Larry Fink (BlackRock Co-founder) – Quarterly earnings, U.S.-Saudi Arabia tensions and the U.S. economy | CNBC (Oct 2018)

Chapters

Abstract

Navigating Through Volatility: BlackRock’s Strategic Insights, Market Dynamics, and Evolving Geopolitical Landscapes

In the ever-shifting landscape of global finance, BlackRock, the world’s largest asset manager, stands as a beacon of insight and strategy. The recent earnings report of BlackRock reveals a complex interplay of market volatility, geopolitical tensions, and emerging trends in investment. Larry Fink, the CEO of BlackRock, navigates these challenges with a focus on long-term economic outlook, while also addressing the current concerns of wage inflation, housing affordability, and geopolitical risks. Notably, BlackRock’s decision to withdraw from the Saudi investment conference post the Jamal Khashoggi incident reflects the intricate balance between ethical considerations and business imperatives. This article delves into the multifaceted dimensions of BlackRock’s strategies, market outlook, and the broader implications of their decisions in a volatile economic environment.

BlackRock’s Earnings and Market Outlook:

BlackRock’s recent earnings report, featuring a higher-than-expected earnings per share but a slight miss in total assets under management, illustrates the current market realities. Despite industry-wide outflows in equity mutual funds, BlackRock experienced positive inflows and growth in areas like its Aladdin business and technology revenues. This performance is a testament to BlackRock’s robust strategy amidst market uncertainties. Notably, the company has been actively raising assets in alternatives, including real estate, infrastructure, renewables, ESG-related investments, and hedge funds. Additionally, BlackRock has made selective investments in private technology startups, although this remains a minor component of its overall strategy.

Market Volatility and Investor Behavior:

Fink attributes the net flow disappointment to a significant de-risking trend among investors, shifting from equities to safer investments. This move highlights the prevailing investor confusion and fear, driven by concerns over peak earnings and modest inflation increases. Fink, however, views the recent market correction as a transient phase, maintaining a strong belief in the economy’s resilience over the coming years. This sentiment is shared by many institutional investors, while retail investors have continued to show net inflows. Hedge funds, on the other hand, have been de-risking, leading to recent outflows.

Wage Inflation and Economic Impacts:

Acknowledging the concerns about wage inflation, especially in European companies, Fink points out that the U.S. has not yet seen significant impacts on margins due to wages. He notes a skewness in wage data, where retiring high-paid workers are being replaced by lower-paid younger employees, particularly noticeable in sectors like technology.

Housing Market Challenges:

The issue of housing affordability, especially in high-priced areas with floating-rate mortgages, is another concern raised by Fink. He highlights the potential economic impacts due to the $10,000 cap on mortgage interest deductibility and rising interest rates, which could lessen housing desirability and affect the broader economy.

Geopolitical Tensions and Market Repercussions:

Fink acknowledges the market implications of geopolitical events, particularly those involving Saudi Arabia and China. He underscores the need for understanding these complex landscapes and their ramifications for investors. Fink has had extensive discussions with other executives regarding the situation in Saudi Arabia, emphasizing the potential impact on global relationships. The recent decision by BlackRock to withdraw from the Saudi investment conference following Jamal Khashoggi’s unexplained death exemplifies the intricate nature of international business ethics.

Corporate Ethics and International Relations:

The withdrawal from the Saudi investment conference following Jamal Khashoggi’s unexplained death exemplifies BlackRock’s ethical stance. Fink’s decision, aimed at balancing stakeholder interests and maintaining relationships, underscores the intricate nature of international business ethics. Although BlackRock has a long history of business ties with Saudi Arabia, the incident raised concerns among employees and clients, prompting Fink to navigate the situation thoughtfully. While seeking a solution to delay the conference until the investigation was completed, Fink respected the long-standing relationship with Saudi Arabia, ultimately deciding to withdraw when his efforts proved unsuccessful.

Emerging Market Equities and the Strong Dollar:

The recent 10% decline in emerging market equities, while the S&P 500 experienced a 10% increase, created a 20% divergence in investment returns. The strong dollar and rising energy prices, partly due to U.S.-China trade tensions, destabilize the global economy. Diplomacy with Saudi Arabia is crucial to stabilizing energy prices.

Trade War with China:

The ongoing trade war between the United States and China threatens to inflict significant damage on both economies. The goal is to contain the conflict to trade negotiations and avoid escalating it into a financial war. Selling US treasuries could be China’s last resort if its economy deteriorates.

China’s Role in the Global Economy:

Despite its focus on trade with the United States, China is heavily reliant on Southeast Asia and global trade beyond the United States. Selling US treasuries would lead to a rise in their currency, harming China’s economy. In recent years, China has taken a more statist and communist approach, slowing down some reforms.

Corporate Values and Transparency:

In a transparent world driven by social media, corporations must clearly communicate their purpose and values. Business interests should align with corporate values to build trust and credibility.

Rise of Robo Advisors and Financial Literacy:

BlackRock has leading robo advisors in Europe and the United States. Robo advisors may impact traditional market trading and the use of asset managers like BlackRock. Financial literacy remains a significant issue globally, requiring attention and improvement.

Financial Literacy and Populism:

Larry Fink believes that the rise in populism worldwide stems from people’s fear of their financial future and retirement. He emphasizes the need for technology to promote financial literacy and gamify investing to engage the younger generation.

Central Bank Response to Financial Crisis:

Fink acknowledges that central banks have limited tools to respond to financial crises and that their actions often strengthen financial markets. This has led to a situation where those with equities and financial assets have benefited more than those relying solely on home equity.

Market Correction and Peak Earnings:

Fink addresses the recent market correction and de-risking by hedge funds. He believes that the U.S. economy is still strong and that there may be a few more quarters of earnings growth before a potential slowdown. He emphasizes that the market is adjusting to uncertainties and fears, and equities are generally cheaper now than in January.

Corporate Accountability and Challenges:

Fink reflects on the irony of BlackRock taking a lead in corporate accountability while facing challenges in regions like China and Saudi Arabia. He maintains that BlackRock is committed to “walking the walk” and making difficult decisions, even if they may not be universally agreed upon.

Navigating the Era of Social Media:

Fink acknowledges the complexities of operating in an era dominated by social media, where black-and-white decisions are rare. He believes that governments are too focused on short-termism and that nuanced and gray area decisions are becoming increasingly difficult.



Through strategic diversification, ethical considerations, and a focus on long-term economic prospects, BlackRock, under Larry Fink’s leadership, navigates the complexities of the current financial landscape. The company’s approach, balancing market realities with corporate values, offers a nuanced perspective on the intersection of finance, geopolitics, and ethical responsibility in today’s interconnected world.

Notes by: Alkaid