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By Per Amundsen, Head of Research, Thinktank
With all economic and financial crises, analysts and commentators often look to history for lessons. Since markets globally went into a tailspin in February this year, it has been commonplace to dissect the Global Financial Crisis (GFC) of 2008 to try and find some answers as to how this COVID-19-induced economic downturn will play out.
Will markets rebound quickly? And if they do, will it be sustained, or will it prove to be a dead cat bounce as in 2009? It’s far too early to tell. How long can governments and central banks continue to stimulate economies, especially as the use of monetary policy as an economic lever would seem to be exhausted.
These questions are not esoteric. The answers have a direct impact on people’s lives and nowhere is this more evident than monetary policy and how it directly affects SMSF trustees.
In 2008, when Lehman Brothers collapsed on 15 September – the generally acknowledged start of the GFC – the cash rate in Australia stood at 7%. Even at its nadir, the cash rate only got to 3% in April 2009. After that point, it steadily rose to be at 4.75% by February 2011.
It means that over this four-year period from February 2007 to February 2011, trustees were able to get term deposits that were comfortably returning above 4% and, in some instances, as high as 6-7%, especially as the domestic banks were looking for deposits at a time when capital markets globally were in turmoil. Little wonder that many SMSFs withstood the siren calls of the bull market before the GFC to remain heavily weighted towards cash – on average close to 30% of their portfolios.
Remember, too, the returns from their term deposits were positive after inflation that averaged 2.83% over this four-year period. And that number was inflated by 2008, when it reached 4.35% before falling sharply to 1.77% in 2009 as the global recession took hold in most industrial countries. Australia was a notable exception.