The Australian share market will not be heavily affected by the ban on franking credit refunds proposed by the Labor Party, with stocks unlikely to be repriced, according to a global fund manager.
In response to concerns raised by investors, Vanguard released a research note that stated while it was difficult to reliably quantify the impact of the proposal, “the changes to franking credit rules are likely to have a modest impact on share market volatility”.
“Removing the franking credit refund will have a minimal impact on most investors. The key impact will be on zero-tax-paying investors who are not subject to the exemption,” the fund manager said.
It pointed out larger superannuation funds will continue to receive a portion of the franking credit refund, which will vary depending on the level of tax paid relative to the value of the fund’s franking credits.
The research note added that funds with large exposure to Australian shares may re-weight into other asset classes to balance out the level of franking with the tax liabilities of the fund.
“As is often the case though, equity valuations, macroeconomic and geopolitical events both locally and globally are likely to have an outsized impact on share market volatility compared to the changes to franking credit rules,” it said.
It also highlighted Australian investors’ home bias, which was high by global standards, adding: “This is especially true if home bias is measured as a multiple of the market capitalisation of the investor’s home market.
“Domestic tax treatment is one reason that has been a powerful driver behind the decision by Australian investors to hold domestic shares.”
It added that while it is impossible to attribute an exact proportion of home bias to Australia’s dividend imputation system, the fund manager did see evidence of the influence this has on investment decisions.
Addressing the issue of substituting Australian shares for other high-yielding assets if the ban is introduced, Vanguard recommended a total return approach with overall risk characteristics in a portfolio that were suitable for the investor and were not sacrificed for the sake of meeting the desired income level.
