tax rules have changed, but many investors are still using yesterday’s strategies. Insurance bonds may offer advantages for those seeking greater control, tax efficiency and certainty about their wealth.

Welcome to Firstlinks Edition 674 with weekend update

What begins as appetite, grows into excess and ultimately ends in spectacle. Millions of investors just discovered this the hard way.

  • 6 August 2026

Testamentary trusts have secured the CGT exemption

Treasury’s latest CGT reform draft delivers a win for testamentary trusts and deceased estates, exempting estate-derived gains from the 30% floor. However, questions on death and divorce rollovers remain unresolved.

Latest Updates

Retirement

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

SMSF strategies

Who really loses from the SMSF borrowing ban?

The ban on borrowing to buy residential property inside a self-managed super fund was framed as closing a loophole for the wealthy. Yet ATO data suggests its effects may be felt more heavily on members with moderate balances.

Investment strategies

The investing rule that explains the next market crash

What if investment success depends less on picking the right assets and more on understanding the decisions of other investors? A principle borrowed from game theory offers a different perspective on markets.

Investment strategies

Gold: should you own the metal or the miners?

Gold is back in the headlines but investors may be asking the wrong question. Before deciding where prices are headed next, it's worth considering whether the investment you choose will deliver the outcome you're actually seeking.

Fixed interest

Global bonds markets are hiccupping

For decades, investors looked the other way as government debt ballooned. But a reckoning may be beginning. Bond markets are stirring and the consequences could reach far beyond markets into everyday life.

Property

Why investors are looking beyond traditional property sectors

A little-known corner of the property market may be quietly benefiting from powerful demographic and healthcare trends. Could this specialised sector offer investors something increasingly difficult to find: enduring demand?

Retirement

Retirement in reality - 6 months in

Is retirement really an identity crisis, or is something else at play? New insights challenge conventional thinking and reveal why some retirees struggle to fully embrace life after work.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.