Tuesday, December 10, 2013

BlackRock Turns Cautious

When the world's largest money manager turns cautious on the outlook for stocks, you probably should listen.

Featured on the cover of this week's Economist magazine, BlackRock manages $4.1 trillion, which makes the largest investor in the world. Although a good portion of its asset management business is in passively-managed index funds, BlackRock also houses a $1 trillion active management area.
The Economist print cover
Nearly three years ago, in the early part of 2011, BlackRock CEO Larry Fink hit the media circuit with the word that investors should be buying stocks.  Here's an excerpt from a March 24, 2011, piece that appeared on the CNBC website:

BlackRock CEO Larry Fink isn't surprised by the recent climb in U.S. equities, as the asset class remains "very cheap," he told CNBC Thursday.

Speaking from the trading floor of BlackRock —which with more than $3 trillion in assets under management stands as the world's largest money manager—Fink said the U.S. equity market remains one of the "most under-invested" asset classes today. 

"People have underinvested in U.S. equities for years—people have over-invested in fixed income," he said. The long-running rally in fixed-income, Fink added, has left equities "very cheap versus where credit spreads are."


This courageous call was, of course, absolutely correct:  the S&P 500 has risen+45% in the past three years.

BlackRock just published its 2014 investment outlook.  While it is not necessarily recommending that investors sell stocks, it does point out that the twin engines of stock market growth over the past few years - central bank liquidity and valuation expansion - are not likely to be as helpful in the coming year.

Here's an excerpt from financial columnist Ambrose Evans-Pritchard of the London Telegraph reported on BlackRock views:

BlackRock, the world’s biggest investor, has warned that central banks are poised to tighten monetary policy in the Anglo-Saxon countries and China, advising clients to be ready to pull out of global stock markets at any sign of serious trouble. 
“2014 is the year to squeeze more juice out of risk assets. But investors should be ready to discard the fruit when it starts running dry,” said Ewen Cameron Watt, chief strategist for the BlackRock Investment Institute. 
The group said in its 2014 Investment Outlook that investors have “jumped on the momentum train, effectively betting yesterday’s strategy will win again tomorrow”, but vanishing liquidity could leave them trapped if the mood changes. “Beware of traffic jams: easy to get into, hard to get out of,” it said.


Here's a link to the full BlackRock Institute Report:


I am typically not a fan of "year ahead" forecasts - so many times they are wrong - but given BlackRock's track record and asset size it is certainly worth considering their views.