Tax Loss Selling

Marcus Today

May 2024

We are approaching June, and it's a good time to start talking about tax loss selling in stocks.

It is something that we should all think about in May rather than June. It works like this:Assuming you pay capital gains tax - many of you don't - on June 30th the tax man will freeze your portfolio, add up all the capital gains you've made this year, all the capital losses, offset the losses against the gains, and come after you for CGT on any net profit.If your accountant hasn't reminded you, then this is a reminder that you can minimise ('defer' really) your capital gains tax (CGT) liability this year by realising some losses as well as gains before the year-end, rather than just holding on. Basically, if you have a net capital gain from stocks sold, or any other capital gain, you should now be looking through your collection of current holdings for any stocks with losses attached (that you could sell now), and in so doing crystallise a loss that can be used to offset any gains made during the year. In so doing you can minimise your need to pay tax this year. Ultimately, it is not about how much tax you pay, that will not change. It is about when you pay it. It's obvious stuff.

Capital losses can offset capital gains.

• Stocks that have not performed well over the year, stocks in which a lot of shareholders are holding at a loss coming into the financial year end, tend to get sold down again towards the end of June. Thanks to tax loss selling, bad performers perform badly in June.
• Small illiquid stocks, ones that have not performed well where again, a lot of shareholders are likely holding at a loss, can get absolutely massacred by tax loss selling in June because the selling is forced through when the liquidity is not there. Net result, if you hold an illiquid stock that is running at a loss, take the loss early, because if you wait until the end of June when every other dodo wakes up to it, you'll be selling into a last-minute frenzy.

If you do want to take a loss before the end of June but want to continue holding the stock long-term, it is a good idea to take the loss early (now for instance), and not buy it back immediately, but wait until the other tax loss sellers destroy it. If all goes well, you can buy it back lower down as the liquidity issue bites the share price closer to the financial year-end.Even if you don't have tax issues, thanks to tax loss selling, trading opportunities can arise, especially in the small illiquid stocks that get massacred. Once the tax loss selling fades away, sold-down stocks can bounce significantly as small buy orders rebound the prices. So traders should be looking for the lows in small illiquid sell-offs over June, hoping for a rally into July. But another word to the wise, whilst you might think you should wait until July 1st to buy, experience suggests that many of the stocks impacted by tax loss selling tend to bounce before the year-end, a week or so before. So for a trader, the game is to identify the stocks getting destroyed and watch for the first rally, rather than July 1st, to get stuck in. The rebounds can be just as sharp as the last-minute drops. Hesitate and you'll miss it.

Which Stocks Do You Sell for Tax Reasons?

Legal Note: ATO Wash Sales Provisions

Taking Advantage of the Selling

Hints for Taking a Loss

• If a stock is going down, it is far more likely to continue going down than it is to turn on a sixpence to suit you.
• An early loss is the smallest loss - The further a stock falls, the more intense the selling becomes as higher losses cause more selling decisions, so sell early.
• The odds are in your favour - If you sell 10 falling stocks, it will be the right thing to do in nine cases, but you will only remember the other one.
• Clear the mind - If you sell now, you are no longer exposed, and all you have to do is come to terms with the loss.
• You can buy it back - If you sell now, you can always buy it back - you might even buy it back lower than you sold it, and in the meantime, you have a period of clarity.
• The eye of the hurricane - If you sell now, you enter the eye of the storm and all becomes calm. You have a moment to think and can watch from a distance. You can always choose to enter the storm again, and you will be thinking more clearly and be armed with a plan if you do.
• Would you buy this stock now? - If you are making a loss on a stock, think to yourself... "If I had cash, would I buy the stock now at this price?" If the answer is 'no', why are you holding it? Sell it. Most people begin to 'hate' the stocks they lose money in... so this argument always works.
• Your state of mind has a value - What would your spouse pay (or you pay) to have you carefree at the weekend, instead of ripping the heads off the kids? Look after yourself. There are not that many weekends in the year (or your life). Don't ruin too many of them by keeping risky loss-making positions until Monday because you didn't have the guts to sell them on Friday.
• Averaging down is a mug's game - If you have money to invest, you should be putting it in the best investment in the whole world. Do you really think that will be the very same stock you have already bought at a higher price and that is falling at the moment? Very unlikely. You already have an exposure... why do you need more of something that has already proved itself to be a dog?
• There is no logic in being emotional about losses - Do what most brokers do with their own shareholdings. They have an Excel spreadsheet linked to live prices monitoring all their holdings and what they are worth. At the bottom of the page is a total of what all the holdings are worth now. That clicks over every second, all day. Up $500, down $500. This figure is the only truth. This is what the shares are worth.
• The price you paid is irrelevant - If it's gone down, it's gone down. XYZ stock doesn't 'owe you'... what you paid for it is irrelevant to where it goes next.
• Opportunity cost - Not selling a dog ties up capital that could be employed somewhere more gainfully than in a dog stock.
• If in doubt, sell it - It crystallises a capital loss for this tax year. Why wait until the end of the year to take your losses? Taking losses today could set you up for making and taking gains this year. You can always buy it back once you've made the sale.

Hopefully, you hold good long-term stocks and won't have to take a loss, but when you do, read this again and see if you can get to the bottom of the list before you put the sell order on.

Author: Marcus Padley

Funds operated by this manager:

Marcus Today Equity Income SMA, Marcus Today Growth SMA

The Rate Debate -

Navigating Australia's Economic Crossroads

JCB Jamieson Coote Bonds

May 2024

Funds operated by this manager:

CC Jamieson Coote Bonds Active Bond Fund (Class A), CC Jamieson Coote Bonds Dynamic Alpha Fund, CC Jamieson Coote Bonds Global Bond Fund (Class A - Hedged)

Looking beyond the noise at this year's Budget

Pendal

May 2024

WHEN you've watched enough federal Budgets (this was my 35th in markets), you start to see familiar patterns across commentaries.

Every vested interest or ideological bent comes out bleating about the Budget being irresponsible or reckless, that there's too much spending or not enough major reform.

What worries me more is when people view the government as no more than a large corporation and when they speak of the budget like a profit and loss statement.

Looking through the noise and self-interest is what really matters for bond markets in the year ahead.

I have narrowed it down to three impacts.

Inflation

There are a number of direct measures that reduce inflation, one of which is electricity subsidies.

Every household gets $300 off their electricity bill, by way of quarterly $75 payments directly off the bill. Businesses receive $325.

The average household bill is $2,000 a year, so that's 15% off.

Electricity is 2.4% of the CPI basket, so this equates to 0.36% off inflation in direct impact. The government is quoting 0.5% overall impact.

Queensland has already announced a $1,000 subsidy while Western Australia has announced a $400 subsidy, again not means tested.

It will be interesting to see what upcoming state budgets keep rolling existing subsidies (no impact to inflation), let them roll off (inflationary) or, like Queensland, increase them (deflationary).

If we assume modest subsidies coming up from other states, then the electricity impact on lower CPI could be 0.8% or even higher.

Other measures in rental assistance and cheaper medicines are slightly deflationary.

Overall, federal Treasury is forecasting inflation of 2.75% in 2024/25, which is below the current Reserve Bank (RBA) forecast of 3.2%.

We expect an upcoming downward revision of the RBA forecast of 3.8% CPI for 2024, which looked too high anyway. This could also see its 2024/25 forecast moderated lower, though still near 3%.

Tax cuts and spending

Against the direct impact of the Budget on lower inflation, markets ask the question of whether the extra money in people's pockets may cause higher inflation if and when it is spent.

There is around $20 billion of new spending measures (the Stage 3 tax cuts have been locked in since 2019) in this Budget, with the majority in the next two years.

The Budget will return to deficit, with a forecast of $28.3 billion for 2024/25 and $42.8 billion in 2025/26.

While still low by international standards, the main question is whether or not deficits are appropriate at this point of the cycle.
It must also be noted that it also is based on the usual conservative commodity price forecasts.

For example, an iron ore price of US$60 is assumed, despite a current price nearer US$110 and a five-year average of US$120.

This opens up potential upside surprises as we have seen in the past few years.

This has really excited Budget hawks and has some calling for higher rates as all this money is supposedly spent, stoking inflation.

The question I would ask is whether or not this money is being injected into an economy at full capacity.

On this, my view is that we are sufficiently past the pandemic that supply chains can handle the modest rise in consumer spending without stoking inflation.

Consumers will be spending more in the year ahead. Tax cuts, subsidies and lower inflation should finally see some growth in real incomes - however, this is from a base of real incomes having for the past few years.

Bond issuance

We will see an update on the 2024/25 program from the AOFM shortly.

Given high refinancing (two benchmark maturities totalling $83 billion) the borrowing task is expected to be around $90 billion, as the RBA has borrowed much more than needed this year.

It is important to remember that when determining yields, bond demand and supply dynamics are largely outweighed by economics.

As a bond manager, I only view supply and demand as a short-term impact around supply events.

Ignore the booming debt rhetoric from some commentators and self-styled bond vigilantes - Australian debt will remain AAA for at least the medium term, and with the RBA moving to an "ample liquidity" framework, demand for bonds will remain robust.

So, what does this mean for bonds?

Well, the market always votes straight away, and has already made a half-hearted attempt to run with the higher spending higher inflation narrative.

However, as the dust settles (to quote the cliché), yields are "sharply unchanged".

I think the RBA will see the Budget for what it is - a mixed bag of measures that will leave it hopeful of further inflation relief but wary of whether the 2%-3% band can be achieved and then sustained.

I would also make the observation that the "Future Made in Australia" spending is an overdue response to the global game-changing US Inflation Reduction Act.

By comparison, our government's measures are modest for now, but can be expected to increase in the future.

We are in a very different world to the last decade and governments must respond.

For now, a more detailed breakdown of the domestic economy is below.

Author: Tim Hext, Pendal portfolio manager and head of government bond strategies

Funds operated by this manager:

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at December 8, 2021. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient's personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

Market Commentary - April

Glenmore Asset Management

May 2024

Funds operated by this manager:

Glenmore Australian Equities Fund