WisdomTree Minds on the Markets
WisdomTree
Minds on the Markets
WisdomTree
Minds on the Markets
2024 Could be the Year of “Investment Savings Account” Reform
ARCHIVE: Week of February 20, 2024
Around here we call it a traditional IRA, but the phraseology used to describe a common form of retirement account in many developed nations is the ISA, or Investment Savings Account. We gather that there is a rising push for retirement account tax reform and contribution limit lift-off from a Japanese pied piper effect. In brief: Japan’s stock market went zooming last year, and the country was actively reforming its retirement savings program, so maybe there is a correlation. Japan and two countries who seem to want to follow along, Britain and South Korea, rank 4th, 6th and 13th globally on GDP, respectively.
On the first business day of 2024, Japan followed through with its plan to triple individuals’ maximum annual contribution in Nippon Individual Savings Accounts (NISAs). The theory goes that some chunk of that contribution, writ large, will find its way into Japanese equities. The country typically runs neck and neck with the U.K. in the competition to be the largest country weight in developed indexes such as MSCI EAFE.
Being as how WisdomTree runs a sizeable Japanese equities business, we have been paying close attention to the country’s retirement savings reform because the development was unfolding in tandem with the broad indices’ long-awaited march to the 1989 highs. Now we are noticing that British officialdom has gotten a little jealous of Japan, especially since Japan’s NISA was originally modeled off its ISA.
We do not see many seers noticing it just yet—mostly because the British are still kicking down the cobblestones on this— but there is some talk there about boosting contribution limits and allowing retirement money to be more easily moved around without incurring the wrath of the tax collector. This initiative may or may not go hand in hand with another big U.K. push: a move to get the country’s pension system to reembrace domestic common stocks.
The rationale for that is simple: for decades the country had a regulatory regime that strongarmed defined benefit plans into owning a disproportionate quantity of their assets in gilts. The 2022 blow-up of the U.K.’s bond market put paid to notions that such a thing was necessarily risk free. Additionally, the rise of private equity and its promised riches over the last quarter century captured the fascination of institutional investors. The result was an ever-dwindling allocation to the country’s own stock market.
To save British stocks, goes the refrain, pensions need to fall in love with their own country once again. Tie it in with larger retirement contributions from the public and voila, a bull case emerges.
South Korea is also having something of a moment on retirement savings reform too. The country doesn’t have as much force in global equity baskets as the other two, but it does have a peculiar quirk: some money managers (like us) classify it as an emerging market, while others put the country in developed market indexes. Because of Korea’s idiosyncratic classification situation, its presence or absence in an index could be the difference between a good and bad year.
That is why it is intriguing that President Yoon Suk Yeol gave a speech last month where he vowed to “expand eligibility” for his country’s ISA, while also increasing the contribution limit. It is part of the “Corporate Value Up” initiative, whereby Korea is trying to elevate the stock prices of a laundry list of companies who trade for less than book value. Having seen Japan succeed (thus far) in its own such initiative, Yoon figures Korea should give it a go too.
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