Budget spending gives investment outlook a lift

The large spending measures announced in Tuesday’s budget by the federal government — an estimated $64 billion over the next two years — could give a much-needed boost to domestic investment opportunities.

The budget is generally getting the thumbs up from investment analysts and economists as a means to provide short-term stimulus until the global economy recovers. For investing, this sentiment is the same. There can be a small domestic upswing in performance for sectors that serve some of the major projects announced by the government, but it’s the combined might of similar budgets being proposed across the developed world that will be the trigger for recovery.

“Clearly this budget is meant to encourage confidence and restore the confidence of consumers in general. Obviously there is a need to encourage spending. That’s the whole point of Keynesian economics and the whole point of what this type of fiscal policy is supposed to do,” says Paul Vaillancourt, senior vice-president and director of portfolio strategy for Franklin Templeton’s managed investment solutions.

Peter Drake, vice-president of retirement and economic research for Fidelity Investments Canada, says the infrastructure spending could provide some immediate investment opportunities.

“The announcement of $500 million to help computerize Canadian health records — that’s a big deal. That has the opportunity to reduce costs and create efficiencies in the Canadian healthcare system, and that’s a big deal,” he says “It’s something that is absolutely necessary to do but it’s a difficult and costly job. Some companies could do well out of that.”

Drake notes the big expenditures will likely be in construction projects. He emphasizes that, while the money is earmarked, ultimately the success of these projects will lie in their execution.

“Will this do something for the general market environment? I think it will. This provides economic growth, and certain companies are going to profit and that’s clearly good for investors. The challenge is execution. We need execution now to get the projects done now, quickly, and execution down the road to get rid of the deficit,” he says.

Vaillancourt believes Canada’s resource sector in particular will benefit from infrastructure spending.

“Canada is in a good place to be right now. You’ve got infrastructure spending — well, for that to work you need natural resources and you need engineering. Canada should benefit from that. Ultimately in return of the growth in the world economy, they, too, are going to need natural resources, so Canada should continue to benefit,” he says.

When you factor in globally the amount of money being put toward infrastructure, it can be a little jarring. In fact a report from CIBC World Markets estimated between $25 and $30 trillion of fresh infrastructure investment will be pumped into the global economy over the next two decades.

“Governments all over the world are buying jobs,” says Benjamin Tal, senior economist at CIBC World Markets. “And the infrastructure sector is where many of these jobs will be created. When it comes to creating jobs and stimulating activity, infrastructure spending is a much more effective tool than tax cuts.”

That amount of money can send inflation watchers into a panic. Eventually that bill comes due. Vaillancourt says the amount of infrastructure money that was announced yesterday being pumped into the economy is necessary to stave off a very real deflationary threat.

“We are definitely in the camp that deflation is a bigger threat, certainly in the short term, than inflation is in the long term. [Bank of Canada Governor] Mark Carney says deflation is not a real threat; clearly when you’ve got major assets such as real estate equities plummeting, it’s tough on confidence and morale and so on,” he says. “Governments in Canada and around the world have used the levers at their disposal, whether it’s monetary policy — such as lowering rates worldwide — in a co-ordinated fashion, and now we’re seeing fiscal policy become very accommodative.”

Eventually, a switch will be hit, Vaillancourt says, and an inflationary environment will likely be created. He doesn’t view that as a negative, and it’s most likely a positive for Canada, which will run it’s deficit at a much smaller debt-to-GDP ratio — about 1.5% to 2% of GDP in 2009 — than other nations and is a major producer of commodities that benefit from inflationary cycles.

“All of these measures are encouraging. The economy is still deteriorating with decreased confidence in consumer sales, and higher unemployment numbers. These are lagging indicators,” he says. “Headlines show a deteriorating economy but then you have the financial markets, seem to have formed the bottom and are rehabilitating themselves slowly but surely. The situation in the financial markets is not as bad as it was four months ago. That’s a positive sign.”

Vaillancourt says his investment team has actually started to tactically add to the asset classes that will benefit from the spending.

“Technical indicators are encouraging right now. Volatility indices are showing signs of improvements and are favouring more equities now than they were a few months ago,” he says. “We’ve added to our risk assets [i.e. equities] in the last few weeks; we’ve added to corporate bonds and certain sectors in Canada, such as energy and some natural resources. In the U.S, we think global multinationals will benefit from the massive stimulus plan from President Obama.”

Drake says he’s confident that the central banks will be able to manage the switchover from fighting deflation to inflation management.

“Inflation is a monetary phenomenon and that’s something people forget. The single most important decision Ben Bernanke or Mark Carney is likely to make in his career is knowing when to change monetary policy,” he says. “In other words, picking the time when the combination of fiscal stimulus and monetary policies that are in place now have done enough to get economies and financial markets back on track. Their next challenge is to ensure inflation doesn’t become a problem.”

(01/28/09)