Retiree investors told to brace for ALP policy portfolio hit

An election victory for the ALP would immediately hit retiree investors and a range of leading franked stocks, warns Citi.

Citi lists the franking credit policy as the first of the three most significant changes which could arrive with an ALP victory. Picture: Bloomberg

An election victory for the ALP would immediately hit retiree investors and a range of leading franked stocks including the banks, the big miners and Telstra, says global stockbroker Citi in a new report.

Calling the ALP the “clear frontrunner” in the election race, Citi’s research team suggests the ALP tax policies risk a “potential de-rating” of the wider Australian sharemarket including an instant reduction in the target price of bank shares of up to 10 per cent. The report also suggest house prices could be negatively affected.

The broker says retirees — especially the million Australians with Self-Managed Super Funds — will be hit hardest by the franking changes. While all investors — retired or not — will face “diminished demand for Australians shares relative to other investments”.

The ALP plans to scrap cash refunds retirees receive from franked shares without any plan for compensation. SMSF representative groups suggest retirees with franked shares receive on average about $6,347 a year under the system which has been in place for decades.

In fact, Citi lists the franking credit policy as the first of the three most significant changes which could arrive with an ALP victory along with plans for tax changes in housing which the broker suggests may have a “muted” effect in an already softer market and the ALP’s energy policy which may deliver “more wholesale price volatility”.

The report coincides with a resurgence of protest among retirees around the franking changes which are unprecedented and favour larger super funds which have already told members the changes will not affect them (larger funds can still use the franking credits system due to the complexity and scale of their investments).

The Alliance for a Fairer Retirement System, an umbrella group of superannuation stakeholders led by Professor Deborah Ralston, says about 70 per cent of taxpayers over the age of 75 receive franking credits. The AFRS this week backed a targeted campaign to highlight the franking issue in the Wentworth by-election.

Citi says bank stocks — generally 100 per cent franked — are the most heavily exposed investment sector with up to 20 per cent of shareholders receiving a franking credit refund each year. The broker also identifies BHP and Rio Tinto, two stocks which have been lifting their dividend policies in recent times, as potential losers in the changes. Within the broader market the broker suggests Telstra may “lose favour”.

In fact, Australian retail shareholders have already been moving out of Australian large cap stocks. Earlier this week, Commsec reported a 30 per cent lift in international share trading among local retail investors over the last six months.

Separately, the Citi report assesses the ALP’s planned changes to negative gearing and capital gains tax (CGT). Labour plans to restrict negative gearing to new houses and to cut the CGT discount applied after 12 months from 50 per cent to 25 per cent.

Citi remains considerably more sceptical about the reality of such changes ever coming to pass.

“These proposals would face significant resistance from housing industry groups and may not have sufficient support to pass through the Senate in their current form.”

However, Citi still suggests, “negative gearing and capital gains tax reductions for investment properties is likely to lower housing turnover and may lower house prices in an already weak market”.