SMSFs, stocks to be hit by super changes: Credit Suisse

Changes to the super system are bad news for SMSFs and the local sharemarket, but property-focused stocks could win big.

Surprise changes to Australia’s superannuation system revealed in the Federal Budget are bad news for the million Australians who self-manage their super funds and will likely hit stock values on the local sharemarket, says respected Credit Suisse analyst Hasan Tevfik.

The changes could also see some of the $600 billion held in self-managed super funds exit their holdings in equities and start pouring into the property market, which may reignite the frothy housing market.

“If there was a single theme emanating from the budget it was ‘bad for selfies’,” Mr Tevfik said. “It seems the budget is trying to displace, what we consider, the backbone of the Aussie equity market.”

“By itself, the budget should be negative for equities given the considerable change to superannuation,” Mr Tevfik said.

The Turnbull Government’s first budget flagged four changes to Australia’s $2 trillion superannuation system on Tuesday, slated to come into effect from July next year. Lifetime non-concessional cap contributions will be limited to a total of $500,000, whereas before there was a limit of $180,000 per annum. The annual concession cap will be lowered by $5,000 to $25,000 for people less than 50-years old, while for people aged over 50 it will be reduced from $35,000 to $25,000. Meanwhile, top earners will be hit with a higher tax rate on super contributions and there will be a limit brought into the pension phase of $1.6 million.

While some of the changes will support lower income earners and women, Mr Tevfik said the reforms would clearly limit the ability of self-managed super funds to pour large amounts of money into their pension pools. With selfies owning around 17 per cent of the Australian stockmarket, and buying around $10bn to $15bn worth of equities per year, making them our biggest marginal investor, the changes will likely be a negative for the equity market.

“We expect less money flowing into the Australian pension pool, less money managed by selfies and less money flowing into Australian equities,” he said.

At the end of last year, official data put the average balance of Australia’s one million self-managed superannuation funds at more than $1m, after a growth rate of 23 per cent over the past five years. SMSFs hold more assets than those held in retail super funds, with nearly $600 billion in investments.

“The changes are also likely to raise the complexity of superannuation to the point that many future retirees withdraw from this form of saving as much as they can,” Mr Tevfik said.

Equities funds managers should be worst hit by the changes, given the likely reduction in self-managed super funds’ desire for holdings in shares. But this means there could be renewed demand for property as a tax-effective asset for retirement, which would likely see investment in property continue to boom.

And while most equities will get the raw end of the deal, property-focused stocks should be a winner from the government’s commitment to infrastructure spending on key projects in Western Australia, Victoria and Queensland. Building and construction materials firms Adelaide Brighton and Boral were the most likely to benefit, Mr Tevfik said.

“While the budget provides small positives for Aussie equity investors we think the changes to superannuation leave our market worse off,” he said.

Mr Tevfik also said the light-touch budget should see more cuts to the official interest rate.

Scott Morrison’s decision to run a “fairly neutral” budget will put further pressure on the Reserve Bank of Australia to cut interest rates even further, despite easing the cash rate to a new record low of 1.75 per cent on Tuesday afternoon before the budget was handed down, Tevfic said.