Dubai: Larry Fink, the Chairman and CEO of BlackRock, the world’s largest investment manager with $3.79 trillion (Dh13.93 trillion) assets under management and around $9.9 trillion additionally in assets on its investment management platform, is surprisingly upbeat about how the world is moving, compared with 10 months ago when he last spoke to Gulf News.
“The world is a pretty good place when you think about what is going on in China, and in Japan. The stabilisation of Europe is far better than a year ago. The direction of the US economy is more understood today and Mexico is growing from strength to strength. There is still uncertainty around the Middle East and Gulf region but all in all you can summarise the world today versus a year ago as feeling a lot better.”
The US markets are a lot more confident than they were a year ago, in the view of Fink, and even with the current uncertainty around the political process, there is an assumption that the economy will be put right in the long term. That said, Fink sees continued concern over how the Obama administration will move on from its short-term fix of the fiscal cliff, and uncertainty about how the administration will develop a long term economic policy.
“The solution that was designed in Washington [for the fiscal cliff] was a short term fix. Now we have the whole issue of the sequester, and the additional cuts in the deficit that must be addressed. Once that is done, we can have a sensible long term process in which we bring down our deficits. At the moment we are about a third of the way there.
“But the market place is taking that all in its stride, and accepts the notion that politics are messy. Despite all this uncertainty markets have expanded nicely in the last five months and that trend looks to continue unless the political process turns into sheer disappointment. But I spend a great deal of time in Washington talking with men and women who are governing our country, and I do not think we are going to see disappointment.
Investors moving from bonds to equities
“People underestimate the positive macro economic trends. When I last spoke to Gulf News, we were very bullish in equities, and since then equities have rallied a lot. I think they will continue to rally because so many people are under-invested in equities.
“People are over-invested in long duration bonds and they are not risk-free. Bonds used to be seen as a stable place to keep your money, but with such low yields on ten year treasuries today, you could lose your whole year’s coupon if interest rates rise only 17 basis points.”
“Therefore we are seeing people moving from cash into equities and higher yielding fixed income, and we are seeing greater opportunities for investment in dividend stocks that can give you three, four or five percent dividends higher interest rates plus some type of inflation protection if you are afraid of inflation.
Quantitative easing and some inflation is a good thing
Fink welcomes the global trend for governments to inject more money into their economies, in order to kick start growth and avoid recession.
“Everybody around the world is finding that they must jumpstart their economies to create jobs. In the past eight months, the Federal Reserve has done more quantitative easing. The new government in Japan is doing its own form of quantitative easing and the UK might start the same type of process.
“There is more probability that the ending to this easing does not have to be messy. Of course, there is a possibility that our central bankers might miscalculate how fast inflation picks up and they will not be able to stop it, which would be a very bad outcome.
“But if we are able to jumpstart these economies, stimulating some inflation, and managing it, then you can’t say that it’s going to be a bad outcome. In the United States, two years ago the Federal Reserve began aggressive quantitative easing and they brought down rates. At that time, bringing down the rates helped the banks because they were able to bring down their cost of liabilities, and they had much better performance because of that.
“Today the persistence of low interest rates isn’t bringing down liabilities because they already came down, but it is causing asset prepayments to erode the earnings of these banks. So if you think about a bank, it historically had a gap between its assets and liabilities. By bringing down the liabilities that are the first to mature; this allows the banks to make money.
“But now their assets are maturing and you see net interest margins of banks declining which tells me that they need to be more aggressive in their lending in the coming years to offset this pressure. It’s one of the mechanisms of the Federal Reserve to stimulate the economy because you’re going to see a more aggressive banking community lending again.
European confidence
While Europe’s political management of its euro crisis has not yet run its course, Fink thinks that the sense of panic is largely over. He is much more worried about Europe’s poor competitive position, which he thinks is a much larger issue than the currency worries, and is something that the Europeans have yet to tackle properly.
“The panic in Europe is over and therefore we have had this gigantic rally in sovereign credits. President Draghi told the market that the ECB would protect the market if things got bad, so people invested again. That caused an aggressive reduction in spreads but that does not mean the problem has been fixed. It just means that the tail risk has been removed so now it is up to politicians to continue their process of austerity, and to make Europe a long-term competitor.”
European non-competitiveness
Europe’s major issue is its lack of competitiveness. Fink sees its currency woes and the big deficits in Europe as an outcome of its un-competitiveness, and he is concerned that not enough is being done to put this right and recover a more competitive position for the European economies.
“Italy and Spain are not yet competitive despite the last three years of austerity programmes. Their wages were 40 per cent higher than Germany’s and now they are probably 20 percent higher.
Even if Germany’s wages are going up, and Italy and Spain’s wages are going down, Italy and Spain still have higher wages for the same unit of labour in Germany.
“This is why Germany has done so well for ten years, as they kept their wages low. Germany had its own austerity programme, and it benefited tremendously from being aggressive in keeping its wages globally competitive. Unfortunately you can’t say that about most of Europe.”
Europe’s problem is France
“Even if Italy and Spain have started to address their lack of competitiveness, France which is the second largest economy in Europe, may still pose a risk. There needs to be a strong stable France to have a strong stable Europe. But when others have been taking action, France has continued to be uncompetitive and is not improving.
“Under Sarkozy the government raised the retirement age from 60 years old to 62 years old, but Hollande has brought it back to 60. In addition, France has gone to a 35 hour work week. Both of these points continue to make France less competitive.
“France in the last seven years has become progressively more uncompetitive versus Germany. Spain and Italy are addressing their lack of competitiveness and their countries have been aggressive in trying to find ways of making their countries become more competitive. You have not seen that movement from France.”
US benefits from secure energy
Fink argues that the United States is experiencing a manufacturing renaissance because of its strong competitiveness, but also because its energy position has been transformed with the discovery of shale gas, and the development of domestic supplies that not only offer US industry secure energy but also positively affect more value-added industries.
He compares this to Europe’s poor energy position which he thinks is compounded by poor policies. “One of the structural problems which affects Europe’s competitiveness is its energy policies. Europe’s energy policies are in my mind very troublesome in the long run. Europe is not allowing fracking, it has gone anti-nuclear, and so it is much more dependent on costly foreign oil and natural gas”.
In contrast, the US will have a huge competitive advantage in energy. “It will be able to use that inexpensive resource in new downstream products. So it’s not just going to be heating oil, it is going to be using natural gas to create plastic and other items creating great manufacturing jobs.
“Companies like Siemens are moving factories from Europe to the United States. Dow Chemicals is opening a multi-billion dollar manufacturing plant in the United States. So every few weeks you read about another foreign company moving factories to the United States, I even heard that a large Saudi company may open facilities in the United States.
“So that is where the United States is going to have a huge competitive advantage, and that it why I think the US will be surprisingly strong in the next few years in terms of its opportunities to become more competitive and a larger job creator than Europe. Obviously there are still issues in Washington but the private sector of the United States looks quite strong.”
China needs more domestic consumption
Fink is confident that China is set to continue doing well, and dismisses fears that it has been decelerating too fast as it continues GDP growth rates of around 7.5 to 8.5 percent.
“Increased domestic consumption is the key for China. It needs to transform its economy to be a much greater domestic consumer and you do not see much evidence of that yet. They are trying to do something, but it is only just beginning. But I do believe the new leadership is aware that that is the big element that is going to transform the Chinese economy.
“Till now we have not seen enough domestic consumption to offset the declining role of exports. So over the next 2-3 years we will see the new leadership look for new policies to stimulate domestic consumption more consistently.
“Over the past five years, Chinese saving rates have gone up from 25-35 per cent, and as wealth has increased you have not seen consumption pick up and there has not yet been a reduction in savings rates. That will be the transformational element, when you see the Chinese feeling more comfortable about their future and willing to save a little less, in order to consume a little more.”
Uncertainty in the Middle East
“We have great political uncertainty in the Gulf and North Africa which to me is a very big problem. It is probably one of the bigger issues we have in the world today.
“The biggest worry I have is volatility in Syria. If you topple a very strong dictator, the one thing you have with certainty is more volatility. And what happens to Syria has an effect on Jordan.”
Obama legacy
As a second term president, Obama will be focused on leaving a strong legacy, which means he needs a vibrant economy. But to get there he needs to sort out some social issues like immigration so that he can concentrate on the economy and issues like the debt ceiling.
“It would be in the President’s interest to try and get these social issues behind us very rapidly,” said Fink.
“Much of his first term was taken up with managing the worst recession of our lifetime, and he has stabilised the economy, even if it was sometimes messy. But during the presidential debates, the economy was not talked about. Hopefully we can get some of these other issues behind us so we can have a sensible fiscal cliff debate.
American immigration policies are a hot topic in the US and Fink believes that they are harming the US economy in two important ways: Firstly, by failing to allow all the bright students who come to the US to study to stay, which is a huge loss to the US economy when they return to their home countries.
“We are educating millions of foreign citizens who are getting their advanced degrees in the United States then we tell them to leave to compete with us. I suggest,under the new immigration bill, that we should say ‘congratulations, here is a green card’.
“In the last ten years we have discouraged things like that. So we need to find a way of keeping the men and women who were educated in our universities to stay in our country, and at the same time we have to address the undocumented worker issue.”
Secondly, Fink agrees with the need to address the position of millions of children who have grown up in the US but are not citizens. “We have millions of people who were raised here as children, many of their children are going to our schools and universities here and yet they are not even American citizens. This is our sore spot, we need to address this, and I do believe this is going to be done in the next 6 months. The Republicans lost because of their social views and I think the Republicans are aware that we need to change that. So I think you will see very fast change in immigration rules and it would be good for America if we do that.”
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