Larry Fink (BlackRock Co-founder) – BlackRock CEO discusses earnings and reopening economy (Apr 2020)

Chapters

Abstract

Understanding the Economic Impact of the Pandemic: Insights from BlackRock’s Performance and Global Trends

Lead: ETF Market Resilience and Aladdin’s Success amid COVID-19 Challenges

The COVID-19 pandemic has triggered significant changes across global financial markets. Exchange-Traded Funds (ETFs), particularly fixed-income ETFs, have shown exceptional performance, offering investors flexibility in adjusting their market exposures. This resilience is further bolstered by the surge in first-time ETF users. BlackRock’s Aladdin system also demonstrated its resilience by seamlessly adapting to unprecedented remote work environments, with a 34% revenue increase.

BlackRock’s Financial Health: Revenue Growth and Client Engagement

BlackRock experienced an 11% revenue increase and a 3% rise in operating income year-over-year. Despite fluctuations, the company maintained stable margins. Proactive outreach to over 50,000 clients was particularly noteworthy, with executives holding numerous virtual meetings, significantly contributing to market share gains. The firm’s Q1 performance was solid, beating expectations on both top and bottom lines. Revenue rose 11% year-over-year, driven by higher base fees and growth in technology services revenue. Net inflows reached $35 billion despite challenging market conditions. Aladdin revenues surged by 34% year-over-year, seamlessly supporting remote work for over 90% of BlackRock’s employees and clients worldwide.

Investment Patterns: Inflows, Outflows, and Sector Focus

Investment patterns during the pandemic reveal intriguing trends. There was an $82 billion inflow into long-term investments at the quarter’s start, followed by a $100 billion outflow, primarily from index products, after February 21st. Cash inflows surged, reflecting a preference for liquidity. Post-quarter, inflows resumed. BlackRock’s focus on active equity and alternative investments, including illiquid alternatives, contrasted with the broader industry trend, as they experienced inflows despite the general market downturn. Significant inflows in cash accompanied large outflows in index products during the last six weeks of Q1. The firm has since seen more inflows. BlackRock experienced $4 billion of active equity inflows and $7 billion of inflows into illiquid alternatives during the quarter, reflecting its emphasis on high-share illiquid alternatives. Cash investments attracted over $50 billion of inflows over the past few years.

Global Economic Outlook and Challenges in Disease Management

Larry Fink’s emphasis on monitoring the disease curve and governmental support highlights the complexity of the economic outlook. As the Southern Hemisphere approached winter, concerns escalated about the spread of COVID-19 globally, particularly in regions with underdeveloped healthcare systems. Rebooting economies emerged as a major challenge, with testing and safety protocols playing a crucial role. This is exemplified by China’s experience, which, despite rigorous testing and monitoring, still struggles to fully revive its service sector. Concerns are rising about the acceleration of COVID-19 in regions entering winter in the Southern Hemisphere. Fink questions whether borders will remain closed for an extended period and if businesses can successfully reopen without adequate information on the global spread of the virus. Additionally, concerns exist about inadequate testing and monitoring systems in developing countries, making it difficult to track the spread of COVID-19. The inequitable distribution of medical supplies, with developed nations holding most of the masks, gloves, and other essential items, is a topic of discussion for the IMF and World Bank.

Privacy, Cultural Considerations, and Economic Recovery Strategies

The need for extensive testing and monitoring raises privacy concerns, especially in democratic societies. Cultural differences also play a significant role in the acceptability of these measures. Economic recovery strategies focus on adequate testing, with companies like Abbott Labs developing rapid testing methods. Fink suggests that recovery, particularly in the service sector, will be gradual, requiring Americans to feel safe and comfortable. Privacy concerns were raised about the use of measures like Beijing’s barcode card to track individuals’ health status and movements, allowing access to certain places. While such measures have enabled China to reboot faster, concerns about privacy may hinder their implementation in democratic societies. Extensive testing and instilling a sense of comfort and safety among the public are crucial for economic recovery. Fink suggested implementing airport testing before entering the terminal to mitigate health risks and boost confidence in air travel.

Market Recovery and Government Response

Fink does not anticipate a rapid V-shaped recovery, projecting a more gradual U-shaped or J-shaped trajectory. This outlook is influenced by the time needed for widespread testing, antiviral treatments, and vaccine development. Government response, characterized by significant monetary and fiscal stimulus, is crucial for stabilizing the economy and markets. Fink warns of potential long-term impacts, such as inflation and dollar devaluation, due to massive government debt. The uncertainty surrounding the economic outlook due to the ongoing pandemic is acknowledged. Fink suggests that the bottom may have been reached if the disease curve continues to decline in developed countries and government support measures increase. However, he cautions that the market may be underappreciating the potential impact of the virus in developing countries as they enter the summertime. Government response is critical for economic recovery, with Fink emphasizing the importance of developing antiviral therapies to reduce the severity of COVID-19. He drew a parallel between COVID-19 and influenza, emphasizing the need to learn to live with the disease through vaccination or treatment. Fink projected a gradual recovery, with a more normalized environment potentially emerging in August rather than June or July.

ESG Investing and Corporate Accountability Amidst the Pandemic

Despite the pandemic, the relevance of Environmental, Social, and Governance (ESG) investing remains intact. ESG-focused investments have outperformed in the first quarter, indicating a growing awareness of environmental issues. Fink acknowledges the government’s role in balancing corporate gains and losses, suggesting that broader market dynamics and corporate accountability will be critical areas of focus once the immediate economic challenges are addressed.

Navigating Economic Challenges and Future Perspectives

In conclusion, BlackRock’s performance during the pandemic serves as a lens through which we can understand broader economic trends and challenges. From the resilience of ETFs to the complexities of rebooting economies, the financial landscape is undergoing significant shifts. With a focus on testing, safety protocols, and ESG investing, the path to economic recovery, though gradual, is being charted with cautious optimism. The insights from BlackRock’s experience, coupled with global economic trends, offer valuable perspectives for navigating the uncertain terrain ahead.

*Market Recovery and Government Response:*

– Larry Fink does not foresee a rapid V-shaped recovery. He anticipates a longer, U-shaped or J-shaped recovery due to the time required for testing, antiviral development, and vaccination.

– Fink emphasizes the importance of government response in stabilizing the economy and markets. He commends the Federal Reserve’s and central banks’ actions in purchasing assets and providing monetary stimulus.

– Fink also highlights the significant fiscal response by governments, which has helped stabilize the economy and allow corporations to access capital.

– He acknowledges the accumulation of large amounts of debt as a result of government actions, comparing it to being in an operating room, where the focus is on keeping the patient (economy) strong.

– Fink expresses concern about the actions of Europe, which he believes have not been as significant as they should be.

– He suggests the need for another fiscal stimulus in the United States to support small and medium businesses and independent contractors, estimating that this stimulus could add another trillion dollars to the national debt.

– Fink anticipates that in three to four years, the large-scale government response could lead to increased inflation and potentially a debasing or devaluation of the American dollar, which he views as a positive development that would improve the United States’ competitiveness worldwide.

*Importance of ESG Investing:*

– Despite the current economic crisis, Fink maintains that ESG (Environmental, Social, and Governance) investing remains important in the long run.

– He highlights the continued demand for ESG ETFs and the outperformance of ESG products in the first quarter of 2020.

– Fink believes that as the world recovers from the pandemic, more people will be concerned about environmental issues, leading to increased interest in ESG investing.

*Government Intervention and Corporate Accountability:*

– Fink acknowledges the government’s role in socializing corporate losses and privatizing gains, particularly during the last two major economic crises.

– He anticipates that this intervention may lead to questions about stock repurchases and potentially higher corporate taxes to address the resulting deficits.

– Fink emphasizes that these questions are important but secondary to the current focus on triaging and fixing the global economy.

*Uncertainty in Picking Winners and Losers Amidst Economic Turmoil:*

– Larry Fink highlights the inherent difficulty in determining which companies will thrive or fail during economic downturns, especially when governmental support is prevalent.

– He emphasizes the moral and practical challenges of deciding to let companies fail, potentially leading to job losses for thousands of employees.

– Andrew Ross Sorkin acknowledges that while it may not be the right time to legislate winner-loser selection, it remains a conversation that will significantly impact the country and markets in the future.

– Sorkin expresses his desire to continue the conversation with Fink on this topic, emphasizing its importance in shaping the country’s economic landscape.

Notes by: datagram