How smart investors are minting money by just tracking the govt

medium120690634When much of the investing community was chasing new-age stocks like Paytm and Zomato and losing their shirts, one section was silently minting money from an unexpected corner of the market. It mostly didn’t fall in either of the popular investment buckets — growth or defensive — which are driven by consumers. It was the one where the state invested.Over the past five years, the BSE Industrial Index has given a return of 440% against 150% for the BSE Sensex. The capital goods sector has been on a roll as the government has gone on a spending spree to build roads, urban transport and is incentivising manufacturing activity and green energy initiatives. Against this, the FMCG sector (92%), the IT sector (170%) and the banking sector (180%) have underperformed the broader markets. medium120690646For the longest time, fund managers have tracked consumers to understand consumption and spending of banks or corporates to comprehend the demand for IT companies. But they never really took government spending seriously. Over the past five years, it is the government that has become the biggest spender and any fund manager who has been tracking that has managed to get his portfolio right. The government has been a big buyer of gold and debt, spending on capital goods and even giving incentives and concessions to healthcare and software companies.Going forward, this phenomenon is only going to grow big. medium120690668On April 7, US President Donald Trump sent shockwaves across world markets after he imposed heavy tariffs on America’s trading partners, ushering a return to protectionism. As protectionism returns, government spending and policy will become an even more important driver of economic activity.It is a time when fund managers are tracking governments and trying to understand how they will behave towards business. Be it tariffs, policies or incentives, markets across the world are focusing on governments.But this is not really a Trump phenomenon. Five years ago, in a bid to curb the negative effects of the pandemic on the economy, many governments across the world became top spenders. From vaccines to debt, governments turned out to be active buyers. Some governments transferred money to people in the form of economic impact payments while others like India boosted spending on infrastructure projects.As consumption subdued during the pandemic, government investment became even more critical for supporting India’s growth trajectory. India’s gross fixed capital formation (GFCF) increased to 30.8% of GDP in FY24, compared to an average of 28.9% between FY15 and FY19 (pre-pandemic period).“Government capex (capital expenditure) has become very important not just in India but also across the world because most countries are looking to diversify their supply chain out of China,” says Mayuresh Joshi, head of equity research at William O’Neal. He adds that the government needs to incentivise industries to invest in backward integration to attract investment from countries looking to reorient their supply chains away from China.In the mid 1990s, it was very common for fund managers to talk about stocks like Hero Motors and TVS Suzuki and how they are stealing the thunder from Bajaj Auto. The hottest stocks were IT companies such as Infosys and Wipro.Later, FMCG and consumer companies were seen as the best bets in a market like India where the domestic consumption theme drove valuations. But over the past five years, the BSE FMCG Index has given some of the lowest returns and has underperformed the Nifty 50. On the other hand, capital goods, infrastructure, defence, PSU banks and manufacturing indices have outperformed the broader market. This is a phenomenon seen not only in India but also globally as government spending seems to be driving the stock markets.Mark Haefele, the chief investment officer of UBS Global Wealth Management, who advises on assets over $4tn, says, “What really works is buying what the government’s buying and because and what the government’s buying in size.”The current big problems are the five Ds, which are debt, deglobalisation, digitisation, decarbonisation and demographics, Haefele said, speaking on the Meb Faber podcast earlier this month. These are big problems, and which is why governments are spending big money to deal with these issues. medium120690687Take the case of gold, where central banks have been aggressively buying the yellow metal and prices on April 23 rose to over ₹1 lakh per 10g, the highest ever.“Central banks’ insatiable appetite for gold reached a significant milestone in 2024. Having added 712 tonnes in the first three quarters of the year, central banks bought a further 333 tonnes in Q4 to bring the net annual total to 1,045 tonnes… 2024 is the third consecutive year in which demand surpassed 1,000 tonnes — far exceeding the 473 tonnes annual average between 2010 and 2021, and contributing to gold’s annual performance,” the World Gold Council said in a press release in February.JP Morgan has predicted that the yellow metal could reach $4,000 per ounce (after touching a high of $3,500 on August 22) by mid-2026. The price of gold is expected to rise due to growing recession concerns, new US tariffs and worsening US-China trade tensions.Apart from spending on infrastructure, the government has boosted domestic manufacturing by providing sops via the production-linked incentive (PLI) scheme. The PLI scheme for electronics manufacturing, launched five years ago, has led to the doubling of electronics production from $48bn in FY17 to $101bn in FY23. Shares of Dixon Technologies have risen 20 times over the past five years.The government also liberally incentivised renewable energy projects. It has allowed for 100% foreign direct investment in these projects, gave preference to India-made solar photovoltaic cells and rationalised Customs duty for key components. As a result, India’s installed non-fossil fuel capacity has increased to 205.52GW or about 42% of the country’s total capacity as of November 2024. These initiatives have led to steep gains in shares of companies like Adani Green Energy, Inox Wind and Suzlon Energy over the past five years.The government’s capital expenditure on railways, too, has increased by 77 % over the past five years to ₹2.62 lakh crore in FY24 with significant investments in the construction of new lines, gauge conversion and doubling. This too has created many multibaggers in the capital goods and industrial space. These investments have led to stocks like Jupiter Wagons, IRFC, BHEL and Texmaco Rail & Engineering outperforming the index over the past five years.The same story is seen repeated across multiple sectors where the government has been investing or incentivising, be it infrastructure construction companies or electric vehicle or component makers. Over the past five years, shares of electric vehicle makers like Tata Motors and Mahindra have risen over 800-900%.So far, government investments and incentives have driven the stock market boom and now even the gold rush globally. As uncertainties around tariffs, de-dollarisation and weak domestic consumption persist, corporate investments are likely to be delayed. Thus, the government will have to continue being the biggest spender to foster higher economic activity. And investors might do well to follow this money trail to make the right bets.