In­vest where the gov­ern­ment spends

In­vestors can ben­e­fit too from the gov­ern­ment's am­bi­tious in­fra­struc­ture pro­jects

Money Magazine Australia - - CON­TENTS - Ross Green­wood Ross Green­wood is Chan­nel 9’s fi­nance editor and Ra­dio 2GB’s Money News host.

Asub­tle mes­sage was sent to all in­vestors in the fed­eral bud­get. The hint is that eco­nomic growth is go­ing to pick up, that prof­its and wages should im­prove and, if these pro­jec­tions are cor­rect, that in­vest­ment mar­kets should re­main ro­bust for the com­ing three years.

In other words, it was a buy sig­nal from the gov­ern­ment.

The first hur­dle to clear to take heed of this mes­sage is ba­sic: do you be­lieve the in­for­ma­tion or not? Many won't. The key in­for­ma­tion is this: eco­nomic growth is fore­cast at 2.75% this financial year fol­lowed by three suc­ces­sive years with 3% growth. The long-term trend of eco­nomic growth is 3.2%. So you can see this is not stel­lar but it's OK.

The other fore­cast that many have ques­tioned is the ex­pected rise in wages (the gov­ern­ment col­lects around half its to­tal tax rev­enue from PAYE tax­pay­ers, that's why this is im­por­tant). In the past year wages growth has been at all-time recorded lows: be­low 2% an­nu­ally in some months. This financial year the gov­ern­ment fore­casts wages growth at 2.5%, 2.75% next year, 3.25% in 2018-19 and 3.5% in 2019-20. The ques­tion is: what will drive this wages growth, es­pe­cially if the econ­omy does not take off? In other words, there is risk in the fore­cast.

There are other rea­sons to doubt the gov­ern­ment (which uses Trea­sury fore­casts): ris­ing debt, a wor­ry­ing in­ter­na­tional en­vi­ron­ment, a di­vided par­lia­ment. To achieve the eco­nomic growth on which the bud­get is pred­i­cated, the gov­ern­ment needs to pass im­por­tant leg­is­la­tion through a frac­tured se­nate.

But while the debt is ris­ing (gross debt will top $600 bil­lion, ac­cord­ing to the bud­get) and the gov­ern­ment is spend­ing, the en­vi­ron­ment for in­vestors will be OK. It's when the spend­ing stops – if that's ac­com­pa­nied by a slow­ing in busi­ness spend­ing, that's the time you want to be sit­ting on the stock­mar­ket side­lines.

In a less dra­matic man­ner than Don­ald Trump, the gov­ern­ment is re­ly­ing on mov­ing the econ­omy more quickly than it is on cut­ting spend­ing. As I have said to you many times be­fore, one sure way to make money is to fol­low gov­ern­ment spend­ing.

So from this bud­get, where to? First, cycli­cal stocks. Trans­port com­pa­nies, me­dia com­pa­nies, health stocks and in­fra­struc­ture are the key. They have all been ma­jor ben­e­fi­cia­ries from the bud­get, and their prof­its and share prices will con­tinue to grow while the gov­ern­ment is spend­ing.

Just look at the front page of its note about in­fra­struc­ture build­ing: $5 bil­lion for north­ern Aus­tralia in­fra­struc­ture; $261 mil­lion for the Perth freight link and $490 mil­lion for the For­rest­field-Air­port rail link; $6.7 bil­lion up­grad­ing the Bruce High­way in Queens­land; $200 mil­lion on the Ip­swich Mo­tor­way; $115 mil­lion of $5 bil­lion for the Western Syd­ney Air­port; $1.5 bil­lion for Vic­to­ria; and $400 mil­lion for the Mid­land High­way in Tas­ma­nia and, even­tu­ally, an­other $7.4 bil­lion (though some es­ti­mates al­ready say $10 bil­lion) build­ing the in­land rail pro­ject from Mel­bourne to Bris­bane.

This is se­ri­ous stuff and, im­me­di­ately, you can see the ben­e­fit to ce­ment com­pa­nies, la­bor hire, steel­works, road builders and con­struc­tion com­pa­nies that win the con­tracts. You might dis­agree with the spend­ing and debt the gov­ern­ment is in­cur­ring but you can­not ig­nore the eco­nomic im­pact it will have – on these re­gions, the com­pa­nies in­volved and their share­hold­ers.

But what about the debt, I hear you ask. Doesn't this make Aus­tralia a riskier coun­try in which to in­vest? Short an­swer: yes. But while the plan is on track, rat­ings agen­cies will hold the triple A credit rat­ing and global in­vestors will flock to Aus­tralia seek­ing the op­por­tu­ni­ties that are emerg­ing. The volatil­ity and po­ten­tial cap­i­tal losses will come if Aus­tralia loses its way on its path to a 2020-21 bud­get sur­plus of $7 bil­lion; or if a global shock hits mar­kets. But the chances of this are now per­ceived to be lower, with the VIX in­dex of volatil­ity in the Euro­pean mar­kets fall­ing to 24-year lows af­ter the French election re­sult. The US mar­ket has less volatil­ity and even the Aus­tralian mar­ket is close to the low­est volatil­ity mea­sure in five years.

So, for the mo­ment, the Goldilocks sce­nario for mar­kets is play­ing out. It won't al­ways be this way, so take it while you can. The gains might not be stel­lar but they will be re­li­able, es­pe­cially if you fol­low the gov­ern­ment's money.

The gains might not be stel­lar but they will be re­li­able

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