The sectors set to soar on government spending
Governments worldwide love to spend more money, and there are no signs that it will change any time soon.
Mentioned: Lockheed Martin Corp (LMT), Northrop Grumman Corp (NOC), General Dynamics Corp (GD), Droneshield Ltd (DRO), Electro Optic Systems Hldgs Ltd (EOS), Austal Ltd (ASB), VanEck Global Defence ETF (DFND), Axon Enterprise Inc (AXON), Technology One Ltd (TNE), Tyler Technologies Inc (TYL), Wagners Holding Co Ltd (WGN), Acrow Ltd (ACF), Ingenia Communities Group (INA), Lifestyle Communities Ltd (LIC), Gemlife Communities Group Stapled Units (1 Ord & 1 Unt - Gemlife Trusts) (GLF), Stockland Corp Ltd (SGP), Jacobs Solutions Inc (J), Fluor Corp (FLR), Vulcan Materials Co (VMC), Martin Marietta Materials Inc (MLM), SGH Ltd (SGH), CSL Ltd (CSL), ResMed Inc Chess Depository Interest (RMD)
Every time I go to Canberra, I marvel at it being clean, green and generally upper-middle class. It’s been that way for a long time and it’s no accident. Obviously, it houses federal public servants and has benefited from increased government spending, federal and local, since it was created. A bet on most things Canberra has been a one-way bet for 100 years, and I expect that to continue for the next 100 years.
Why? Because increasing government spending is one of the few secular trends that you can bank on. The federal government is running budget deficits and is projected to run those deficits over the next decade.
It’s not only here. The US government is spending trillions each year, running deficits that are the largest in a non-recessionary, peace-time world. Europe is similar, and Japan too.
Overall, governments worldwide love to spend more money, and there are no signs that it will change any time soon.
The downsides of this government largesse are widely known. Less discussed are the potential opportunities, so let’s do that here.
Defence and policing
Defence is an obvious one. At the start of his second term as US President, Donald Trump made it clear that the US wouldn’t continue to be the world’s policeman and he pressured other countries, especially Europe, to lift defence spending. The European Union has committed to increasing defence expenditure from under 2% of GDP to 5%. Naturally, European defence stocks have since gone ballistic (have a look at the share price of German arms manufacturer, Rheinmetall AG below).
Source: Morningstar.
US defence stocks have lagged. If you believe that government spending on defence will continue to rise in the US, and that there’s the potential for increased major power conflict in future, ie with China, then stocks like Lockheed Martin, Northrop Grumman, and General Dynamics look reasonable value. The beauty of these stocks is that they’re also resilient, generally outperforming during market downturns.
Source: Morningstar.
Australia has also committed to boost defence spending from around 2% of GDP to 2.4% by 2033-2034. Unfortunately, most of the stocks on the ASX have already factored in this news and positive headlines from overseas. Stocks like DroneShield, Electro Optic Systems, and Austal are worth monitoring, though.
Droneshield share price
Source: Morningstar.
Defence is a trendy theme right now, evidenced by the VanEck Global Defence ETF being up 97% over the past year to September! However, there still seems to be pockets of opportunity.
Policing and public safety also benefit from government spending. In Australia, there aren’t any stocks that I know of which are exposed to these areas. In America, AXON Enterprise, which created the taser gun and provides things like body cameras for police, is one company that has successfully ridden this trend.
Software
Software is a beneficiary of increasing government spending on technology. In Australia, Technology One’s enterprise software powers many local councils, and state and federal governments. The company has been a stellar performer on the ASX for a long time.
Technology One share price
Source: Morningstar.
In the US, Tyler Technologies, a software company with 95% of revenue from governments, has also been an amazing business in recent decades.
The Olympic Games in Brisbane
Thinking laterally, the lead-up to the Olympic Games in Brisbane in 2032 will bring with it plenty of government spending on new stadiums, transport systems etc. Suppliers are one way to play this. Construction materials company Wagners and scaffolding business Acrow have large exposure to south-east Queensland and are likely winners from this.
Wagners share price
Source: Morningstar.
Land lease communities
There are a growing number of retirees and housing is expensive, so more of them are taking up the option of land lease communities. With these communities, they own buy a home without the land attached, making it much cheaper. The businesses own the land, and get rent from the retirees, and the rent increases in line with the pension.
Stocks such as Ingenia, Lifestyle Communities, and Gemlife Communities offer exposure to this theme. Property developer Stockland is also aggressively growing its land lease portfolio.
Ingenia share price
Source: Morningstar.
Infrastructure and construction
This is more of a US theme. The Biden Government, and now Trump, have committed to a massive public infrastructure program, via the US Infrastructure Investment and Jobs Act, CHIPS Act, and Inflation Reduction Act. That will drive demand for materials and engineering.
American stocks that should capitalise on this tailwind include Jacob Solutions, Fluor Corp, Vulcan Materials and Martin Marietta.
In Australia, housing is one to watch. We’ve all heard about how we’re not building enough homes. Over time, governments will incentivise more construction and that could benefit the likes of SGH, owner of Boral.
SGH share price
Source: Morningstar.
Healthcare?
Australia’s population is ageing and that means more government spending on healthcare. However, the structure of many healthcare industries isn’t appealing. For instance, private hospitals and aged care suffer from burdensome regulation.
Healthcare insurers are potentially attractive, though the industry runs the risk of being restructured to allow more money to flow to private hospitals at the insurers’ expense.
There are lots of indirect beneficiaries from rising healthcare spending, like CSL and ResMed.
Overall, though, most of the healthcare industry gains from government spending though runs the risk of government intervention squashing returns on capital.
Ideally, you want the spending without the intervention.
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