Government Covid-19 responses 'back individuals, not banks'

Global governments are 'going direct' to individuals rather than promoting the 'wealth effect', a differing response compared to the 2008 global financial crisis (GFC), according to a new report from global investment firm Franklin Templeton.

Since banks and the financial system are healthier this time, there is an emphasis on going direct to consumers — putting money in people’s pockets to help them weather this crisis, the report suggests. In comparison, the quantitative easing model used during the GFC led to inflation of asset prices and increased wealth stratification.

Stephen H. Dover, Franklin Templeton's head of equities and chief investment officer, said: 'Globally, governments’ short-term priority is to provide income and credit support to households and businesses so that economic activities can resume quickly once Covid-19 is contained. I believe a quick government policy response is more important than a perfectly efficient one to prevent otherwise solvent firms from shutting down, or from delaying recovery.

'Central banks' movement of interest rates to zero is counterproductive, in my opinion. First, they perpetuate 'zombie' companies, creating more challenges for commerce and for otherwise healthy companies. Second, when central banks cut rates to zero, the collapse in interest income can cause risk aversion on the part of savers — thereby affecting their consumption.'

Dover added: 'China is more likely to create stimulus policies with a focus on local government infrastructure projects in smaller cities. Chinese equities are likely to benefit from Chinese central government policies, at a minimum in the short and medium term.

'China continues to recover, but there are two concerning risks. Returning to work could lead to a resurgence in infection rates in China. Secondly, the global demand for the products manufactured in China will slow down while the West deals with the course of Covid-19.'

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