The head of the world's biggest money manager says the degree of irrational fear in the market suggests it is hitting a bottom.
Laurence Fink, the chief executive officer of New York-based BlackRock is frustrated with bumbling politicians and regulators. But he appears to be more concerned about investor sentiment than he is about the issues that have spooked those investors.
"The biggest problem right now, in the markets and everywhere else, [is that]we're frightened of shadows," Mr. Fink said during an interview in Toronto. BlackRock oversees more than $3.6-trillion (U.S.) in assets and has a client list that includes a who's who of pension and sovereign wealth funds.
"The fear that I felt in the market Friday and Monday really gave me a moment of pause, where I said 'this could really break down,'" Mr. Fink said.
Once he stepped back and thought about it, though, it gave him some cause for optimism. "This fear and the irrationality I'm seeing in the marketplace is now giving me an indication we're bottoming … It still may have to fall another 15 per cent before they find the bottom, but I do believe … over a cycle it will probably be proven to have been a very good time to invest. Because the irrationality is so great, you can taste the fear."
That means this is the time to be in stocks, not bonds. Mr. Fink points, for example, to JPMorgan, a bank that he says is likely to do well over the long term. The return from its dividends is better than the return from its bonds. Other names he likes include Siemens and Verizon Communications
It could take a year for the market to bottom, but investors with a long-term view should benefit from a shift into equities now, Mr. Fink suggested. "I think we're in our 11th year of flat markets or down markets since 2000, and the worst we've ever experienced is 16 years," he said.
Mr. Fink said he thinks average investors are now more unsettled than they were at the height of the 2008 crisis.
"If your [investment]horizon is 10 years, you should not be in bonds," he said. "Stocks have not been this cheap since 1980. People have run away from equities because they're frightened about the future."
Much of the blame rests with politicians, Mr. Fink suggests. And he has a few thoughts on what they could do better.
For one, he suggests that now is the time for fiscal stimulus measures. Part of the reason the Great Depression stretched on so long was because governments became more restrictive and did not stimulate the economy, he said. Similarly, he thinks U.S. authorities should be pushing banks to lend to consumers with less-than-stellar credit ratings because banks have tightened their lending standards too much.
"The pendulum was so lenient [prior to the crisis] and now the pendulum is so restrictive, we need now to be a little more calm," he said.
Mr. Fink would like to see Europe fix its problems once and for all, a solution that he says is likely to cost something in the neighbourhood of $2-trillion.
"It could have been a $1-trillion fix maybe six months ago," he said. "The problem in Europe today is it's all incrementalism. They just do these little fixes, little fixes, and the market gets worse because the little fixes are just not enough."
Unlike U.S. banks in 2007 and early 2008, Europe's banks are not, by and large, over-levered, Mr. Fink said. So, while this problem still has the capacity to morph into a banking crisis, the underlying problems are not as great, he suggested.
"What is happening today is predominantly a de-risking," he said. "There's trillions and trillions of dollars of money sitting on the side. So it's very different than '08 and '09. Money is there, it's just people are frightened."