BlackRock CEO Larry Fink says capital is the winner from automation so buy equities.
BlackRock chairman and chief executive Larry Fink showed again this week why so many political leaders, central bankers and chief executives are so keen to get a chunk of his precious time.
In an interview with Chanticleer he mixes insightful comments about financial markets with big picture views on the global economy, the entrenchment of Xi Jinping’s power and Fink’s own theory on how to close the gap between rich and poor.
His views on transformation of the French economy are informed by his privileged access last week to President Emmanuel Macron. Fink says they spoke for several hours and he took away from that discussion a Macron idea that he thinks might work well in Australia: an estate tax on property sales.
Unlike many visiting global chief executives Fink does not skate over or avoid questions about the local economy. Nor does he refuse to speak about burning local issues such as the reputational damage to the big four banks from recent scandals including the money laundering charges against the Commonwealth Bank of Australia.
Fink is not afraid to comment on individual executives, but only in the context of what is best for the long-term interests of all shareholders.
As the world’s largest manager of index funds and exchange traded funds and one of the world’s largest active equity managers, Blackrock has the power to influence the direction of many companies.
It can and does use its votes at shareholder meetings to exercise its fiduciary duty to the owners of BlackRock’s funds.
“An active manager, if they really hate a company, they can sell the shares or become public activists,” he says.
“You have two choices: sell the shares if you don’t like it or really force public change.”
But Fink says BlackRock does not have the option of selling. It must exercise its fiduciary duty through voting its shares.
“We can’t sell the shares which means we have to be more active than an active manager,” he says.
The exercise of these votes has, in some cases, brought BlackRock in direct conflict with the management and boards of many large, poor performing companies.
Fink revealed on Tuesday Blackrock plans to set up this engagement with companies it invests in. He wants to take BlackRock’s engagement to a “whole new level”.
That should make the managers of poor performing, large cap companies avid readers of Fink’s annual chairman’s letter.
Over the past five years Fink has used this medium to set out his views about a range of issues including corporate governance, generating long-term shareholder value, changes in the investment landscape and the impact of technology on the global economy.
Here are some excerpts of Fink’s views on a range of issues in a conversation with Chanticleer. Fink says several of these will make it into his next chairman’s letter.
China and Xi Jingping
“You have had the Party Congress and now we’ll see how the Xi government will navigate the economy and reforms over the next five years.
“So, we probably have a period of some uncertainty in China. They’re going to do some reforms and generally when you do reforms you see the economy slow down.
“If Xi’s benevolent it’s a good thing, if he’s not benevolent it’s a bad thing. But I don’t see any reason to fear.
“I think his first five years have shown that the Xi government has done very well in terms of navigating the economy and improving the quality of life for more Chinese. In theory, some elements of the society may have less rights, but on the other hand I would say the majority of society in China have done very well. I would qualify the Chinese leadership as one of the best leadership teams in the world.”
“The biggest problem you have in Australia is the amount of leverage that’s in real estate. I don’t see a housing bubble.
“You have a housing bubble if your economy sputters, you have a housing bubble if you reduce immigration.
“If you allow immigration you have new entrants in society who are looking for housing. If you are now going to find ways to reduce immigration, which is the big issue in so many countries right now, you may have a change in housing valuations. Right now, I don’t see that.
“Household debt is only a problem if household income rises slower than inflation and or you have rising unemployment. Over the last three years or I think the Australian banks have been pretty good at keeping a good loan to value ratios and low default rates.”
“I am less fearful of the banks. Two years ago I would say the banks were very expensive versus international banks.
“in the last two years the banks, based on the stock prices are flat, Macquarie is probably the only one that has been rising.
“But the majority of the banks haven’t really moved, whereas JPMorgan’s stock price has doubled. BNP Paribas’s stock price has more than doubled. So, all the rest of the banks are now closer to the valuations of the Aussie banks.”
“Australia has its share of governmental issues, like so many democracies, like the UK and the US.”
“Generally when there’s political instability the first line of attack is against the banks. When there is uncertainty around governments there is generally uncertainty around banks.”
“But I don’t think the banks in Australia are usually bad. I would say that the banks by and large are pretty strong in the foundational beliefs of doing the right thing.”
“But I believe the Australian banks have done a very good job overall.”
“Now could there have been some lending practices that could have been better? Sure. Obviously, there’s no excuse for money laundering, so I’m not here to say that there is not some evidence of some bad practices. There has to be change when you see that type of bad behaviour if there is not the proper process.
“But I would say for the size of these entities these four banks in Australia and the scale of what they do in terms of what they do for a society and they are not so bad.”
Savings and investing
“I think one of the greatest problems we have in the world today is people are so frightened of the future despite how well everything is economically.
“It’s manifesting in so many different ways. In Japan there are $US5 trillion of individual savings sitting in a bank account or Japan Postbank earning zero.
“Imagine Japan if most of that money was invested to the outcome of your liability, your pension. You put that into equity. You put that in the long-dated assets.
“In Europe 72 per cent of all savings is in a bank account. In Europe investing is considered gambling.
“If you invested in a German bank account for the last 25 years you earned a 20 per cent return, so you earn less than 1 per cent a year for 25 years. If you invested over the 25 years in the German equity market, the DAX, you made 4.7 times your money.”
“If you read Thomas Piketty, if you read some of the progressive economists some of the problems that we see is that as we substitute humans for machines the people who own the capital are the big beneficiaries.
“So you see the wealthy getting wealthier, which is a common problem worldwide right now.
“We can narrow that divide though if we finally can get all these savings into investing
“Because the average company most of the companies have a payout ratio at least 70 per cent between stock repurchases and dividends. In fact, in Australia most of the banks have a 70 per cent dividend policy.
“But if you own equities and you’re participating in the growth of the company you don’t have that problem, as I just suggested. If capital is the winner and if we had greater participation in equities worldwide instead of sitting in bank accounts over a long horizon we would have less of this problem.”