A European-wide financial transaction tax may wipe off as much as 10 percent from equity valuations and offset the benefits to the region’s economy of governments raising money, according to HSBC Holdings Inc.
The proposed tax “does present a major downside risk to both the banking sector and the broader market,” London-based HSBC analysts Robin Down and Lorraine Quoirez wrote in a report dated yesterday. “Investors should also anticipate a market-wide increase in the cost of both equity and debt, and major upheaval in the repo market.”
France and eight other European Union countries are seeking to introduce the levy on shares, derivatives and high-frequency trading. The European Commission in September suggested a tax of 0.1 percent on equity and bond transactions and 0.01 percent on derivatives, which it said could raise 55 billion euros ($72 billion) a year. EU finance ministers are due to discuss the tax next month.
Taxing transactions would prompt equity investors to expect higher returns from the asset class, the analysts said. The tax “as currently presented could see European valuations impacted by up to 10 percent,” they wrote.
The proposed tax would amount to about 1 percent of a typical transaction, as every purchase involves about 10 steps and each would be subject to the tariff, Down said in a telephone interview. It would therefore increase the cost of equity, or the amount a company theoretically pays investors in its shares, to about 9.5 percent from 8.5 percent and erode the value of stocks, the analysts estimated.
French President Nicolas Sarkozy and German Chancellor Angela Merkel have proposed the tax to appease voters frustrated by the role banks played in the financial crisis. Sarkozy, who faces re-election in April, plans to unilaterally impose a 0.1 percent tax on financial transactions in France starting in August, he said on Jan. 29.
“Investors should be wary of assuming that the capital markets’ perception of financial logic will always prevail and that such a radical change could never be introduced,” the analysts from Europe’s biggest bank by market capitalization said. “Understandably, after the economic travails of recent years there is a groundswell of public and political opinion that supports action against the financial sector, almost regardless of the ultimate cost.”
Costs Passed On
Most intermediaries would probably transfer the cost of the tax to clients, Down said. The asset-management industry would be hit hardest because customers would be put off from investing, the analysts said.
Unlike the stamp duty applied to equity transactions in the U.K., Ireland and Hong Kong, the proposed EU tax would be levied based on the location of the buyer, seller or broker rather than where the securities are listed. This will encourage firms to migrate outside the area of scope, Clifford Chance, a law firm, said in October.
The European Commission estimated in September that derivatives turnover may decline as much as 90 percent in some segments, especially in high-frequency trading.