Invest where the government spends

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

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