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Investment market impacts of coronavirus. Part II

February 2020

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Financial markets, which had until now adopted a ‘wait and see’ attitude to the coronavirus pandemic, seem to have changed course. 

On Monday, global shares had their worst day in two years and the Australian share market has in recent days seen its biggest sell-off since the depth of the US-China trade wars last August.

There appears to be a realisation that economic dislocations stemming from the coronavirus may be more significant than markets previously assumed.

While more Chinese provinces have downgraded their emergency response levels on reports infections have plateaued in the country, the virus is spreading to more countries with Iran, Italy and South Korea now among key sources of worry.

The vast majority — 90% of the new infections in South Korea, were in Daegu (population 2.5 million), the country’s fourth-largest city and the epicentre of the country’s outbreak, and the neighbouring province of North Gyeongsang.1

Stories out of China of people told to stay at home and not return to work; factory shut downs freezing global supply chains for everything from mobile phones to autos and pharmaceuticals; and dramatically lower consumer spending is causing investors to re-exam previous assumptions of a limited global economic impact.

Also under question are expectations of a post-Covid-19 economic bounce. The 2003 SARS parallels investors are looking back to as a guide may be inadequate, emphasising our view that the past can be a poor steer to the future, especially when the data set is limited.

It seems a stretch to assume Covid-19 will play out like SARS simply because both originated in China!

The Investment Futures Framework captures pandemics

Generally, investment professionals think about what is likely to happen, as distinct from what can happen.

By contrast, our Investment Futures Framework actively steers us away from this kind of comfort zone thinking towards understanding the many things that could happen (Chart 1) and then identify the most appropriate trade-off between risk and return for each of the portfolios we manage for clients.

Chart 1: Our Investment Futures Framework considers many possible futures, including a global pandemic (scenario 25)

Source: MLC Asset Management Services Limited

Rather than imagining one or even several sets of outcomes and their associated investment returns, the Investment Futures Framework recognises the possibility of a vast number of scenarios with a great breadth of return possibilities. This includes highly likely scenarios as well as ‘long shots’ like pandemics, such as the current coronavirus outbreak.

The coronavirus and the way it is disrupting societies, economies and markets demonstrates the Investment Futures Framework’s practicality and elasticity. Having pandemics as a possibility, even if remote, means that we’re not taken by total surprise when low probability events occur.

We’re not caught scrambling to analyse on the run. Perhaps the worst time to begin thinking about a low probability event is when it’s already underway.

Portfolio changes

For some time, we’ve been emphasising risk control in our MLC Wholesale Inflation Plus portfolios. In our MLC Wholesale Horizon and MLC Wholesale Index Plus portfolios, the overweight to foreign currency has helped to cushion these portfolios during recent market moves.

Likewise, options-based strategies in our Inflation Plus portfolios2 have helped the portfolios to mitigate the weakness in a number of share markets. Our gold futures position in these portfolios have also contributed positively to returns as investors flee risk for traditional safe-haven assets, including precious metals.

Events and markets are moving fast. We are continuing to be vigilant on behalf of our clients.

1 Source: Coronavirus latest updates: WHO mission director warns world is 'simply not ready' for pandemic. Wednesday 26 Feb 2020. Accessed 26 February 2020.

2 Investors in MLC Wholesale Horizon and MLC Wholesale Index Plus portfolios have exposure to these strategies through their investments in real return strategies.

Important information

This communication is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (MLC), the Responsible Entity for the MLC Wholesale Inflation Plus, MLC Wholesale Horizon and MLC Index Plus portfolios, and is a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230 686) group of companies (NAB Group), 105–153 Miller Street, North Sydney 2060.  MLC is not an authorised deposit-taking institution and NAB does not guarantee or otherwise accept any liability in respect of any financial product referred to in this publication.

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

The Product Disclosure Statement (PDS) for each of the MLC Wholesale Funds mentioned in this communication — MLC Wholesale Inflation Plus Conservative; MLC Wholesale Inflation Plus Moderate; MLC Wholesale Inflation Plus Assertive; MLC Wholesale Horizon 1 Bond portfolio; MLC Wholesale Horizon 2 - Income portfolio; MLC Wholesale Horizon 3 - Conservative Growth portfolio; MLC Wholesale Horizon 4 - Balanced portfolio; MLC Wholesale Horizon 5 - Growth portfolio; MLC Wholesale Horizon 6 - Share portfolio; MLC Wholesale Horizon 6 - Accelerated Growth portfolio; MLC Wholesale Index Plus Conservative Growth Portfolio; MLC Wholesale Index Plus Balanced Portfolio; and MLC Wholesale Index Plus Growth Portfolio — are available upon request by phoning 132 652 or on our website at

The PDS for each of the MLC Wholesale Funds mentioned in this communication is issued by MLC Investments Limited, and you should consider them before making any decision about whether to acquire or continue to hold those products.

This information is directed to and prepared for Australian residents only.

Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market. Any projection or other forward-looking statement in this document is provided for information purposes only, and no representation is made that they will be met. Actual events may vary materially.

Opinions constitute our judgement at the time of issue and are subject to change. Neither MLC Investments Limited nor any member of the NAB Group, nor their employees or directors give any warranty of accuracy, not accept any responsibility for errors or omissions in this publication.