It’s not just Labor’s franking credit threat that’s already sending investors to America
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Aussie investors are beginning to look offshore for stock market joy, in anticipation of a Labor electoral win killing off generous franking credit rules.
Annual returns for both the All Ordinaries and the Small Ordinaries are sitting around a measly 2 per cent — less than some bank accounts are paying — and it’s been generous franking credit rules, as opposed to generous dividends, that have kept many investors at home.
Fund managers such as Wilson Asset Management chair Geoff Wilson and Hamilton Wealth Management managing partner Will Hamilton have been popping up in the media saying investors will just go overseas.
But Matt Leibowitz, the boss of US investing app Stake, says the proof is in the data: they are seeing more people float into US securities, a country where companies don’t typically pay out dividends, citing the prospect of losing franking credits as the reason.
He says they are now looking for capital growth rather than dividends — the payouts of which have surged in the last six months in anticipation of the tightening of franking credit rules.
In Australia dividends are paid out of after-tax profit; franking credits allow the recipients to avoid paying a second round of tax on that money by using the credit for their other income.
A change in 2001 allows them to take the credits as a cash refund if they don’t pay tax or don’t have a tax bill.
Labor wants to stop these cash refunds.
Companies could pay out a bigger dividend rather than offer franking credits, but recipients would still have to pay tax on the whole sum.
But former ASX small cap investor Piara Singh says even if the franking credit rule remained the same, the returns in Australia just aren’t positive enough to tempt him.
“[US stocks] don’t pay dividends but their movements are much more positive,” he said.
“Whereas on the ASX the movements are not that great, especially with the small caps that I have.”
After being disappointed by the downwards motion of his $50,000 worth of investments in earbuds maker Nuheara (ASX:NUH), biotech Cynata (ASX:CYP), and fire retardant designer Alexium (ASX:AJX) made a few years ago, Singh headed to US markets in December 2018.
A $US40,000 spend on Netflix (his best return so far), Tesla, Berkshire Hathaway, and Microsoft has provided a $US10,000 return so far.
Netflix and Microsoft have been his best bets, followed by Berkshire Hathaway stock. Tesla is “just going up and down”.