Uncertain times for investors

Predicting future trends in sharemarkets is always difficult, but at present rising US interest rates and proposals to change the imputation credit system are increasing uncertainty for Australian investors.

Even though Australian short-term interest rates are unlikely to follow US rates upward, our sharemarket is strongly influenced by the sentiment of overseas institutional investors. If the increases in the US cash rates forecast by the Federal Reserve Board do occur, US sharemarkets now at near record levels could peak and even fall back as the yields available on alternative investments continue to increase.

Higher US interest rates reduce the attraction of Australian investments and increase the risk of capital losses for foreign investors if the Australian dollar continues to fall in value. Support for the Australian market in this situation will have to come largely from Australian investors.

The proposal to cease cash refunds of excess franking credits for up to 1.4 million share owners could, if introduced as proposed, depress share prices by as much as the 9 per cent estimated by an ANU economist. Coming at the same time as widely held franked dividend-paying bank shares are put under pressure from the banking royal commission, the loss of access to franking credits will reduce the attraction of owning many dividend-paying shares.

Capital gains tax considerations may reduce the incentive for some investors to sell, but overall the combined impact of lower demand from affected investors and selling to restructure portfolios will depress share prices. To date, given the uncertainty about what changes will be introduced, there hasn’t been widespread selling of shares paying fully franked dividends. Nevertheless, widely held bank and Telstra shares have been languishing in the market despite their high fully franked dividends. Investors are realistically being cautious about future yields. Even investors not affected by the proposed tax changes stand to benefit from holding off on purchases and, in some cases, short selling shares in companies likely to be affected by the tax changes.

The key message from this analysis is that Australian share prices could well be placed under considerable selling pressure over the next 12 months because of US interest rate rises and possible changes to the imputation credit system. If share prices do fall because of the tax changes, this will reduce the attraction of owning shares even for investors not directly affected by the changes.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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