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Where we are now in investment markets and economies

Dear Investors and Super Fund Members,

The beginning of a year is always a good time to take stock of what happened over the year that’s gone and to also think about the one that’s ahead.

So, I’d like to use this note to give you a perspective of the extraordinary events that took place across investment markets and economies in 2020; touch on how MLC’s investment team think this year may pan out; and finally, tell you how we’re managing your money, based on our assessment of the many directions markets could take.

To begin — the COVID-19 pandemic overshadows everything.

As you know, the rapid spread of the pandemic forced governments around the world to impose restrictions on people movements and business activity from around March last year. This was a massive blow to many businesses and industries.

Industries like domestic and international travel, the international student market, which is so important to schools and universities in countries ranging from the UK, US and Australia, retail, both eating out and shopping at malls, and many others, effectively shut down.

While COVID-19 is above all a health emergency, the hit to employment and people’s livelihoods has been distressing.

Shocks were also felt across share markets as they fell faster and deeper in the three months to the end of March 2020 (Chart 1) than at any time since the 1930s.

Chart 1: Global share markets fell hard and fast in March 2020….

Name of share market

Returns for three months to 31 March 2020 ‘pain’
S&P500 Index


S&P/ASX300 Total Return Index


FTSE 100 Index


DAX Index


MSCI China Index


Source: FactSet. Returns shown are measured in local currency terms

Then, something remarkable happened — share markets staged a quick and massive recovery. Usually, recoveries from large market falls take place over months, even years, but the comeback from March’s ‘COVID crash’ was one for the record books.

In fact, the same share markets that dropped far and fast, in March, delivered positive returns in the three months to the end of June 2020 (Chart 2).

Chart 2: …but staged strong recoveries soon after

Name of share market

Returns for three months to 30 June 2020 ‘recovery’
S&P500 Index


S&P/ASX300 Total Return Index


FTSE 100 Index


DAX Index


MSCI China Index


Source: FactSet. Returns shown are measured in local currency terms

What drove the share market recovery?

The explanation for the remarkably quick share market recovery was massive government and central bank intervention.

While the economic situation remained difficult; for example, the US unemployment rate hit 14.7% in April after being below 4% pre-COVID, central banks, like the US Federal Reserve, the Bank of England and the Reserve Bank of Australia, slashed official interest rates to near zero, and provided other forms of support injecting vast amounts of money into the financial system.

It’s estimated that during a six-week period over late March-May, the US Federal Reserve provided as much financial support as it did over the whole Global Financial Crisis period of 2008/2009.

In Australia, the Federal government rolled out programs like JobKeeper and JobSeeker to support Australian workers and businesses. Governments around the world did similar things.

The upshot of all this was that many major share markets ended 2020 with positive returns (Chart 3).

This also meant that many investors’ portfolios, including super fund portfolios, delivered better returns by the end of 2020 than would have seemed possible during the worst of March’s share market upheaval.

Chart 3: Many share markets ended the year positively

Name of share market

Returns for 12 months to 31 December 2020

S&P500 Index


S&P/ASX300 Total Return Index


FTSE 100 Index


DAX Index


MSCI China Index


Source: FactSet. Returns shown are measured in local currency terms

Technology companies leading share market returns

A feature of the past year has been the performance of technology companies, especially in the US share market, which is the world’s largest.

Companies like Apple, Microsoft, Amazon, Google (as well as electric car-maker Tesla) have provided very strong returns. In fact, returns from these five companies, together, have been so great that they’ve dwarfed the rest of the US share market.

Things have got to the stage that some people have been describing the US S&P 500 Index (which measures the share market performance of America’s 500 largest companies) as the S&P 5.

Many investors have continued buying the shares of Apple, Microsoft, Amazon and Google on the grounds that as we’re now all spending more time at home — and the way we work going forward will probably involve more working from home — we’ll keep needing these companies’ services and products.

Tesla, for its part, seems to be benefitting from incredible excitement (possibly over-excitement) over its potential to dominate the fast-growing electric car market. Here’s some perspective on Tesla: the current market value of Tesla’s shares is so high that one estimate suggests that it would take an investor almost 1,600 years to make money from owning its shares!1

President Biden may super-charge the US economy and boost share markets  

All this brings us to the current situation in share markets and economies where there are grounds for optimism on both fronts.

This is driven by expectations that the new US administration of President Joe Biden will deliver a massive ‘pick-me-up’ for the American and global economies through big spending programs, as well as the fact that we’ve now got three vaccines against COVID-19.

Just before taking office, Mr Biden detailed a US$1.9 trillion coronavirus rescue package titled the American Rescue Plan with proposals2 including:

  • Direct payments of US$1,400 to most Americans, bringing the total relief to US$2,000, including December’s US$600 payments
  • US$50 billion toward COVID-19 testing
  • US$350 billion to state and local governments to keep their frontline workers employed, distribute the vaccine, increase testing, reopen schools and maintain vital services
  • Increasing the federal minimum wage to US$15 per hour

Stage two of President Biden’s economic program, expected in February, will tackle his longer-term agenda.

During the presidential campaign, Mr Biden proposed more than US$5 trillion over 10 years in new spending, with much of it front-loaded into the first few years. The proposals covered infrastructure and climate policies, domestic manufacturing, research and development, health care benefits, education, and childcare, among other things.3

At this stage, it isn’t clear which of these policies will take priority, but infrastructure and climate-oriented policies appear to be high on the list.

President Biden’s proposals, combined with continuing ultra-low official interest rates, could super-charge the US economy with knock-on benefits for the rest of the world.

Share markets, for their part, have generally reacted positively to the potential for the US economy to grow at a high rate over the next few years.

Higher government spending that translates into more money in people’s pockets means more demand for the products and services products provided by many businesses and industries. It should also mean more jobs.

Good news on vaccines, but COVID-19 is also mutating

After a year of mostly grim news on COVID-19, we finally got some good news with three vaccines —from Pfizer-BioNTech, Moderna, and Oxford-AstraZeneca — beginning to be rolled-out. Incidentally, according to the World Health Organisation, there are more than 200 COVID-19 vaccines still in development.4

That said, producing vaccines in massive quantities so that most of the world’s population can be inoculated is a tall order. COVID-19 doesn’t respect national borders, so this is what’s going to be required. Only by doing this will we be able to confidently return to something that truly looks like normal life everywhere.

Effective, mass inoculation would be a huge boost to morale across communities. It would also provide another to lift investor confidence and allow businesses to plan with future confidence.

A complication in all this is the emergence of new strains of COVID-19. Two mutations – one that’s been circling around the United Kingdom, and that’s also been detected in several locations in the United States, and a second strain detected in South Africa – are more contagious.5

It’s no surprise that the coronavirus has mutated — that’s what viruses do. There’s currently no firm evidence the variants will reduce the effectiveness of the vaccines or cause a more severe illness. Still, more studies are needed to understand the mutations and the impact they could have on the pandemic.6

Might inflation rise?

Another cloud in the sky is the potential for inflation — which can be described as an increase in the prices of goods and services in an economy — to rise faster and higher than expected.

Inflation has been unusually low since the GFC and explains why interest rates have also been low since then.

However, if the US economy does end up getting super-charged, it could result in inflation. As a rule, economic growth is good as it spurs job and income growth, but economies that grow too fast can trigger imbalances including inflation.

There are also other trends that could contribute to higher inflation.

Thanks to COVID-19, governments are under pressure to produce more ‘essential items’ such as medicines and related products, at ‘home’ rather than relying on overseas supply.   

Reducing dependency on overseas supply for genuinely essential items by switching to more domestic production is understandable, but there’s also a risk of over-shooting if more and more industries are pressured to ‘come home.’  

It’s possible that the list of what’s judged to be ‘essential’ just keeps growing and growing.

Lower prices are one of the great benefits of global production for many things we take for granted ranging from clothing to white goods to cars, phones, TVs, furniture and much more.

Higher prices/inflation is an obvious risk if countries reverse course from global production because producing items for smaller domestic markets is more expensive.

How we’re positioning portfolios

The possibility of higher inflation is one of the risks MLC’s investment team is very alert to. Furthermore, while vaccine developments are positive for economies and investment markets, a vaccine resistant strain is also a possibility, and this is one of many factors we consider when positioning clients’ portfolios.

The way we manage money looks out for multiple risks as well as opportunities, not just a narrow set of investment themes. Narrow thinking can lead to bad investment decision-making.

We don’t want to be wrong-footed by markets and so rather than exclusively preparing your investments for inflation, we’re equally aware that the current low inflation environment may stretch a little further.

So, instead of going all-out to get ready for higher inflation or continuing low inflation, we’ve been making subtle changes to the investments we manage on your behalf.

We have, for instance, increased exposure to infrastructure companies providing essential services such as water, power, and transport because they generally deliver reliable income streams in higher inflation as well as low inflation environments.

At the same time, we’ve been adding to investments in emerging markets (share markets outside the developed country share markets of North America, western Europe, Japan and Australia) as they should do well if the US economy does go into a strong growth period.

We’ve also been putting in place what we describe as ‘participate and protect’ investment strategies.  We use what are known as ‘derivatives’ to execute our ‘participate and protect’ strategies.

Derivatives provide very cost and time efficient ways of acting on our investment views.

Derivatives can be used like investment insurance. For a small premium — a bit like the premium most people pay for car insurance or house and content insurance — we can buy protection for clients’ portfolios so that even when markets go down, our portfolios get a return for the derivatives.

This is just another example of the many assets and investment instruments we use to manage your money against short-term risks while setting them up for long-term success.

Putting money to work across many types of investments

At the end of the day, the future is always uncertain, and we think the best way of dealing with uncertainty is through diversification by which we invest across many types of industries, companies, managers and investment styles in many countries.

In fact, a typical MLC investment portfolio contains thousands of assets.  The more you diversify, the less impact any one investment, or type of investment, can have on the return from your overall portfolio.

Diversification is what we’ve stood for since we began managing Australians’ money in 1985.

Sticking by diversification has enabled us to get clients’ portfolios through many investment market shocks including the bursting of the internet bubble in 2000, the shudder than went through markets on the heels of the September 2001 terrorist attacks in the US, the GFC, as well as last year’s COVID-19 crash.

Our highly experienced investment team has learned from each episode and made us better prepared for the next. Investment market surprises, even shocks, will appear from time-to-time.  That’s just a fact of investment life.

The key is not to be fazed by them, but to have an investment approach that can act quickly and flexibly when markets are rattled.

For most investors, particularly super fund members, investing is a multi-year, even multi-decade commitment.

There will be some bumps along the way, but by sticking by diversification, as you did during last year’s events, you kept your eyes on the long-term endgame.

My investment team colleagues, and I are privileged to serve you. We take the responsibility of managing clients’ money very seriously and we will continue to apply all our skill, knowledge and experience to preserving and growing your investments.

Warm regards,

Jonathan Armitage
Chief Investment Officer, MLC Asset Management

1 Tesla would take nearly 1,600 years to make the amount of money the stock market values it at. Mercedes Streeter, 13 January 2021., accessed 14 January 2021.
2 Biden’s $1.9 trillion Covid relief plan calls for stimulus checks, unemployment support and more. Thomas Franck, 14 January 2021,, accessed 15 January 2021.
3 Q&A on the policy outlook under Democratic control. Goldman Sachs Economics Research, 11 January 2021
4 More than 200 COVID-19 vaccines are still in development, with some now focusing on mutant strains and older people. Nic Sas 24 January 2021 More than 200 COVID-19 vaccines are still in development, with some now focusing on mutant strains and older people - ABC News, accessed 28 January 2021.
5 The Coronavirus is Mutating: What We Know About the New Variants. Julie Reis, January 6, 2021, Healthline,, accessed 22 January 2021.
6 Ibid.

Important information

This information is provided by MLC Investments Limited, ABN 30 002 641 661 AFSL 230705, “MLC” or “we”. MLC is a wholly owned subsidiary within the National Australia Bank Limited Group of companies (“NAB Group”).  No company in the NAB Group guarantees the capital value, payment of income or performance of any financial product referred to in this communication, nor do those products represent a deposit with or a liability of any member of the NAB Group.

This information included in this communication is general in nature. It has been prepared without taking account of an investor’s objectives, financial situation or needs and because of that an investor should, before acting on the advice, consider the appropriateness of the advice having regard to their personal objectives, financial situation and needs.

Any opinions expressed in this presentation constitute our judgement at the time of issue and are subject to change. We believe that the information contained in this presentation is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made at the time of compilation. However, no warranty is made as to their accuracy or reliability (which may change without notice) or other information contained in this presentation.

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