With the recent introduction of tax changes, it is worth looking past the speculation and bias to see what the potential impacts really are.
As we mentioned previously, the idea that investment will stop is probably not correct. Imagine a market where there are people who want to buy a product. But according to the doomsayers, no one will be willing to invest because of those dreaded taxes. We would suggest there is probably one person who realises that if this were the case, they could invest and have a monopoly, since no one else wants to.
As we have suggested with stock investing, if taxes influence your decision, for better or for worse, then that is probably not a good decision-making process. I have seen plenty of people make investments for "tax reasons" and find they usually lose money, because tax deductions are promoted precisely because, under normal circumstances, no one would invest given the economics.
Rather than argue about the tax changes in the abstract, it helps to look at the real numbers. Here is a worked example: shares or managed funds bought for $100,000 in 2022, sold for $200,000 in 2032. A $100,000 gain. Income between $45,001 and $135,000. Inflation assumed at 5%.
The headline panic does not match the maths. On a $100,000 gain held a decade, the change costs about $4,011, or 0.2% per year of return. That is not nothing, but it is a long way from the "investment will collapse" narrative. Under the new rules only your real, above-inflation gain is taxed, which is why the inflation assumption matters so much. The point stands: if a 0.2% per year tax change is enough to stop you investing, the investment was never strong enough to begin with.
Estimates only. General information only, not financial, tax or legal advice. The Federal Budget 2026 CGT changes are proposed legislation only and have not yet passed Parliament.
The war is over, apparently, although there is a high level of skepticism regarding whether the truce holds. It appears to be a 60-day ceasefire agreement while they try to negotiate a permanent arrangement. We remain doubtful this is the end.
A 60-day ceasefire is not peace. It is a pause that lets both sides regroup and re-arm while negotiating. Oil markets will trade every headline in both directions. For investors, the lesson from the past month holds: do not position your portfolio around the next geopolitical headline, because you cannot predict it and neither can anyone else.
Watch out, here comes Pauline. As we discussed a few weeks ago, politicians need to keep an eye on immigration, because it will be the vehicle for voicing all sorts of discontent. The Guardian this week ran a piece showing Gen X are poorer, less likely to own a home, and now turning towards One Nation. Australians in their 40s and 50s are struggling with low wages growth, rising inequality and falling rates of home ownership, and many feel left behind. When people feel the economic system has failed them, the politics follows.
Given the government's recent changes, we can expect an increase in properties for sale. The reason we have always been skeptical of the "property is a long-term investment" line is that a very small number of investors hold a property long enough to see it reach positive cash flow. The big money was always in the capital gain. When that disappears, you can expect investors to sell, because the future prospects no longer look attractive.
The yield data tells the story. Gross rental yields across the combined capitals sit at just 3.12% for houses and 4.47% for units. Once you take into account net yields after costs, and the additional holding costs of an investment property, the returns are thin. Property is a high-risk investment. Leverage is wonderful on the way up, but nasty if it does not work out.
Gross yields before costs. Net yields after holding costs are materially lower.
If you want the full framework for thinking about property in this regime, our two recent pieces lay it out.
Read on TMM →
Read on TMM →
The S&P 500 Shiller CAPE sits at ~41.4, holding near the second-highest level in 155 years of market data. Only the December 1999 dot-com peak of 44.2 has been higher. The implied future annual return from these levels is around 1.6%.
Initial investors will accept losses while a technology is in the development stage, but at some point they want a return on their investment. It is one thing to tout the promises of AI. It is an entirely different proposition to make it profitable. Without profits, the dream dies.
The AI story has been largely hype, and the original promises of the coming revolution are failing. The longer it goes, the worse it looks. The expected IPOs of Anthropic and OpenAI will force the economics into the open. And the numbers that are starting to leak are sobering.
Eventually companies have to show costs and benefits from this technology. The failure of clients to see the benefits is starting to seep into the market. We suspect this sector may be the catalyst for the market's reversal, just like the dot-com sector was in 2000.
The critical minerals sector continues to provide serious concern regarding China's dominance. A US business group this week described some critical minerals as "nearly unobtainable" from China.
Briefly, the picture from impacted firms: most are now searching for mineral alternatives to China; the lobby says it will take years for the US to diversify its mineral supplies; and only half of US companies plan investment in China this year, due to uncertain US-China relations. This is the structural realignment we have been writing about for months, now showing up in hard corporate data.
Let's dig a little deeper into how we can prepare for the coming high-inflation era. First, emerging markets outperformed the US the last time the US was seriously overvalued. It also stands to reason that commodity suppliers, mainly in emerging markets, should do well in the next decade.
Look at what happened from 1999 to 2003, the last time the US CAPE was where it is today. While the dot-com bust dragged the S&P 500 down 9%, emerging markets rose 85%.
Emerging Mkts
That is a 94 percentage point gap over five years, driven by exactly the conditions we face now: an overvalued US market mean-reverting while cheaper, commodity-rich emerging markets re-rated higher. History does not repeat, but it often rhymes. The set-up today looks more similar to 1999 than to any year since.
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