CGT boosts fixed interest

Fixed interest products are set to boom as a result of recent capital gains tax (CGT) changes, says one manager.

Fixed interest products are set to boom as a result of recent capital gains tax (CGT) changes, says one manager.

Associate director of fixed interest at AUSBIL Partners John Honan says the retirement market will increasingly be looking to invest in these products, creating a boon for companies looking to issue securities.

Honan argues that the changes to CGT will make shares experiencing capital growth more attractive than those producing high yields. Many companies will look at reducing the amount paid out in dividends to investors. This will in turn make fixed interest returns more attractive to investors wanting quarterly paid income and returns of more than 6.5 per cent.

“Australian blue chips have been encouraged to have a high payout ratio on dividends. Now, with franking credits diminishing due to offshore investments as well as the capital gains tax changes for individuals and superannuation funds, there is a strong incentive for blue chips to have higher levels of retained earnings and use these for growth,” he says.

“There’ll be an investor base attracted to this (lower yielding shares), but the retirement sector will find themselves looking for a higher yielding investment.”

Honan says the recent frenzy over income securities which saw $5 billion worth of issue illustrates “an incredible burst of interest” from investors.

“While these have not met investor expectations new corporate issues will be much better structured,” he says.

The recent successes of well-known corporate issues, such as PBL and Cable & Wireless Optus are good examples of what’s to come, he says.

“The corporations will come to the debt market and mums and dads will be attracted.”