Australian Housing and Defence Sectors: Above-Average Growth Expected

As analysts, we hold a positive perspective on the potential trajectory of the Australian market, especially on fast-growing small cap stocks. Despite the unpredictable and event-filled recent history of global equity markets, certain Australian sectors stand out. The Housing and Defence industries, in particular, show solid promise for above-average performance in the upcoming years.

Let’s take a closer look at where the potential lies in the equity market. One key area is the Housing sector, where an upward trend in property prices coupled with anticipated upticks in approval rates is foreseeable. A couple of decisive actions from the Reserve Bank of Australia (RBA) have laid the groundwork for this projected rise.

The RBA has implemented two reductions in interest rates since their peak in late 2023. The latter reduction arrived during the May committee meeting and saw a further slash of 0.25%, bringing rates down to 3.85%. Subsequent to these changes, a promising upward trend in national auction clearance and house prices has been observed.

Shouldering into the RBA’s target range, current annual headline inflation forecasts are now anticipated to induce additional cash rate cuts over the next year to a year and a half. Policies introduced by the government to bolster housing supply and affordability are designed to spur additional growth for businesses within the sector.

Certain subdivisions within the Housing sector are poised to reap the benefits of these anticipated circumstances. Areas such as the construction & development sector, which includes land release and construction, and household retailers dealing in hardware, furniture, floor coverings, and bedroom products, are predicted to enjoy significant growth.

Additional contributions to economic growth within the sector are expected through infrastructural developments related to the Brisbane 2032 Olympics. The creation and improvement of venues for this major event should stimulate economic activity region-wide, particularly in Queensland, and well into the future.

Now, the highlighted stocks within the Housing sector. These include Mirvac (MGR), Stockland (SGP), Australian Finance Group (AFG), Cedar Woods Property (CWP), Peet (PPC), Maas (MGH), and Wagners (WGN), each of which finds itself well-positioned within the evolving landscape of the sector.

In addition to Housing, there’s distinct growth potential visible in the Defence Industries. Factors such as escalating geopolitical tensions in the Indo-Pacific region suggest that domestic defence spending will see a notable surge in the medium to long term.

An anticipated rise in additional expenditure aimed at construction of vital infrastructure and bolstering security is set to benefit an array of companies. Those boasting defence engineering and construction capabilities are particularly well-positioned to thrive in this environment.

Indeed, increased investment in the Defence sector is not only beneficial for the industries directly involved. Subsidiary sectors, and the broader economy as a whole, can also profit indirectly from the momentum. The injection of capital into these industries may lead to job creation, further infrastructure development, and the advancement of technological capabilities, offering benefits far beyond the sector itself.

Given this, sectors such as the previously mentioned small cap companies, especially those with a footprint in the defence engineering and construction space, could see sizeable profits. The growth potential for this sector is teeming, particularly in light of the evolving geopolitical situation, and the subsequent Defence spending that is expected to result from it.

When we look at specific equities in the Defence sector expected to perform well under these circumstances, we find Downer EDI (DOW), Service Stream (SSM), Ventia Services (VNT), Veem (VEE), Austal (ASB), Codan (CDA), Electro Optic Systems (EOS), and Droneshield (DRO). These companies are well-poised to capitalize on the anticipated developments in defence spending.

In conclusion, it’s our belief that, despite the ongoing volatility in the global equity markets, there are certain sectors within the Australian market that present a robust outlook. Both Housing and Defence stand as two such industry sectors, each poised for above-average growth over the next several years.

The Housing sector, boosted by government policy and the upcoming Brisbane 2032 Olympics, along with the Defence sector, underpinned by escalating regional geopolitical tensions, both present unique opportunities for growth. Indeed, for investors with a keen eye on the Australian market, these sectors and their affiliated stocks are worthy of close attention.

While no market performance can be guaranteed, we believe there are resonating signs of potential profitability within these two sectors. Investors are thus encouraged to closely monitor these markets for further developments, and consider these sectors as part of any comprehensive investment strategy within the Australian market.