Reading time: 5 minutes
The re-election of the LNP Morrison Government appears to be providing a timely “shot in the arm” for the Australian share market. This note suggests the ensuing policy certainty with regard to taxation is also particularly beneficial to high-yielding local shares able to offer attractive franking credits.
Certainty around dividends and franking
With feared changes to dividend imputation (were the Labor Party to have won the election) now removed, many high income Australian stocks with attractive franking credits will likely find renewed favour among local investors. This is especially so given the growing risk that the Reserve Bank of Australia appears set to cut the official cash rate in coming months, which should reduce the returns available from traditional bank deposit and bond investments.
Due to the improved certainty with regard to economic policy, especially concerning taxation and housing, we expect the election outcome will result in improved business and consumer confidence in coming months.
Fiscal stimulus to come
Apart from a general lift in confidence, the newly elected Government is also offering specific new fiscal stimulus.
Tax cuts likely to be legislated in June will deliver $1,080 per year for individuals earning between $45,000 and $90,000 at an annual cost of $7.2 billion. According to Commonwealth Bank estimates, this is equivalent in economic stimulus to two 0.25% interest rate cuts. Further tax cuts are scheduled in coming years, including an increase in higher-income tax thresholds and elimination of the 37% income tax bracket, resulting in 94% of taxpayers eventually facing a tax rate of no more than 30%.
The Government also promises to lift its 10-year infrastructure spending budget from $75 billion per year to $100 billion. The OECD estimates that for every $1 invested in public spending, GDP is boosted by $1.10 to $1.30.
The BetaShares Legg Mason Equity Income Fund (managed fund) (ASX Code: EINC)
One fund we believe is well-positioned to benefit from any improvement in investor confidence with regard to the share market, and especially the greater certainty concerning franking credits, is the BetaShares Legg Mason Equity Income Fund (managed fund) (ASX Code: EINC).
EINC invests in an actively managed portfolio of income-oriented Australian shares, which are carefully selected by an experienced and award-winning investment manager, Martin Currie. In particular, the Fund aims to provide an after-tax income yield above the S&P/ASX 200 Index while also growing this income above the rate of inflation. The Fund seeks to optimise after-tax returns, such as through maximising exposure to franking credits where appropriate, which can then be distributed to end-investors.
As at 30 April, EINC had a 12 month forecast gross portfolio yield of 7.0% p.a.1
Stocks currently held by the Fund that could potentially benefit from the election result include:
- Medibank Private (MPL) – The Government will not place a low cap on health care premiums. This should be a positive for Medibank as some analysts had assumed much lower premium increases under a Labor Government.
- Telstra Corporation (TLS) – The Government will most likely retain its ban on Huawei supplying software and telecommunication equipment into the Australian market. We have already observed that this policy means that TPG will no longer proceed with a fourth mobile network, which should benefit Telstra.
- Banks – The Government has already announced that the recommendations from the Royal Commission will be implemented. Under a Labor Government, we had expected a more difficult relationship with the regulators, so the banks could benefit from the election outcome.
- Retailers – The boost from tax cuts and improved consumer confidence should benefit Harvey Norman (HVN), JB Hi-Fi (JBH) and the discretionary shopping centres.
- Housing – With no changes to negative gearing, the housing market may well show some improvement after a lot of uncertainty leading up to the election. New home buyers will also be a beneficiary of the new $500 million guarantee.
*This is information is based on analysis from Martin Currie Portfolio Manager, Will Baylis. The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.
1. The yield forecast for the next 12 months is calculated using the weighted average of broker consensus forecasts of each portfolio holding and research conducted by Legg Mason Australia, and excludes the fund’s fees and costs. Actual yield of EINC may differ due to various factors, including changes in the prices of the underlying securities and the number of units on issue. Neither the yield forecast nor past performance is a guarantee of future results. Not all investors will be able to benefit from the full value of franking credits.