Election result tipped to boost property, high-yielding shares
With some of the key features of the tax system likely to remain untouched following the Liberal election win, high-yielding shares and residential property may now see a boost, an economist predicts.
BetaShares chief economist David Bassanese said the surprise election result “unpenned many previously held beliefs and fears concerning Australia’s investment markets”.
Ms Bassanese said there are three key implications of the election result for investments.
Given the strong backlash against Labor’s proposed restrictions on franking credit refunds, it is likely this will remain an important investment opportunity for income-seeking investors.
“No future government is likely to risk making changes in this area unless part of a broader tax reform proposal,” he said.
“The preservation of these tax advantages naturally favours investments that offer high levels of franking credits, such as high-yielding Australian shares and hybrid securities.”
Another one of Labor’s proposals was to restrict negative gearing to newly built residential properties and not existing properties or other investment assets such as shares.
“While such a proposal might have encouraged a shift in investor interest toward new properties, the overall effect on the property market would likely have been negative – given existing properties would no longer benefit from negative gearing provisions, and even the tax advantages for new properties would not be transferable once they are re-sold,” Ms Bassanese explained.
“With this proposal gone, this source of lingering uncertainty for property and geared investments more generally, no longer exists. This should favour investments with either direct or indirect exposure to residential property activity, such as developers, landlords and sales agents.”
Mr Bassanese also noted that with proposal to halve the capital gains discount from 50 per cent to 25 per cent for assets purchased after 1 January 2020 and held for longer than 12 months, another important source of risk is removed for long-term investors seeking to benefit from solid capital returns over time.
More broadly, he predicts the economy may well receive at least a short-term boost due to a ‘relief rally’ in business sentiment and property markets.
While the Morrison government plans to implement tax cuts that, if enacted before 30 June, would provide a low and middle-income tax offset for some taxpayers of up to $1,080 once they file their 2018-19 tax returns, the Reserve Bank is still only forecasting overall consumer spending to grow by 2 per cent in 2019, and is forecasting only modest growth over the next few years.
“Accordingly, with inflation and wage growth likely to stay low, and the unemployment rate under upward pressure, the Reserve Bank still seems likely to cut the official cash rate by at least 0.5 per cent over the next six months or so, with a rate cut as early as June still quite possible,” Ms Bassanese said.
With the low rate environment set to continue, finding decent income returns will remain a challenge for investors, he said.