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Investors should be careful of stocks that rely on the government

The share market is full of risks and reasons why you shouldn’t invest. There will always be something that could stop you from investing – a possible pandemic like SARS or Ebola, perhaps Donald Trump’s trade war or maybe the latest goings-on in Europe.

All of these issues die down after some time. Ukraine, Russia, ISIS, North Korea and so on – they all are resolved one way or another. And the share market, as a whole, keeps climbing.

However, there are individual risks with each business that you need to think about when buying a share. The chance of a disease wiping out all of Tassal Group Limited’s (ASX: TGR) salmon is small, but if it happened then the company could be in trouble.

It’s unlikely that every retail customer would start buying all their products online, but that’s a growing risk to the Harvey Norman Holdings Limited (ASX: HVN) business model.

One central risk that can affect lots of different shares in different ways in the government. The governments in Australia (state and federal) spends vast amounts of cash on various categories, or unlocks potential projects for businesses. It can be a boon for businesses that can latch onto that expenditure. Just look at how well Lendlease Group (ASX: LLC) and Transurban Group (ASX: TCL) are doing from it.

However, the government expenditure tap is essential. The tap can be slowed, or even stopped. Nearly all of our healthcare businesses rely on the government increasing the expenditure to continue growing profits. NIB Holdings Limited (ASX: NHF), Medibank Private Ltd (ASX: MPL), Ramsay Health Care Limited (ASX: RHC), Japara Healthcare Ltd (ASX: JHC) and Primary Health Care Limited (ASX: PRY) are just a few reliant on government funding.

Citadel Group Ltd (ASX: CGL) and G8 Education Ltd (ASX: GEM) are another two to rely on a supportive government.

Foolish takeaway

If the government decides to slow down the funding increases, then it can turn sentiment about an industry right around. This isn’t to say you should avoid those businesses, but I think it’s important to consider that being government-related can be bad for a business as well as a positive.

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Motley Fool contributor Tristan Harrison owns shares of JAPARA DEF SET and Ramsay Health Care Limited. The Motley Fool Australia owns shares of Citadel Group Ltd. The Motley Fool Australia has recommended NIB Holdings Limited and Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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