Long-term investment outlook now brighter, says BlackRock’s Larry Fink

THE quick succession of interest rate hikes last year hit the values of stocks and bonds, but long-term investment opportunities have since opened up, says Larry Fink, chief executive of BlackRock, the world’s largest asset manager.

Inflation, Fink told The Business Times in an interview, is set to remain elevated going forward – not at the 7 to 8 per cent levels that the US saw in 2022, but likely at 3.5 to 4 per cent. “All that just means tighter central bank behaviour,” he said.

Until recently in 2022, investors avoided fixed income assets, which produced very low yields, and invested more in alternative assets for higher returns. “Now in 2023, you can invest a large percentage of your portfolio in bonds, and you don’t need to overlay that with so much illiquidity by going into private markets. A lot of valuations have normalised towards a better long-term PE ratio. I look at 2023 as the beginning of long-term opportunities,” he said.

For the fiscal year 2022, BlackRock’s revenues fell 8 per cent due to “significantly lower markets and dollar appreciation on average AUM (assets under management) and lower performance fees”, the company reported in its filing with the Securities and Exchange Commission. AUM fell by 14 per cent from US$10 trillion at end-2021 to US$8.59 trillion. Still, net inflows were strong at about US$393 billion, thanks to record flows into bond ETFs, significant outsourcing mandates and growth in private markets.

Fink had argued previously in his famous letters to companies and shareholders that companies should have a purpose and that sustainability would drive a significant reallocation of capital. There is, however, currently a political backlash against ESG and “woke capitalism” in the US, and against BlackRock in particular. Some state investment funds have pulled an estimated US$4 billion in capital, on the grounds that an ESG agenda runs against a manager’s fiduciary obligation to achieve the best returns. Fink’s annual letter is expected within the next few weeks.

Fink said the debate mainly centres around the “S” or social component of ESG, and includes issues like diversity. “Very visibly, four states have taken about US$4 billion of money from BlackRock amid a lot of fanfare. But last year, BlackRock raised (nearly) US$400 billion in long-term assets. In the US, we raised over US$230 billion. The silent majority is awarding BlackRock more business than ever.”

“Clients appreciate our fiduciary standards... We’re trying to correct (the states’) errors. They are misstatements about us. So much of it is politics, and it’s hard as a public company to stand in front of the noise, but behind the scenes to deeply correct them. We’re doing that.”

Fink said China’s economy is likely to reflect a strong post-Covid bounce as business activity resumes. But the long-term prospects, particularly in the context of a shrinking and ageing demographic, are more uncertain. “The Chinese stock market has rallied by quite a bit, but now the question is what is the sustainable growth rate for China? I don’t think you will see a normalisation to a 6 per cent growth rate anytime soon.”

China reported 3 per cent growth in 2022, and strategists have revised their forecasts to over 4.5 per cent for 2023. China’s population has fallen for the first time in six decades, and the birth rate is at a record low.

China, he said, has other challenges. One is the ongoing restructuring of supply chains out of the country. “This doesn’t reflect anti-China sentiment. It’s about creating a more resilient supply chain.”

Yet another is getting consumers to consume and invest more. Excess household savings in China reached five trillion yuan (S$1 trillion) in 2022, equivalent to 5.1 per cent of GDP. With its departure from zero-Covid restrictions, some savings are expected to be channelled into consumption.

“The Chinese systematically save more than any country in the world, which means they consume less,” he said. “When a society saves more, that tells me they have less hope in the future. Chinese growth is governmental. For China to go the next step, growth has to be driven by the private sector.

“Will they transform their savings into investments? That’s what everyone hopes for. If the Chinese invest more, that can be an engine of growth and China can develop its capital markets.”

Institutions, he said, remain under-invested in China, “because they don’t understand if China will be a long-term destination for capital”. A sticking point, he said, is China’s stance in the Ukraine war. To date, China has not condemned the invasion by Russia, and it has opposed economic sanctions against Russia, among others.

China’s biggest trading partners are the US and Europe, alongside South-east Asia. “The Ukraine war is an existential threat to Europe and a threat to the US. There is the big, unanswered question – is China going to support Russia? I’d say that China’s clients – Europe and the US – they’re going to find different friends to do business with, if you are doing something against the interests of your clients. China is dependent on its exports, and it doesn’t really export anything of magnitude to Russia.”

On the tech sector, Fink welcomed the downward revaluation of stocks. But he lamented the dearth of transformative technology, especially to enhance productivity. “People invested with the idea that some tech companies would be magically different, and they weren’t… But we need to continue to think about how tech will transform and build our societies. The next ideas will be around AI. Let’s hope AI is going to be the next technology that enables humans to be more productive.”

But he is optimistic on tech’s role to enable a “fair and just” transition towards a net-zero emissions world. “The technology we create must bring down the cost of green energy, or it would be hard to have that transition… We have to develop cheaper mechanisms for carbon sequestration and capture. If we want to reshape most of the world, the area on which there is less focus is how to bring down the carbon footprint of agriculture.”

In the US, a BlackRock unit is involved in a project with Valero Energy Corp and Navigator Energy Services to develop a pipeline to gather, transport and store carbon dioxide emissions in the US.

BlackRock has also partnered Temasek to establish Decarbonisation Partners, a US$600 million commitment to invest in companies and technologies that reduce and potentially eliminate carbon emissions.