By Fergal Smith
TORONTO (Reuters) -Canadian defense, construction and metal mining shares stand to benefit as Ottawa commits to increased military spending and the speeding up of major infrastructure projects that could boost the economy, investors say.
Shares of some of the companies in these sectors have already outperformed the broader Toronto stock index so far this year, including aerospace and defense company Bombardier Inc, which has more than doubled.
Canadian Prime Minister Mark Carney has vowed to boost funding for the armed forces and hit NATO’s initial military spending target of 2% of gross domestic product this fiscal year, five years earlier than promised.
On Thursday he launched a new Defence Investment Agency aimed at speeding up Canada’s notoriously slow defense procurement, and tapped Doug Guzman, an executive from Canada’s largest bank the Royal Bank of Canada, to run it.
“It seems like Canada is going to be fully on board with that NATO spend and that’s going to be good for a lot of these companies that are related to that spending,” said Greg Taylor, chief investment officer at PenderFund Capital Management Ltd.
Carney has also identified a number of projects for fast-track approval, including those that would increase natural gas production and expand both metal mines and a major container port, as part of a campaign to diversify the economy and reduce reliance on the United States.
Canada now spends about 1.4% of GDP on defense. It will boost pay for service members and buy new submarines, aircraft, ships, armored vehicles and artillery, as well as new radar, drones and sensors, Carney has said. It will also introduce a new policy to ensure the federal government buys from Canadian suppliers.
“In light of this elbows-up stance that our country and many others seem to be taking these days, to the extent possible we’ll be trying to keep some of those dollars at home,” said Brian Madden, chief investment officer at First Avenue Investment Counsel Inc, referring to a hockey term for self-protection.
First Avenue owns shares in Bombardier. Kraken Robotics Inc, which produces subsea sensors, batteries and robotic systems, is another company that could benefit from stepped-up defense spending, Madden said.
Canada has further agreed to NATO’s new defense investment pledge of 5% of GDP by 2035, which includes 3.5% of GDP for core military capabilities and 1.5% for defense and security-related infrastructure.
“The materials sector, we see as the main beneficiary here,” said Victor Kuntzevitsky, a portfolio manager at Stonehaven, Wellington-Altus Private Counsel.
“As you read through what the Canadian commitment is to NATO, a large percentage of it is the mining area, specifically metals that are required for the military and industrial complex. So anything that can help with permitting, allowing the material companies more easily and quickly and cheaply get those metals out of the ground, will help.”
A more streamlined assessment of nation-building projects would boost prospects for construction and engineering firms such as AtkinsRealis Group Inc, WSP Global Inc and Stantec Inc, while heavy machinery company Toromont Industries Ltd and uranium producer Cameco Corp could also benefit, investors say.
The building of a small modular nuclear reactor in Ontario is one of the projects under consideration for fast-track approval.
The projects are long-term in nature, which has some investors taking a wait-and-see approach, and government policy is not the only factor driving these stocks. Still, it could raise their upside.
“We are seeing tangible optimism around the Canadian government policy which is aimed at encouraging economic growth,” Kuntzevitsky said. “You’re really seeing that the Canadian government is recognizing the significance of being able to export our vast commodities to global markets.”
(Reporting by Fergal Smith; Editing by Caroline Stauffer and Shri Navaratnam)
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