Invest
Why we aren’t heading for a great depression
Despite concerns that the COVID-19 pandemic will cause another great depression, a fund manager believes the extraordinary government response means history is unlikely to repeat itself.
Why we aren’t heading for a great depression
Despite concerns that the COVID-19 pandemic will cause another great depression, a fund manager believes the extraordinary government response means history is unlikely to repeat itself.
While the unemployment rate has spiked around the world and large financial institutions are grappling with forecasts of a long recession, Franklin Templeton’s head of equities, Stephen Dover, does not believe it is the same as the Great Crash of 1929.
“I do not agree with comparisons to the Great Depression, given the stark difference in the fiscal and monetary policy responses,” said Mr Dover. “During the Great Depression, policymakers tightened monetary policy, misdirected fiscal aid, raised trade barriers and increased the regulatory burden on banks and industry. Policymakers have learned from that mistake; the current global response has been the opposite.”
The Great Depression in Australia saw both the state and federal governments adopt deflationary policies, moving to balance their budgets as incomes fell and unemployment rose.
At the time, it was seen as being prudent management. It was later viewed to have aggravated the crisis and led to a more protracted period of unemployment. During the crisis, unemployment peaked at just below 20 per cent, while today Australia’s unemployment rate is tipped to be 8 per cent before the government’s intervention.
The coronavirus crisis has seen the government move to support employment and maintain consumer spending through a series of surplus packages.
The outlook for equities is also more favourable, with a strong government response and the fact that the crisis is health-driven, putting a floor beneath falling prices.
“As we are better able to access the length, health consequences and costs of the virus, the volatility in the markets is likely to abate,” Mr Dover said.
“Companies are strengthening their balance sheets: the results may be that companies will need to have stronger balance sheets going forward, and investors, especially individuals, will need to have larger ‘rainy day’ accounts,” he continued.
“In a world where central banks lower government bond yields to, or in some cases below, zero and governments are adding massive fiscal spending, equities should outperform dramatically in relative terms… I also expect some support to equities as institutions and retail investors, especially in balanced funds, rebalance their portfolios.”
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