MT: Mike Taylor
Managing Editor
Money Management
JM: Julie McKay
Senior manager, technical and research
Leveraged
KF: Kevin Flynn
Director and Financial Planner
Epacris Securities
WC: Wai-Yee Chen
Senior adviser, Ord Minnett
Private Wealth
KH: Keith Hildson
Head of distribution
Leveraged
EE: Earl Evans
Head of wealth management
Shaw and Partners
MT: I thought we’d kick off with a fact we can hardly ignore — that we’re running into a Budget and an election year, and that when policy is being talked about and negative gearing has come up, it has consequences for margin lending, for a whole range of reasons.
I’m just wondering in the view of the panel, what sort of impact do you think it’ll have on an industry that when it came out of the GFC [global financial crisis], was a bit on the nose? How do we think that it is going to impact investors’ attitudes towards leverage?
I’ll kick off with you, Earl.
EE: Well, certainly uncertainty. That’s the big thing. I think coming into an election is always challenging. Both parties obviously have got different policies and I think again are more leaning towards populism than reality in a lot of situations.
So there’s confusion, quite frankly. I think that makes it very hard from the advice perspective and the advice business. I think it’s just confusion. I think in some elements, we’re taking a view that it’s really the status quo. I think a lot of noise gets made and in reality, a lot of change doesn’t actually happen or occur.
MT: Julie?
JM: I would agree with Earl. I think there’s been a lot of just policy statements without any substance or understanding of what that looks like and what the implications are, so it’s difficult at this stage to say that it’s good, bad or indifferent for the industry. I think overall, though, the reasons for looking at gearing and the benefits of it aren’t going away and aren’t really going to change that much in all terms. I think there would be maybe some disruptions and initial confusion, as you say, but overall the reasons for doing it are just too compelling.
MT: Keith?
KH: Yeah, I agree. Strategies for gearing are still valid strategies. People still need to accumulate wealth over a long-term cycle, so to Julie’s point, the reasons are still compelling to gear.
MT: Wai-Yee?
WC: I think one big thing that came out after GFC with gearing is that a lot more investors are more apprehensive about gearing. That has impacted the way I use gearing with my clients, which means I don’t want to do a margin call, I don’t want them to start to panic, I don’t want them to start at the bottom of the market.
A lot of the strategies that are put in place with lending involve hedging, which means downside protection. So when that is in place, the whole strategy becomes active positive gearing, because the income itself and franking credits are more than enough to cover interest expense and the cost of transaction. Negative gearing has come up as a question about this particular strategy, but it’s not an issue from that perspective, when you put it all in perspective, and the way it is being implemented.
JM: I think Wai-Yee actually has a point there in terms of a lot of advisers, while they do take a unique approach with that downside management, a lot of advisers do actually look for neutral to positive gearing when they’re looking at gearing on a share portfolio anyway.
WC: Absolutely.
JM: Particularly when you take into account the franking credit benefits that you get. We know it’s a fairly well used strategy, say, in the property sector, but it’s less of a driver in the share sector. I still think it raises confusion and until the statement becomes real legislation that we can actually deal with it, we don’t know what it looks like. But actually, I think neutral to positive gearing would be a more typical adviser approach.
MT: Kevin?
KF: Well, we have a very conservative approach to gearing and margin lending, full stop. We’ve been gearing for 20 years. We’ve geared right through to the GFC, through the GFC, and post-GFC.
The tax consequences? We’re very reticent to try and base any investment strategy on tax, so what we say to clients is that assuming the whole negative gearing thing is tipped on its head and becomes illegal to do it tomorrow, will this thing still float? Can we still do this with or without the tax deductions? If it’s no, then we shouldn’t be doing it. We’re not relying just on legislative risk. It’s got to be a good strategy, it’s got to hold up, it’s got to hold water or it doesn’t.
We’ve also had a few clients like these two who have a big confusion. Should we go out and buy property now or — should we hurry up and go buy something now before they change the rules? We’ve said no, just wait. Let’s see what actually eventuates rather than all the noise that the newspapers and this populist election vote grabbing talk, and let us then review the situation post that. But we’re, as I said, very reticent to have any strategy that’s based purely on tax deductions.
Read the other parts of the roundtable here:
Leverage and volatility a safe mix? – Margin Lending Roundtable Part 2
What a typical margin lending client looks like – Margin Lending Roundtable Part 3
Matching leverage to the right clients – Margin Lending Roundtable Part 4
