Investors have gone through the tech boom, the mining boom and the Chinese tourism boom. There was plenty of money to be made in stocks that rode these waves before each of these cycles turned.
The good news is that there is an opportunity to ride a new wave as another boom is about to start. Is your portfolio ready?
The latest boom is tipped to be in domestic infrastructure with the Australian Financial Review reporting that we are on the cusp of the biggest wave of public infrastructure spending in at least three decades with state and federal governments committing to spending nearly $100 billion in this financial year alone.
The Reserve Bank of Australia's (RBA) governor Philip Lowe pointed out this upcoming boom in a recent presentation. While he noted that incomplete infrastructure work stood at just under 6% of nominal gross domestic product (GDP) in 2017, this figure is expected to keep rising.
This infrastructure construction boom won't be short lived either. The AFR reports that transport projects alone are set to surge ahead for much of the next five years and will only peak in 2020.
It's easy to miss the green shoots of this boom as the market has been too focused on the negatives with low wage growth, high household debt, and rising regional tensions taking most of the spotlight.
This is the time to get yourself exposed to the expected spending boom in the sector and the obvious winners are construction and engineering groups that are directly involved in the construction of such projects.
One of the largest listed players in this field is the former Leighton Holdings construction group, now called CIMIC Group Ltd (ASX: CIM). It's an obvious one that comes to mind but the problem is CIMIC's shares look fully valued as it is trading at around a forward price-earnings (P/E) multiple of around 20 times after the stock jumped by around 50% over the past 12 months to $43.32.
It's also geographically diversified as it operates in over 20 countries. It is better to look at construction engineering groups that are more leveraged to the local economy to ride this boom.
A better proposition in my view is Lendlease Group (ASX: LLC). While it has offshore operations, it still generates most of its income in Australia and is heavily leveraged to infrastructure construction.
The stock is also better priced in my view despite running up over 30% in the last year to $18.00, which puts it on an estimated forward P/E of around 15-16 times.
It isn't in cheap territory but given management's track record, I believe it should trade at a comfortable premium to the market.
Another engineering group worth looking at is Downer EDI Limited (ASX: DOW). The stock is trading at around the same valuation as Lendlease on a P/E basis after increasing to $6.41 over the past 12 months, but its big exposure to transport and utilities infrastructure makes it an ideal stock to own when governments are looking to spend big on these projects over the coming years.
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