Beyond the downturn

ARMANDO SENRA:  Welcome to the BlackRock Future Forum, for the first time coming to you from our brand-new global headquarters in Hudson Yards here in New York City.  I'm Armando Senra, head our Americas Institutional business at BlackRock and it’s my pleasure to be hosting today.

We created the Future Forum to bring together thought leaders and investors to share the topics that shape the investment landscape of today and tomorrow.  We want this to be an interactive event.  So, join us in the chat room, ask questions, and see what your peers are thinking with our real-time polls.

Now, there’s been plenty of headlines about a potential recession, the debt ceiling, Fed policy, and escalating geopolitical tensions, including the ongoing war in Ukraine, but also growing tensions with China.  For institutional investors, any one of these present hefty challenges.  But coupled together, it is very difficult to know where to focus and how to position portfolios. 

Despite all of these, there’s still a lot to be excited about.  This economic downturn has been well advertised and anticipated.  The fundamentals are very different from past experiences.  Unemployment remains at the lowest level we’ve seen in 50 years, while company and consumer balance sheets remain relatively healthy.

So today, we’re going to move beyond the noise and explore the headwinds, but most importantly, focus on the investment opportunities ahead.  We’re starting the conversation with two of the most prominent leaders in the business world, BlackRock’s Founder, Chairman, and CEO, Larry Fink, and Jane Fraser, the CEO of Citi. 

I’ll sit down with them to ask about their outlook for the economy and sources for optimism about the future.  I will then speak with Anand Selvakesari, CEO of Citi’s Personal Banking and Wealth Management, on the state of the consumer health and innovation driving financial inclusion and growth. 

As always, we will have actionable investment ideas.  We’ll have Gargi Chaudhuri joining us to speak with BlackRock experts on what this all means for portfolios. 

Now, before we get started, please get to know our tech interface because we have an interactive agenda.  And don’t forget to join us in the live discussion with your peers and BlackRock experts on all the topics we’re covering today.  Welcome to the Future Forum.

Larry, Jane, great to have you here today.  It’s our first event here at our new headquarters in Hudson Yards.  And, Jane, by the way, you’re the first guest that we have at the event, so which is very fitting given the relationship we have between both firms.  So, great to have you both on this conversation with our clients.

JANE FRASER:  Well, thank you very much.  I'm having building envy.  It’s absolutely superb, Larry.  It’s gorgeous here.

ARMANDO SENRA:  I want to start off by getting your view of the world today.  Obviously, 2022 was incredibly challenging.  We had supply chain disruptions, a war in Europe, high inflation, drawdowns in both equities and bonds for the first time in a long time.  What is your outlook for the economy in 2023? 

JANE FRASER:  Well, I think you’re absolutely right, Armando.  When we think about last year, we really in the back end of last year got used to just having a litany of bad news, and it was rather refreshing to start the year with some good news for a change on multiple different fronts.  So, you know, a better start to the year than many of us expected.  I don’t think we can afford to be complacent around that, because there’s still a lot of structural issues to be addressed. 

But China opening, albeit with a human dimension that is challenging, but from the economic point of view I think a services-driven recovery there is going to be helpful for Asia.  When we look at Europe, the warmer winter, they’re looking more at stagnation than we were worried about contraction there, still with some structural issues to address in energy that will be a longer-term fiscal situation.  And here in the States, you know, a pretty staggering jobs report and some other data getting the year going.  We’re still expecting to see rolling country recessions in several parts of the world.  So, while we’re – the chances of a softer landing in many places have increased, I think we’re still concerned about some pretty persistent services inflation from the pivot to services. 

So, from the macro side, I think the big difference that we’ll see is more in the markets.  So, a lower growth environment does not necessarily translate to a bad year in the markets, and I think we’ve seen that the beginning of the year.  A lot of investors are very much risk on.  We had a pretty extraordinary first couple of weeks in terms of primary issuance and a lot of investor appetite. 

And, you know, last year it was a lot about the macro and, you know, concerns around the inflation side.  I think that’s pivoted a bit more to the growth agenda and concerns on growth.  So, we’ll be expecting to see some more focus around countries and around asset classes versus last year where it’s much more around macro. 

And I'm a bit more optimistic.  A grim year in the economy doesn’t always translate to such a bad year in the market.  So, I'm hoping the second half will be better. 

I'd close by saying what are we seeing from our clients and hearing from our clients, because we have a very big global footprint.  I think like many we’ve been enjoying being around the world.  Everyone always says is globalization dead?  I would say it’s just, it’s different.  It’s certainly getting more fragmented, but the risks are getting much more connected.  So, if we think of cyber risk, we think of defense risk, we think of energy risk, climate risk, food risk, financial security, all of those pieces are getting more connected together.

ARMANDO SENRA:  Great.  Larry?

LARRY FINK:  I, I'm coming from a totally different perspective.  I think for long-term investors, 2023 is a great launch.  If you think about what it cost to invest in 2020 and 2021, bonds’ yields were so low, negative that most long-term investors had to invest in more illiquids to beat their targeted liability.  So, it was a good trade because you had central banks, you know, stimulus and you had huge fiscal stimulus.  So, it all worked out. 

But the reality is the long-term risk and the how much illiquids that most investors needed to put in just, you’re just, the investors were adding so much risk to that.  Now we can own a two-year at 4.75.  You know, you have the ability to look at your long-term portfolio allocation and bonds can be a major component.  So, you’re going to be able to de-risk and still get two-year targeted liability. 

And I think actually if you were, just got to pull the money in 2023, you would’ve said this is a great opportunity to invest.  PE ratios have come down.  Valuations have changed.  We, you know, we reassessed everything because of all the geopolitical issues, because of going from deflation to inflation, going towards globalization to fragmentation.  All those things are real, but the reality is the opportunity for long-term investors is so much better than it was in 2021-2020.  And so, I look at it from that framework. 

Now all the advancements in decarbonization and because the IRA, the subsidies that investors can attain now investing in it, you’re going to be able to invest in illiquid, like a infrastructure project that is decarbon, decarbonizing.  You’re going to get a high coupon.  You’re going to get high certainty of good cash flows because the stimuluses are for ten years.  And so, I – the way one can invest today is far easier to achieve the liability than it was just two years ago.

And so, we are actually, because of the geopolitical issues we’re imposing more inflation, more structural inflation.  And so, that’s going to be with us longer.  But that being said, the market is pricing in quite a bit of this.  And so, I look at this with much more opportunity than even a year ago, despite the, you know, the changes in policy, both fiscal and monetary.  But a much better place to invest.

ARMANDO SENRA:  Can we touch on something?  You were mentioning the – how globalization is changing.  You mentioned national security and obviously that creates inflationary pressures.  But on the – for the long term you also see, you know, the forces of deflation coming through, right?  So where do you see this roll off? 

Right now, you’re building more resilient supply chains.  National security’s driving inflation.  But there is also seeds of deflation being grown right now in the world.  Where do you see that beyond 2023?

JANE FRASER:  I see it probably the response that will come to tight labor markets.  So, as we think about where robotics, where we think about all these extraordinary technology advances that are happening and really revolutionizing different industries.  At the same time as all of this is going on that we’re talking about, those will be some of the forces that I think the tightness and I – the reduction in the labor participation rate’s quite dramatic in quite a few different countries, this one included.  That, I think, is going to force more and – more and more companies to accelerate what they’re doing around the automation to capturing different technology trends that are out there.

We’re seeing it in every single client industry that we work with that that is something that’s taking over.  And, frankly, the private equity space, which you’re obviously getting very heavily involved in as well and the alternative assets, that is also accelerating those trends because you don’t have some of the public market pressures on quarterly earnings that can act as a bit of a brake on it.  So, I think it’s all about technology.

LARRY FINK:  The inflationary trends that we’re developing right now will ultimately mean more resiliency, more duplication, which then leads to more deflationary pressures.  So, the front end is very inflationary as we fragment supply chains.  Europe became very aware of their dependency on Russian gas.  Most companies are looking at the highly dependency of China.  They’re diversifying away from China.  They’re not running away from China, but they’re diversifying and they’re looking for more resiliency of supply chains.  So, you may have some countries being big beneficiaries of that trend, whether it’s going to be an Indonesia or a Vietnam.  India and Mexico are the big beneficiaries of this. 

So, all of this are the seeds for deflationary pressures.  The short-term problems that we have in labor, as Jane was talking about, is real.  I mean the greatest labor market problems are generally associated with not just bad demographics like you’re seeing in many parts of Europe and now in China in a very severe way.  You have bad policy.  I mean the US, we have 2.5 million fewer legal immigrants, legal, I want to underscore legal immigrants because we changed immigration policies.  At the same time – at the same time we have huge needs. 

Last summer, which is this is a pretty startling fact with so much food inflation, we had ten million acres of farmland fallow in the summer of ’22 because lack of labor, fallow, with all the elevated food prices.  And so, these are just policies that we’ve created that has created this elevated wage inflation.  And there will be – the outcome will lead, as Jane was saying, it’s going to lead to faster implementation of technology, whether that is some form of robotics, but more importantly it’s going to be more AI.

So, yes.  All the issues we have today, because of the changes from globalization to fragmentation and all these issues, we’re in the short-term cycle, and short-term could be five years, of more inflation, which is going to be the seeds for greater deflation out in the second half of this decade.

ARMANDO SENRA:  Jane, this is a perfect lead, talking about technology, talking about data.  Citi has tremendous access to financial information on consumers.  So, you have a great perspective on consumer sentiment, consumer spending.  What are you seeing right now in that data?

JANE FRASER:  I think it’s a lot of good news, but also some normalization that’s going on as well.  So, the consumer has come out of COVID really around the world with excess savings, excess deposits in their accounts.  What we’re seeing in the States right now though is that there is an increasing K-shaped dimension to this.  So, the bottom quartile have now got fewer deposits in their bank accounts than they had pre-COVID; whereas, the top quartile has over a trillion dollars more deposits in their account.  So, beware the danger of averages, because they’re not really showing the full picture of what’s going on.

We’re seeing consumers back with a very strong focus again on services, and that’s had teeth all the way through from the summer last year and continues on, supporting the labor market.  That's also good because a lot of people live paycheck to paycheck.  So that services spend is translating into supporting the lower end FICO scores and that important part of the population.

So, you know, areas where we’re seeing real growth is travel, dining, entertainment, all of that experiential that we missed out for a long time, and we see that in different countries around the world.  That will happen in China as China opens up again.  What we’re also seeing from the consumer is some real shifts in how they’re behaving.  So, we got used to digitization.  Everything went digital away from physical.  But it sometimes masks some of the other shifts going on.  Healthcare, wellness, so that element around the consumerism is really changing enormously.  

And then we’ll see what happens with rates, we’ll see what happens with some of the other trends on the economy as to whether that goes to mild recessionary levels or not.  It should be manageable.  We don’t think it’s going to be very challenging, and it gets back to those things from banks, from consumer health and even corporate health that we usually pull heading into a period of lower growth, right now are strong.  They will not be amplifying the waves that we have in the way that we’ve seen in the past unless someone does something really crazy in the world.

ARMANDO SENRA:  Yeah.  That's also brings back the – that sense of optimism that you had at the beginning of the conversation. 

JANE FRASER:  Yeah, cautious optimism. 

ARMANDO SENRA:  Cautious optimism.

JANE FRASER:  I think there’s a little bit too optimism in the market.  But, you know, as Larry’s talked about from the market can afford to be ahead of the economy.

ARMANDO SENRA:  Right.  So, Larry, taking it now from the consumer to investors, what are the high conviction views that you have for 2023 and the opportunities that you see for investors that they should be thinking about in 2023?

LARRY FINK:  As I said, bonds represent a great opportunity.  If you look at the traditional pension fund 25 years ago, 80% of their pension fund was in bonds.  They were able to meet their target.  And then over the course of the last 25 years as interest rates systematically went down, bonds had to play a smaller and smaller role in the assets to meet the liability targets and more risk, attendant risk had to be put on.  And by and large it worked out because of the amount of central bank stimulus and then most recently a lot of fiscal stimulus.

I don’t see we are going to have any monetary stimulus by any central bank for a long time.  In fact, you know, they may stop raising rates, but they’re going to still have to unwind their large portfolios and do quantitative tightening instead of quantitative easing. 

So as that as a backdrop, the long-term opportunities to have our governments and our central banks to stimulate the economy, it’s going to be a lot harder.  And so, one is going to have to reevaluate where the successes are and, as I said, bonds are going to play a particularly good role.  The reassessment of PEs in the marketplace make equities a better valuation than they were just a year ago. 

I talked about infrastructure and the opportunities in decarbonization, and I think other countries are going to do the same types of subsidies.  Europe – Europe was – is quite concerned that they’re going to see a big swing of companies leaving Europe to go into the United States and, indeed, that’s happening because of the IRA.  And so, there are going to be great opportunities for investors right now.

And I just finished a tour in Asia.  The opportunities to invest in Southeast Asia, as I said, are going to be good there.  You know –

ARMANDO SENRA:  Paying attention.  Nearshoring, friend shoring, if you want that. 

LARRY FINK:  Well, that’s why I'm, you know, I’ve been a loud believer in Mexico and it’s, you know, it’s starting to show up in their GDP numbers.  And I do believe that we are going to see this revolution in technology that’s – that we want to be a part of the investing landscape.

And so, but we could design a portfolio now that is going to be far less risky than what you had needed to design two years ago.  And I think that’s one of the principal issues.  And I think whether the markets go up and down, the reality is you can now de-risk a major component of your portfolio in investing in shorter-term bonds.  Credit, credit now you can get 5-6% now. 

So, I look at this as a really, as a fertile time to invest.  As good as the markets were in 2020 and 2021, it was the markets were great because of the monetary and fiscal stimulus.  So, that’s behind us and one has to reevaluate are we going to have that type of stimulus to allow us to have that much illiquidity.  And but you’re going to be paid for it by investing back into some liquidity and then taking on more illiquid items that you believe will allow you to achieve your long-term liabilities.

ARMANDO SENRA:  So, let’s completely switch and let’s talk about leadership.  If you look at the world today, there’s so many things happening, so much volatility.  You have the, I think tomorrow will be one year since the beginning of the war in Ukraine.  We’re also living with the natural disasters that happened after the earthquakes in Turkey and Syria. 

Let's talk about leadership in this type of moment.  You lead a global institution.  Can you talk a little about leading in this type of volatility, in this type of environment?

JANE FRASER:  Yeah.  We’ve been through a lot, from a pandemic, war, huge, huge disruptions and distortions that have gone through, and they’ve had an impact, and the world is different than the world it was, you know, three years ago.  So it’s, I think it’s very important to be out as leaders listening and curiosity is probably one of the most important traits to have, that trait as a leader of not assuming but going in with curiosity, understanding where are the new areas of opportunity, the Indias, the Mexicos, the – some of the Middle East opportunities, what’s happening in Southeast Asia, Africa, complete – some of the countries there are incredibly dynamic, others not. 

And every country you go to is full of surprises as to which ones have really leapt forward, which ones are feeling more stale, because there is a lot of noise in the system at the moment.  But there’s some huge opportunities and there’s some big problems to be solved which are infinitely solvable, but we need to get on with that rather than getting distracted with where the noise is in the system at the moment.  And I think it’s both, I would say it is conviction, it is curiosity, and it’s also courage that are some of the important traits.

ARMANDO SENRA:  That's great.  Larry, any comments on leadership for you before I – ?

LARRY FINK:  Well, I think Jane said most of it.  I would just say with the polarization in the world today it’s more important than ever for leaders, both political and corporate, to stand by your principles and values every day.  I think there’s an absence of strong voices because everybody’s hiding from the polarization.  But I, you know, but the – to have a strong employee base, a committed employee base, to have a strong client base that understands and believes in the company, it’s up to the leadership to convey that to both to your clients and to your employees.  And you can then see the conversation and you can build from that and there’s nothing – there are going to be many times where you may disagree, but you understand each other’s position.  That allows you to move forward. 

And so, for me, getting back to the humanness, instincts of how we live and operate, we need conversation.  We need to have that humanistic connection and in person.  And to me, that’s the greatest lesson from the pandemic and how we lived and how we operated.  You know, you’re able to cauterize and correct mistakes.  And it’s hard to do that when you’re not together and remotely.

So, I think there’s going to be a lot of lessons to be learned.  But it’s about leadership and it’s about inspiring.  It’s about, you know, elevating the company’s principles and its purpose to, you know, to have that connection with your employees and your clients.

ARMANDO SENRA:  So, let’s just stay with that one for a second.  For our audience, for our clients listening to us here, you’ve always been very consistent about the mission and the purpose of BlackRock.  What would you say in terms of BlackRock’s role and responsibility to our clients and to society and the message that you would give, you know, the ultimate beneficiaries?  Think about the millions of people that we manage their pension plan.  What would be the message that you would give?

LARRY FINK:  Look it, our job is staying in front of the needs of the clients.  I mean the market’s evolving and changing and we need to be providing advice and guidance to our clients so they can navigate through all the uncertainty, so that they could navigate around all the negativity.  And to me, it’s about having that continuity of advice and guidance that differentiates BlackRock.  And then more importantly though, through that process we then can help shape more lives and help people have a better financial future.

And I think from, you know, next month will be our 35^th anniversary as a firm and we have not changed our mission statement once.  It is the same mission statement.  Our principles are the same.  It’s about trying to really understand the world and the world’s evolution and stay in front of that evolution, anticipating that evolution so we can stay in front of the needs of clients and provide the proper guidance, comfort, and then allowing them to have a better and brighter future.

ARMANDO SENRA:  So, we are about to end.  So, Larry and Jane, I know both of you are optimists at heart.  2022 was incredibly difficult.  What are you looking forward the most in 2023?  Let's end in a good note.

JANE FRASER:  I'm looking forward to spending more time with the American entrepreneur.  I think as a proud immigrant, as you might be able to guess by the accent, to this country, I am forever astounded by the innovation of the American entrepreneur.  I think it is an extraordinary capability of this country and what it can deliver. 

And if I look at be it the energy space, think around the technology space, think around healthcare, you, you know, you name sector after sector, I am just looking forward to getting excited by the possibilities as we sit down with different clients who I'm sure will be companies that you’re investing in here and around the world, but at what they’re going to do, because that’s – that is one of the greatest pleasures of the seat I'm in is to have access to these incredible companies, many of which are middle market.  They’re not necessarily the huge, large ones, but the innovation and that is just breathtaking and it’s just damn exciting.

ARMANDO SENRA:  Yeah.  As another immigrant I can attest to that.  That, it’s one of the things here in America that’s just incredible.  So, Larry?

LARRY FINK:  I think I’ve said it already.  Having more conversations in person.  Having a conversation really highlights the opportunities.  And I would say in 2023 so far, the desire for more conversations is as great as I ever remember.  And having those conversations mind will – in my mind will ameliorate a lot of the tensions.  And I think having those conversations on the political side, on the business side, on the personal side, that we have those dialogues worldwide, we have those dialogues in country. 

And there is a huge amount of innovation going on in the world.  And at the same time, there’s a lot of parts of the world that are being left behind and if we don’t elevate.  You know, the one most important thing I would say, the opportunity I see is in more countries now they realize that the role of the capital markets is becoming the real economic engine.  And whether that’s India or Mexico right now, the desire to build their global capital markets to be more part of the global system, to, you know, bring in capital, to attract capital for entrepreneurialism, that, that’s happening everywhere.

And to me, I believe the key will be is the openness of markets.  And that if the markets continue to be open and expand, a long-term investor is going to be in a really good position over time.  I'm not here to suggest the markets are going to go up or down anytime this year, but what we see is the desire to expand the global capital markets worldwide in almost every country gives me a high degree of optimism that we’re going to solve more problems and hopefully we can lift more people in the world and then we can have a safer and sounder world.

ARMANDO SENRA:  Larry, Jane, thank you.  What a great way to finish this conversation.  Thank you for being here.

LARRY FINK:  Thank you, Armando.

JANE FRASER:  Thank you, Armando.