Question 1: I currently hold fixed interest ETFs VAF and VGB in my portfolio to provide some asset balance to my other growth and income shares. VAF and VGB haven’t performed well in the past few years. I was expecting that with interest rate increases, these ETFs would have increased in value. Do you see these ETFs improving in the next 12 months, or should I sell and open term deposits instead whilst rates are high?
Answer: Vanguard Australian Fixed Interest ETF (VAF) and Vanguard Government Bond Index ETF (VGB) increase in price when bond yields (interest rates) fall and decrease in price when bond yields rise. Because bond yield have been rising (until very recently), the prices of these securities have been falling. They are both long duration funds…that is, they comprise bonds of long terms to maturity. On paper, you have suffered capital losses, although probably enjoyed higher income distributions. Have bond yields peaked? That’s the $64 question, but the evidence seems to be that they have in the US and are probably close to the peak or have peaked in Australia. Ultimately, it all comes down to your view on inflation and what the Central Banks will do with short term interest rates.
So yes, I would stick with the ETFs and would expect to see some improvement in returns over the next 12 months. If I was looking at term deposits (and didn’t need access to the cash), I would go long…potentially out to 5 years if the rate was attractive.
Question 2: Is Allkem (AKE) likely to recover, or just keep falling like lithium prices generally?
Answer: The most immediate catalyst for Allkem is likely to be its proposed merger (as equals) with Livent Corporation to form Arcadium Lithium. You will get to vote on this shortly. As for the near-term share price, this is being driven by the weak underlying price for the commodity (spodumene). Due to weak Chinese demand, this is near a two-year low.
There are very divergent views on Lithium. Some who point to a supply shortage, other who say that supply is developing, and demand will be weaker than expected and there is too much “hype” about lithium. At the moment, the latter argument is winning. I am no expert on lithium prices, but given the fall, I would be inclined to stick with Allkem. As for the brokers, they are all pretty positive on Allkem. Target price of $15.77, 72.8% higher than the last ASX price of around $9.12.
Question 3: Why isn’t ANZ’s dividend fully franked? Is this going to apply to future dividends?
Answer: Interestingly, ANZ warned about 18 months ago that it wouldn’t be able to fully frank its dividends, and then proceeded to fully frank the next two. Monday’s announcement that the current dividend wouldn’t be fully franked took many by surprise. In addition to an ordinary dividend of 81c franked at 65%, ANZ declared a ‘special’ unfranked dividend of 13c to make up for the lack of franking. All up, shareholders will get a 94c dividend, franked to 56%.
Why isn’t it fully franked? Simply, because ANZ is not paying enough Australian company tax. This is primarily due to its earnings base … it earns quite a bit in New Zealand (where it pays tax to the NZ Government), but this doesn’t count for franking credits. The latter represent the tax the company pays in Australia.
Going forward, as ANZ warned 18 months ago, they will only be able to partly frank their dividends. Looking at the interim and final dividends together (a total of 162 cents), probably in the order of 70% to 75%.
Question 4: My Newcrest shares have now converted to Newmont CDI’s. Do I need to complete a W8-BEN form for tax purposes?
Answer: Newcrest shareholders received Newmont Corporation (NEM) shares on a ratio of 0.4 NEM for every 1 Newcrest share. Technically CDIs (CHESS depositary interests), NEM is set to pay a dividend in December. As a US corporation, I would expect that you will be asked to complete a W8-BEN form. Normally, the Registry (Computershare) would contact you about this. You don’t have to complete a W8-BEN, but if you don’t, withholding tax on the dividend at a rate of 30% may apply (rather than 15% if you have completed the W8-BEN).
