CGT, negative gearing reforms in federal budget look good for the ASX: UBS
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The news: The proposed end to the capital gains discount and negative gearing looks set to give Australian equities a relative boost, according to UBS, although the measures are unlikely to make a significant dent in future deficits.
The context: Speaking at a pre-budget media roundtable, UBS Australian equity strategist Richard Schellback said the proposed reforms would make equities “a more competitive investment space”.
“It’s because the current tax system and the structure that’s been in place, you know, for most of the last three decades, has relatively favored property,” Schellback said.
“Now, it’s not that the tax changes increase the expected returns on equities, but it means that favorable tax treatment that property once had placed equities at a relative disadvantage, and this has leveled the playing field.”
However, the removal of the capital gains discount would make growth equities “slightly less attractive from a risk/return point of view” when compared to income equities that are paying dividends.
“For income equities, a higher proportion of your total return is coming from the dividend payments that you receive each year, with less of the total return consideration coming from capital gains,” he said.
UBS ANZ chief economist George Tharenou said that the changes could be “an adjustment on the asset and credit cycle that could be quite material” but from a revenue raising perspective seems “not that big a deal”, with estimates ranging from $2 billion to $5 billion per year.
Tharenou noted, however, that the reforms could also help fight inflation by reducing investment sentiment, but it is unlikely to lead to a sharp drop in overall demand for home lending.
“What I’m concerned about would be a sentiment hit, at least a period of time where investors just ... reassess whether or not they’re willing to continue to buy,” Tharenou said.
“So obviously, your longer-term investment return could change with the capital gains tax changes annually. Cashflow dynamics on the negative gearing changes as well. So that’s the negative story, potentially material.”
When considering the broader budget position next week, Tharenou said that the Treasurer’s preferred measure of the underlying cash balance deficit is likely to come in as a beat to MYEFO forecasts on budget night.
But Theranou noted that “what matters for an assessment of the fiscal impulse is the headline deficit, because increasingly the spending by the Australian government is being counted as investments rather than operating”.
“And so, the headline deficit in this year and coming years will probably be larger still,” he said.
The source: UBS media reoundtable
