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A message from MLC Asset Management's Chief Investment Officer

January 2021

By Jonathan Armitage, Chief Investment Officer

Dear Advisers and Investors

The new year is still new, but head-shaking things have already taken place with the most startling being the chilling entry of mobs into the Capitol Building in Washington while Congress met to certify Joe Biden’s election as America’s 46th president.

Despite the violence and fears of further outbreaks, Mr Biden was constitutionally confirmed and is now in the White House.

In this note to you, I want to touch on three related topics.

The economic implications of a Biden presidency; the potential for both higher than anticipated economic growth as well as inflation stemming from President Biden’s policies; and how greater economic growth may give a boost to value stocks, which have underperformed for most of the post-GFC era compared to growth stocks as well as share markets generally.

Democrats’ razor-thin majority

The Democratic Party’s two surprising wins in the early January run-off Senate elections in traditionally Republican voting Georgia has caused investors to recalibrate what may happen under a Biden presidency. With the addition of Vice President Kamala Harris’ tie-breaking Senate vote, Democrats now have control of both chambers of Congress, albeit by very narrow margins.

So, for at least two years until the 2022 mid-term elections, the prospects for passing Mr Biden’s ambitious economic agenda seem brighter than was the case just a couple of weeks ago when most observers had assumed a continuing Republican Senate majority, which would probably have been a hand-brake on the new president.

First up: coronavirus rescue package

A week before his inauguration, President Biden unveiled details of a US$1.9 trillion coronavirus rescue package. The proposal, titled the American Rescue Plan, includes familiar stimulus measures with the goal of sustaining families and firms until vaccines are widely distributed.

The plan is the first of two major spending initiatives Mr Biden is aiming to rollout in the first few months of his presidency.

Key proposals1 include:

  • 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
  • Providing US$15 billion to create a new grant program for small business owners
  • Making US$35 billion investments in some state, local, tribal, and non-profit financing programs that make low-interest loans and provide venture capital to entrepreneurs.

Longer-term agenda and tax changes

A second bill, expected in February, will tackle the president’s 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.2

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.

High income earners are also likely to be paying more tax, but close watchers of US politics expect the revenue raised to be used to finance tax cuts for middle-lower income earners, including partial restoration of the deduction of state and local taxes. Capital gains taxes might rise too, however, expectations are for any increase to stop far short of ordinary income tax rates.

Ultimately, corporate taxes are expected to account for most of any tax increase: the US corporate tax rate fell from 35% to 21% under President Trump. During his campaign, Mr Biden proposed raising the rate to 28%.

While tackling the economic hardship (and health havoc) caused by COVID-19 is understandably the focus of the first part of President Biden’s domestic agenda, the largest part is the repair of America’s bitter social and political divisions through activist economic policy.

There’s a view across the Democratic Party, as well as growing numbers of social and economic thinkers, including some Republicans, that ‘small government’ policies centred on low taxes are inadequate to deal with America’s alarming problems.

Getting independent minded Democrats on board

That said, President Biden doesn’t have a free hand, despite the Democrats’ majority in both houses.

Unlike the usually disciplined Republicans, Democrats are a more loose-fitting group. Critical to passing legislation in the Senate will be winning support from the likes of famously independently minded West Virginia Democratic Senator Joe Manchin, a key swing-vote representing a conservative state.

Keep a close eye on people like Senator Manchin over the next few years. They’ll be influential and accommodating them will be necessary to progressing President Biden’s agenda.

Higher inflation ahead?

Still, it’s very difficult to imagine America going down the austerity road and so, on balance, there’s a good chance that the US will be spending big over the next few years. At the same time, the US Federal Reserve (the Fed) has revised its monetary policy to say it will tolerate inflation going above its 2% goal (a level not breached since the GFC).

This marks a shift from previous cycles when the Fed tightened interest rates before inflation threatened to break out. All this represents a sea change with policymakers clearly signalling that they intend to run the economy at a high pace with the aim of returning to pre-COVID-19 unemployment levels.

While the inflation threat has been conspicuously absent since the GFC — in fact undershoots of inflation targets have been a greater problem for central banks — investors believe this time could be different as central banks seem committed to letting inflation run faster than usual before tapping the brakes of higher interest rates.

Investor reactions to this have been as expected.

Share markets have generally reacted positively to the prospect of accelerated economic recovery on the back of massive US government spending.

By contrast, the bond market isn’t so happy as evidenced by bond yields moving higher (bond prices softened). Bond investors are focused not just on a burst of new bond issuance that will be required to finance increased stimulus, but on the longer-term implications for higher inflation.

The prospect of higher cyclical inflation together with trends like ‘de-globalisation’ that add to price pressures is a topic discussed in my previous note.

There’s a risk that we’ve all become so used to very low inflation that we can’t envisage the possibility of higher inflation. Successful investing looks out for dangers ahead to avoid them and this generation of investment professionals need to be thinking about inflation now, rather than when it’s on top of us.

At MLC, rather than betting on higher inflation and simply buying expensive assets that are linked to inflation and hoping we’re right, we prefer to invest time to identify investments that are likely to react positively to an inflationary environment but are not as sensitive to a continuation of what is now a very long period of low inflation.

This obviously brings with it a series of trade-offs that limit the reward of being ‘right’, but at the same time reduce the consequence of being wrong. Given that it’s impossible to have perfect foresight, and that we are ultimately risk managers, we believe this is the right way to invest in these highly unusual times.

Flickers of encouragement for value stocks

While bond market inflation-hawks are leery about the higher economic growth outlook, value investors have their fingers crossed that it arrives sooner rather than later. That’s because a strong, widespread economic rebound is typically associated with better value stock returns.

Economic growth across major economies has largely been below par over the past decade and company earnings growth has also been uninspiring. Consequently, investors have paid up to own the shares of companies, especially a handful of technology companies, associated with upbeat earnings prospects. Said differently, many investors have been willing to pay for earnings at any price.

The likes of Facebook, Amazon, Microsoft, Google and Tesla have benefited enormously from this and seen their market valuations skyrocket. In calendar year 2020, the market concentration of the biggest American stocks reached new levels with the five largest companies in the US S&P 500 Index accounting for 40% of the growth index at the end of the year.3

No wonder some have taken to describing the S&P 500 as the S&P 5. As an aside, Tesla’s valuation is so stratospheric that one estimate suggests that on the current price-to-earnings ratio, it would take the company almost 1,600 years to make what the stock market says it’s worth!4

Meanwhile, value stocks in industries leveraged to economic growth such as banking, energy and mining have struggled.

But better days may be coming for value stocks. Even as several countries reintroduced COVID-related restrictions, the price of oil has been rising with the West Texas Intermediate crude price approaching US$50 a barrel, territory that has not been seen since the start of the pandemic.5

An upturn in the economy would also be good for financials, particularly banks, as steepening yield curves and improved economic activity bolsters their profitability.

There have been other flickers of hope for value stocks – emphasis on ‘flickers’ as short-term data does not constitute a trend.

In November, value stocks in the US S&P 500 Index delivered a total return of 12.9% against 9.7% for growth, while in December value stocks’ return of 3.5% was only slightly short of the 4.1% return of growth stocks.6

Investors will be keeping a close eye to see whether this truly represents the start of a rotation from growth to value stocks, or a false dawn.

Trusting diversification

As ever, we’re relying on diversification across many dimensions to prepare for multiple eventualities.

Through diversification across many managers, countries, asset classes, securities, investment styles and philosophies, we’re able to source returns in numerous ways rather than relying on the success of any single investment theme to drive performance.

Diversification also means that long-term portfolio return profiles tend to be smoother than those dependent on a narrow set of performance drivers.

As you’d imagine, our portfolios are devoid of dogmatism and prepared for a wide range of scenarios and possible return outcomes. Markets are dynamic and our investment approach responds to ever-changing risk and return potential.

For instance, while inflation is a risk we’re alert to, we’re also conscious of the possibility that the disinflationary environment may stretch a little further. So, rather than going all-in on inflation or disinflation, we continue to take measured steps to embrace risk where we believe it will be rewarded and build as much exposure to real cash flows.

In this context, the portfolios’ listed infrastructure exposure plays a dual role, bringing an element of inflation sensitivity, but low cyclicality and a robust real yield. The allocation to infrastructure complements cyclicality added in 2020 via metals and mining stocks, as well as controlled risk-taking through strategies deployed in Chinese equities and emerging markets.

Giving clients access to alternative assets

Alternative assets are another source of diversification as they provide returns that aren’t strongly linked with the performance of mainstream assets.

Alternative exposures include ‘low correlation strategies’ that aim to deliver returns mostly independent of share market performance. Likewise, client portfolios have access to multi-asset ‘real return strategies’ that don’t have common restrictions such as asset class limits, enabling managers to build strategies that are well diversified and can cope with a range of risks.

Portfolios also include insurance-related investments where returns are primarily derived from accepting insurance risk. Returns from these investments are, by their very nature, largely uncorrelated with share markets, hence they provide substantial diversification benefits to portfolios.

Alternative strategies have traditionally been difficult for retail investors to access, and we continue to have high conviction in their diversifying role.

Our emphasis with alternative asset managers, in fact all managers, is to develop deep relationships that create a true sense of partnership.

Due to this, we’re able to keep downward pressure on fees, in addition to negotiating innovative arrangements where we benefit from external managers’ commercial success. The results of this accrue to you, our clients.

Warm regards,

Jonathan Armitage

Chief Investment Officer, MLC Asset Management


1Biden’s $1.9 trillion Covid relief plan calls for stimulus checks, unemployment support and more. Thomas Franck, 14 January 2021,, accessed 15 January 2021.
2Q&A on the policy outlook under Democratic control. Goldman Sachs Economics Research, 11 January 2021.
3Tide may eventually be turning for value stocks after strong end to gloomy 2020. S&P Global Market Intelligence, 6 January 2021. accessed 15 January 2021. Returns quoted are in US dollars.
4Tesla 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.
5Tide may eventually be turning for value stocks after strong end to gloomy 2020. S&P Global Market Intelligence, 6 January 2021.
6Ibid. Returns quoted are in US dollars.

6Ibid. Returns quoted are in US dollars.[3] If you buy an options contract, it grants you the right, but not the obligation to buy or sell an underlying asset at a set price on or before a certain date. A put option is bought if investor expects the price of the underlying asset, such as a share, to fall within a certain time frame. A call option is bought if an investor expects the price of the underlying asset, such as a share, to rise within a certain time frame. Because of this, options are used for hedging purposes to manage risks.  [1] The Investment Futures Framework is MLC’s unique scenario-based portfolio construction approach applied to manage the MLC multi-asset portfolios, also known as the “MLC Investment Trusts” —including MLC Wholesale Inflation Plus, Horizon and Index Plus portfolios.

[2] A put option is a contract that gives an investor the right, but not the obligation, to sell shares of an underlying security at a set price at a certain time. A put option is typically a bearish bet on the market, meaning that it profits when the price of an underlying security goes down.


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.