Wei Li serves as global chief investment strategist at BlackRock BLK , the world’s largest asset manager, with $9.42 trillion as of the end of June.
So when she talks, people listen.
I spoke with her on “Money Life” about the company’s outlook for this year, her view of financial stocks and country allocation, and why artificial intelligence (AI) and technology stocks might have more room to run.
A key quote:
‘We want to be selective in how we are deploying money and deploying risk … because we are not in an environment where a rising tide is lifting all boats.’Wei Li, BlackRock
This interview has been lightly edited for clarity.
Chuck Jaffe: Everyone’s 2022 forecast was wrong because nobody expected the market would peak on the first day. Forecasts for 2023 were wrong because everyone was saying there’s going to be an event, like a recession. How hard has 2024 been in order to prep your outlook and feel confident about it?
Wei Li: Very hard, very hard. And I think, Chuck, you are spot on in observing that, at the beginning of 2023, there was a lot of concern about a recession coming, us included. And it ended up being a year where we actually escaped recession, and markets, especially AI and tech, did quite well following a very, very bad 2022. So in contrast to 2023, where sentiment was quite negative, 2024 started with reasonably strong sentiment, if I may say so, speaking to peers and clients and investors from all across the world.
People are feeling quite good after the Fed pivot in December, especially given the cash on the sidelines and clients telling us that they are keen to deploy cash. So from where I stand, yes, there are macro challenges, but momentum can run for a while because inflation is coming down and the Fed essentially gave the green light to start pricing in rate cuts.
CJ: You mentioned money on the sidelines, and a big part of BlackRock’s global outlook is putting money to work. Obviously you want to be getting that money off the sidelines, but where in the world do you want to be putting it amid these conditions?
WL: We want to be selective in terms of how we are deploying money and deploying cash and deploying risk. And the reason for that is because we are not in an environment where a rising tide is lifting all boats. We’re in an environment where there are still macro constraints, macro challenges. If you look at the latest non-farm payroll from the US, the labor market participation rate is coming down. There is real concern around supply constraints, and the labor market continues to be quite robust. The growth still looks OK, but there are macro challenges. That’s the bottom line.
That being the case, as we think about how we want to construct portfolios and put money to work, we want to be selective along the lines of which are the countries, the sectors, the styles that can benefit from an environment where central banks start cutting rates, which is our expectation, but also growth … slowing down from where we from where we are in terms of momentum. Inflation is coming down but with a lot of uncertainty because of supply constraints. So we need to understand this kind of environment, what are the parts of the markets that are fairly priced in and maybe even with upside versus parts of the markets that have priced already for perfection, which is the case for some, especially after the melt-up Christmas rally that we had.
CJ: BlackRock’s outlook includes a number of different themes. So while I want to find out where you’re putting money, the biggest theme was managing macro risk. We’ve got two wars going on globally, and that is an overhang on everything. So is the macro risk the thing that is ultimately pushing you in certain directions, or is it more you want to be investing away from the macro risk. In other words, pick the industries and the places in the world that are least affected by … the big geopolitical stories.
WL: With every risk comes opportunities as well. When we say managing macro risk, it’s also really just managing the macro landscape and identifying opportunities. As we think about how we put money to work on a selective basis, I would flag, for example, within fixed-income, where in an environment where central banks are cutting rates, yields are at an attractive level and we want to lock that in for a long time. Over three years, we were underweight US government bonds. Toward the end of last year, in Q4, we turned neutral. And we’re looking at more opportunities like that, where we can lock in some of these attractive yield levels. The front end of the curve looks very interesting, especially in the context of rate cuts starting.
We also warmed up to the belly of the curve. We liked investment grade for a long time. Now spreads are a little tight, so we like it a little bit less now. But high-yield on a relative basis, but not only high-yield in the US, but high-yield in Europe … represents a good value opportunity. Mortgage-backed securities we also like, especially given valuation.
As you can see, we’re not talking about going across the board. We’re talking about selective pockets of the markets. And for those that are interested, again, staying within fixed-income but interested in venturing further afield, emerging market debt that is offering attractive income and, at the same time, benefiting from the rate cut cycle that started earlier in emerging market versus developed markets. That’s interesting too. So those are the fixed-income opportunities.
On the equity side, I talked about being selective. For most of 2023, we were overweight in tech and AI, which has paid out really well. We think there could be more to go in this theme. AI adoption is just getting started. We’re still keeping that overweight, but we also recognize that parts of the markets have underperformed — healthcare, for example. We see opportunity, value opportunity, there. We like energy as a sector as well, especially in the context about the two ongoing wars and energy finishing the year where it did. There is some geopolitical risk premium that we could tap into industrials, given where we are in the cycle. So lots of interesting selective opportunities that we are investigating as we put money to work.
CJ: What I didn’t hear mentioned was any mention of financials. We lived through a banking crisis in 2023. It was a short-lived banking crisis, and there’s a lot of disagreement about whether it’s going to come back. Where are you on financials?
WL: That’s interesting. We do like European financials where valuation is very attractive. There is a preference for European financials.
And the reason that we’re not warming up to US financials as a whole is because, after the banking crisis, there has been a flight of deposits. So there is dispersion even within the sector itself, the larger players versus the smaller players, which in our view warrants a more selective, even more selective, approach, more granular than the sector, all the way down to sub-sectors and single names, which is what our active investors are specialized in. [That’s why] this outlook didn’t feature on a sector level, but certainly there are more granular opportunities there. But if we want to stake on the sector level, European financials, given the valuations, look reasonably attractive.
CJ: You mentioned that you are looking at European financials, but you’re underweight Europe. In terms of global allocations, how much is emerging markets a focus? How much is stay-at-home because the US is still the best market in the world?
WL: We talk about [emerging markets] as a big block, but actually we cannot paint them with the same broad brush because one emerging country is very different from another emerging country. In fact, as we think about geopolitical fragmentation, some are beneficiaries and some are losing out, right? It’s hard to kind of talk about emerging market as a whole, but what I would say is that we see better income opportunities in emerging markets, in fixed income, than in equities, which carry greater volatility. You talked about this home bias, which is very interesting and notable in the flows that we see as well. Looking at US flows, there has been a real focus in terms of really kind of going into the US equity market, capitalizing on the tech theme, on the AI theme.
We like that. As I mentioned, we continue to like it in 2024. We think that there is more to go, volatility notwithstanding. As we think about the broad market macro challenges, but at the same time, selective opportunities on the single sector front that I just talked about, US equities on aggregate, more than a European equity market where we are broadly underweight because the growth dynamics in Europe is weaker than the US and inflation is falling down very quickly, but I wonder if that represents a weaker growth trajectory. And at the same time, we had Jay Powell pivoting in December. Whereas Madame Lagarde, ECB, actually making it really clear that they would try to keep rates higher for longer and they haven’t officially pivoted. In terms of the environment that we’re in right now, I do feel that especially given the AI-focused and tech concentration within the developed market, the US equity market, we have a greater allocation toward it.
CJ: 2023 was the year of the Magnificent Seven. And in terms of BlackRock’s global outlook, you were talking about mega trends. You mentioned artificial intelligence as one of them. But do you ever get to a spot where you look and you say, OK, here are these companies, they are leading things, there’s reason to believe that it will continue, but oh, by the way, it is overblown. I mean, do you have to kind of rein in the appetite for the Magnificent Seven and that leadership element in a market that hopefully, for a lot of investors, will broaden out and have a little more dispersion of performance going forward.
WL: I’ll tell you something interesting, Chuck. Everybody looks at the Christmas rally where leadership broadened out and the likes of small-caps were catching up, the likes of value was catching up and maybe the Magnificent Seven was losing some of its lead. But if we look at the relative gap between Nasdaq and the S&P 500, actually the gap has widened even going into year-end, which means that, yes, the laggards started to perform, but the leaders continued to outperform. That really speaks to the momentum with which a theme, a mega theme, mega force like AI continues to charge into the new year. I get a question all the time, which is how is this episode different from the dot-com bubble? Like is it going to end in a bad place?
Well, the difference between what we’re seeing right now in tech and the tech sector back during the dot-com bubble or before the dot-com bubble, is that earnings are coming through. Earnings are coming through in a very, very meaningful way. Tech companies are not only growing their earnings, they’re growing their margins. They are again expected to carry more than half of S&P 500’s earnings growth for 2024. So we look at some of the earnings guidance. Analysts are catching up as well, revising up earnings forecasts for this year. This isn’t just empty talk, we’re talking about a theme, the adoption of which is just getting started. From our perspective, there are different layers of the implementation for the AI theme. You start from the semis and the chips and the providers to foundational models, to infrastructure centers, to application going from public market to private market. There are lots of ways to play this theme. The obvious ones have been rallying a lot, but the less obvious ones that require greater selectivity, there is still a runway, which is why we are still overweight this theme.
CJ: I’m curious about real estate, because we talked financials earlier and we have talked about the market broadly, but real estate is one of those areas that, depending on what you’re looking at, if we wind up seeing real problems there, it could trickle down and become a real issue in the financial sector and the rest. And yet, when I was reading BlackRock’s outlook, it’s very clear, you guys are pretty positive on real estate, which is not the common thinking that I’ve seen in outlooks for the new year.
WL: I wouldn’t say that we’re pretty positive on real estate as a whole, but we see selective opportunities in real estate, especially the public, the liquid part of that, that has repriced a lot, right? When we talk about private market, the issue is that parts of it haven’t priced to the higher rate environment, but the traded, the liquid part of it has priced quite meaningfully to such an extent that there is now value, selective value to be found, which is what we are speaking to in the outlook. I would also say, though, after the banking crisis, there was a lot of concern around where is the next shoe to drop and a lot of talk went to commercial real estate. And so far, that has not turned out to be the next shoe to drop. We didn’t have a crisis from commercial real estate. I wouldn’t say that we’re out of the woods.
But with rates coming down, I think a lot of the fears are getting alleviated. I would say selective opportunities, especially given meaningful repricing in the listed market, is how I would think about it. But we’re not outright overweight. It’s definitely an area that requires selectivity, and very clear and thoughtful due diligence.
CJ: What is the nightmare scenario for you? What keeps you up at night? What’s the thing that you worry about? If this happened, you can throw away the outlook because it’s going to mess everything up.
WL: As we think about 2024, the expectation is that inflation is going to come down. We see that coming through in the goods deflation. We expect some of that to come through as rental core service inflation coming down. We actually expect inflation to come close to target by the end of this year. That should be what we want. It would be good for the economy, for consumers and all of that. If we have a geopolitical type of event that really turns out to be inflationary in a big way, and it stops central banks in their tracks to cut rates and all this optimism the markets have been feeding from central banks’ pivot and inflation falling put on pause. I think that would really then draw attention to the fact that markets are priced for, I wouldn’t say perfection, but pretty close to perfection. And the reality, if inflation were to return in a big way, a reality check can be pretty serious for markets. But as I said, momentum at this rate can go on. It’s gonna take a while for macro data to come through to challenge that, which is why we think that it could go on for a bit, which is why we want to put money to work.
CJ: In summation, it seems everything is pretty optimistic for the year ahead, admittedly knowing that it’s got to be selective to be optimistic and finding the right opportunities. But as you are looking forward with an election year domestically, but also many elections around the world, do you think that 2025, after we get through the election, becomes the year when all that stuff finally comes to roost.
WL: I think a version of what didn’t happen could happen in 2024 already. Consumers having been very strong, wearing down their savings buffer so growth would slow. It’s just that we are not expecting a traumatic recession. We’re expecting growth to slow down. I think part of that has been pushed out, merely postponed, not derailed. I think we’ll see a version of that in 2024, and maybe more in 2025. But I would also say look ahead for one year. Let’s focus on this year. And I wouldn’t characterize our 2024 outlook as optimistic. It’s more if I can stretch cautiously optimistic or definitely selective. That’s how I would characterize it because we are cognizant of the macro challenges, but we want to put money to work. And there are opportunities that we can do so.
CJ: This has been great. I really appreciate your time.
WL: Thank you so much.
Chuck Jaffe is a contributor at Equities and the host of “Money Life.”