Monthly economic update with MLC, February 2020

Funds Management

by Clive Tompkins

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MLC Senior Economist Bob Cunneen discusses the impact of the coronavirus for MLC portfolios.

How have share markets reacted to the coronavirus outbreak?

Well, investment markets have been thrown into turmoil. If you look at the American share market, you've seen an 11 per cent fall in the final week of February, and for the Australian share market you had a circa 10 per cent fall. So, it's been a negative reaction. But we also have to keep in perspective, this comes after an extraordinary 2019, when the American share market posted gains of around 31 per cent, and the Australian share market was up about 24 per cent.

So, essentially, investors were giving back some of those positive returns from last year, but we need to take a watching brief on what's going to happen over the next couple of months in particular.

What does this mean for clients' portfolios?

It means, year to date, that it's likely to see negative returns. You do have some mitigation factors in play. A lower Australian dollar helps unhedged global share returns, and if you have bonds in your portfolio, they provide a little bit of insulation because we've also seen historic lows on government bond yields.

So, for example, the American 10-year bond yield is down below 1 per cent, the Australian 10-year government bond yield is down around 0.7 per cent. So, these positive returns in the bond market offset the negative returns in the share market, as long as you have a diversified portfolio.

What can clients expect over the coming months?

Clients can expect a tough ride because until we get more positive signs on the coronavirus, in terms of the number of cases of infection, as well as the mortality rate peaking, we are still going to be sensitive to the negative returns in the share market.

But, at some point, share markets will be anticipating the recovery story in terms of after the coronavirus. So, it's very difficult as an investor to time that market, so it's important that you stay with your long-term investment strategy.

What should clients do about their investments?

Investors should stay calm because we've seen in the past, when we've had these significant event risks, whether it's been the 1987 stock market crash, or the Asian crisis in 1997, or the 2001 terrorist attacks, we've seen that share markets have responded negatively in the short-term, but have rebounded strongly when the crisis has cleared.

So focus on the longer term and think about having that diversified portfolio, and that should put investors in a good place over the longer term.