Canadian defence, construction, and metal-mining stocks are poised to be among the biggest winners as Ottawa ramps up military spending and hastens the rollout of giant infrastructure projects.
According to Reuters, investors are saying the dual policy changes could spur the economy and now drive long-term development in areas associated with protection and industrial progress.
Already this year, stocks in some defence and construction-related firms have outpaced the broader Toronto Stock Exchange.
Bombardier Inc. — the aerospace and defence manufacturer — has more than doubled on renewed confidence that government investment will keep demand high for Canadian-made military and aviation equipment.
Ottawa accelerates military investment
Prime Minister Mark Carney has vowed to increase defence expenditure and meet NATO’s 2% of GDP target this fiscal year, five years ahead of schedule.
On Thursday, he announced the formation of a Defence Investment Agency, a new organisation aimed at speeding up Canada’s chronically slow defence purchase process.
Carney nominated Doug Guzman, a Royal Bank of Canada executive, to run the agency.
“It appears that Canada will fully support NATO spending, which will benefit many of the companies involved,” said Greg Taylor, chief investment officer at PenderFund Capital Management Ltd.
Canada presently invests approximately 1.4% of its GDP in the military, but Carney’s plan calls for significant increases in expenditure for personnel, submarines, planes, ships, armoured vehicles, artillery, and advanced radar and drone technologies.
A “buy Canadian” procurement policy seeks to ensure that federal expenditure favours domestic 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.
Winners in the defence supply chain
First Avenue owns Bombardier stock, and Madden identified Kraken Robotics Inc., a manufacturer of subsea sensors, batteries, and robotic systems, as another potential benefit of increased defence spending.
Canada has also agreed to NATO’s broader defence investment pledge of 5% of GDP by 2035, which includes funding for both core military capabilities and security infrastructure.
“The materials sector, we see as the main beneficiary here,” said Victor Kuntzevitsky, portfolio manager at Stonehaven, Wellington-Altus Private Counsel.
“A large portion of Canada’s commitment to NATO is in the mining sector—specifically, metals 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.”
Fast-tracking major infrastructure
Among these are multi-billion-dollar projects in natural gas, metal mining and a major container port itself, which Carney has targeted for fast-track approvals.
These initiatives are part of a larger push to broaden the base of the Canadian economy and move away from dependence on the US.
Construction and engineering companies, for example, AtkinsRéalis Group Inc., WSP Global Inc. and Stantec Inc. would benefit from a more simplified assessment process, as would heavy equipment supplier Toromont Industries Ltd. and uranium producer Cameco Corp.
The construction of a small modular nuclear reactor in Ontario is among the initiatives that could be accelerated, signalling Ottawa’s long-term commitment to diversification of energy supply.
A cautious but optimistic market
Although a majority of the potential projects will take decades to develop, investor sentiment regarding government policy has become more favourable.
Wider market circumstances and the prices of many commodities will also play a role in returns, leading to some investors taking a wait-and-see approach.
However, there is a real sense of movement in Ottawa’s new economic approach. “We are seeing tangible optimism around the Canadian government policy, which is aimed at encouraging economic growth,” said Kuntzevitsky.
“You’re really seeing that the Canadian government is recognising the significance of being able to export our vast commodities to global markets.”
The next decade could witness a reshaping of the Canadian industrial landscape, rooted in defence manufacturing, mining, and construction, as Canada expands defence spending and means to accelerate its infrastructure agenda.
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