Nothing seems to make much sense any more, at least not in financial markets.
Central banks in Canada and Europe delivered more supersized interest rate hikes this week, and in the United States, Federal Reserve officials suggested they are ready to unleash another major hike of their own. But instead of running scared, equity investors sent markets higher – this after they sold stocks for three straight weeks because they feared this very scenario.
At the same time, the environmental, social and governance (ESG) principles that have dominated investing decisions over the past five years have ignited some fury – particularly principles pertaining to climate change, loudly championed by the world’s largest money manager, New York’s BlackRock Inc.
Amid such chaos, there is a human desire to find meaning and restore order. But take it from BlackRock, with US$8.5-trillion under its watch, this time there are no easy answers. In the same way the COVID-19 pandemic made us reconsider how and where we work, it is also reordering the way the global economy and financial markets function – and there is no going back.
“We are ending a 40-year period of ever loosening monetary conditions,” Mark Wiedman, BlackRock’s head of international and corporate strategy, and a top candidate to succeed chief executive Larry Fink, said in an interview in the company’s Toronto office. “What has basically been a price signal to companies to borrow and lever up – that’s over.”
Mr. Wiedman has touched nearly every aspect of BlackRock’s operations in his nearly two decades with the company, and prior to his current role, he was the global head of iShares and index investments, the division that transformed BlackRock into a financial juggernaut. Because of his experience, he hobnobs with the world’s most sophisticated investors, including those at his own shop.
So when he says the chaos will not subside for some time, it is an informed take. Investors hoping to wait it out on the sidelines, perhaps in an ultrasafe GIC, may be twiddling their thumbs for quite a while.
The good news for the global economy, he stresses, is that unemployment in the United States hit a half-century low in July. But Mr. Wiedman was in Europe recently, and he couldn’t quite believe the difference in attitudes between the continent and North America.
“Canada and the U.S. face similar macroeconomic headwinds, particularly around inflation and the shock of rising rates,” he said. “The biggest issue is excessive stimulus in the United States that led to a little excess demand. That’ll get worked over time with higher rates, but it’s not an existential problem.”
“This is nothing compared to the energy shock that is roiling Europe,” he said. “We’re facing a winter where German industry may have to shut down.”
As for financial markets, equity prices and bond prices are falling at the same time, which isn’t supposed to happen. Typically, investors dump stocks when they’re scared and seek refuge in bonds. The only times in recent history when prices of both assets have fallen in tandem are seminal eras, such as when Britain abandoned the gold standard in 1931, and when the United States entered the Second World War.
That this is happening now raises serious questions about the traditional portfolio mix of 60 per cent stocks and 40 per cent bonds. “Is the 60/40 portfolio dead? I would say probably,” Mr. Wiedman opined.
He doesn’t know what the new mix should be – no one does, really – but he puts it this way: If a portfolio looks the same as it did before a once-in-a-two-generation shock, “you might want to think about that a little harder.”
All the uncertainty has serious consequences for BlackRock, which built its name on the back of low-cost exchange-traded funds. Rocky markets make investors reconsider how much money they should have at risk.
So far, BlackRock is still seeing net inflows into its ETFs, meaning more money was invested than pulled out in the first half of its current fiscal year, and Mr. Wiedman said there is still a long way to go until there’s equilibrium between ETFs and other financial products, such as mutual funds, in client portfolios.
But in this market, BlackRock is particularly keen on two assets, both of which are outside its historical wheelhouse: private credit and infrastructure.
Asset managers of all stripes have been pushing alternative investments – private credit, infrastructure, private equity and real estate – for close to a decade now, because they delivered stellar returns in an era of incredibly low bond yields. But now that interest rates are rising, there are fears the entire asset class of alternative investments has lost its tailwind, which makes BlackRock’s push seem risky.
Mr. Wiedman doesn’t deny there are bound to be some changes. To his mind, private equity is the most susceptible in the current environment, partly because low rates had made it so easy for private equity firms to fund debt-heavy takeovers. “It’s open question whether we’ve had a regime change,” he said. “It’s a hot debate within the company.”
But BlackRock is confident about private credit because banks can’t lend the way they used to. Ever since the 2008-09 global financial crisis, bank capital levels have risen and leverage ratios have come down. Yet there is still as much demand for loans, if not more. “Credit has shifted off of bank balance sheets into asset managers’ portfolios,” he said.
Infrastructure, meanwhile, is intertwined with climate change. “The demand for infrastructure, especially infrastructure for a low-carbon economy, is going to be huge – and it’s intensely capital-consuming,” he said. The likes of BlackRock, Toronto’s Brookfield Asset Management Inc. and Canadian pension funds have gobs of cash available to help build natural gas pipelines and electric car charging networks.
Another source of growth: sustainable investing, particularly through BlackRock’s ETFs. “We’ve had more interest than we’ve ever had in investing in sustainable products,” Mr. Wiedman said, adding that this category is driving 20 to 25 per cent of the company’s growth. In Europe, it comprises almost all of BlackRock’s growth.
That BlackRock sees so much promise in sustainable investing is at odds with a growing backlash against ESG. Some critics, including Republican Texas comptroller Glenn Hegar, blame such principles for the global energy mess because oil and gas companies are punished for expanding production.
And because BlackRock has been so vocal about climate change, it has become a target for much of the anger. In late August, Texas blasted BlackRock for an alleged “boycott” of energy companies and threatened to ban its government funds, including pension plans, from investing in the asset manager.
Mr. Wiedman oversees BlackRock’s sustainability task force, and for him, there is no backing down. “Petroleum demand is going to decline, and a lot of people don’t want to hear it,” he said. “That’s not being created by wokeism, that’s not being created by climate activists. It’s being created by market forces.”
Certain elements of the Republican Party, he said, “have polarized and used this as a bête noire, a hobgoblin to try to rally, when actually the underlying substance is completely specious and empty.”
“I drove an electric truck in Sweden last week, a 44-tonne electric truck,” he said. “They’re coming. They’re really coming.”