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Oscar Pulido: The geopolitical landscape in 2025 has seen significant shifts and developments. President Trump's second term has ushered in a new era of international relations characterized by bold policy changes and strategic maneuvers.

The implementation of new tariffs has reshaped global trade dynamics, raising concerns about broader economic implications. As we navigate these complex geopolitical changes, investors are asking how these developments will impact international trade, economic relations, and market stability.

Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Coming up on The Bid. We continue our market coverage following the latest geopolitical events and their impact on global markets. We're recording this episode on Monday, April 28th. I'm joined by Catherine Kress, head of geopolitical research and Strategy at BlackRock. Catherine will provide an update on the current status of tariffs globally.

We'll discuss the key developments investors should be watching and how they might impact international trade and economic relations. We'll also examine geopolitics in President Trump's first 100 days in office. Other major stories on the horizon and how they could evolve in ways that impact investors.

Catherine, thank you so much for joining us on The Bid.

Catherine Kress: It's great to be back

Oscar Pulido: This is becoming a bit of a recurring segment on The Bid, which is to have you here to talk about the geopolitical landscape. And of course, geopolitical fragmentation is one of the mega forces that we talk about. That is this structural driver of return. And it feels like geopolitics have been almost the only thing we're talking about in 2025.

We are recording this on Monday, April 28th. We're publishing it on Wednesday, April 30th, which marks a hundred days of the Trump administration. So, tell us a little bit more about what's happened in those first a hundred days and talk to us more about the geopolitical landscape from what you're seeing.

Catherine Kress: Well, thanks for having me back, Oscar. You know, right now the geopolitical landscape is unsettled. It's changed dramatically in recent years and even in just the last a hundred days.

We've spoken before about the sheer number of global shocks that we've seen over the last decade or so, including the trade disputes of 2018, which at the time represented the most significant protectionist steps the US had taken since the 1930s, the Covid Pandemic, which was the largest global health emergency, in a hundred years.

The inflation spike we saw in 2021, which the US hadn't seen anything like that in decades. And then last Russia's full scale invasion of Ukraine in 2022, which was the biggest security event to take place in Europe since World War ii. What's been striking amid these shocks is just how resilient markets and economies have been, despite the magnitude and just the scale and transformational nature of the shocks, investors and economies have found ways of adjusting to them. Now, however, we are facing another significant moment of change and uncertainty, and that's reflected in the U.S.'s shifting approach to the world.

For the last 80 years, the US has been central to the geopolitical landscape. It's been an economic stabilizer, a provider of global public goods with a new administration now in place, however, we are seeing a fundamentally different view and approach. President Trump has been in office for almost a hundred days as of this recording. And in that short period of time, he has taken dramatic steps to fundamentally reshape the US' relationships with the rest of the world- both economically and geopolitically. He has arguably taken more and more consequential steps than any US President since FDR. The changes we've seen as a consequence of US policy have been rapid, fundamental, and in some cases, irreversible. 2025 may prove to be a hinge point in history.

Now, if we think about the changes that we've seen, we can think about them in five broad buckets.

First, the world today has become more fragmented and unstable. You and I spoke around this time last year and we talked about the emergence of competing economic and geopolitical blocks in the world with it, with the US and its allies in Europe and Asia. On one side, Russia, China, Iran, North Korea, on the other; countries like India, Brazil, the multi-aligned nations somewhere in between. That system today is coming under pressure. Though China, Russia, Iran, and North Korea continue to cooperate and deepen their relationships, the multi-aligned countries remain firmly multi-aligned, the Transatlantic Alliance is showing signs of fray.

Second, the world today is more dangerous. We are seeing the largest number of violent conflicts worldwide since World War II. Now, there are some areas, for example, in the Middle East and in Ukraine where we may see some stability in the near term. But there are other areas, for example, in Asia where conflicts may be brewing. That increase in volatility is giving way to a rise in global defense spending. We've seen a sharp increase in global defense spending over the last few years.

Third, the world today is more competitive. We see this, especially in the case of the technology competition between the US and China, where there really is this epic zero-sum competition to seize the commanding heights of advanced technologies.

Fourth, the world is more protectionist. There's been a rewiring of globalization as countries and companies prioritize security and resilience over pure cost efficiency and market factors. Trade restrictions have increased exponentially over the last decade, and that's going to increase going forward.

And then last, the world today is more populist. We're seeing more anti-incumbent, anti-establishment forces on the rise. 2024 was a historic election year and a punishing one for incumbents. The Financial Times actually showed that every governing party across the developed economies lost vote share last year. That's the first time it's happened in more than 120 years.

So geopolitical fragmentation competition, rewiring of globalization. These trends are accelerating with profound implications for the economic and financial landscape.

Oscar Pulido: And it's interesting, as you went back through that list, I'm remembering all the different episodes that you've been on to talk about the multi-aligned countries, the competition and technology between the US and China. We had you on to talk about the elections, and so all of these things have created noise, but you also mentioned that markets have been resilient during this period. Not only very recently, but also when we went back over the last decade.

Having said that, we've seen a lot of market volatility recently with respect to tariffs,

where are we now in terms of, more recent tariff news? What should we be watching and how does this impact, relations, globally across countries and for global economies?

Catherine Kress: You know, the US under President Trump is pursuing an entirely new approach to economic management based largely on tariffs. We've discussed before that President Trump sees tariffs as an all-purpose tool of economic and foreign policy. Since taking office, he's taken a set of steps that together reflect the most significant protectionist steps we've seen from the US in over a century.

In February, president Trump set in motion new tariffs covering half a trillion dollars of imports from Mexico, Canada, and China. In March, he doubled the tariff rate on China and imposed 25% tariffs on steel and aluminum imports. And then finally, earlier this month on Liberation Day, president Trump announced a 10% universal baseline tariff on most imports of the United States. As well as unique reciprocal tariff rates on some 60 countries with which the US has the largest trade deficits. He also imposed 25% tariffs on auto imports to the United States.

Now, as of this recording, the reciprocal rates for most countries have been paused for 90 days, and China faces a new tariff rate of at least 145% on goods coming to the U.S.. Though some goods face a rate closer to 200 or 300% reflecting previously imposed tariffs. The average effective tariff rate for the US has risen to more than 20% today, significantly higher than where it was just a few weeks ago. Uncertainty right now is high and going forward, there's four things I'm watching.

One is negotiations. The Trump administration has said that it intends to strike 90 trade deals in 90 days. This is an enormous challenge. What's more likely, and Treasury Secretary Scott Bessant has indicated this, is that the White House prioritizes the 14 largest economies that trade with the U.S., including countries like Japan, South Korea, and India. But negotiations with economies like the EU, China will be much more complicated and likely take longer.

Two, I'll be watching for potential sources of pressure. We're already seeing signs of pushback in the courts. In some states, for example, 12 State attorneys General filed a lawsuit last week against the Trump administration, as well as in Congress. And in each case, these different sources of pressure are specifically questioning the ability of the president to levy tariffs under emergency authorities.

It is also worth noting here, president Trump's approval rating. The real clear politics polling average as of this morning showed President Trump's approval rating at 45%, which is down from 50% in January. According to Gallup, president Trump is the only US president to have sub 50% average approval ratings during his first quarter in office. So we'll have to see if this functions as a source of constraint going forward.

Three, we're watching for more tariffs. President Trump has repeatedly indicated that he would impose tariffs on sectors like semiconductors, pharmaceuticals, copper, lumber. Indeed, there's investigations underway into these sectors. We also could see secondary tariffs on countries that are purchasing oil from the likes of Russia and Venezuela.

And four, I'm watching for the decoupling from China. The tariffs that the US and China have imposed on each other are well above levels that most economists say will crush trade between the two countries. We've effectively seen the world's two largest economies impose trade embargoes against each other almost overnight. The administration has acknowledged that these tariff levels are likely unsustainable. There have been reports that they may come down substantially, be phased in over time, move to a tiered system in which the highest rates are only applied to the most strategic goods.

There have also been exemptions on both sides. But it's hard to see either country right now acting unilaterally to meaningfully lower tariffs in the absence of some form of an agreement. So as analysts and investors, we should expect some high level of tariffs to stay in place on Chinese imports for an extended period of time.

You know, Oscar taking all of this together, we see these developments accelerating the rewiring of globalization. I noted previously that the level of trade restrictions in place today has increased exponentially over the last decade or so. That's going to increase not only in the wake of the US tariffs, but also as countries respond to China's continued exporting of its excess industrial capacity, as well as goods being diverted from the US in the wake of tariffs.

As the famous economist, Doug Irwin once said, Once trade barriers go up, they're very hard to bring down. So I think we should expect this protectionism theme to be with us for some time.

Oscar Pulido: You mentioned China as part of your discussion, and I think that you almost need a little bit of a handbook to keep track of everything that's going on across tariffs in terms of the goods that it applies to the reciprocal tariffs that are in place in certain countries, but maybe not others.

And when they go into effect. One thing that is clear that seems to rise above a lot of this noise is that the trade policy with China is, very aggressive. and so it has to have a meaningful impact when you have two large economies like that, operating with trade policies like this. So can you talk a little bit more about how does this impact the relationship between US and China going forward?

Catherine Kress: With China, the risk over time is that the trade conflict extends to something much bigger, more like a broader economic and financial conflict. Competition right now really remains the main frame for the US-China relationship. President Trump is surrounded by individuals who are committed to tariffs. They're committed to technology competition, support of Taiwan, the isolation of China. Tensions will increase as the trade conflict extends, the technology competition intensifies and volatility in the region grows. It's hard to imagine a comprehensive resolution right now.

Now in the trade space, we're going to see tariffs on China continue, and the administration will use trade negotiations with other countries to pressure those partners from limiting their dealings with China in exchange for the US lowering tariffs. This is going to be a tough sell, including for many of the economies like in Southeast Asia, who are very dependent on the Chinese economy and Chinese trade.

In technology, export controls will continue and by mid-May, the Trump administration is going to have to decide what it wants to do with the previous administration's rule on AI diffusion, which was a broad set of steps intended to control who gets access to US semiconductors and under what terms.

And then in the financial space, the administration is contemplating steps to restrict the flow of capital, both inbound into the United States and outbound, the flow of American capital into China, including by harmonizing different US government sanctions lists and trade blacklists, prohibiting US pensions from investing in Chinese companies and potentially even delisting Chinese companies from US exchanges.

Now in each area, it's worth noting that US policy is not differentiating Hong Kong from mainland China.

The US and China are increasingly calling on other countries to choose sides, deepening the geopolitical fragmentation that we've spoken about. While the US is conducting trade negotiations to try to box out China, China is threatening countries that take steps that are seen as potentially damaging to the Chinese economy. Just the other week, Chinese president Xi Jinping took a neighborhood diplomacy tour in Southeast Asia and he called on countries to quote 'jointly oppose unilateral bullying.'

At the same time that US Defense Secretary Pete Hegseth, and Treasury Secretary Scott Bessent, traveled to Latin America warning of Chinese influence. The two sides are looking to build influence in their respective neighborhoods as part of their broader economic and geopolitical strategies. But here too, the risk is that this competition and influence building escalates into a broader confrontation and potential conflict, including in the South China Sea and Taiwan, where we've seen tensions pick up recently.

Key to watch going forward is any leader-to-leader dialogue, including between the two countries’ presidents, which could reflect some effort to bring down the temperature between the US and China.

Oscar Pulido: I think what you're pointing out is that, while the headlines are focused on the US and China and the trade policies between each other, there are secondary impacts, you mentioned Latin America, you mentioned countries in Southeast Asia, that are important trade partners of the US and China, and there's impact on those economies as well. Let's talk about another region of the world that seems to, also be feeling the impact of geopolitical fragmentation, which is Europe. in fact, the US and Europe, seem to have more tension these days than maybe we would've talked about a year ago. So tell us a little bit about what's going on there.

Catherine Kress: When it comes to Europe, we've seen a complete reset between the US and its allies. President Trump has a different conception of alliances than his predecessors did. He sees alliances as similar to an insurance policy something countries should have to pay for.

He's looking to reorder alliances based on a belief that allies have been receiving benefits like security that they should reimburse the United States for. This fundamental view has driven a complete reordering of the US Europe relationship as we've known it for 80 years. Just think about what's happened.

The US articulated that Europe would no longer be a primary security priority. It announced that it would seek to establish direct relations with Russia. The US jump started Ukraine Peace talks with Russia initially without the participation of the Ukrainians or the Europeans, and it's expressed support for a number of Russian positions in the negotiations.

And then most recently, the US moved forward with large scale tariffs against the EU, including specific sectors like steel, aluminum, and autos. This breach with Europe is a sharp departure in US policy. We are on the path of continued separation and difficult conversations on a range of issues including defense, trade, China, climate, technology. Europe is realizing it can no longer fully rely on the US and that it must urgently take steps to construct an independent defense facility as well as pursue an accelerated economic reform program. As European Commission President Ursula Von Der Leyen put it starkly in a recent interview, quote, 'the West, as we knew it no longer exists.'

In recognition of this, we've seen unprecedented action in Germany and at the European level as well. In a remarkably short period of time, decades of European policy has been overturned. There are even questions emerging around Europe's nuclear posture, including the possible extension of France's Nuclear Deterrent and Poland's newly stated ambitions to explore its own nuclear capabilities. These are historic changes. And while these changes have boosted European unity in the short term, and they provide a real set of opportunities, including in the defense space, the risk of longer term fragmentation and breakdown remains.

Oscar Pulido: Can we follow up on Ukraine specifically, which has been a source of tension between, the US and Europe. There, there was some belief that we were going to see, peace in the region earlier this year, that we were going to see an end to that conflict. Do you still, think that is a likely scenario here in the near term? Or what are you watching right now that gives you more optimism?

Catherine Kress: There's been a lot of movement on this, even in just the last two, three days. We saw a meeting between President Trump and President Zelensky at the Vatican in Rome over the course of the funeral for the late Pope Francis. Russia's invasion of Ukraine continues to reflect the largest, most dangerous military conflict in Europe since World War II.

US and Russian delegations began holding direct talks in January as I noted, for the first time since the invasion began. Those talks initially left out the Ukrainians and Europeans, though those two parties are now participating. Most recently the US put forward the outlines of a Land for Peace agreement, but a number of sticking points remain on all sides, including issues around Ukrainian territorial concessions, NATO membership for Ukraine as well as post-war security guarantees.

Our view is that a definitive, comprehensive deal will be difficult to reach in the near term, because of the competing aims of not only Russia and Ukraine, but also the US and Europeans, as well as ongoing conversations around the potential normalization of US relations.

Now the US is threatening to walk away if a deal can't be reached imminently. Secretary of State Marco Rubio stated this weekend that they will decide this week whether to continue pursuing a negotiated settlement or turn their attention to other matters. So the situation right now is very fraught. In the meantime, the conflict remains a devastating war of attrition between the two sides with an enormous humanitarian cost.

Oscar Pulido: And since we're talking about conflict, we should, note that we've also seen conflict in the Middle East that has been dragging on for some time. One of President Trump's first achievements, which actually happened before he took office was the support of a ceasefire agreement in Gaza. Talk to us a little bit about the status of the war in the Middle East and how are you thinking about the risk of escalation in the region more broadly?

Catherine Kress: So first on the war, it's true that President Trump supported the initial set of ceasefire agreements between Israel and Hamas, most prominently in Gaza, but we also had a ceasefire agreement with Hezbollah and Lebanon. Both of those ceasefires have since broken down. In Gaza, we've seen the resumption of Israel's air and ground campaign, and in Lebanon, Israel and Hezbollah have exchanged fire again.

It's also worth noting that the Yemen based Houthis have also resumed targeting Israeli and US assets, which has led to significant US retaliatory strikes. Iran and its proxies today are significantly diminished. Iran is weaker today than it's been in decades, so the key development to watch going forward is the negotiations between the US and Iran over a potential new nuclear deal.

The outcome here is quite binary. Either we get to a deal or we see military action. The two sides are not going to talk forever, so it's likely that we see one or the other of these outcomes this year.

Now in the deal scenario, a new nuclear agreement could lead to a de-escalation of tensions in the region and some removal of sanctions on Iran. In this scenario, we'd expect additional Iranian oil supply to come on the market, Adding to the large surplus is already expected this year and next further pushing down prices. In a no deal scenario, the scenario in which talks fail, president Trump has threatened military action. In this scenario, we'd expect attacks against Iranian nuclear and other infrastructure by Israel and the us, which could lead to all manner of retaliatory steps by Iran further impacting oil markets.

Now, President Trump has expressed his clear preference for a deal, and the mood music coming out of talks this past weekend were quite positive. There's going to be another round of talks next week. So these negotiations coupled with President Trump's visit to the region in mid-May are going to be key signposts for the outlook for the region going forward.

Oscar Pulido: I want to come back to something you said at the very beginning, which is how resilient markets have been, and just listening to all of the things that you've outlined - the protectionism, tariffs, geopolitical conflict in Ukraine, in the Middle East - if you're somebody, picking up a newspaper for people who still do that, and you read the headlines, it would be sort of a scary environment to think about investing, but again, markets have been resilient. What does this mean then, for an investor who's thinking about the geopolitical landscape? What are they supposed to be thinking about from a portfolio perspective?

Catherine Kress: Our view at the BlackRock Investment Institute is the U.S policy shifts that we’re seeing and the geopolitical dynamics underway are adding to the structural transformations that were already underway. We've argued for several years that mega forces like geopolitical fragmentation, like the rewiring of globalization are transforming the world. U.S. trade policy is adding this transformation. This isn’t a business cycle in our view, it's a long-term structural shift. That raises big questions around the trajectory for the global markets, particularly as long-term expectations are becoming more sensitive to short-term news. So, as investors, I think we need to constantly reassess the long-term trajectory, be dynamic with asset allocation as we learn about the future state, but importantly, invested through the uncertainty. As we've seen time the matters most.

Oscar Pulido: Stay invested has been a message that we've shared on recent episodes when we've delved deep into market volatility and seems to be a good message to take over the long term, but for sure, we will be having you back, Catherine, we're going to keep your chair nice and warm for when you return later this year to tell us more about what's going on in the geopolitical landscape. Thank you for visiting with us here on The Bid.

Catherine Kress: Thanks so much, Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid. Next week we'll be back to our regular schedule on Fridays, so be sure to tune in when we discuss capital markets and their importance to the global economy with Samara Cohen. And don't forget to subscribe to The Bid wherever you get your podcasts.

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Oscar Pulido: Global markets have been experiencing extraordinary volatility in response to the US tariff pause announced on April 9th. A reflection of the uncertainty surrounding the economic and policy outlook, but similar to other unprecedented market moments in history, the investment strategies that work today may not apply tomorrow. So how can investors adapt their investment approach when the familiar economic rule book is thrown out?

Welcome to the bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Coming up on The Bid, we continue our market coverage following tariff policies and their impact on the global markets. We're recording this episode on Tuesday, April 22nd.

To help us put these market events into context. I'm joined by Rich Matheson, a senior portfolio manager within the systematic active equities team, a quantitative investment group at BlackRock. Rich will take us through some of the pivotal moments in history where uncertainty was a catalyst for transformation, and the insights and strategies used by investors. He'll share how that's playing out in markets today, including the data and techniques that can help investors cut through the headline noise.

Rich, thank you so much for joining us on the bid.

Rich Mathieson: Thanks, Oscar. Lovely to be with you.

Oscar Pulido: Rich, we've actually spoken to some of your colleagues in the systematic investing in the past People like Jeff Shen, people Brad Betts, and talked to them about how your teams big data artificial to go I'd love to ask if we take a step back and in the a lot of had of news around policy foreign news coming you about this relative other historical periods

Rich Mathieson: Yeah, I think there's been, there's maybe been two or three unique features of this particular episode. I think the first one would be the speed at which it's evolved. The start of 2025 seems a long way away, but it was only really, three and a half months ago. We started the year with a white-hot US economy, equity markets, all-time highs, inflation coming back towards Fed target. And generally a sense of bullishness across the investor base. Fast forward three and a half months things are very, very different. If you look at macro and investor sentiment levels, they've completely capitulated. Interest rates are higher than they were at the start of the month, inflation expectations are rising and actually for many investors, recession has become a likely bear case scenario, if not a base case scenario. So things have changed very quickly and the way that we've seen that play out in our data is that it seems like a lot of investors have been taken by surprise. If you look at measures of riskiness around popular momentum trades and crowded hedge fund positioning, they are flashing very, very red at the moment. And that's leading us to rotate our portfolios quite significantly away from some of the winning trades from the last two or three years.

A second feature is the starting point, no matter how you cut it, valuations, particularly in equity markets, were very, very rich, and that was particularly the case for U.S. assets. and it's somewhat sobering that, even with a peak to trough draw down of 17% in the MSCI world, as we've seen during the month.

And then the final one, I think maybe the most pertinent point is that in this episode, investors, have found it a lot more challenging than normal to isolate sources of defense to protect their portfolios. if you think across that level, normal, safe havens- dollar denominated assets, particularly US treasuries -have not given the ball that investors would've hoped for, when we drill into the equity markets areas like high quality tech that have been sources of defense in the past, have, if anything, been more at the epicenter of the downturn.

And then even more traditional defensives, thinking pharmaceuticals, consumer staples in many instances have brought you into the crosshairs of escalating trade tensions and tariff policy. And so, know, you've had to think very carefully about where defense sits in your portfolio, how to measure it, how to get exposure to it, and that has been one area where data has given us a very nice edge.

Oscar Pulido: And Rich are there any similarities or differences to other periods, periods like the 1990s perhaps I'm just curious how this compares to history.

Rich Mathieson: The similarity here is that we're seeing something that we have never seen before. And if I think over the last five years, we just had the fifth anniversary of Covid back in March. and I think in the five-year period since then, we've seen a rate of change in events in the market that pretty much you could all describe as 'unprecedented'. We had a lockdown, we had a global pandemic, we then had vaccines and a reopening of the global economy that none of us have seen before. We then had inflation and interest rates rising at levels that haven't really been observed since the 1970s. You then had the introduction of big secular themes like artificial intelligence and then more recently obviously the escalation in trade tensions that very few of us have seen the likes of in our careers.

So, the one thing that all of these episodes have had in common is that they have been unique, they have been different. it's made us really think about how we can use the data that we have at our disposal, the technology stack that we've built up over the last 10 to 15 years to answer, these emerging investment questions in a way that is very differentiated that maybe we wouldn't have been able to do before.

As a great example, I think about artificial intelligence. January, 2023, we were actually underweight or short Nvidia across most of our portfolios. Nvidia came out and produced earnings that were significantly above expectations, and they attributed it to artificial intelligence. Now, we had been using artificial intelligence to build models, to build signals to pick stocks, so we were already adopters of the technology, but it was the first time we had really seen a company monetize the opportunity in the way that Nvidia clearly were back at that time.

And then pretty much Q1 ‘23. Every single technology stock in the market claimed they were investing in artificial intelligence and they were going to be the next Nvidia. And it was quite clear that. Our models hadn't quite picked up in this emerging opportunity. We were actually poorly exposed to the companies that were rallying on the back of the Nvidia earnings.

And so, we went back and we asked ourselves the question, who are the other companies that are going to be like Nvidia? That are going to be able to monetize this opportunity in the near term? And who are the ones that are saying they're doing it, but maybe are just riding the wave? And we were able to answer that question by going to our data. So we looked at two year’s worth of earnings called transcripts. We looked at two year’s worth of online job postings and hiring, and we identified the companies that had been talking about artificial intelligence and hiring for schools, occupations, talents associated with artificial intelligence. And we identified the companies that weren't doing that, but essentially said they were doing it in their Q1 earnings call and that enabled us to navigate the evolution of that secular theme, it became a very important driver of return dispersion across the U.S. equity market to ‘23 and a lot of 2024.

Fast forward to this most recent event, clearly the questions we're asking ourselves right now are, who are the companies that are going to be the most exposed to trade tensions to tariffs, and who are the companies that are somewhat immune?

And again, we've been able to go and query the data stack that we have to answer that question. Now, this has been a little bit more challenging 'cause ultimately the question of tariffs in trade comes down to costs in manufacturing and typically companies don't give you a lot of information about where they incur their costs and where their operations are based. They'll tell you a lot about where they're selling, but you don't get that cost analysis.

And so we've been able to go back to the data, and we've been looking at data sets such as geolocation data, online job postings- that has enabled us to identify that relative to sales in the U.S. where companies are hiring, where companies are present, where they're potentially manufacturing, where they're based, versus maybe for example, companies that sell a lot in the US but have a lot of their operating costs or evidence of their operating costs in other countries.

Shipping data gives us a sense for what companies are importing from overseas into the us. Versus the ones that are more reliant from domestic production. And so, analyzing the data in that way, we've got a sense for where, American companies operations are relative to their sales versus those that are maybe more exposed internationally to production bases and supply chains.

And if I look at the types of signals that have navigated this recent episode. very well. Those have given us a fantastic edge and being able to query a very expansive data set that we've been investing in over the last 15 to 20 years has been able to navigate these very changeable markets, that we've seen now for coming up in 60 months.

Oscar Pulido: You mentioned that one of the recent market volatility maybe some past episodes, is just how unprecedented in fact use of the word ‘unprecedented’ is overused. It goes show just how unique of a an environment we're living through what you're touching on that there have been then prevailing and innovations in how your team uses analyze some of periods that we're living I think those are some of the examples you're mentioning?

Rich Mathieson: Absolutely. And I think the big change that we've seen in our approach is just the need to be a lot more dynamic in how you're using the data and the questions you're asking the data. Essentially bringing in an element of dynamism into your research process to make sure that at all times it is very market aware, it is reflecting whatever theme is prevailing and making sure that you have some exposure to that, at least in your portfolios, even if it's a, a worst case scenario, just a risk control to make sure that you don't have any gaping holes that you're exposed to.

Oscar Pulido: And so Rich shifting gears a little where we are now in current how are you interpreting data or what is the data telling you about the range of potential outcomes for markets the economy and policy?

Rich Mathieson: In terms of very high level, I would say through the first quarter of the year, a lot of our top-down macro models did start to move slightly more defensive. here I think the more traditional macro models are looking at, vectors of returns across all asset classes, equities, fixed income, credit. We're overlaying that with the most recent economic releases, and then we're taking all of the current data and saying what period historically most resembles what we're currently seeing.

Now as we came into 2025, a lot of that analysis was pointing to a fairly mid cycle constructive regime. I would say, if anything, it's starting to look a little bit more late cycle. And so, we had already been moving portfolios to be a little bit more defensive, So buying up defensive, large cap size, selling down high risk, high volatility.

I think I would say currently if you look at all of that traditional data, and you put it together and you flip it on its head, and you look at the current data, and look at the data that prevailed six to 12 months before every recession, you can reverse engineer a probability of going into a recession in the next six to 12 months, that has gone up, but based on the traditional data, it still looks somewhat muted, somewhat benign.

Having said that, we're very aware, the speed at which the world has changed is probably a lot more rapid than we've seen in previous episodes. And so we're continually monitoring, I would say higher frequency data, for example, go back to online job postings, gives, it's a good sense of we are starting salary levels are moving and we're seeing some evidence that wage inflation, that consumers have benefited from is maybe starting to roll over. And it's actually maybe some evidence of it starting to roll over where it really counts in the high-income brackets. But nothing that gives us too big a cause for concern just yet.

So for the time being, we're still recession, not the base case, but we're very focused on a lot of that higher frequency data to give us an early sign of where the core, top-down models might move towards.

Oscar Pulido: So, recession is not base case is starting to the data is starting to tell that maybe that's a more likely scenario than it was at the beginning of the year. Notwithstanding that, Rich, plus the fact you've had volatility, one of the messages that we've been conveying some of our recent episodes around this period of market volatility is the need to stay invested but perhaps what you're invested in starts to change in this environment. What are some of the investment opportunities and your team are seeing?

Rich Mathieson: Yeah, I think in the near term, we've got volatility now stabilizing to a certain extent at reasonably high levels. If we look at, three, six months from now, something that I'm reasonably excited about is, you are starting to see the concentration in global equity markets break down to a certain extent.

I mentioned earlier, some of these highly profitable, large cap tech companies that have led markets down through this episode that is improving the breadth of the overall market. But in all honesty, a world where being long seven stocks, and short everything else as the right answer, doesn't really lend itself too well to a systematic approach that is really designed to exploit a much broader opportunity set across global equity markets. And I think as we go forward from here, I would expect to see breadth in the US market improve. That will follow, what we've already seen in areas like Europe and Japan, and that has significantly improved the opportunity set just to identify the winners and the losers in those markets. I fully expect the US market to follow as we move beyond this latest episode, breadth will improve and the opportunity set for stock selection will improve.

Oscar Pulido: Right, more breadth means more opportunities for active managers such as yourself to try and. outperform some of the benchmarks that maybe in the past couple years have been a little bit more difficult to outperform because of the narrowness of companies that have been outperforming that benchmark.

Rich, it's clear from listening to that we're in unprecedented times to use the term, and the volatility that is something that has a lot of historical precedence. You also mentioned that one of the observations in markets recently was that the areas of the market that traditionally served as safe havens or flight to qualities have behaved a little bit differently than they have in the past. So, what does this mean for portfolio construction when we think about the path forward?

Rich Mathieson: In terms of just equity portfolios, we've had to work harder to identify the sources of defense. I think more broadly from an asset allocation point of view, you just had two years of 20% plus returns in the S&P 500 that's very unusual and I think, we'd already started to see before this recent episode, I think capital market assumptions being revised down. and the way that that's played out for our platform is we've seen growing demand, this maybe a shift in, in allocation coming back the other way from passive investors being prepared to embrace active management again.

So, we've seen investors start to embrace active management, just move up the risk curve a little bit, to capture that driver of return. I think the other aspect, and I think this comes back to the heart of your question, Oscar, the other aspect of capital market assumptions that has been changing, and I think this goes back to what we saw even in 2022, which was maybe arguably the most similar episode to the one that we've seen currently, the diversification investors can expect to obtain by allocating traditional asset classes, namely equities and bonds has been revised downwards. And again, you've seen a period recently where both of those asset classes have been losing money at the same time.

And that has led many of the investors we speak to, to embrace or look for alternative sources of diversification, alternative sources of ballast in their portfolios, that can produce a very uncorrelated source of alpha. Even in markets that are going down, as we've seen so far, year to date.

Oscar Pulido: Well, rich, we know that investing is very emotional exercise for, a lot of investors, and it's always reassuring to hear when, people like you and your team are really looking at the data to make sense of how to navigate these complex dynamics. You also mentioned Alpha, which is hard to generate but you're saying that now this is an environment where you think, is perhaps possible given some of the volatility that we're seeing in markets.

So Rich, thank you for sharing all this context with us, and thank you for doing it here on The Bid.

Rich Mathieson: You are welcome. Thanks for having me, Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid. Next week, Catherine Kress joins us to discuss the latest in geopolitics. Make sure to subscribe to The Bid wherever you get your podcasts, and don't miss an episode.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2025 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0425U/M-4431356

<<THEME MUSIC>>

Oscar Pulido: On April 9th, the US administration announced a 90 day pause on country specific reciprocal tariffs. Exempting Key Tech imports while maintaining high tariffs on select Chinese goods, global markets experienced extraordinary volatility in response to this tariff pause. The s and p 500 rebounded nearly 6% last week and had one of its largest daily jumps in history.

Meanwhile, long-term US treasury yields spiked and the US dollar tumbled to three year lows against major currencies. The question remains, how should investors respond when considering the implications of prolonged uncertainty, including potential recession risks, impacts on corporate investment and consumer spending?

Welcome to the bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Polito.

Coming up on The Bid, we continue our market coverage following tariff policies and their impact on the global markets. We're recording and publishing this episode on April 15th to help us navigate the recent market moves. I'm joined by Alex Brazier, global Head of Investment and Portfolio Solutions at BlackRock. And Helen Jewel, chief Investment Officer for EMEA at BlackRock. Alex and Helen will help us unpack the details of this tariff, pause its effects on market dynamics, and provide strategic insights for investors considering how to navigate volatile markets.

Helen and Alex, thank you so much for joining us on The Bid.

Helen Jewell: It's great to be here.

Alex Brazier: Fantastic to be back, Oscar.

Oscar Pulido: Helen, welcome back. I know we had you on recently to talk about infrastructure and Alex, it's been a while, it's really good to have you back. We have some sort of pattern where we seem to invite you when there are really complex things going on in the markets, and we need someone to help explain it to us and that seems to be you.

So, Alex, let's start with you. The last week has seen a lot of volatility in the markets. I should mention, we're recording this on Tuesday, April 15th, just to give a sense of what point in time we're in, but maybe you can give us an overview of what has happened in the last week with respect to tariffs?

Alex Brazier: What has happened in the last week, one day, whole books are going to be written about what happened last week. So, let me just try and summarize very briefly. I think there are three broad buckets of things that were, I think, historic about last week. The first is in fixed income markets we saw long-term interest rates in US Treasuries have their biggest selloffs for decades. The 30-year US Treasury yield had its biggest weekly rise since 1987. And both it and the 10-year US Treasury yield were up about 50 basis points in a week.

Now, they've stabilized a bit since, but that market remains pretty volatile. Now to some extent, the fundamentals have been in place to drive long-term interest rates higher for a while.

We've got sticky wage growth, signs of labor shortages, sticky inflation, and most importantly in the United States, we've got a fiscal position- deficits and debt levels -that's historically very large and a lot of issuance coming up for the market to digest. So, the fundamentals were in place for yields to rise.

Then we also saw some mechanics of the treasury market amplifying the move. Our trading teams here at BlackRock have been monitoring what's going on, and they think there was some pressured selling from hedge funds that had effectively bet on US treasury yields falling relative to the equivalent interest rate swaps and futures. Now, it was all pretty orderly, it wasn't like we saw at the outset of Covid, but all of that combined for a move in fixed income markets of pretty historic proportions. So that was the first thing.

Second thing that was really notable in the last week is that even as interest rates rose, the US dollar weakened. And that was suggestive of international investors moving money from US assets to elsewhere in the world. And we saw in exchange traded products, particular flows from the US into Europe. So that was the second striking thing about last week.

The third striking thing about last week was of course, that on the back of all those moves in markets perhaps prompted by those moves in markets, we saw a big change in the policy of the US administration. We saw a pause announced on what are called reciprocal tariffs on 90 countries for another 90 days. So that leaves us with a baseline 10% tariff on imports into the United States, plus extra tariffs on autos and steel. And at the same time, we saw tariffs on China - Chinese imports into the US - raised to 145% after a sort of tit for tat escalation between Washington and Beijing. that leaves us at a level of tariffs that many analysts think is inconsistent with doing much bilateral trade between those countries. And it's north of where the president talked about on the campaign trail. Now we saw at the end of last week an exemption announced for electronics products, given the disruption that tariffs at those levels might have caused to important supply chains, which just goes to show actually that this decoupling process is going to be really hard given the way supply chains are wired. But then we saw, to top it all off, an announcement that we could expect new sectoral tariffs on pharmaceuticals and semiconductors to come.

So, big moves in fixed income, interesting moves in the dollar and capital internationally, and a big change in policy. But this is not the end. It's probably not even the beginning of the end. It may be the end of the beginning, all of this, and there's going to be more volatility to come.

Oscar Pulido: Alex, you mentioned there will be whole books written about this past week, I think you've given us the first few chapters. You talked about the fixed income markets, what's happened in currency markets, and then highlighted the evolution in tariff policy. But Helen, one thing we haven't talked about yet is the equity markets. How have they reacted to all this news?

Helen Jewell: Well, of course the equity markets, have had a really rough few weeks. If we look at the implications post Liberation Day, there was a two day fall of just over 10% in the markets making it one of the worst two day drops since the s and p was first created. Up there you've got the 1987 crash, you've got the peak of the financial crisis, and of course the 2020 pandemic.

What's also really important is that post this pause announcement, you then saw the S&P post the third biggest one they gained since World War II. So, that pause was incredibly important in terms of the market moves as well. In some ways that's been what's the most challenging for investors because that has introduced real whipsaw risk into the market.

You've seen significant moves very quickly, both on the downside and then on the upside, and the VIX has reached the highest level that we have seen since the Covid pandemic at around 50. And this uncertainty in the markets and the uncertainty of how long the uncertainty lasts is something which is of concern for investors.

Now, what's been weird is that the last couple of days, so as you say today's Tuesday, Friday and, and Monday, although there have been a few announcements in terms of tariffs actually, in terms of the market reactions, we've seen a few swings, but nothing to the kind of level that we had seen. So it feels that the moment that although the market is moving a little bit, it's certainly pausing just to see exactly what comes through in the next 90 days. So it's going to be an incredibly important 90 days for markets. And as Alex says, it probably is the end of the beginning and I'm looking forward to the middle segment when we can actually start to understand what is going to happen in the tariffs and we can start modeling out what those implications will be for corporates.

Oscar Pulido: You mentioned the whipsaw risk. In the last week, we spoke to Glenn Purves, in the BlackRock Investment Institute and also Gargi Pal Chaudhuri, and we talked about the need to stay invested in these markets because markets can move pretty quickly, and in fact, the day after we spoke to them, Helen, as you noted, markets, bounced back. And so, illustrating the challenge for equity investors now of what to do. And our message was stay invested because, volatility is moving in both directions.

Alex perhaps to come back to you, we talked about equity markets, but you also mentioned at the very beginning of your comments, the importance of the move in the bond markets and the fact that interest rates moved higher. I think historically when we see periods of market volatility, we've been accustomed to seeing the US treasury market rally in those periods. In other words, interest rates going down. So, what is the significance of interest rates going up? Does that mean that US government bonds are no longer the ballast in portfolios that they used to be?

Alex Brazier: I think it means they're not as reliable a ballast in portfolios that they used to be. Old school portfolio construction was really about a broad index of stocks and a broad index of bonds. And you could pretty much rely on the fact that when one went down, the other went up. So when stock prices fell, maybe in a recession, you knew the interest rates were going to fall and bond prices would rise.

So, there was this neat negative correlation between them- they were a nice natural hedge for each other. And that's no longer reliably the case as we've seen recently. We are in a more inflationary world. We're in a world with bigger fiscal deficits and higher debt levels. So long-term bonds, just not providing that ballast, as you put it, that they used to.

So, investors are thinking about, well, how do I build a portfolio to stabilize things in some other way now? And there are various ways to do this. We've seen lots of flows into gold, for example, as an alternative diversifier, and that's done pretty well over the last year in performing that role.

But there are other ways too, and one way, historically, that we've seen investors taking more interest in recently is to effectively take down your exposure to the broad index of stocks and the broad index of bonds, and instead replace it with strategies that make relative calls within those markets. So, they might take a long exposure to one part of the stock market and a short exposure to another. So, where the broad market goes isn't really relevant, it won't have much of a correlation with that. The return will be determined by whether that relative call pays off. Now, if you do that in this sort of environment, you can actually build portfolios that are more stable, but still generate return. And what you're trying to do is just reduce the correlation of your portfolio with those broad stock indexes and broad bond indexes. But overall, it's an example of how when bonds don't work as a reliable ballast, like they used to, actually it requires some pretty hard thinking about how to build portfolios and how to diversify them.

Oscar Pulido: And that's a theme that we've been, discussing actually for quite some time with, our guests, which is we're in a new market regime, and that new market regime requires investors to be more active, more granular, and perhaps more diversified in their portfolios than they historically have. Helen, what questions are you getting from investors and how are you thinking about positioning a portfolio during times like these?

Helen Jewell: Well, the first question we are getting is should they stay invested, the answer is absolutely yes, you should stay invested because of the whipsaw risk. But then the next question is, okay, well if I'm staying invested, what do I need to do? And that's when this diversified point comes out.

You shouldn't at this point in time, be significantly over or underweight anything, whether that is from a sector perspective or indeed a geographic perspective. Make sure portfolios are sensibly diversified, both in terms of the balance between equities and bonds, and also other asset classes, alternatives, and gold as Alex mentioned as well.

So diversified portfolios remain key. We're also maintaining a more defensive stand overall. This isn't the time to be looking down for beaten down turnaround or recovery names. This is the time to be thinking about where is there quality, where is there strength in the balance sheets, and where is their robustness and resilience in cash flows and earnings and margins?

And the other thing that we are very much keeping an eye on is valuations and valuation levels. What we've seen at the moment is a lot of the stocks that are moving significantly are those where the valuations have been at the higher end of the scale, where they've seen significant run-ups. You're seeing a bit of an anti-momentum move in a lot of pockets of the market at the moment. So, valuations remain incredibly important, and Europe is an area, that from a valuation perspective, looks interesting.

So, where valuations are compelling are really interesting places to look again, both in terms of a geographic perspective, but also in terms of a, a sector and a stock specific perspective as well. If you've got conviction on names that have seen a significant pullback, maybe it's the time to be leaning into those names. But staying invested, being diversified, and keeping an eye on valuations, they're the key things that we're telling investors right now.

Oscar Pulido: Helen, you talked earlier about that there's uncertainty and specifically there's uncertainty about how long that uncertainty will last. So, what are you keeping your eye on right now to feel confident that in fact, we've put that period of uncertainty behind us?

Helen Jewell: I think the period of uncertainty is going to keep going for a little bit longer. We've had a lot of conversations about 'peak uncertainty'. I'm not entirely sure what that means, and I feel the peak uncertainty was probably the day of the announcement of the tariffs and everything from now on in perhaps is less unexpected and more baked into numbers.

In terms of what we are looking at, I always focus on the things that I think I can understand and we are just starting to go through the earning season. It kicked off last week in the US and it started this week in Europe as well. Now it had been a little bit dismissive of this earning season. I looked back and I thought, well, the Q1 numbers are just historic numbers and it's just going to be too soon for corporates to give any kind of sensible guidance of what they might do, we're just going to have an air pocket. But I realized I was wrong. The earning season is going to be incredibly important. Important, both in terms of the narrative, but also understanding which companies are really able to build on the margins that had already been quite high last year. We were seeing high margin level through 2024, and maybe therefore are going to have more of a buffer to absorb things like tariffs that might come through.

So this earning season is going to be incredibly important for us to really assess which companies are well placed, high quality, have those moats that are therefore going to enable them to navigate this period of uncertainty, which I'm sorry to say I think is going to be with us for a little bit longer.

Oscar Pulido: Alex, what are you looking out for in the near future?

Alex Brazier: Well, I start by answering that with, something we've learned from investors. We've been surveying investors quite a lot through this period, and they've been pretty consistent in staying invested.

60% of respondents typically say, I'm not doing anything with my portfolio. So they're listening to Helen in some respects. 20% say I'm looking to defend a bit more, looking to take down some risk and 20% say, actually I'm looking for opportunities here. In some ways, I think they're all right. So definitely stay invested, but we are looking for new opportunities that emerge. There are going to be opportunities after a period of volatility like this to go a bit more on the offense.

People are going to need to be agile in their allocations, and they have been, we've seen record trading volumes in exchange traded products over recent weeks suggesting a lot of money is actually in motion. But as Helen describes, this is probably not an environment where just leaning into the broad index is necessarily the best approach.

The dispersion that's here, the importance of quality names and resilience can't, I think, be under-emphasized. So, careful selection and looking for opportunities. So that's the first thing.

Second, thing we're looking for is protection in the portfolio against downside. Equity volatility has come down, but it's still high. And as Helen says, uncertainty is going to be here for some time to come. The administration's going to be trying to negotiate 90 trade deals in the next 90 days. We've got more sectoral tariffs coming. So we're looking for ways like 20% of, investors to defend in the portfolio as well.

And for example, indexes of stocks that are designed around stocks that typically aren't very volatile through the economic cycle, they've done very well year to date. They're up year to date when the broader S&P index, for example, is down 8%. So looking for ways to manage that volatility. And then thirdly, as I said before, we're looking for ways to diversify portfolios in diversified ways. We're looking for alternative strategies now that we can no longer fully rely on bonds in the same way we used to, which is something that's actually playing out in the money that's in motion.

We're seeing money sometimes move out of higher risk, fixed income and equities, but not in the traditional way into long-term bonds- we're seeing it move into shorter term bonds and inflation protected bonds. So investors are really getting their hands around this need to diversify the diversifiers in the portfolio.

Oscar Pulido: Interesting when you talked about the results of the survey, when you talk about the investors that you've been speaking to, the answers varied a lot, but I love what you said, which is they're all right. In other words, stay invested, and it's more about what you're doing within your portfolio in these times that matters most.

Helen and Alex, I'm not sure if both of you are naturally authors, if you plan on writing a book about this period that we've been through, but I know audio books are a thing so, I think you've given us a start at, what's been going on and perhaps we'll have you back on at some point so that you can tell us more about the subsequent chapters. We appreciate you, giving us this color and we appreciate you doing it here on The Bid.

Helen Jewell: Great to be here. 

Oscar Pulido: Thanks for listening to this episode of the Bid. If you've enjoyed this episode, and if you want to keep up with what's happening in the economy and the latest market trends, make sure to subscribe to the bid wherever you get your podcasts.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2025 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0425U/M-4411174

<<THEME MUSIC>>

Oscar Pulido: The recent tariff announcements by President Trump on April 2^nd have sent shockwaves through the global markets, triggering significant market volatility, driven by the uncertainty of these tariffs and their impact on global supply chains, inflation, and economic growth. As markets are grappling with various potential scenarios, how should investors be positioning their portfolios to navigate continued uncertainty?

Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido. 

Coming up on The Bid, I’m joined by Glenn Purves, Global Head of Macro at the BlackRock Investment Institute and Gargi Pal Chaudhuri, Chief Investment and portfolio strategist for the Americas at BlackRock. Glenn and Gargi will help us navigate the current themes driving market dynamics, how these shifts impact supply chains and prices, and how investors can manage volatility and uncertainty in these turbulent times.

Glenn and Gargi, thank you so much for joining us on The Bid.

Gargi Chaudhuri: Thank you for having me.

Glenn Purves: It's great to be back.

Oscar Pulido: I should mention we are recording this on Tuesday, April 8th, because there's been a lot going on in the markets in the world economy just in the last couple of days.

And Glenn, if I could start with you, the last time that we spoke to you, it was the beginning of February. You were here with Catherine Kress, and we were talking about, at the time the new tariff announcements. April 2nd came and went; we heard more news on tariffs from the Trump administration. Can you give us an overview of what these announcements were and what has been the impact on the macro landscape?

Glenn Purves: Great. Thanks Oscar and great to be back. Yeah. A lot has happened since, we were last here in February. The US administration, they set out three components of tariffs since the last time we spoke. The focus, on April 2nd was really about setting out the key components. The first component is about strategic sectors and where the administration would like to reshore manufacturing capacity in the us and this started with announcements.

Not on April 2nd, but back when we last spoke in February 25%, tariffs on steel and aluminum as well as auto assembly and parts are in place right now and we expect the administration to continue down the path for semiconductors, for pharma, copper, and lumber.

The second component is a universal component for all countries. It's 10% broad-based tariff for all import, same level applied everywhere, and this seems to be about securing a stable source of external revenues for the administration. The third component is unique, and it's specific to over 60 countries where they have trade surpluses with the us a surcharge tariff up and beyond.

The 10% unique to each country, and this is being applied against many of the largest economies in the world. China, for instance, and Asia in particular, given the size of some of their trade surpluses. This and this third trade deficit component is quite idiosyncratic because while there's been some stated intentions by the administration that these can be negotiated down, the playbook on this really remains opaque at this date, which is spook markets since April 3rd, creating a lot of volatility.

From a macro standpoint, a central question is how quickly the uncertainty disperses, how this all plays out, and where this ultimately lands. If what was set out on April 2nd holds or something similar to this, then stagflation, meaning lower growth and higher inflation seems unavoidable and the risk of US and global recession is much higher to this extent. There are some parallels to March 2020 with COVID and the world looking for signposts and signals for greater certainty.

Oscar Pulido: So, tariffs are nothing new in the long-term perspective of markets, but to have this much news around tariffs, this widespread across so many economies and of this magnitude, all of that though, does seem pretty unusual. Gargi, what has been the market reaction to all this news?

Gargi Chaudhuri: Sure. Oscar and you and I have been in this room, talked about this before, just that. Equity markets like certainty, and one of the things that Glenn talked about was this injection of volatility and uncertainty that's come about, and then you couple that with uncertainty around expectations of growth, perhaps moving lower expectations of earnings, perhaps moving lower for companies. And what you have is a recipe for market turmoil, which is what we have seen.

And I want to break it down into sort of two distinct, periods of time right after April 2nd when the markets responded right after the news came out, you did see an immediate reaction to lower prices in stock markets in all parts of the world. And that continued on, not just on Thursday, but also on Friday when we got the retaliatory effects from China when we got that news. So, a huge sell off on that Thursday and that Friday, which was the biggest two-day rout, actually since COVID in 2020.

Monday was again another day when, at least globally, when the markets opened up on Sunday night. We saw some of that market, continuation of that volatility. But we did see stabilization. And today, as you said, we're speaking on Tuesday. We have seen markets stabilized and actually some dip buying come in.

The markets right now, as I left my desk, are up for the day, but I think that we are going to learn a lot more. Two distinct periods, lower first and then stabilization to a little bit higher. That's just equities globally. There's also been the bond market reaction, which I think has been fascinating. Where at first, on the Wednesday and Thursday, we did see bond yields go down. At first there was increased expectations of the Fed coming in and cutting rates, or at least that's what the market was pricing in. That helped for maybe one and a half days. And after that there's been a very significant move, higher in yields, especially in the long end of the curve.

We haven't seen these moves in, many years where we saw a 36-basis point move in the 30-year treasury, which, was pretty meaningful. We've only had eight instances of that in the last 25 years, so I think it's pretty meaningful. So, bonds did go down but actually didn't retain that move. They actually bond yields moved higher.

Then we look at other parts of the market like commodities where growth commodities like copper and oil have also come under pressure. One of the areas that's been a little bit of a silver lining if you will, but it's actually gold, which has held in well for the entirety of this year. so that's been the initial market reaction and obviously a lot more to unfold as we learn more.

Oscar Pulido: You've actually talked to us about gold in the past when you've been a guest. I just want to go back to your comments on the bond market, which is in the initial parts of the sell off bonds rallied, bond yields went down, so there was that typical flight to quality. When investors are coming out of risk assets like stocks, they bought bonds. But you said more recently, now bond yields are going up. And Glenn, maybe that ties to what you mentioned about stagflation. You said that one of the risks is that we could be in a period if these tariffs persist, where growth slows, and inflation goes higher and that is not a good recipe for the bond market. So maybe you can talk a little bit more about how your investment views have shifted as you've digested all of this tariff news.

Glenn Purves: Sure, Oscar and I'll talk about silver lining as well with gold because it ties in there as well. given all the developments starting on April 2nd, we set out a bulletin on April 4th that changed our view on this.

And what it sets out is that we see the current maximalist stance of the administration and the de-leveraging market dynamics that Gargi walked through as keeping risk assets under pressure in the near term. But for how long? Or how short is also uncertain. That's why we've shortened our tactical horizon and we're reemphasizing the first phase of our long-held view that things will get worse before they get better.

And over this shorter horizon, we reduce risk in, taking equity exposure to US, Japanese, and Chinese stocks to neutral. And instead, we're allocating more towards, short-term US treasuries. Which could benefit as investors seek refuge from volatility, and we also allocate to medium term treasuries as well.

Now, if clarity returns quickly, we look to re risk, of course. And in terms of what, where we continue to be, we still remain underweight long-term treasuries given persistent US deficits and sticky core inflation, even before any tariff impact at which links to the point that you made. And we still see gold as a better diversifier, as Gargi said, it's been a silver lining than longer term, or longer duration bonds. But overall, this environment it still favors security selection and taking an active approach with portfolios.

Oscar Pulido: So, Gargi, what Glenn's saying is that the BlackRock Investment Institute tactically is reducing risk in portfolios and looking for more clarity. I know you spend a lot of time talking to investors during this period and. Helping them make sense of the volatility in the markets. what are you hearing from them and what do you think we should be doing in terms of portfolio positioning? Because certainly we go through periods of market volatility. That's what investing in the markets is all about. Is this period different than other periods?

Gargi Chaudhuri: Sure. So, I'll pick up on the first point around market volatility all the time. And if you look of the last 75 years. The average intra year market drawdown has been about 14%. This is to say that volatility is often always with us.

Obviously, this time around, we did see the S&P500 come down about 20% from its peak at one point on Monday morning, so maybe a little bit higher than that average 14%, but I think it's important to remember that drawdowns. Even slowdowns in growth are all a very normal part of a market cycle. Another question that's coming up a lot from investors is just around, is there panic out there and how are things trading?

And I want to make sure that our investors who are listening understand that as of right now, things are trading in a very orderly fashion. So, when we look at volumes across ETFs, or when we look at volumes that are trading in the. Various stock exchanges, those are hitting record numbers and what that means, what that indicates to us is that there's an exchange of risk transfer taking place, which is a healthy sign.

As we are thinking about the market and how investors should think about the market, I think it's important to remember that if you invested about a $100,000 in the market 20 years ago, that's about $717,000 today. But if you just missed five top performing days. That number is significantly lower, about $452,000. So, despite volatility, staying invested, especially if you're a long-term investor with a long view on markets, I think it often pays off.

Having said that, of course, if you are thinking in a more short-term or medium-term nature, this is volatility and there are changes to come. And a lot of clients have been asking me about. Our view on a recession and if that's something that they should be, thinking about as, when it comes to their portfolio.

And the three things that we're telling investors to think about is really, first of all, thinking about diversifying. Glenn talked a little bit about this around, where you can go around, different asset classes, but it's not just around different asset classes, it's also around us versus the rest of the world.

It's around shorter-term, fixed income, parts of the market, inflation linked bonds, gold market neutral strategies that don't take a lot of equity market beta, for example. So, adding that diversification. And then the second is defense within your equity portfolio. So obviously many of your listeners and many people have some portion of their investments in equities, and that's what we're talking about in terms of volatility.

So, adding that defense within equities. So maybe thinking about more minimum volatility strategies that can reduce that volatility profile in your portfolio. And I think that's important in these times. And then number three, broadly thinking about defense in your entire portfolio. So not just thinking about defense in your equity portfolio, but thinking about your, the defensiveness of the entire portfolio.

And then this is where thinking about, what are the diversifiers that have a negative or a zero correlation in your portfolio? So again, broadly having a diversification, U.S. versus the rest of the world. Having defense within equity. So minimum volatility as a strategy and then having defense on your entirety of your portfolio, which is really thinking about things, again, like inflation linked bonds, thinking about things like gold, thinking about things that can earn you income, especially in the belly of the curve, which we define to be the 3-to-7-year part of the curve.

Oscar Pulido: And just tying both of your comments together - Glenn, you're saying that the BlackRock Investment Institute is taking a shorter time horizon right now to evaluate markets and maybe make sense to take down risk, and Gargi you're saying be diversified. You can do that geographically or based on the types of strategies you use in your portfolios. But what you're both saying is stay invested, that this is still a prudent approach, over the long term is to stay invested.

But having said that, Gargi just, maybe one more thought, which is what are maybe inflection points or signs that you're looking for? That were coming out of the storm, that would start to get you more constructive.

Gargi Chaudhuri: Yeah, so you heard about the D'S and now we’ll talk about the R’s. So, a few things that we're keeping our eye on, whether that comes to turning more defensive or even more constructive. The first is certainly just reaction from countries and we obviously have heard some news around that from China and there's talk about others may be coming soon. There's a question about recognition of where rates end up landing.

So, what might that look like? And then I think thirdly, and this is probably the most important one as we think about, the path ahead is response from both companies and from monetary policy. So, if growth significantly slows, is the response from the Fed, for example, to cut rates or are they not able to because inflation is sticky enough that they can't look through that?

So that is a response that I'm keeping in mind. A response from companies is really important. Most immediately, my focus will move to the earning season. That's coming up just at the end of this week. We're going to start getting the first look at Q1. And as we've seen historically, about 20% of companies provide quarter ahead guidance on earnings call, and about 43% provide full year guidance.

So, to what extent are we finding that companies are not able to provide guidance at all? And we saw a little bit of that during Covid, so that's something I'm watching for. Obviously, any kind of negotiation or pushback, around reciprocal tariffs, any kind of delay, I think that'll have a market reaction.

But broadly the three Rs. So, recognition of where tariffs land reaction from companies, and most importantly the response from corporations as well as monetary policy. That's what I'm thinking about holistically as I think about how investors should be thinking about this market space.

Oscar Pulido: And Glenn, what about you? What are some of those signposts that you're looking for that starts to change some of your sentiment?

Glenn Purves: Yeah, I think, like Gargi mentioned a lot of them. I would say deals with countries and confirmation of retaliation intent, I think that's a big one. Status of lawsuits currently in the system. And the other one is, the extent of economic damage as a consequence of the lack of certainty and stakeholders and how the response mechanism occurs to that. I think that's going to be very important to watch. Like Gargi mentioned, the Fed, I don't think the Fed, the role of the Fed isn't to clear out uncertainty, it's to provide price stability and full employment.

And in the case of the Fed, I think they're going to be in a very difficult spot due to the sticky inflation that Gargi mentioned that already existed even before these tariffs came in place. The only thing I would add to this is, I think we have to keep in mind that this is not just a tariff story. It's not even just a trade story. And I thought, Steven Miran, the chair of The Council of Economic Advisors for the White House, put it very clearly this week when he said that the underlying objective is greater cost in burden sharing on security and trade between us and partners.

In his words, that means other countries accepting tariffs on their exports to the US without retaliation. And so that objective of raising, revenues is going to be very important to the us. it means stopping unfair trading practices, by opening markets and buying more American. It means investing in and installing factories in the US and it means boosting defense and security spending and procurement from the us which we've seen in Canada and Mexico thus far.

And Secretary Rubio seeking higher NATO contributions and commitments, of up to 5% of GDP and whichever way you see it, it means foreign governments, households, and businesses spending more. That kind of fiscal expansions, it feeds into these global rates resetting higher momentum that we've been seeing even before the US administration kicks in.

So, some of the growth advantages that you could see emerging may be more delayed and in the near term, as a consequence of tariffs, I think you're seeing more stagflationary impacts and the question's really going to be how big it's going to be.

Oscar Pulido: So, part of what you're saying is that tariffs are in the news right now. That's what everybody's focused on, but there are, this is part of a broader, longer-term shift in US foreign policy, US trade policy that's going to have implications far beyond the next couple of days.

So, Glenn and Gargi, we know you've had a busy week already, and as we said, it's only Tuesday, but we appreciate you sharing kind of real time what's going on in terms of, tariffs, how it's impacting the markets, and what, investors should be thinking about here in the near term. thank you for joining us here on The Bid.

Gargi Chaudhuri: Thank you for having me.

Glenn Purves: It's great to be here. Thanks so much.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you’ve enjoyed this episode, leave a review and share with a friend, and if you want to keep up with what’s happening in the economy and the latest market trends, make sure to subscribe to The Bid wherever you get your podcasts.

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Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

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Oscar Pulido: When people think of how early-stage companies finance their initial growth. Venture capital and private equity are often the first things that come to mind, but growth and venture debt have become increasingly prominent in the financial landscape, especially in the wake of the collapse of Silicon Valley Bank.

These forms of debt are now seen as vital compliments to equity raises, offering unique advantages in loan structuring and security. So, what's driving this shift towards debt financing and how are these trends reshaping the way companies finance themselves? As compared to previous cycles,

Welcome to the bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Here to help me understand this investing trend is Ross Ren a portfolio manager in the growth debt team at BlackRock. He'll help us understand the current themes, driving growth and venture debt opportunities, how his team identifies and evaluates emerging trends, and the role of relationships and local presence shaping the future of this market

Ross, thank you so much for joining us on the bid.

Ross Ahlgren: Thank you, Oscar, for having me. It's a privilege.

Oscar Pulido: So Ross, we're here to talk about venture and growth debt, which is perhaps a term or terms that people are not familiar with and maybe taking a step back. When I think about an entrepreneur or somebody starting a new company, I know that they need capital, they need money to help fund their growth. And I think we usually hear the terms venture capital and private equity, that this is the way that entrepreneur usually gets some of their financing. These investors take an ownership stake in the entrepreneur's company and one day hopefully the entrepreneur has a successful venture, and investors make money from that early investment.

So, venture and growth debt, I think is the other side of that equation where similarly, they're helping fund early-stage ideas, presumably from lending money, earning some sort of interest rate. But maybe you can help elaborate a bit more on this space, I think I'm down the right track, but you're the expert.

Ross Ahlgren: Well, you're definitely down the right track. If you break it down, there's an invisible ozone layer of profitability. So, companies that have traded profit for growth are normally on the venture capital side where companies that are profitable are normally on the private equity and, other lender side.

So we're talking about that collective of companies that have traded profit for growth, some of them become profitable and move on, but as you said, the equity providers are the ones that fund the business plan of a company. So, they usually fund a company depending on type of company it is, whether it's a healthcare or technology company. They will fund the business plan for the next 12 to 24 months. That is to say that they organize hiring and firing and the growth of the company. But if something comes along, for example, a company is rolling out across Europe or they're rolling out across America and a state is going better than expected, or a country initiative is doing better than expected, that's where they would like to put more capital to work.

And what they up doing is using venture debt for that expansion use case. So it can be a geographic location, it can be a new product, it can actually be inorganic growth through acquisitions. So it's something that is an expansion use case, and we provide a non-dilutive, or at least a less dilutive option, than equity through debt.

Oscar Pulido: It sounds like an opportunistic infusion of capital is what you described that, hopefully is expected, but sometimes unexpected, and a company needs additional capital to help continue their growth profile.

Ross Ahlgren: It's a symbiotic relationship between the venture capitalists that are providing the equity and the venture debt providers that are providing debt. So, they tend to work together. Their jobs are slightly different and as I said, it's more of an expansion use case for the debt on that side. But in the grand scheme of things, there's normally when you do a venture debt or a growth debt facility, it's usually single digits or 10, 11% of the value of the company. So unlike equity, which you mentioned earlier, which is the leveraging of a balance sheet, maybe 60 or 70% of the funding of the company comes from debt. This is very small this is maybe 10% of the funding for the company.

Oscar Pulido: Ross, as you're educating us a little bit about growth in venture debt and, the differences with venture capital and private equity, are there any misconceptions about, this space that you work in?

Ross Ahlgren: Probably the biggest misconception is that we are providing debt facilities with venture capital risk. So, we are getting paid debt prices for taking venture capital risk, that is the biggest misconception that initial investors have and other people on the outside of the business have. But that is actually not the case. What we're providing is a different risk reward than the equity. So, the equity goes into a company, and it could be a two year journey or it could be a 15 year journey before they ever get their money out through an exit.

The venture debt provider comes in and they provide short term, usually three to year facilities of debt to provide a more, non-dilutive, funding option for the company, but they get paid back on a monthly basis.

So, from an investor's point of view, they're getting a risk-reward that's very different than the equity. So, it may not have the upside, it definitely has more of downside protection because it's senior secured and it's paying back monthly

Oscar Pulido: Right, when you said venture capital risk, and that being one of the misconceptions that investors might have, I think you mentioned one of these things which is venture capital risk means you might have to have a very long-term time horizon in terms of exiting the investment, but also that the potential reward and the potential loss, there's greater variation about what those could look like.

Ross Ahlgren: People used to say, when I started way back when, that in venture capital, a third of their companies go under a third go sideways and a third go up, and they often make their fund on one, two, or three investments out of a dozen.

In venture debt, what you try to do is, you never want to be in the losers and you never necessarily want to be in the top binary companies that are either going to make it big or fail, you want to be somewhere in the middle. And if you have a three year or a four-year debt facility, you would hope that that company on their growth trajectory, that they naturally grow into the facility and they pay it off as go along.

So the business model of running a fund like this is that the facilities themselves are self-liquidating. So as a company takes a debt facility, it might take on, when it's early, it might be 3 to 5 million, but they pay that off over a two, three-year period. As they do that, they may have a new use case that comes along where we can- if the company is doing extremely well- we can re-up with that company and do another debt facility and continue to grow. Those that don't do well, they pay it off, self-liquidating and we get off that company and we move we move on to something else.

Oscar Pulido: It is clear there are different, like you said, risk-reward, trade-offs between being a venture capital or private equity investor and a venture debt investor. Ross, if I could take a step back and just provide a little bit of market context. Two years ago, we were talking about the failure of Silicon Valley Bank.

Here’s a quick reminder of the events that led to Silicon Valley Bank’s collapse from our episode with Alex Brazier in March 2023, then deputy head of the BlackRock Investment Institute…

Alex Brazier: The story goes back some way, but really what's happening here is that the fastest rate hiking cycle since the 1980s It was clear that was always going to cause some economic damage and expose some cracks in the financial system.

So that's really the scene setter, but then what actually happened with Silicon Valley Bank… well, it was a bit of an outlier in two important respects. The first is that it had a very large share of its deposits, greater than $250,000. So, they're uninsured deposits, and those are typically more flighty and more likely to, be withdrawn in stress than insured deposits. And the second thing it had in which it was an outlier, was that it had a very large book of US treasuries and mortgage-backed securities. And of course, as interest rates have gone up a lot the market value of those securities has fallen a lot.

Now, Silicon Valley Bank hoped that it wouldn't have to sell these securities. It hoped to just hold them until they matured. But to link these two outlying characteristics together, a lot of its depositors were spooked and asked to withdraw their money, and as a result, it was forced to sell some of these securities at today's market prices and realize some of the losses. That meant that more depositors withdrew their money as the bank realized some losses. and so, it entered this kind of spiral, downward and the authorities then stepped in to take control of what was at that stage, a failing bank.

So what did the authorities do when they stepped in? Well, they’ve seized control of these banks written down the equity, and they've protected the insured deposits as they normally would. But very importantly in these cases, they've also used what's called a systemic risk exemption, which allows them to protect the uninsured deposits as well.

So, these banks failed, over the weekend and on Monday morning, all the depositors. Whether their deposits were insured or previously uninsured had access to their money on Monday morning. So, the authorities have dealt with these banks not by giving a bailout to the shareholders. This isn't shareholder friendly, but by protecting, the depositors in those banks.

Oscar Pulido: Ross, talk to us about why that event is significant for this space of private lenders that, your team works in.

Ross Ahlgren: Well, you almost have to go back to the 1980s when the industry was created. Around that PC development, and they were building fabs and labs and, funding a lot of hardware. That's where debt was created. And at that time, through the eighties and nineties, as the market matured in the US, there were two big winners. One was a fund called ComDisco, one was Silicon Valley Bank. And throughout the period of the nineties and the growth almost to today, until two years ago, Silicon Valley Bank was the only bank that was consistently focused on this industry. They didn't come in and out of the market as other banks did.

They were the best bank at this. And they got so embedded in the US market that they funded some of the VC funds, they funded the VCs themselves for their houses, their mortgages, et cetera, but they were focused on this ecosystem. And when they failed, they had such an outsized market share that it was a very big shock to the market in the US and it's time to fill that void.

Now, several funds have filled that void. It wasn't naturally filled with other banks. When you look outside the US, Silicon Valley Bank was in Europe, maybe 10 years. So, the type of relationship they had with the market, the market share, how embedded they were, was much less. But you still saw how the industry was when you saw some of the governments stepping in to help HSBC over here, take them over and again in the US as well. So they became an important part of the innovation, economy. But I would like to just add one thing because I know them well and knew the people there. They did not fail because of the loans they were giving or the relationships they had with the ecosystem. They failed at the C-suite level with a balance sheet mismatched. But the underlying business they had was very strong.

Oscar Pulido: It's clear that they played a big role in the venture debt community, is your point and there's a gap there and it makes me think a little bit about one of the mega forces that we talk about, which is this future of finance. This changing, in the industry, from banks being a primary lender to the economy, and then other private market participants that are stepping in to help fund growth in companies in the economy. Perhaps you can, talk to us a little bit about that trend. Do you agree with that? And maybe what are some of the other big trends that you're observing in this space?

Ross Ahlgren: Totally agree. I think the funds have a consistent mandate to do just this. The banks and other players the market, depending on, in Europe anyway some of the smaller regional banks may have an influence or have, but they tend to do very small and they just naturally don't take risk. They use a specific credit scoring model and it takes a while develop somebody like Silicon Valley Bank.

I think the bigger mega forces are the funds that are coming into play, the bigger players coming into this market. But when you look at what we do and what we have been focused on, is innovation and growth within tech and healthcare, these are the mega trends of the digitization of industries or the use of technology in general.

We've been through eras of machine learning and, cloud computing, and now it's AI and there's quantum computing coming. All of these things are not necessarily businesses themselves, but cut across wide sectors. So there's a number of business use cases and so, the venture debt community has evolved very quickly, over the last, in Europe since ‘98 when we started, but in the US it's proven to be incredibly resilient to fill the void that was left by Silicon Valley Bank.

Oscar Pulido: Ross, you've alluded a little bit to some differences in the US versus Europe, you talked about differences in how banks might approach lending to some of these companies and their risk profile, but talk to us a little bit more about these regional differences that you might see and how does it affect the way you go about investing in this space?

Ross Ahlgren: First of all, the is obviously the biggest market, it's the most mature market, a single sort of common set of rules, bankruptcy procedures, language, everything. When you go across pond and you look at Europe, it's much more fragmented. There's many languages, regional differences, legal systems, bankruptcy systems, et cetera. And when you are a debt provider, a venture debt provider, you to be able to perfect security in each of the locations you are. So, most of the US players that come to Europe will come to Ireland or the UK, where there's obviously common language much common legal practices. The fragmentation in the rest of Europe is much more of a spaghetti mix of many different things.

But when you have a mantra like we do that says, we want to invest in the best companies with the best venture capital backers, no matter where they are. It means that you can cherry-pick around different regions that different expertise, whether it's Switzerland, which has healthcare, or Finland that has a lot of very tech stuff going on, Germany, et cetera. So there's a lot of different areas with different, expertise and for other players, it's difficult to break into those markets.

Oscar Pulido: Ross, you've mentioned healthcare and tech. These sound like two sectors that are maybe focal areas for entrepreneurial early stage growth. Maybe talk more about the investment opportunities that you see more broadly, does it extend beyond those two sectors? And also, what are some of the risks in this space that investors need to consider?

Ross Ahlgren: From an investor point of view, when you're at this market, many investors that want access to innovation and growth will think that your natural entry point is to think about this sector is venture capital. And if you want to access market, investing in a venture capitalist often means that the fund might have 15 or 20 investments a fund, and by nature they're very, very focused. Whether it's enterprise, SaaS, software, optical photonics, quantum, they can be, very, very focused. So it's hard for investors to know which one back because you're taking such a single point of failure or single risk.

With a venture debt fund one of the benefits is we are sector-agnostic. So when I say technology, that's such a wide area of focus. But we tend to work with each of those venture capitalists at different stages, different companies, so we try get a portfolio of 110, 120 companies. Spread across, all those sectors and stages.

So, I think, from an investment point of view, it's just hard to know how to the industry for most of the investors.

Oscar Pulido: And Ross, what about some of the risks? Is it, liquidity? is it, time horizon? Although you've mentioned that maybe the time horizon of exiting an investment is different than if you were a venture capital or private equity investor. But what are some of things that, that you think investors should be aware from the risks standpoint?

Ross Ahlgren: All these markets, there's different stages, sectors, all of those things, some people want access to different parts, may want the early stuff because that has a higher potential upside.

Some other ones just want the growth companies because they're not going to get as large a multiple, but there's less risk. So most of the risk of any fund you're to invest in is the scale of the team, the scale of their ability to go from 2 million to a hundred million.

So they can pick and choose what stage they want invest in, the access have, they're not just in English speaking side or a particular state or a particular region in the us but they're broader that. So the core risk of any investment is going to be the access the team has and the underwriting the team known for, and as long as those teams are well run they stick to that, that's probably a better indication of where the real risk lies.

Oscar Pulido: And if you're an investor, how, do you think about this as part of a portfolio? Where does it fit in the broader, allocation across public and private markets, when we think about stocks and bonds, how do you see that fitting in that pie?

Ross Ahlgren: Primarily when we fundraise, we're talking to investors that want an allocation in private credit, and that access to private credit can be the stuff that you sleep easy night which, is the corporate debt. It may only yield single digits, mid-single digits. Once have that core, they may want access, for example, to debt or growth debt. They may want that because it gives them higher returns, it gives them junior-like returns with a senior security down below it. So what we provide is that juice or that little bit of access to innovation. So once they've got core debt strategy and private credit portfolio taken, they often bolt on investments in venture debt or, growth debt to add a bit of upside to their portfolio.

Oscar Pulido: And I used the word opportunistic before, is, that a fair characterization of maybe these are areas of the market where you can be a little bit more opportunistic and look for some higher return potential.

Ross Ahlgren: I would guess so. When you've been doing this a long time, it's much more methodical than opportunistic, but at the same time, I think most investors that come to asset class come to it because they've heard about it from other people that have invested. And there's always that misperception, again, that we talked about earlier, the misperception of what we do and what risk is.

Oscar Pulido: Well, Ross, I have to say this is a new, topic even for me, something that you've helped educate me on. I appreciate you helping us venture into a new space, a new asset class that, can learn about, and thank you for, teaching us this on The Bid.

Ross Ahlgren: And thank you for having me, Oscar, it's a pleasure.

Oscar Pulido: Thanks for listening to this episode of the Bid. Next up on the bid, we revisit the topic of India and why Indian equities might warrant a larger role in long-term portfolios than traditional indices. Suggest. If you want to keep up with what's happening in the economy and the latest market trends, make sure to subscribe to the bid wherever you get your podcasts.

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Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2025 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0325U/M-4307446

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Oscar Pulido: When investors consider how to diversify their investment portfolios, traditional assets like stocks and bonds are often the first things that come to mind. But private markets have become increasingly prominent in the financial landscape. These unique investments can offer diversification benefits that are often insulated from broader economic cycles. So, what's driving this shift towards private market investments and how are these trends reshaping the strategies of investors compared to previous cycles?

Welcome to the bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Joining me are Paul Braude and Vidy Vairavamurthy. Portfolio managers at BlackRock, they'll help us understand the current themes driving private market opportunities, how they identify and evaluate emerging trends, and how private market investments can complement public market exposures. We'll also discuss the complexities and challenges associated with investing in emerging private assets and key takeaways for investors looking to capitalize on these trends.

Viddy and Paul, thank you so much for joining us on the bid.

Vidy Vairavamurthy: Great to be here, Oscar, we're really excited about the opportunity.

Paul Braude: Thanks for having us.

Oscar Pulido: So, we're going to talk about this term, private markets. I've also heard the term alternatives. Vidy maybe, first question to you, which is: alternatives, private markets, are these the same things? And how do they compare to the public markets?

Vidy Vairavamurthy: Great question. Oscar, I think in the context of private markets and alternatives, there's been an evolution, and I think the names themselves have gone through an evolution. I think if you go back 30 years, when you thought about classically where people are investing, it was largely in public markets.

So anything outside of that was viewed as alternatives that first came with hedge funds, and now we know the broad adoption around hedge funds globally in client portfolios and private markets are also going through that moment where historically it was really around a couple of different asset classes that people were collecting and now they're becoming much more mainstream and actually very much a part of all portfolios.

I think from a broad sense we would also acknowledge that public and private markets are effectively converging. Historically there's been a different perception around private markets. Private markets are often viewed to be much more risky. And why is it? Because a lot of the assets that were part of the private markets were riskier. For example, venture equity, as part of the private equity landscape. But that's changed. Now, both today, public and private markets offer a range of risk opportunities that we view as a spectrum, right? So, on the very low-risk side, high quality assets such as AAA corporate bonds to investment grade, infra debt on the private market side you can also lean into part of the areas that are much more risky. For example, you can invest in public tech stocks that exhibit a lot more risk than, say your traditional, value company, and also invest in growth equity companies in the latest AI company. Now we think that's how private markets are evolving and being a bigger part of the conversation when you think about the whole portfolio.

Oscar Pulido: Vidy, and we should have said public markets, maybe it sounds obvious, but we're talking about traditional stocks and bonds, these are companies that have IPO'd or in the bond space. This could be things like corporate bonds or government bonds, that's what you said are the traditional asset classes. And everything outside of that was thought of as alternative, and you started talking about private markets, things like private equity venture, infrastructure. That gives us a little bit of definition.

Paul, what else has been evolving in this space of private markets to get us to where we are today and where are we seeing some of the investment opportunities?

Paul Braude: Absolutely. So maybe I'll start at the same point in time that Vidy just referenced, or about 30 years ago. At that time, the private market universe was really looking very different in that you saw private equity, you had venture capital, and you had real estate segments. And importantly, access to those investments was really limited to institutional investors only.

Over time, we've observed remarkable growth in a private market universe as a whole. It now stands at over $13 trillion and is actually expected to grow much more to over 20 trillion by 2030. Importantly, private markets have grown not only in size, but in breadth as well. So, in addition to private equity and real estate infrastructure and private credit have now emerged as full-fledged asset classes.

On the one hand, the growth in these new asset classes has been driven by demand for private capital in the markets. So, for private credit, we see more demand for companies as they stay private for longer, and as their CFOs develop an appreciation for the flexibility and certainty of execution that private lenders can provide.

But for infrastructure, its growth has been fueled not only by the demand for traditional infrastructure investment. But also, by the build out needed to sustain the growth of, ai, of course, whether that's building new data centers to house all the computational power needed for it, or frankly, financing the development of the energy infrastructure required to provide the electricity and power to power all of these servers.

So, on the other hand, new and innovative structures have been developed over time to enable access to these private markets for more investors. And access is no longer limited to just large institutions. Individuals can now invest in these assets as well, through structures, called semi-liquid structures.

And I will say it's a rapidly evolving space driven by, regulation evolution globally, and I would expect there to be more evolution in terms of products and ways to access these private investments in responsible ways going forward. As private markets have grown more complex, we've seen an interesting evolution in opportunities that do not neatly fit the core private market strategies.

These are opportunities in niche or smaller assets, which effectively play the role of alternatives in alternatives. These investments can vary widely from taking on insurance related exposures to pursuing acquisitions of music royalties. But one common theme that unites them is that they tend to be less correlated to both traditional public markets as well as the larger core private market strategies. And as a result, these investments can provide benefits of diversification and resilience in investors' portfolios.

Oscar Pulido: Paul, you touched on the size of private markets going from $13 trillion now to, expected to be a $20 trillion in just the next couple of years. And then you also talked about what appears to be the democratization of access to some of these markets that maybe historically were hard to access. So, Vidy, when it comes to then a portfolio allocation, what role should private markets play in a portfolio and what might be some of the challenges that are involved with that as well?

Vidy Vairavamurthy: I'm going to build on some of the themes that Paul highlighted and give you what I think are three main reasons why investors would look to private markets.

I think first and foremost is an acknowledgement of the return potential that's available in private markets. You can be very disciplined in sourcing different risk within the private markets that can deliver differentiated forms of return, which could be hugely advantaged in your portfolio. And then the other component related to that is private markets is really where active management can deliver really enhanced performance because these are assets where there's a hands-on approach to actively managing the types of assets, value creation, and effectively monetizing those assets at much higher valuations than what you would typically see in some of the public market discussions had today.

The second is portfolio diversification. The ability to introduce real breadth into your portfolio and having different risks actually deliver that real diversification benefit and think about places where, for example, when you think about music royalties or other sort of different IP, those are risks that you're not being able to source today in public markets, which can provide a real ballast when you think about introducing, diversifiers to your portfolio, and you think about it today, the cash flows on what a record is doing in your music catalog has nothing to do with what's happening in the public markets,

And the last thing that's really exciting about private markets, as an investor that wants to be really targeted in the types of themes that they want to see in their portfolio, you can be very prescriptive in being able to say, ‘Hey, I want to play in digitalization or in decarbonization, or for example, demographic shifts.’ Those types of assets are very abundant in private markets and can provide that specificity that you want in that whole portfolio approach.

Now, with that comes the challenges that you acknowledge. I think the first and foremost, is the liquidity challenge, right? These aren't assets that you're going to be able to trade. Once you've made a decision with them, you're going to hold them in many cases for years. There is that challenge around how do you make decisions around private markets where you are trying to invest over multiple years? And the complexity today really comes from data. The data today has been, a slow going, but we're seeing an improvement in that. So, decisions around how do you think about value? How do you think about risk? How do you think about the different forms of liquidity that you need to solve for? I think there is that element of how do you do that with the right level of conviction that you would do in public markets.

And then the last thing that I would acknowledge is the convergence between public and private. not only are you seeing convergence in how we think about opportunities, but we're also talking about risks. So now more than ever, it's really important to think about how does the macro and the geopolitical considerations of our time affect how we think about trends that are going to play out over multiple years? And that is becoming really hard to do, and it requires a lot of expertise to do that

Oscar Pulido: As you're talking about the breadth in a portfolio, I think about a lot of the conversations we've had with investors on the podcast about this is a new market regime, the need to be more granular, the need to, look for sources of return in different places than maybe we did in prior market regimes.

Vidy, you started talking a little bit about the, some of the considerations that investors need to think about when making that differentiation between public markets and private markets, one of which is the time horizon. If you invest in public markets, you can get in and out pretty quickly, but you can't do the same in a private markets investment. What else is there that investors need to consider?

Vidy Vairavamurthy: One of the most important things that you need to think about is what are the sort of right risks that you want to include in your portfolio? I think one of the things that we observed is, classically it's really been, and when think about investing in private markets, it's really been an exercise around collecting.

What I mean to say is there'd be x, y, z manager out with a certain fund, and investors would evaluate that fund on a standalone basis. They would think about proven manager with a track record. I like the strategy, I'll invest. And they'll do that sort of iteratively through the opportunity set. And there was never really a unifying theme around how you made those decisions.

While then it made sense because those allocations were probably smaller. As those allocations are growing and we see institutional, investors in many cases having exposures of 30, 40 and sometimes 60% depending on their risk preferences, we're seeing that dynamic now evolve where more and more investors are thinking about how do be targeted around that exposure, and how do I think about this holistically?

Now, the approach that we think that's really critical to this is this total portfolio approach. Don't differentiate between your public and private. Think about, at a whole portfolio level, where do you want to be levered? What types of risks do you want to see? How do you think about the value that's being priced in markets today, both across public and private?

And then think about what are the forms of liquidity that you want to manage across? If you're a long-term investor, you can leverage that ability to think long-term and evaluate opportunities across that spectrum that we refer to on a risk basis, but also on a liquidity basis.

The other thing I want to highlight is the fact that you want to be flexible. You want to acknowledge the fact that there's a lot of things that you don't know in the market that will evolve through time. So having the ability and the discipline to think about what are the areas that you want to be tactical, what are the areas you want to retain some level of capital that if a change does manifest itself, you can take advantage of it.

Oscar Pulido: And an underlying theme that you're mentioning, Vidy, is that this is now a growing part of investor portfolio. So, the considerations that they have to account for are more and perhaps just more information that needs to be taken into account when thinking about how to allocate.

Paul, you said something about the alternative to alternatives and Vidy said something about music royalties as well. So, I think this is a space that is starting to emerge, I think we actually call it emerging private assets. I want to distinguish that from emerging markets, which is another topic we often cover. But talk to us more about these emerging private assets. How do they fit into the broader landscape of private markets? And can you give us some additional examples maybe?

Paul Braude: So maybe to set the stage, so private market strategies, they continue to expand in size and scope, and more and more sectors are benefiting from the flexibility of private capital as well as the financial innovation that they can provide.

But at the same time as private allocations become more prominent in investor portfolios, investors have been starting to look for diversification of those portfolios, and that is exactly where niche or emerging private assets can come in. So, these areas of private markets, which we believe represent an over $700 billion opportunity currently have been growing at a 15% annual pace over the last 15 years, which by the way, is actually faster than the overall growth rate for private markets as a whole. And because the segments usually start out at a much smaller scale, they tend to fly under the radar of traditional, larger scale private market strategies, which we believe can actually create some interesting and attractive investment opportunities.

So, one example since we've been talking about music, music royalties represent a very interesting, example of an evolution of a niche asset class. And by the way, music royalties, means buying the rights to intellectual property, that artists and writers can create, which then is associated with cash flows that the intellectual property generates, as we all consume content and listen to songs, for example.

So, 15 years ago that industry was basically non-existent, and any transactions were one off at best. And now, what we've seen is a growing demand from investors as they've seen data historically that shows that music consumption is really not correlated to what's going on in the market. And in fact, that was proven during the global financial crisis. At the same time, artists got more comfortable with selling their rights to these assets, and that has resulted in the growth in that industry, which is now estimated to be over $60 billion in size. So maybe a little bit less niche or emerging than it once was.

One other, maybe a little bit more esoteric example that I'll give is whiskey aging. So, the global demand for that spirit continues to increase, and the relatively long aging process has created an interesting point for patient institutional private capital to enter that space. And importantly, as whiskey ages in casks or barrels, its value actually increase is increasing. And so effectively you own an asset that is appreciating in value over time. And in general, for these types of assets, we focus on gaining access to businesses or cash flows that, increase in value and generate cash flows, regardless or frankly sometimes in spite of what might be going in on in the broader market. And it's exactly these types of qualities that create an attractive way to diversify or add resilience to investors' portfolios.

Oscar Pulido: It sounds like you can get very creative as to the assets that, make it into your portfolio and also just listening to the both of you. Is it right to say that when we talk about private markets, I think the core portions of private markets are things you've mentioned, like private equity, infrastructure, private credit.

These areas like music, royalties and whiskey are really those, and perhaps why you refer to them as the alternative to alternatives. These are really more niche, esoteric, growing, but still a smaller part of the private markets landscape. Is that how you would think about it, Paul?

Paul Braude: No, that's exactly right. And that's why we think they can be actually more attractive for certain investors as a way to access a differentiated set of exposures or differentiated set of investments than what they would otherwise be getting in the markets.

Oscar Pulido: Both of you as you scan the private markets, these are areas of deep expertise, for you both. what are some of the trends driving the growth of private markets that you're looking at the moment and take us forward, what are you seeing as we go forward into the future?

Vidy Vairavamurthy: Yeah. I think the first and foremost is, I think we should acknowledge on the supply side there's a significant evolution that's happening. What I mean to say is, if you think about how people invested in private markets 30 years ago, it was largely through closed end vehicles that were lockup vehicles that oftentimes were 10, 15 years as far as the length of time the capital was locked up.

The investment community itself is thinking about how do they adopt them appropriately into their whole portfolio. For example, as Paul highlighted, one of the areas, there's a lot of, innovation that's happening is in these products known as semi-liquid evergreen products. And these are products that are well suited for new investors, specifically in the wealth and retail space that want to have exposure to private markets, but adhere to some of their policy requirements, whether it be some form of liquidity, some form of transparency that's much more consistent to what they invest in their portfolios.

Other areas in the market, we can talk about the emerging spaces that Paul talk about, these alternatives, if you will. Those are really critical, right? When you think about some of the spaces that were less trafficked from an institutional capital perspective, as they become more exciting and more investible, that creates better, ways of creating opportunities in client portfolios to deliver alpha that you might not have been able to do 10, 15, 20 years ago.

Paul Braude: I'll add to that, that from a thematic perspective, we think that similar secular trends that are driving public markets are also applicable to the private markets. And of course, the proliferation of AI is one of those trends. And in addition to the computational power and energy that's needed to sustain the growth in ai, we've been focused on understanding how it will transform the various industries. I mentioned music royalties before, but the rise in that sector, I believe is more emblematic of a broader shift that we've been seeing in the way that we all consume content. So, the technology evolution that we've seen in particularly in streaming, has enabled all of us to access content so much more easily and with a lot less friction than we used to. And at the same time, for content creators, the creatives, they can create content much more cheaply and make it much more accessible to the rest of us. In addition, we've seen a lot of crossover in the way that intellectual property is monetized. So what I mean by that is think about video game, intellectual property, and all the TV shows that have now come out based on video games. Or think about all the, beloved artists and singers that we know who have now become movie stars, right? And we believe there's a con continued opportunity in this entertainment IP space ranging from music to tv, to live theater, and of course to sports. And sports in particular has been a red-hot area for private investors.

But I will say that we're quite conscious of the changing environment more broadly and what this higher inflation and higher interest rate environment is going to bring us and how the geopolitical risk, is going to affect the investment landscape.

Oscar Pulido: Paul, you're making me, think as I walk around on the street, I'm going to be looking to see can I monetize that particular asset because you're certainly, making me realize that there are a lot of distinct ways to bring return streams into your, portfolios. Vidy and Paul, thanks for sharing all this expertise, on the private markets, giving us a little bit of a history lesson, but also taking us forward a bit. And thank you for doing it here on The Bid.

Paul Braude: Thanks a lot. Thanks for having us.

Vidy Vairavamurthy: Thank you, Oscar. It's been great.

Oscar Pulido: Thanks for listening to this episode of the Bid. Next up, we dive into the exciting world of growth and venture debt. Exploring the dynamic shift towards debt financing and what it means for the future of investments. If you want to keep up with what's happening in the economy and the latest market trends, make sure to subscribe to the bid wherever you get your podcasts.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2025 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0325U/M-4315258

<<THEME MUSIC>>

Oscar Pulido: Infrastructure investments have long been recognized as a foundation for economic growth and low carbon infrastructure is increasingly becoming an area of interest for investors in both public and private markets. But how will low carbon infrastructure play a role in the evolving energy investing landscape?

Helen Jewell: Infrastructure is the physical back bone of any part of the economy. It's transport, it's power, it's water, it's waste, it's digital assets. It's everywhere, and it's absolutely key to growth in what is a relatively low growth environment.

Oscar Pulido: Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Coming up, Helen Jewel, Chief Investment Officer for fundamental equities at BlackRock will help me explore the significance of infrastructure from an investing perspective, the opportunities in public markets, and the long-term growth potential from investments in renewable energy.

Helen will also provide insights into how infrastructure can facilitate the decarbonization of power generation and the challenges investors should consider in this dynamic investing trend.

Helen, thank you so much for joining us on the bid.

Helen Jewell: It's great to be here.

Oscar Pulido: Helen, we are here to talk about infrastructure, which is a topic that we've been talking about for a while now. We've had Jay Jacobs talk about the infrastructure development that is needed in the us. we've also heard from others about the build out of data centers that are needed for the growing use of AI, but perhaps you could give us a reminder of its significance from an investing perspective, and also how does it tie to this theme of low carbon investing?

Helen Jewell: Oscar, the key thing to remember is that infrastructure is the physical back bone of any part of the economy. It's transport, it's power, it's water, it's waste, it's digital assets. It's everywhere, and it's absolutely key to growth in what is a relatively low growth environment. What's important is that when we have quite high public debt levels, we need to have private capital coming in to really make a difference in infra and infrastructure is critical to addressing the world's expanding energy needs.

I know a lot of people have talked about this already. But historically, Europe's energy need was decreasing, and the U.S. was flat, but that is now changing. Global electricity demand is forecast to grow by around 4% a year between now and 2027. And in the US that means adding the equivalent of California's current power consumption to the national total over the next three years.

Now, that is driven by a number of things, and the one that most people talk about is of course, AI. One of the most sources of need for energy in the future is also things like air conditioning. So, it's not about AI, it's about so many of the things in the day to day. And a mix of energy is really important to meet that demand. You need not only the traditional energy sources, but you need low carbon sources to be coming through, and that requires ultimately a lot of infrastructure spend.

Oscar Pulido: Helen, you mentioned infrastructure is all around us. It's a fundamental part of any economy. And you also mentioned that private markets play an important role in funding the growth of infrastructure, and that's I guess how I think about it, because these tend to be longer-dated projects, and they require capital that maybe needs to be locked up for many years. But how do public markets offer access to the infrastructure theme?

Helen Jewell: Yeah, it's a great question because I think when people think about infrastructure, they often do think about the private market piece. But key infrastructure includes electric transmission, distribution lines, toll roads, railroads, airports, power plants, pipelines, cell towers, data centers, utility companies- it is, like you say, infrastructure is literally all around. And all of these of these companies can actually be accessed by public markets. So, I’ll just a throw a couple of examples out there. Cable makers like Prysmian are for power grid upgrades, and other grid service providers such as Hubble, they are found in in public markets. Public markets are also home to many of the materials and energy companies that are essential to infrastructure expansion. So, what you actually find is much of the infrastructure need is found in public markets.

Oscar Pulido: And so, Helen, what are some of the reasons that investors might want to use public markets over private markets to, to access this theme? or do you see value to, both public and private markets as a way to invest in infrastructure?

Helen Jewell: There's definitely value in but let give you four reasons why we think that public markets are a really interesting place to play the infrastructure theme. Liquidity, diversification, income, and valuations.

So, let's start with liquidity. Ultimately, public markets are liquid and private markets are not. The second of these is diversification. What a people don't realize is there's not a large overlap between infrastructure and global equities. For example, the MSCI World or the S&P500 contain just 3% infra. So, by increasing your exposure to the asset class, you offer a natural diversification to your portfolios.

And what we've also seen is that infra stocks historically outperform when broader markets fall. Companies like utilities also give you income. And income is really important part of the infrastructure story. You've seen dividends of around 3% within this space.

And the final part is valuations. Infrastructure stocks remain at a discount versus the broader equity market, especially those companies in the renewable energy space, because a lot of the news flow around that space is putting pressure on the valuations.

But we that this presents a really attractive entry point for investors who are interested in listed infrastructure names. The discount has already been noticed by private buyers who are recognizing both the long-term earnings potential of listed infra companies and their low valuations. And we are expecting and already seeing listed infrastructure M&A activity to be the valuation story as well and providing us with a flaw for those valuations.

Just recently, for example, we saw private equity company Brookfield buy the US renewable energy assets from National Grid. So, four really, really important reasons why public equities are such an important part of infrastructure spend. Liquidity, diversification, income and valuation.

Oscar Pulido: Helen, that was super clear. Those four reasons and the valuation point, I can't help but think that with public markets, the price is invisible in the market every day, right? That's the point of public markets; you see valuation instantaneously and-

Helen Jewell: We sure do!

Oscar Pulido: - you don't see that with private markets that goes to your point of liquidity. Liquidity is different and sometimes private market valuations are a bit lagged, but the valuation point is instantaneous and noticeable to the buyer and the seller for that matter.

Helen let's talk about low carbon infrastructure. How does the low carbon landscape intersect with the infrastructure theme that you're talking about?

Helen Jewell: Well, it's all about the investment. I think the starting point of so much of this is to remember what those energy needs really are. An investment in the low carbon energy transition has grown 11% to hit $2.1 trillion in 2024. You need power and that power generation comes from all different sources.

And again, it's not just those companies which are the initial power you need the companies that are supplying the grid related connections, cables equipment transformers, power management, that is all part of the jigsaw puzzle.

So, investment in power grids totaled around $400 billion in 2024. And whilst renewable companies can be accessed in private markets when it comes to these grid related names, they are mostly accessed by public markets. And we all know, and it's been talked about so much on The Bid as well, the AI demand pull that is coming over the next few years for energy but right now what we are really focused on is hardening- making these grids more resilient, especially as climate related disasters are becoming more common.

We want wires to be below ground to reduce the risk of fires. So, expansion of this grid infrastructure is absolutely pivotal to the low carbon transition and enormous investment is needed to boost the ability to get that energy from where it is made, maybe a remote wind farm miles away to where it's actually being used in towns and cities.

Just take National Grid- National Grid owned the electricity transmission system in England and Wales, and these kinds of utilities are the ones that are critical to making sure that the sources of power generation are able to get to where that power is being used. And National Grid has outlined enormous levels of investment and aims to double the amount of energy that can be transported around the UK.

So, it all goes back to that stat, we need 4% more energy. This comes from renewable energy as well as hydrocarbons, and it all needs to go to where it is needed. And these grids are pretty much exclusively in public markets.

Oscar Pulido: Helen, the more I, listen to you, it's clear that infrastructure is a very pervasive theme. It cuts across private markets and as you've made the case, public markets as well and numerous sectors, and for that matter, numerous geographies. Part of what you've talked about is the utilities sector, so maybe talk a little bit more about how utilities facilitate the decarbonization of generation and maybe talk more about the long-term earnings growth from investments in renewable energy.

Helen Jewell: Oh, Oscar, I just love utility companies! And utility companies are often overlooked in the ongoing overhaul of the world's energy system. Even they comprise around half of the listed infrastructure universe. They give you also resilience in portfolios. Some of them are pretty monopolistic in nature, meaning very high barriers to entry, and so what they have is these cash flows that are viable, visible, long-term, contractual- really, really powerful cash flows. And the sector's investment in renewable energy may result in significant long-term earnings growth. They could cross a 50% share of electricity generation at the end of the decade through renewables.

The electrification of various fossil fuel powered processes, oil drilling, oil driving, is also supportive of electric utility growth, and the drive to a low carbon economy has brought support from the regulatory space as well. Governments, consumers, are all leaning into the investment that is needed by the utilities to support the energy need. And utilities they are part of the solution for this.

Oscar Pulido: It is interesting 'cause when I think about the utility sector historically, it does feel like a little bit of a, I'm going to use the word 'boring' sector, but boring is not a bad thing there as you mentioned, consistent cash flows, they operate in high barriers to entry, and now it sounds like it's a sector that is, uh, benefiting from the demand for AI, the infrastructure theme, and so perhaps a sector that is going through a little bit of a Renaissance.

Helen Jewell: It really is going through Renaissance. I think when people think about boring, they're missing what exactly you say what means. It means resilience, it means consistency of cash flows, and a lot of the time what people are, focused on is, they're thinking, okay, well, maybe the regulators will start to back away from things like renewables. Again, what it's missing is the need for renewables to be part of the energy solution that we have. So why wouldn't you these assets that give you a steady source of cash flow with potential earnings uplifts as well? They're in the perfect place to be, and again, what we're seeing at the moment is a lot of the valuations are being compressed because of externalities that are not really relevant and important to the actual fundamentals of these businesses.

Oscar Pulido: Helen, we have talked to some of your colleagues, at BlackRock. Folks like Olivia Markham, who last year talked about the materials that would be needed to electrify the power grid. We've also talked to Will Su about the demand for energy that is going to be created from the growing use of AI and the power demand that that brings And, and you've alluded to that. How is the demand for materials and metals expected to increase due to investments in AI data centers and renewable power. And what challenges does the supply side face? In other words, is it easy to get these materials and metals?

Helen Jewell: The short answer is it's not easy to get them, but they're going to be needed. The vast investment in AI data centers and renewable power means that metals and materials demand is set to soar. Copper is the great example, and I know Olivia talked about this a lot as well. According to one forecast, copper could grow by around 70% to 50 million tons a year by 2050, but copper is pretty come by. Existing mines might produce around 15% less copper in 2035 than they do today. So, you've got an increased demand and yet a reduced supply for copper in the future, and that is obviously basic 101, where you've got from an investing perspective, a sweet spot in terms of an investing need.

Mining companies ultimately are investing billions of dollars to grow that copper supply. The major reinvestment just to stand still is a challenge for the industry. So, demand rising, supply struggling, what happens in that environment? The price goes up and again, from an investing perspective, super, super interesting. And one other thing always to remember with this, most of the world's major metals producers are listed on public markets. So, we believe this area presents a really interesting long-term investment opportunity.

Oscar Pulido: Helen, you've made a compelling case for infrastructure as a long-term theme, that there are a number of sectors and industries that you can invest in to benefit from it, and that, of course, it's not just private markets, but also public markets that offer access to infrastructure.

But perhaps you can also talk about some of the challenges when investing in this area that investors should also consider.

Helen Jewell: Well, there's a couple. The first is politics. Politics is really important. The regulatory environment is different in every region, so it's really important to have that local expertise and deep company knowledge.

The second is interest rates. Ultimately what we have here are companies that are valued based on the present value of future cash flows. So, they're very bond-like in the way that the prices react. And if interest rates are seen to be stickier, just like with bonds, that does put pressure on their prices. So that that could be a little tricky. If interest rates stay sticky because of inflation, then what we might see is some pressure on these prices, and that's something we to be aware of. 

But I want to bring it back to basics. This is a sector which is critical to what the world needs at the moment, which is more energy. And we are in a situation where the amount of demand that is being required is greater than the supply, which we think will give us earnings growth going forward. So, these are some of the benefits of investing in infrastructure, as well as some of the risks. And these are the things that investors ultimately to consider.

Oscar Pulido: Right Helen. And that last point, it almost goes back to something you said at the outset, which is the demand for e energy, electricity is growing worldwide. There's a step change in that, and therefore these companies are seeing a step change in their earnings profile, which is what should be the most compelling item for investors to consider. Helen, this is definitely a theme that I think is going to have some persistence for some time. So, I have a feeling that we're going to welcome you back at some point to, to hear more about what you're seeing in the public markets. thank you for sharing this info and thank you for doing it on The Bid.

Helen Jewell: Thank you very much, much, Oscar. It's been great to be here.

Oscar Pulido: Thanks for listening to this episode of the Bid. Next up, we dive into the growing trend toward private markets investing, and how these types of exposures can be a ballast in uncertain economic times. If you want to keep up with what's happening in the economy and the latest market trends. Make sure to subscribe to the bid wherever you get your podcasts.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2025 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0325U/M-4301756

<<THEME MUSIC>>

Oscar Pulido: Rapid advancements in artificial intelligence are influencing global power dynamics in ways that are reshaping the investment landscape.

Catherine Kress: artificial intelligence or AI has become this driving multidimensional force in the geopolitical landscape. and nowhere is that clearer than in the technology competition between the US and China

Oscar Pulido: So how are these AI developments impacting geopolitics, and what does this mean for investors?

Jeff Shen: I think we're entering a period we are likely to see more reversal, more contrarian movements, it could be a big news for a day and then things start to revert. a, a more of a prevalent behavior in the market.

Oscar Pulido: Welcome to the bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Joining me are Catherine Kress, head of Geopolitical Research and Jeff Shen, co-head of Systematic Equities at BlackRock. They'll help us understand the current themes driving the intersection of AI and geopolitics, how the technology and AI race is evolving, and the broader implications of the shifting US policy landscape on active management opportunities.

Catherine and Jeff, welcome back to The Bid.

Catherine Kress: Thanks Oscar. It's great to be back in the studio with you.

Jeff Shen: Great to come back, Oscar.

Oscar Pulido: And, I say, welcome back. it's been very recently that we've had both of you on, but we needed both of you back on because we want to talk about two of the mega forces. We want to talk about geopolitics and AI. And these have been topics that both of you have joined us on the podcast to talk about.

Catherine, if I could start with you. Tell us a little bit more about this intersection of geopolitics and AI that is occurring right now and what are the core issues that you're looking at?

Catherine Kress: So, Oscar, you and I have talked about this a number of times on previous episodes, but to set the scene, artificial intelligence or AI has become this driving multidimensional force in the geopolitical landscape. It's at the white-hot center of global Geopolitical competition and nowhere is that clearer than in the technology competition between the US and China. The US and China are engaged in this epic zero-sum, long-term structural competition to seize the commanding heights of advanced technologies in the 21st century.

Now we've seen this technology competition play out across a range of dimensions and touching on a number of different technologies. But what's front and center right now – and the topic of our conversation today – is artificial intelligence. Why is that? First, there's a strong belief both in the US and China, as well as in many other countries in the world, that AI will bring tremendous economic advantage to whichever country that leads in it.

Second, there's also a belief that AI will spark a revolution in military affairs, and we're only at the front end of this. The potential use cases for AI are innumerable and have the potential to radically change everything about how militaries around the world organize, prepare for, and ultimately conduct their operations. AI can assist with everything from planning, maintenance, budgeting, decision making, information gathering, intelligence targeting, autonomous weapon systems, drones, submersibles, you name it. To this end, it's not just about the specific weapons that AI may enable, but about the weapon systems that it can enable and ultimately give an insurmountable advantage to whichever country is at the leading edge of AI. Now, because of these dynamics, both economic and military, the technology development and associated build out of AI infrastructure globally is increasingly seen as a national security issue. It's being viewed through the lens of national security, particularly in this context of US-China competition.

Jacob Helberg, who is a former technology executive and has now been tapped for an undersecretary role at the State Department, had a quote recently that I thought was telling. He said, 'we've seen throughout history that countries that are the first to exploit periods of rapid technological change can often cause shift in the global balance of power.' That line of thinking is what I believe is driving the thrust of US policy today on artificial intelligence.

Oscar Pulido: And when we've talked about AI in the past, I feel like we've talked about the impact on consumers. we've talked about how companies are adopting AI, but what you're pointing out is that it's governments, it's countries that are now thinking about how AI is going to influence the policy decisions that they take and how they're interacting with each other.

The last time we had you on, you talked about tariffs and trade policy and how the Trump administration is enacting some of these and the things that they're doing as they've been coming into office. What has been the Trump administration’s approach to technology?

Catherine Kress: Sure, and on your first point, I think what's interesting is that with artificial intelligence, unlike previous technological breakthroughs including GPS, and other technologies, artificial intelligence has really been driven by the private sector. It's not a government led initiative. So right now, what we're seeing is governments around the world trying to race and keep up to figure out what is the best way to both incentivize the development of artificial intelligence, as well as regulate its use, control its dispersion around the world. And so, it's an interesting balance that we're seeing between the public and private sectors. But on your question, specifically, as I said, the economic and national security concerns around AI are front and center in the US policy approach, and we see this across a range of areas.

So, under former President Biden, the US pursued this comprehensive effort, which included export controls, targeted investment restrictions, government funding and other measures to protect and extend the US lead and advance technologies. And the key competitive steps the administration took were to deny China access to, as well as the ability to indigenously make, the highest end semiconductors, which the US saw as having military applications. What's interesting is these security concerns were front and center for former President Biden through to the last days of the administration.

And in fact, one of the Biden administration's final acts on security was releasing what's called the Interim Final Rule on artificial intelligence diffusion. The rule was a bold set of steps, that was intended to, one, maintain US leadership on AI, and two, ensure that US (not Chinese) technology powers global AI development. In the words of Jake Sullivan and others, the goal was to 'make sure that the world's AI runs on American rails.'

Now the diffusion rule sought to achieve these objectives by defining each country's access to advanced AI chips, keeping as much AI infrastructure in the US as possible, providing clarity to US allies and partners, how they could partner with the US on the global AI build out. And it sought to execute on this policy largely through companies, mostly US companies that the US designates as validated end users. Now beyond these overarching goals, the rule intended to do things like prevent the theft and diversion of AI chips, limit chip diversion, ensure that countries of concern were limited in their ability to develop frontier models and capabilities, maintain restrictions on arm embargoed countries like China and Russia, all while enabling the controlled diffusion of AI technology around the world.

Now I focus on this rule, it's received significant pushback. It's been the subject of some controversy, but implementation now falls to Trump. It has a 120-day comment period, Trump is going to have to decide whether he keeps these rules, whether he scraps them entirely, or whether he adjusts them in some way.

Our expectation is that he will almost certainly look to make his own mark, and some reports suggest that he may even look to make the rules more restrictive. President Trump, like former President Biden, sees AI as economically and strategically important. And he says the US must be at the forefront to take the lead over China going forward. So bottom line, there's going to be a continued sharp focus on AI leadership in the US policy approach going forward.

Oscar Pulido: And so, Jeff, maybe to bring you into the discussion, it sounds like there are some policy decisions that we have to wait on over the course of the next couple of months. in the meantime, as an investor, what does this mean for the tech sector? I'm hearing maybe that geographically the US technology sector could potentially benefit from this, from some of the head start that it's had, but maybe it's more nuanced than that. How do you think about the opportunities in tech.

Jeff Shen: I think it's certainly going to be very nuanced and that to your point, also highly uncertain. I like to think about it as any asset price is really going to be driven by two things. Cash flow surprises and also discount rate surprises. And I think on the cashflow surprise front, it's actually pretty important to think about how artificial intelligence is going to impact the profit, also the revenue of a particular company.

A lot of things evolving and changing to some of the things that Catherine talked about. So, I think, a particular company, as a particular stock we invest in, it's pretty important to think about how AI would actually impact, how profitable and also how much revenue surprise it would be.

And I think a lot of things are going to be evolving and changing. Now, interesting is also when we look at the tech sector specifically, demand and supply picture for the tech, stocks, they've actually been very much global for a long, long period of time. You extract revenue around the globe. get your supply chain around the globe, and that's very quickly changing as we speak, given some of geopolitical risks that Catherine very well laid out. So, what we're finding is really that technology independence, becomes increasingly more of a theme.

You actually certainly want to broaden your demand side as much, around the globe as possible. But at the same time, from a supply side, I think there's this national security concern that drives a lot of independence, and also making sure that things are nearshoring or, friendly, friendly shoring.

So, from that perspective, the discount rate, if you will, that how we are actually discount that future cash flow becomes much more complex. It used to be that this is actually not too much of a concern as long as the companies are generating this cashflow surprise. But now how we discount that cash flow becomes much more nuanced.

And know, from an ecosystem perspective, I think you certainly see a China-led ecosystem, a US-led ecosystem. And it's also important to think about that a lot of countries there are still what I would call ‘swing states’. They are trying to figure out how to align and where to align. And from an investment lens perspective, it’s also pretty important to think about that. There are a lot of nuances and a lot of uncertainty. it's not really black and white, especially for a lot of these swing state countries. So, I think, the world in technology investment is becoming much more complex and I think it's pretty important to stay current but also stay dynamic.

Oscar Pulido: Right. And just hearing you talk about, there's US Tech and China Tech, it fits this theme of geopolitical fragmentation. And you also mentioned supply chains coming closer to home. This has been another theme that we've been talking about over the last couple of years.

And Jeff, you mentioned China. I have to ask you about the Chinese AI startup DeepSeek, which made news a few weeks ago. I wonder if you can just give us an overview of what happened, how did the markets react, and how has this changed the AI race between the US and China?

Jeff Shen: So, DeepSeek released a new model that, seemed to have a pretty superior performance. But the more important thing is they claim that it only costs about $5 million to train their model. And the ongoing assumption that this type of large language model would cause around a hundred million to, close to a billion dollars. So, there's a huge cost, saving that seemed to be possible. Alongside with that, I think there's also a bunch of assumptions that we have, in a sense, that these large language model would also consume tremendous amount of energy.

So, there's a downstream supply chain implication. There's also this assumption that the US is certainly leading the AI race and here is a small startup that seemed to be able to do, a lot of things that the big US company haven't actually been able to do.

So, it was a reasonably dramatic news. US equity market actually saw about $1 trillion market cap being wiped out in a single day. And you have also seen Nvidia, went down about 18% on the single day. So, it was a dramatic event. Now, fast forward today, a lot of these losses have actually been recovered. The reason is I think when people dig a little bit deeper, I think a few of these assumptions that people have, people are starting to realize that things may not be as black and white, as people expected before.

Clearly the training costs is still very much a question mark, but also to be able to train a model like that, it still builds upon the billions and billions of dollars that's already been invested in large language models. So, it's not like you can go from a blank sheet of paper, spend $5 million and come up with a new model. So, that's one and I think it's while there are many clever things that DeepSeek has come up with, there is this expert system that they've come up with which is rather than have a generalized AI system - they call on specific experts one point at a time. So that way is actually a pretty efficient way to train the model and also to add to provide reasoning.

And so, there's some interesting and innovative approach embedded in there, at the same time, it leans also quite a bit on US technology. So, this idea that you can actually have a native developed Chinese technology completely independent of the US technology. That assumption's also not necessarily right.

If I zoom it out a little bit, it actually does highlight that from the methodology perspective, it is quite possible that you actually would see methodological diversification and there could be many different ways to develop large language model and artificial intelligence method on a forward-looking basis. So, I think that's probably here to stay. The reliance on hardware where some of the chip companies, especially in the US, certainly have a very strong positioning that's probably more likely to last on a forward-looking basis.

And the last, but not the least is, I do think that the magic will still be in the applications. How do you adopt AI? How do you use this AI? How do you use it for your advantage? To Catherine's point, it does become a bit of a zero-sum game in the sense that the people who use AI effectively versus people who don't, there will be a huge competitive advantage. So, I think long story short, is really to say that this is certainly ongoing, and I think the race is still very much open.

Oscar Pulido: And you've pointed out in the short-term, it seems like the market is back to where it was, but presumably Catherine, there are geopolitical and policy implications that are more intermediate and longer-term that come as a result of the DeepSeek news. Is that how you're thinking about it?

Catherine Kress: Absolutely. DeepSeek developments raised important economic and geopolitical questions. Economic questions that Jeff touched on around how capital intensive is the AI model really. and then geopolitical questions specifically around the US policy approach, especially when it comes to export controls. Now it's worth noting that there had been some concerns building for some time around the effectiveness of the US approach with people highlighting a number of issues like outright evasion, tech evolution and workarounds, indigenous innovation.

This is one of the reasons why we saw so many steps from the Biden administration on semiconductor export controls. Because each next step was an effort to tighten the controls, identify loopholes, fill gaps in the system.

Now I will say though, DeepSeek sparked significant questions around these issues. The overwhelming responses Jeff noted from hyperscalers, from investors, and importantly from policy makers, has really been to double down. And I think what we're going to find is that the post DeepSeek world looks a lot like the pre-DeepSeek world, but now with a much clearer competitor to the US AI ecosystem.

So, from a policy perspective, Trump, as I noted, is sharply focused on maintaining US leadership in AI. He called the DeepSeek developments a wakeup call, he said that the US needs to be laser focused on competing to win. And this is an area of continuity between Biden administration and the Trump administration. So going forward, I expect a raft of policy measures intended to do a number of things.

One, incentivize and enable the AI infrastructure build out in the US, on US soil, including by easing permitting for AI data centers, expanding energy production, loosening restrictions on AI safety and security. President Trump is surrounded by many members of the accelerationist wing of the AI movement, who generally believe that any form of restriction or regulation is stifling to AI innovation and development.

But then two, there will also be an effort to regulate AI development infrastructure abroad by imposing export controls, tariffs, and other measures. Just the other day, we saw President Trump announce that he expects potentially around April 2nd, to announce 25% or higher tariffs on semiconductor imports to the United States. And the goal here is really to reshore semiconductor production in the United States. Vice President JD Vance gave a speech in Paris the other week that I thought was telling. And in it he said, 'the United States of America is the leader in AI, and our administration intends to keep it that way.' He stated, unequivocally that the US intends to lead on chip design, algorithms, applications, infrastructure, will not be contained by external regulation. He said that the US would continue its efforts to prevent the theft and misuse of American AI and chip technologies, working with allies and partners to close pathways and loopholes, and then he affirmed the administration's intent to concentrate the AI build-out on US soil. Going forward on this note, our expectation is that AI data centers and industrial clusters more generally are going to be considered, as I said, through the lens of national security, increasingly treated as critical infrastructure in the United States with all manner of security protections that entails.

Now a final point - and just to build on something Jeff said earlier - from a geopolitical perspective. There is increasingly the view that DeepSeek as an open-source model could widen the gap between the US and its partners and allies and the rest of the world, especially the emerging and developing world. And I say that because now there is a cheaper, high-quality Chinese model on the market that happens to come with less restrictions and regulations around its use.

So, if you're an emerging and developing market who's looking to embed AI in its economy and processes, this presents an attractive alternative to the US tech model that once again means that the global AI race is going to get a lot more competitive.

Oscar Pulido: So, I would think that investing in AI or tech is hard enough in terms of identifying a company Jeff, to talk about, what you mentioned in terms of the cash flows, identifying those cash flows and trying to value a stock. But, Catherine, you've added a whole bunch of other variables that now need major consideration when it comes to, policy decisions. You've used the term zero-sum game to talk about the race that is taking place for AI dominance.

So, Jeff, maybe to come back to you, you're managing a team that is investing and having to take all of these things into consideration. So, what are your thoughts on the biggest risks or opportunities for 2025?

Jeff Shen: Listening to Catherine, I think, certainly, our job is getting, harder. that's for sure. But it's also both the risk and also opportunities. the first point that I want to make is the sense of the country as a unit of analysis it's becoming more and more important. I think, historically for a while given the globalization trend this idea of thinking about country as a strong unit of analysis was getting weaker and weaker. But I think we're reverting back that we really need to think about, a particular government's, The national security concerns that, Catherine very nicely laid out, and also just to really think about foreign currency, for example, as a transmission mechanism to either amplify or dampening some of these policies. So, I think country as a unit of analysis is becoming more and more important.

The second one here is also. maybe we've actually been living in a world where the trending insights or the major trends have actually been continuing for a while, and I think we're entering a period we are likely to see more reversal, more contrarian movements, because there's a lot of uncertainty, DeepSeek to the point that you just raised, Oscar, that it could be a big news for a day and then things start to revert. So, I think we're going to actually, this idea that we are living in a world where, we have to watch out for some of this trending, behavior, but really to think about potential reversion as a more of a prevalent behavior in the market.

And last but not least, I do think that data and insights are becoming, more and more important in this new dynamic and complex world. I give you one specific example, what we are doing now is actually, essentially try to look at some of a policy movement that's actually coming from Washington, DC and also around the world to use policy as a pulse and then thinking about country as a unit of analysis. Then you really need to map out, both from a revenue profile perspective and also from a cost structure perspective, how global a company's profile is, and also where the geographic locations are from a revenue and from a cost perspective.

Then you essentially use the policy as a pulse to see what other shocks can be. So, to the extent that you can go for a deeper analysis to adapt to some of these policy dynamics, there's actually a lot of opportunities from an active management perspective. So, I think, the job is getting harder, I think the possibility to generate alpha in this new environment, could certainly also be richer.

Oscar Pulido: Right. It's getting harder, and you mentioned country risk, being a unit of analysis that it is reintroducing, so I hope you have a geopolitical expert on your team, Jeff, and if not, maybe Catherine, you'll make yourself available to talk to Jeff. it's great to have you both back on.

We talk a lot about the five mega forces, are at play in the global economy. We don't often talk about how they intersect, but it's been great to hear about how geopolitics and AI are really, at that intersection and what the risks and opportunities are. Thank you both for sharing these insights and thank you for doing that on The Bid.

Catherine Kress: Thanks for having us. 

Jeff Shen: Thanks Oscar!

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2025 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0225U/M-4263274

<<THEME MUSIC>>

Oscar Pulido: Thematic investing is gaining traction in today's investing landscape, but what exactly is thematic investing and how can investors take advantage of this new trend?

Jeff Shen: It is really a creative way of thinking about investment. You can divide the stocks through country lens, through industry or sector, lens and theme; is a way to think about, how to look at the world a bit differently.

Oscar Pulido: Unlike traditional investment strategies that may focus on sectors or regions, thematic investing looks at broader transformative forces, such as technological advancements, demographic shifts, and environmental changes.

Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Here to help me understand this investing trend is Jeff Shen, co-head of systematic Active Equity at BlackRock. He'll help us understand the current themes, driving investment opportunities, how his team identifies and evaluates emerging themes and the role of technology in shaping the future of investing. We'll also discuss the risks associated with thematic investing and key takeaways for investors looking to capitalize on these trends.

Jeff, thank you so much for joining us on The Bid.

Jeff Shen: Thank you so much. It's great to be here, Oscar.

Oscar Pulido: And welcome back. we had you, on the bid back in 2023 and you gave us this fantastic history of AI, or artificial intelligence. We learned a lot about how it's evolved over many decades. And, not surprisingly, AI has continued to be a topic that we've covered on the podcast from many different, lenses.

So, one of the lenses in which we've covered it is how it is an investible theme that investors can take advantage of, and we want to talk about thematic investing. What does that term mean to you? And how does that differ from traditional investment strategies?

Jeff Shen: That's a very good question. I would say that when I think about theme investment, it is really interesting in the sense that it's a creative way of thinking about investment. Where all of us are very much familiar with 5,000 global investment universe the global equity market. You can divide the stocks through country lens, through industry or sector, lens and theme; is a way to think about how to look at the world a bit differently. You talked about artificial intelligence, now there's a supply chain aspect of the artificial intelligence, power supply, chips, and computing stack. Then there's also the demand side of the AI food chain, if you will. Think about how the enterprises and also consumers going to be using AI. So, when you think about this AI theme, you realize that it doesn't really fit into the country or sector or industry definition very neatly, and it kind of cuts across that. So that makes it an interesting, very creative way of thinking about investment.

And another aspect that makes theme investment also interesting, exciting, but also potentially difficult is that there's also aspect of timing. A theme can come in and out of favor. There could be an emerging theme that nobody's thinking about, but it becomes much more dominant. There could be a theme that's being overpopulated, overhyped and therefore there should be quite a bit of caution.

So, I think there is a bit of a life cycle of a theme that makes also theme investment quite different from the traditional investment. So, I'll say that identifying the theme and also timing the theme, could potentially be both, challenges, but also opportunities.

Oscar Pulido: And what you're describing is very similar to when we've spoken to Jay Jacobs about this topic where he talks about themes. There are multiple ways in which to invest in a theme. There are second order effects across sectors and industries, and there's a lot that has to be taken into consideration and you can be a bit more dynamic when you're investing through a thematic lens than maybe a strict sector or industry lens.

Jeff, when you look at the macroeconomic landscape and the markets, whether it's today or recent past, can you share some examples of current themes that help bring thematic investing to life?

Jeff Shen: Absolutely. You know, we were talking about artificial intelligence. This is certainly a long-term secular theme. That has certainly a life cycle of its own. But I'm also thinking that there are also a lot of cross-sectional thematic implications. There are going to be businesses that are actually AI proof, if you will, and there are going to be businesses that are actually going to be deeply impacted by the development of generative ai.

So, there's going to be a bit of a long, short aspect of it that certainly is a big area of focus. I think there's also, when you think about the development of GLP-1 drug, the weight loss drug that's actually quite popular, both in the US and also around the globe. There are certainly implications for fast food for producers. There's also implications for snack producers by taking some of these drugs that maybe the appetite for fast food or unhealthy snack or go down. So that could have a short-term and also long-term implications. And, clearly given, some of the news that's been coming up in terms of President Trump's new policy and executive orders.

There are also many interesting themes that actually come out of that. Deregulation, immigration, geopolitics, and also in particular tariffs. So, I'll say that theme investment is certainly all encompassing, and I think there are many interesting themes as we speak right now.

Oscar Pulido: It sounds identifying themes is a full-time job and Jeff, you're part of a systematic team of analysts and investors. How do you go about, evaluating themes that are, really interesting to evaluate? And maybe you can also start with a brief reminder of what does it mean to be a systematic investor?

Jeff Shen: Systematic investment has been around for a long time, and our team has also been around for about 40 years. I've only been with the team for 20 years but I think the way to think about systematic investment is that we use a lot of data. A lot of algorithms and technology to eventually invest in equity or fixed income across many different asset classes. Humans are very much in the process, but machine plays a pretty significant role. And when you think about artificial intelligence or machine learning, these are certainly the latest techniques to help us make this systematic investment decision.

Now come back to your earlier part of the question in terms of a theme. Identification. I think this is also the place where it's quite interesting. I think there's certainly the creative part in terms of human input. what are the interesting themes or what are the interesting topics people talk about?

Now, I like to say that we like to hire PhDs who don't like to read. So there's a bit of a sense of using machines to read a lot of these, texts, whether it's broker reports, conference call transcripts, financial news, anything that could be helpful for us to think about a theme idea and the large language model clearly today is extraordinary powerful, but we have a long history of using machines, using natural language processing, to help our decision making.

So identifying themes today is certainly prompting the large language model to help us to think about how we can come up with additional insights and additional basket. And the benefit of using the machine to do some of this work is that you get a lot more themes. I understand there are many mega themes out there, but at the same time, there are also some micro theme today that could become a mega theme in six months, in 12 months. So, I would say that's a theme. Investment powered by technology is really a game of diversification, and it's a game of identifying many topics and many themes.

Oscar Pulido: And it sounds like themes could have, in some cases a longer-term time horizon of investability, but when you said micro themes. Perhaps that could also mean that it's a shorter-term theme, but one still worth identifying and investing in. And Jeff, you talked about technology, but I'd like to ask you a bit more about that 'cause, we've talked about things like gen AI and large language models, and there's just so much innovation in this space. And talk more about the role that technology plays in thematic investing and again, that mix of man and machine that, that you alluded to.

Jeff Shen: Absolutely. I would say that technology for us is certainly central in terms of, advancing the potential ability to deliver alpha or out performance for our clients. And from that perspective, I talk a little bit about how large language model and AI can help us identify the theme.

At the same time, timing the theme is also very important. Oscar, you were just talking about, some of the theme may be transitory, some of them may long term, and to think about the timing aspect of it. The machine and technology can help us also quite a bit in terms of positioning.

Is this a particular position or particular theme becoming very crowded? When you think about all the flows, hedge fund, mutual fund, ETF flows out there that can potentially impact the ebbs and flows into its positioning of a particular theme. They're also interesting to think about market attention on a particular theme. A lot of people talking about it, is this a headline grabbing versus not too many people talking about it? Social media, alongside with financial news, give us a pretty good read on the sentiment of the market. So, these are the tools that we are using, not only to identify the theme, but also can time the theme now.

Last, but not the least, is also to think about once you have a theme view, you think it's a good time to invest in a particular theme. Now, how do you implement that particular theme view? Now, implementation is slightly boring, I'll say at the same time, extraordinarily important that can makes a difference between winning versus losing. So we take the implementation part, identifying the basket, really to think deeply about one single stock could potentially be exposed to multiple themes. How do you think about this kind of a multi-variate analysis, is actually all, quite important. Risk modeling comes into place, transaction costs come into place. So, the implementation, even though this is not the most exciting topic, in theme investment per se, but in our mind is extraordinarily important.

Oscar Pulido: It's clear to me that just thinking back over, the history of markets and we've talked about markets through the lens of asset classes, stocks and bonds and sectors like energy or technology. But this lens of investing through themes has become more prevalent in recent periods.

And it sounds like there's a lot of innovation going on in this space that you and your team are part of. Jeff, notwithstanding all the exciting things that you've talked about, the opportunities in thematic investing and how you can leverage technology, what are some of the risks that investors should also be aware of when we're talking about thematic investing?

Jeff Shen: There's definitely opportunities, there are also plenty of challenges. I'll say that I talked about timing the theme to be quite difficult. I think theme tends to be a bit trend following, if you will. There is something that maybe a few people thought leaders are starting to talk about it and then there'll be more followers.

Maybe 10 years ago, not too many people were talking about AI. Fast forward today, everybody's talking about AI, so I think there's certainly this kind of a trend following aspect of it, and I think one of the things that we really need to watch out for is what I call is late momentum trait. So everybody's already on it, and you get on to the last, person on the bus and the bus is going to veer off the course, I think that you better watch out. So I think that's one key risk and challenge.

I think the second part is also a lot of investors are also thinking about is where do I take money from if I were to invest in themes? How do I benchmark this if I'm investing in a global equity market universe or a US equity market universe, do I take it out of MSCI world? Do I take it out of my S&P500 exposure? And if so, would the theme investment while in itself can be interesting, exciting, but would it really outperform MSCI World or the S&P500, over short-term or long-term?

So I think benchmarking, is also quite important. And the last but not least is implementation. So implementation is clearly a big challenge. You can have a great idea, but when it comes down to portfolio construction, putting the investment into work, I think there are many details that you've got to get it right. So that's also another challenge.

Oscar Pulido: So just identifying the theme, what is that, and what are the companies to own implementing that theme, you mentioned that's an important piece of the puzzle as well. Timing, not only when to get into the theme, but also when to get out and has it run its course. And then you also mentioned, sourcing, which is if you're invested in the market and you want to invest in themes. What am I selling in order to invest in the theme?

Jeff, what takeaways should investors have for those who are interested in incorporating more thematic investing into their portfolios? What should they be considering and what should they be looking ahead to in terms of trends?

Jeff Shen: Yeah, I think first and foremost, theme investment is here to stay. I think it's an extraordinary, exciting way of thinking about the world. Yeah. If anything, it's also a creative way of thinking about investment. So, I think, this is maybe a little bit of my liberal arts roots come through that I think is actually quite important to think about this as a creative way of thinking about investment.

And so that being said, I think it's also very important to think about how do we identify theme through this kind of a new technology. It turned out to be that I think rather than concentrate on the themes, I think there is a lot of room if you use the right technology to potentially broaden the potential them investment.

So I think there's a potential diversification for them investment. And the second part of them investment, I think is quite important, is that knowing there is a bit of a trending aspect of them investment, knowing there's a danger of late momentum trade, I think is very important.

Time these traits, very carefully. a particular economic theme can. Be very much right over the long run, but at the same time, the timing of it is quite important. The last, but not the least, is that implementing it, with a sense of, perfection, if you will. This is actually, this is not a place to be loose.

This is a place that you want to be very tight in implementation. And I think if you get, some of these things right, I think you're going to have the creative part but also get the potential strong investment results from this type of way of investment.

Oscar Pulido: We've definitely talked about this is a new market regime. You need to be more dynamic, and you need to be a little bit more granular in how you approach the market. So it sounds thematic investing helps you do that. Jeff, one of the themes of having you on the podcast is we learn a lot. we've learned a lot about AI and we've learned a lot about how to look through, look to the market through a different lens. So thank you for educating us on that, and thank you for doing it here on The Bid.

Jeff Shen: Thank you so much for having me. Great to be here.

Oscar Pulido: Thanks for listening to this episode of the bid. Subscribe to the bid wherever you get your podcasts.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2025 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0225U/M-4225429

<<THEME MUSIC>>

Oscar Pulido: Welcome to the bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Sharp moves in bond yields have been a key area of focus in markets to start the year. yields on 10-year treasuries are over 1% higher than they were in September 2024. Despite the fact that the Fed has been cutting interest rates. This is a historically rare occurrence in both the direction and magnitude of moves. So, what's driving this phenomenon and how is it reshaping the investment playbook compared to previous cycles?

Here to help answer these questions is Jeffrey Rosenberg, senior fixed income portfolio manager within the BlackRock systematic business. Jeff will share his perspective on the different dynamics impacting bond yields. How his team is navigating this unique environment.

Jeff, thank you so much for joining us on The Bid.

Jeff Rosenberg: Great to be here. Thanks for having me.

Oscar Pulido: So, Jeff, 2025 has, kicked off. And we're here to talk about the bond markets and interest rates and for anybody who follows markets, these are important things to look at.

I'm thinking back to a discussion that I had with Jean Boivin, who's the head of the BlackRock Investment Institute, and we were talking about the outlook and he said, we are in a period of time where the old playbook doesn't apply anymore. We're in a new regime. So, talk to me a little bit about what's going on in the bond market, what's going on with bond yields, and why is this so atypical from a historical context?

Jeff Rosenberg: Let's talk about one of the most surprising things that happened in the bond market last year, and that was that the bond overall performance didn't follow the direction of interest rates that was being set by the Fed. You had a decoupling between longer term interest rates, longer maturity, interest rates, and the shorter maturity interest rates that the Fed sets, that's typically not what you expect. And it was surprising to investors because a lot of investor expectations for bond market performance are set around what is the Fed's outlook of the Fed's policy going to be.

And last year, it didn't work out. It's not the first time that had happened. I had written about this in my outlook last year, called it the 'potential for a new conundrum.' The old conundrum was something that happened way back in the Greenspan era where long-term rates were going down while the Fed was raising rates. And we saw a little bit of that atypical behavior, but in the opposite direction.

What you saw was Powell, the Fed Chairman, the FOMC, they were cutting interest rates last year and longer-term interest rates went up completely offsetting in direction, the movement that you saw in the short term. And there are a lot of reasons for that, But that was really the atypical behavior that Jean's talking about, and it carries over into the outlook for 2025. The reasons for that atypical behavior haven't gone away. They're still with us, and so when we look forward, we have to be thinking about them when we're thinking about the fixed income interest rate outlook for 2025.

Oscar Pulido: And you mentioned a couple names Greenspan, that's Alan Greenspan, who was the head of the Federal Reserve back in the 1990s. And then you mentioned, Jay Powell, who's the current Fed chair and the Fed can control short-term interest rates, but your point is that they can't necessarily control long-term interest rates. Those are going to do what they do, and the way in which short-term and long-term rates behaved was atypical use your word.

Jeff Rosenberg: That's right. And usually they'll move in the same direction, but this time you had short term interest rates going down, long-term interest rates going up. So like when they're moving in opposite directions, that’s pretty atypical.

Oscar Pulido: And it sounds like, that's why we're in a different regime and the playbook is changing. So, what is it in the economic data that you are seeing that tells you where you think the path of interest rates are? What is the economic data telling you?

Jeff Rosenberg: So, what's the big issue? And I think everyone listening to this understands that the changes in the economy that occurred after Covid was this incredible shock to inflation. So, if you go back to the pre covid environment, it was an environment where inflation was really something people didn't worry so much about. The Federal Reserve beginning in the 1980s, through Greenspan and subsequent chairmen were very successful in reigning in not just inflation, the level of inflation, but also inflation volatility, the uncertainty, how much it moved around so that people just stopped focusing on it.

And then in 2020, the big shock was Covid. And then two great policy responses. So the impact of federal government spending- we call that fiscal policy- and the impact of monetary policy- that's what the Federal Reserve controls in terms of setting of interest rates and other factors that they control, combined to really unleash, a lot of growth, but we had a lot of growth where there was still constraints on the supply side, the ability to produce goods. Remember the constraints in buying things, the imports, the shipping constraints, all of that was pushing down on supply while at the same time as we restarted our economy, we had this huge shift upward in demand.

Well, that disconnect between demand and supply, that creates inflation and prices went up a lot. We certainly know this. Now, the price changes have certainly come down, the price level hasn't come down, but the price changes have come down. But they haven't come down to that pre covid level environment.

So, when we measure inflation, we're going to measure it on annual percentage changes. Pre covid, that was less than 2%. Peak covid, you're talking about 10% type increases. Now, we're settling back down, but we're settling above this 2% target that people like the policymakers at the Federal Reserve like to target.

Because that inflation has still not come down to that 2% level, you're seeing this disconnect affect interest rates, and it's one of the reasons for that atypical behavior where the Fed's controlling interest rates on the short end, the very short maturities that they control. But longer end maturity interest rates, they as much reacting to what the Fed's doing as they're reacting to what's happening in inflation and importantly future inflation expectations. So, it's in that aspect that this atypical behavior, because inflation hasn't come back down, is still with us in the 2025 outlook.

Oscar Pulido: That was going to be my next question, which is why are long-term rates, behaving differently than short-term rates? And you've gone back to this period of covid and the pandemic where we saw an inflection point in inflation. And while, perhaps the increases in inflation are a little bit more tamed now, they, they haven't dissipated completely. So, is that the only reason that long-term rates then are moving higher or are there other bigger trends at play that you're looking at?

Jeff Rosenberg: There are other trends as well. So, inflation isa big one, but it's not the only one. So, let's talk about a couple of other things that are happening in the world today that is creating this disconnect between the behavior of short-term interest rates and long-term interest rates.

So another thing is what we call the 'term premium'. Now, it sounds fancy, but it's very simple. It's basically just what's the difference in investor pricing? How much do I get paid to tie up my money overnight - cash, CD - versus tying up my money for say, 10 years. Certainly, there's a difference in giving your money to someone for 10 years and giving it to them overnight. And that premium, that differential is the compensation that you get for not having access to that money for that long period of time. So, we call that the 'term premium.'

. There was virtually no extra compensation that investors were getting for locking up their money for a 10-year period or for a short-term period. And what we've seen in the post covid environment is the term premium has reasserted or reassessed itself higher. And there are some reasons for that, one of which is the incredible volatility in inflation and in growth that we've seen in the post covid environment, but just that the term premium itself had gotten to such a low level. So, as that term premium is changing, it's affecting the relationship between long- and short-term rates.

I want to mention one other thing, which is obviously, something on everyone's mind as we move into 2025 and the new administration and what we're about to move into in terms of a huge debate around fiscal policy, but away from the short-term debate on fiscal policy is the long-term trajectory that we've been on in terms of fiscal policy.

So, you go back 20 the mid-nineties, there was a brief period in time in the Clinton administration where we actually had fiscal surpluses. That's rare! We'd been running around 2% annual fiscal deficits. That's the amount each year that we're spending more than we as a country are taking in. That's the deficits. And prospectively, it could grow even further depending on what happens in this coming year's Fiscal debate. Unlike you and I, we face a budget constraint, we can't spend more than we earn. The Federal government, it can persistently run higher deficits, it can spend more than it earns, and then it borrows the difference in government bond markets.

The difference today, is that at that's the way in which we measure it, percentage of the debt outstanding relative to the size of the US economy.

And it's getting to points where the bond market is starting to say, 'Hey, we're going to have to price in a little bit more of a premium for this longer-term fiscal uncertainty associated with this higher level of debt and deficits.' And that's a change that we've seen and Covid really shocked both of those measures. The debt, the accumulated amount, and the deficit trajectory, all inflected upwards as a result of a lot of the Covid policies that we saw during that time period.

Oscar Pulido: I mentioned at the beginning the, the bond market is such an important indicator that people look at, there's a lot of information that, that it gives you, and, and you've just highlighted, is it's telling us about inflation and where people think it, it's, it's going, it's telling us about the term premium. You mentioned that that extra premium that people are asking for to, to lend that longer term time periods. And then you also mentioned fiscal policy and, and people's view on the trajectory of where fiscal policy is headed. And, and the combination of all these three things is what's causing bond yields to rise.

Jeff, all those comments does seem very specific to the US, is this the same when you look at across other world economies?

Jeff Rosenberg: So, it's really interesting when you look at the cross global perspective because in some sense, everyone went through covid and the policy responses to Covid were very similar and we had great harmonization of both fiscal and monetary policy, the world over.

As we're exiting the Covid period and we're seeing, the changes in global country growth and inflation, you're starting to see a lot more dispersion- differences in what central banks are doing, what's the impact in their interest rates and in their bond maturity profile.

So, Japan’s raising interest rates, in this environment that we're talking about the fed cutting interest rates, they face a very different environment. They had too little inflation Covid helped them to achieve their inflation targets, they're above their inflation targets now they're moving to raise interest rates.

Contrast that to continental Europe and the European Central Bank, their growth environment has been much weaker in the post covid environment than in the US. In the US it's a story of US exceptionalism, the dynamism of our economy, partly how we dealt with COVID and the job market disruptions, partly the amount of our stimulus and partly the strength of our consumers and the weight that consumption plays within our economy, all factor into big differentials in terms of growth exposure but that factors into a much more aggressive outlook for the ECB cutting interest rates relative to the Fed, who's sort of saying, 'We're going to slow down here. We're not so sure. Maybe it'll be two more cuts in 2025.' but signaling a slowing, whereas the ECB’s full speed ahead.

And one other country we've seen in the UK, a renewed concern around fiscal policy. The ability of the bond markets to finance that debt and deficit ratios. Very different story, much smaller economy, much more global and externally financed, so a lot more sensitivity. But some of those themes about longer term interest rates decoupling from short term interest rates, you see even more strongly in the UK gilt market.

Oscar Pulido: So let's go from, what has been a very macroeconomic discussion that you and I have been having about the bond market inflation fiscal policy. And if you bring it now to. The investment opportunities. When you're building portfolios, how do you change your portfolio construction or, or how do you do things differently if you have long-term bonds behaving differently than they have in past cycles?

Jeff Rosenberg: I want to capture this idea in two aspects. First, when you have different performance across the yield curve, this concept of where you hold your duration and duration is your measurement of price sensitivity to interest rates. Why? Why do people hold bonds in their portfolio? It depends, but a big reason people hold bonds in their portfolio is as ballast or as a diversifier to the equities in their portfolios, a whole portfolio construction perspective.

And when you're thinking about owning bonds from that perspective, now what becomes almost the most important characteristic as to how much you want to hold is, how will those bonds respond if equities go down.

And the point about where you hold your duration matters as much as how much duration you hold is they may respond very differently. That the long end may not respond in a down equity market scenario, recession fear, global economic shock, 10- 20%, as much as you thought they would. And it's really important to take this into consideration when building portfolios.

And here's the kind of punchline. The Fed can control short-term interest rates, and if there was a big enough shock, the Fed's likely to respond to that and want to bring those rates down. But if they're doing that at a time like we have today, where that inflation side of the mandate hasn't completely been won, then it's potential that you might have the long end of the curve, not react favorably to the Fed, basically saying, we're going to preference our growth target here over our inflation target by cutting short-term interest rates. when you're holding a bond portfolio, and you're holding it for ballast, you're going to want to hold the ballast part more on the shorter end of the curve.

You're going to need more notional to do that. So that creates some challenges from portfolio construction perspective, but it helps to concentrate where am I thinking about? I want to hold my bond portfolio when I'm thinking about it from ballast terms. That's one aspect.

Second, quickly, I also want to think about the components of my portfolio in terms of the components that are driven primarily by the directionality of interest rates. Are interest rates going up - what I was just talking about - and I want to separate that from the earlier thing we were talking about, which is opportunities investing in dispersion. Investing in differences in interest rates across different geographies, countries, central banks. And what's really exciting about the opportunity set in 2025 is that the dispersion opportunity is growing.

And generally, what we see is when the beta, when the directionality component, when that becomes more challenged, it's an environment where this cross country cross. Government cross central bank perspective starts to increase in its opportunity set and then what I can do is I can weight my portfolio.

How much do I want to have in the beta and the directionality aspect? How much do I want to have in this kind of cross-sectional aspect Right now, we want to be increasing that cross-sectional aspect because the opportunity set is growing, and it reduces our reliance on getting the forecast of the direction of interest rates correct.

I don't know, maybe you're going to ask me that as my next question, where are interest rates going? We'll give you a forecast, but I don't want to make the entire portfolio performance dependent on that one forecast, we want to diversify our opportunity set.

Oscar Pulido: I have to say that, oftentimes, people will describe the bond market as being a little bit boring compared to all the activity that goes on in equities. But, Jeff, in listening to you, there's a lot going on in the bond market. It's conveying a lot of information about inflation, fiscal policy and growth. And interesting investment opportunities that are arising. Jeff, thanks for sharing all of that color about your outlook and thanks for doing it here on The Bid.

Jeff Rosenberg: Great. Thanks for having me, Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid. Next week be sure to tune in where we discuss thematic investing and investing trend that focuses on identifying and capitalizing on long-term themes expected to shape the future. Subscribe to the bid wherever you get your podcasts.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2025 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0225U/M-4197791

<<THEME MUSIC>>

Oscar Pulido: Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Trade policies have always been a critical aspect of global economies and recent developments in US. Tariffs have sparked market volatility and discussions around the impact on inflation. The latest tariff announcements by President Trump have sent ripples through the market, affecting various sectors, and raising questions about their long-term impact. But what exactly are these new tariffs and how will they influence US companies, global supply chains and the broader market?

Here to help me understand these developments is Glenn Purves Global head of Macro in the BlackRock Investment Institute and Catherine Kress, head of geopolitical research and Strategy at BlackRock.

Together we'll delve into the rationale behind the recent tariff decisions, their potential macroeconomic impact and the implications for investors. We'll also discuss the investment opportunities and risks associated with these tariffs, the influence of geopolitical tensions and key takeaways for investors looking to navigate the evolving trade landscape.

Catherine and Glenn. Thank you so much for joining us on The Bid.

Catherine Kress: It's great to be back.

Glenn Purves: Thanks for having us.

Oscar Pulido: So, we're here to talk about US trade policy and the last few days there's been a lot of announcements around tariffs, that the US announced.

Some have been implemented, some have been delayed. We've also seen other countries retaliating against the US because of some of these announcements. So, Catherine, maybe I could go to you, help us make sense of all the events that have taken place over the last few days and are you watching for next?

Catherine Kress: Thanks Oscar. So certainly, a lot has happened. In the last few days, we saw some of the first truly significant steps taken by the Trump administration on trade. So, if we rewind on Saturday, February 1st, President Trump announced that the US would soon be implementing 25% tariffs on all goods from Mexico, all goods from Canada, with the exception of Canadian energy resources, which would face a 10% tariff, as well as 10% tariffs on all Chinese imports. And on China the important thing to note is that the 10% rate would come on top of any existing tariffs in place. President Trump announced the tariffs by Executive Order, and the orders detailed actually a number of other measures that the administration would take, including one, escalating the tariffs further in the event of retaliation by Canada, Mexico, or China. And two, closing this so-called 'de minimis trade channel' that essentially waives tariffs on small packages valued at $800 or less. This is especially significant for China, given Chinese shipments account for a large portion of de minimis imports into the United States.

In announcing the tariffs, President Trump claimed executive authorities provided by the International Emergency Economic Powers Act- or IEEPA. IEEPA gives presidents sweeping economic powers during a national emergency, which allows them to bypass most regulatory checks and move quickly in taking action. In this case, the executive orders cite the flow of migrants and illegal fentanyl across the US national border as a national emergency.

Fast forward to Monday, two days after the tariffs were announced, one day before the tariffs were set to take effect, we learn that Mexico had reached an agreement with the US to delay the tariffs by 30 days. Mexico promised to bolster the National Guard presence along the border with an additional 10,000 troops. Later that afternoon, Canada reached a similar arrangement, promising to increase border security, appoint a fentanyl czar, and other steps.

So where are we now? As of today, the 10% additional tariffs on Chinese imports are in effect. China has announced a number of retaliatory steps, including tariffs on US coal, LNG, crude oil, agricultural machinery, and number of automobile categories. Those are set to take effect on February 10th. Export controls on critical minerals were also announced by China. Those are key to a number of advanced technologies. And finally, China has announced steps against a number of large US companies. As you look through these retaliatory steps, you can see they were carefully calibrated so as to allow for potential negotiations with the US, but they also show that China was prepared for the US to take these steps.

So, in terms of what I'm watching for next, I would highlight five things. One is whether the tariffs on Canada and Mexico do in fact go into effect on March 3rd as currently planned. President Trump noted that Secretary of State, Marco Rubio and Howard Lutnick, are prepared to begin negotiations with Mexico on an unspecified issue set. He also indicated that he would try to reach an economic deal with Canada in the coming month.

The second thing I'm watching though is if these negotiations fail, whether Canada and Mexico retaliate, and I'll be looking to see what retaliatory steps they take. Canada previously outlined detailed plans targeting politically sensitive goods in the us, whereas Mexico promised a range of tariff and non-tariff measures, so the back and forth there could escalate the conflict further.

Third, I'll be waiting to see whether President Trump and Chinese President Xi Jinping have a call in the coming days, as has been suggested they might do, they're able to reach some form of an agreement to roll back the 10% US tariffs on Chinese goods, as well as delay the imposition of the Chinese retaliatory steps. Reports suggest the US is looking for a so-called 'grand bargain' with China touching a range of economic issues.

Fourth, if the Chinese retaliatory steps do take effect on February 10th, we'll have to see if the US escalates further given that escalation clause in the executive orders. President Trump characterized the 10% tariffs on China as an opening salvo. He said that if we can't make a deal with China, then the tariffs will be very substantial, so we're watching that.

And then last, I'll be monitoring whether there are any legal challenges to Trump's executive orders, which could impact their ultimate implementation. Bottom line, it's a very volatile situation. It's moving quickly, a lot has happened. A lot could happen, so we're monitoring it closely.

Oscar Pulido: Catherine, there's definitely a lot to follow there. It feels like markets are looking at things like earnings, interest rates, GDP growth and now tariffs are major variable to consider. And so, Glenn, how did markets react to the news? On the one hand, learning a lot of new information this week, but on the other hand.

It's perhaps not a complete surprise; the threat of tariffs has been signaled by the US administration. So, what was the reaction and what does this mean for US companies who have complex global supply chains and that derive a lot of revenue from the US?

Glenn Purves: Thanks Oscar, I thought Catherine laid out the complexity and the uncertainty quite well. And in general, the markets moved intuitively on the initial tariff move. Equity markets were broadly down, the US short term yields were up, and US inflation expectations rose a bit. This suggests the markets are of the view that these tariffs would weigh on US growth likely push us inflation up and could prompt the Fed to respond.

You're right to highlight the complexity of the global supply chains, absolutely. And that's a critical driver of how US tariffs affect domestic companies. There are some companies that are pretty insulated. They don't depend on imported goods to produce their own output, and production itself is entirely within the US, but most prominent sectors have more complex production chains that straddle the borders.

Auto production is a great example of that where producers have tightly integrated supply chains across both Canada, Mexico, and alongside the US. Take a crankshaft or a car seat, for instance, before it makes it its way into final assembly in the car, those are instances where they crossed the borders multiple times before being finalized. And it's a good example of why we saw on a sectoral level the equities of US auto producers being particularly impacted compared to the rest of the market after the tariff announcement this weekend.

Oscar Pulido: Right, so markets were impacted generally a sort of negative reaction - certain sectors impacted more than others. What about the macroeconomic impact of these tariffs? Glenn, you mentioned that yields went higher. Is that a signal of the markets, interpretation of what this could mean for inflation? Maybe talk a little bit about what it means for the economy now.

Glenn Purves: Sure. And Catherine did mention many of the complexities and touched on some of the intent of the tariffs, but having a view on the intent of the tariffs to be able to answer that question is really important. And there seems to be a dual purpose at this point.

The destination seems to be a permanent and universal tariff as a tax. The fact that the new administration has ambitions to create an external revenue service seems to conclude that this'll be a permanent feature of US fiscal policy, and we think around 10% is probably the going spot for that tax.

And reasons are that, as Catherine mentioned, tariffs were levied on Chinese Imports at about 10%. And as well, it was proposed at 10% for Canadian oil coming into the US and the US is very reliant on a lot of that Canadian oil still.

En route to that destination, we're also seeing tariffs as a negotiating tool. 25% were proposed for Canada and Mexico, even Columbia, before all of it was paused. And in all three cases, the pauses came after committed actions by all three countries came to be. This distinction's important from a macro perspective because if it's just a 10% tariff and the rules are clear and it's widespread, the macro impact is more focused on the first order elements, and the key question is really how it's passed through to US producers and consumers in the form of inflation and it, but adjustments to supplier are bit faster in the world. It's broadly spread out, there's no real substitution for accessing supply and so it, it has an inflationary impact of course, and it's going to have a growth impact.

If there continues to be lingering uncertainty about higher tariffs at the 25% level, it would prompt more second order impacts and we think, changing some of the hard wiring of supply chains, more substantial investment and production changes at the firm level reconsideration of markets, of the markets the firms want to be in, and even more active policy and retaliation beyond just the tariffs. We've seen 'buy domestic' from other, other countries involved.

And because of these compounding second order effects, we think that the impact in particular on growth would be more magnified in that scenario. But in the end, from a macro standpoint, this all has to be netted out with the many macro enablers going on in the us regulatory reforms, energy competitiveness, IT investments, and even the upcoming tax package being considered for later this year.

Oscar Pulido: So, there is unquestionably an impact on the economy, but the more significant impacts could be if the tariffs go above that 10% level that you mentioned. If 25% tariffs become more the norm, then you really have a rewiring of global supply chains.

Catherine, I know you worked closely with Tom Donilon, who we spoke to recently at the World Economic Forum. And when we talked to him, he mentioned tariffs as part of the new US agenda. So, what should investors be mindful of in the coming months with regards to trade policy and should we expect more tariffs against more regions of the world?

Catherine Kress: So, as you and I have discussed and as you discussed with Tom, trade is a central focus for the new administration. President Trump sees trade, particularly tariffs as an all-purpose tool of economic and foreign policy.

He believes tariffs can address a range of issues. Glenn touched on this, including reducing US trade deficits, raising revenue for the country, negotiating with countries on matters of economic and national security, encouraging inbound investment to the US, sanctioning the non-use of the dollar. There's really a variety of uses in his mind.

President Trump has been very clear in his intent to levy tariffs on a range of countries and products to advance his goals. In fact, on his first day in office, Trump directed various agencies to investigate and, in some cases, make recommendations on tariffs and other actions to deal with persistent US trade deficits, unfair trade practices, and a host of security issues. Agencies are requested to report their findings by April 1st, so that's going to be a key signpost we're watching.

But ahead of that, there's a number of geographies and product sets that we can look to as potential targets. Those include Europe. President Trump has said that tariffs will definitely happen with the European Union indicating they're coming, quote 'pretty soon.' Trump has specifically called out US trade deficits in auto and agricultural products with Europe, I'd expect these areas at a minimum to be targeted. Europe has been preparing its response for some time, so the back-and-forth year is going to be important to watch.

Second are the BRICS, the expanding group of emerging market countries that includes Brazil, Russia, India, China, and South Africa. Trump has threatened a hundred percent tariffs on BRICS countries if they move to create a new currency or back any other currency to replace the dollar. Dollar diversification has been a big theme for many countries outside the West as governments look to protect their economies against broader volatility and potential sanctions.

Third, beyond these geographies, Trump has threatened tariffs on specific products like semiconductors, oil and gas, pharmaceuticals, steel, aluminum, copper. The exact timing of these tariffs is uncertain, but I wouldn't be surprised if we saw some announcements before the end of the month.

Last, I'm watching for the ways in which trade frictions might escalate further with China. One element of the President's executive order on trade was a specific request that agencies review China trade policy and other unfair economic practices by China. This could result in new investigations and tariffs. And additionally in the US Congress, lawmakers have introduced bipartisan bicameral legislation to revoke China's permanent normal trade relations status. Revoking this designation would subject Chinese imports to significantly higher tariffs. So those are the areas I'm watching right now.

Oscar Pulido: Catherine, when we've had you on in the past, we've talked about the mega forces and specifically the one around geopolitical fragmentation, which talks about how old trade alliances are changing, supply chains are being rewired.

Talk to us a little bit more about how these developments around US trade policy are playing into geopolitical tensions more broadly, specifically things like US China strategic competition, which you started to touch on.

Catherine Kress: Sure. So, our view, even before the latest developments, was that geopolitical risk had increased substantially over the last half decade. Part of that, as you noted, is that the world has grown more protectionist in the wake of the pandemic, Russia's invasion of Ukraine, the reaction to China's exporting of its excess industrial capacity and other shocks. Global protectionism has increased. Countries and companies are leveraging a range of tools to bolster their resilience, protect their national interests, and globalization is rewiring as a result.

Now, there's an increasing number of trade restrictive measures in place across the world today. The World Trade Organization has reported on that. The latest actions by the US mark a sharp escalation in this trend, and they will accelerate the rewiring of globalization that you and I discussed. When it comes to US China competition specifically, we see tensions as poised to increase across a range of dimensions including trade, technology, defense, and more.

So, on trade, there's going to be this early period of tension over tariffs, as we've discussed. We could see some sort of agreement come out of that, but we're going to look to the findings of that trade policy review in early April for a signal as to any further actions the US may take against China.

In the technology space, the US and China are engaged in an epic zero-sum competition to seize the commanding heights of advanced technologies. The new administration has emphasized AI leadership as key for US economic and national security. We see a continued focus on tariffs and export controls among other policy steps to further that goal and advance the AI infrastructure build-out in the US.

And then last in the military domain tensions in the South China sea are high, conflict over Taiwan remains a risk. Additionally, the Trump administration is seeking to pressure China to bring Russia to the table for a potential peace deal in Ukraine.

Across each of these areas, President Trump's advisors have strong views, but the ultimate decision of whether to escalate or not will come down to President Trump. So, we'll have to listen to his words very carefully, as well as watch for any leader-to-leader dialogue with President Xi. These are going to be important signals for the relationship going forward.

Oscar Pulido: And so, Glenn, we've been very focused, talking about short term, developments as it relates to US trade policy and tariffs. but if we zoom out a little bit and we think about the longer-term landscape here, what should investors be thinking about both in terms of the risks and the opportunities?

Glenn Purves: Thanks Oscar and I think it is important to zoom out at this point. And there is a bigger macro backdrop here, and you've discussed it in past Bid podcasts, as I've heard. And before these tariffs came along, the world was already shaped by supply side factors, big structural changes in production. And you mentioned it, we call them mega forces, and because of elevated levels of deficits and debt We're already facing a bit of a tug of war between things that may boost growth and things that may be a source of inflation and with more limited fiscal and monetary policy maneuverability to course correct, this gets amplified.

So, when we're thinking about the mega forces and, Catherine, how she walked through the geopolitical fragmentation just now, lumping these tariffs into that just again, amplifies the importance of that mega force for, identifying the path forward. And our central view is that it'll dampen growth and place higher pressures on inflation. How much, and whether this continues, becomes a stagnationary shock, I think depends on how long it continues to create uncertainty and in particular, I would focus on that negotiating tool aspect of it.

But there are still many other things to consider, in terms of what are market friendly developments going on, and two in particular to note, AI, the raise of AI and the three phases that we set out Build out, adoption and transformation. Adoption feels much closer now with all the investments in the news we've been seeing in breakthroughs. The second is energy transition, the easing of energy regulations and the mission to set out to reduce energy costs. If competitiveness can come down that can be a good thing and a tailwind for growth.

Oscar Pulido: Right. So, your point is that despite the short-term headlines, there are still some longer-term structural trends that investors should be paying attention to, that present investment opportunities.

And what we've heard from investors is that they're not making many substantial changes in their portfolios right now. There's still a preference for equities but we're also hearing that investors are looking for new ways to diversify, maybe looking for other asset classes beyond just things like bonds, for example, to diversify their portfolio. So, it's definitely a very fluid situation and, we're going to learn a lot in the next couple of weeks, as you've mentioned, a couple of deadlines that will come up, in early March that we have to keep a close eye on.

Glenn and Catherine, thanks for, enlightening us on US trade policy and tariffs more broadly. And thank you for doing it here on The Bid.

Catherine Kress: Thanks for having us.

Glenn Purves: Thanks Oscar.

Oscar Pulido: Thanks for listening to this episode of the Bid. Next week, be sure to tune in when we talk to Jeff Rosenberg about the recent conundrum in bond markets and why short-term interest rates and long-term interest rates are moving in different directions. Subscribe to The Bid wherever you get your podcasts.

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Oscar: Welcome to the Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Today we're bringing you a special episode recorded live from the World Economic Forum in Davos, Switzerland. We're diving into the macroeconomic and geopolitical outlook for 2025, what it means for investors and policy makers. Joining me are Philipp Hildebrand, Vice Chairman of BlackRock, and Tom Donilon, Chairman of the BlackRock Investment Institute. Philipp will help us focus on the macroeconomic outlook, particularly in Europe, while Tom will unpack the broader geopolitical landscape, highlighting some of the key dynamics that will impact the world economy in 2025.

Philipp and Tom, thank you so much for joining us on The Bid.

Philipp: Great to be here, Oscar.

Tom: Thank you, Oscar. It's good to be here with Philipp.

Oscar: We're in Davos, Switzerland. We're here at the site of the World Economic Forum. this is an annual event that has occurred in Davos for over 50 years. So, Philip, I know you've been coming to this event for many years, and for people who are not familiar with Davos and the Forum, what would you tell them about the significance of this event and how has it evolved over the years?

Philipp: Yeah, so it's actually been going on for many decades. 1971 is the origin. It was called something else, it was called the European Management Symposium, and the idea at the time was to bring in the kind of Harvard Business School and other business schools, insights on, on how to conduct businesses effectively to Europe.

So, the original idea of Professor Schwab was to bring in these American management theories that were emerging at the time in the sixties and seventies and expose Europe to it, which is why it was called European Management Symposium was very small. Many of the meetings were on the ski pistes. Even when I started coming in the eighties, many of the meetings were kind of up on the mountains actually, and people came in ski boots and would then ski.

So it was a lot less corporate than it is today. And then in the eighties, it kind of shifted to becoming much more of a global political economy, politics, geopolitics, economics, context and, has remained, it has become a very important gathering place, and a kind of networking exchanging of information platform. For many years. In many ways it was unique. Today you certainly have some competing platforms in the world, but it has remained, I think, an unusual and very special platform and very valuable for Switzerland.

Oscar: It's fascinating to hear how it's evolved over many decades. And you mentioned the meetings used to be in the mountains because in fact, Davos is the highest city in all of Europe from an elevation perspective. So, we are surrounded by, by mountains and it's a fascinating picture as people are walking through the streets. You've been busy in conversations this week. what are you hearing? What has the mood been like? what are some of the impressions that you're taking away?

Philipp: I think there's three big themes, The biggest one is, the implications of the new administration. So, I think there was an intense focus on what does it mean for the world? How does it change the structure of the global economy, the inflation outlook, et cetera.

The second theme, not surprisingly, since there are a lot of Europeans here, we are in Europe, is the question of how does Europe respond to this? What are the implications of it? Can Europe rise to this occasion? And if so, how? Including the geopolitical context of the Ukraine War, of course.

And then I would say the third big theme is the extraordinary developments around AI First of all, what does it mean? Fascinating discussions here on the implications on cancer research on research generally, how much research has advanced as a result of ai? But, of course, also how it will impact the global economy, how it will impact growth. What, does it mean for capital markets? how does it impact investments that are going to be made on a vast scale, for data centers, for the energy that will be needed to fuel the data centers that are needed in order to produce the AI. To me, those were kind of the three broad themes that dominated most discussions

Oscar: And you may not have done this intentionally, but some of the themes you're mentioning are some of the mega forces that we talk about on the podcast. Tom, you're the chairman of the BlackRock Investment Institute, I'd love to get your thoughts what've been your impressions and, and your takeaways?

Tom: I'll say a couple things. Number one is, a kind of reflection of the continued relative advantage of the United States. In terms of its economic position, it's a geopolitical position. Also, as Philipp was alluding to its position on technology, as a leader, across the value chain, particularly in AI and other technology as well, but especially AI.

Second, is a lot of anticipation here about what the new administration means for the global economy, for global geopolitics. We were here as President Trump was being inaugurated, and he issued, of course, on his first a couple of days in office, a blizzard of announcements and executive actions and steps that the government is going to take, bring about some fundamental change. And of course, it's natural that there be a lot of discussion here about what does that mean for regions in the world, global economy, different countries in the world.

On technology, I agree. You see these various technologies evolve and their importance of the world at Davos. You can see, and you can almost judge by the storefronts right as you go down the promenade here. And obviously artificial intelligence is now front and center in all its dimensions, as Philipp was saying. The core technology, the models, the hardware, but also very importantly, the infrastructure on which it's going to be built.

One dynamic that wasn't here in full, is the US-China or the Western-China dynamic. That wasn't really a big point of discussion. But that obviously remains the most important strategic dynamic in the world. And there wasn't a lot of presence here from, from China. There wasn't really a way to talk to the Chinese about where they are in their development on artificial intelligence. Because of course one of the principle competitions geopolitically in the world right now is the geopolitical competition around technology between the United States and China.

Philipp: I think Tom, this is partly a problem that the forum has, or a challenge. And of course it reflects in a sense globalization, the fact that we are in a fragmented world. And if you look at the membership here of the people attending or the composition. It has become less global, there's no question about it.

As we live in this fragmented world, in some ways you could argue you actually need more places that can bring all the parts together again, and this is one of the questions the forum will have to really ask itself, can it play that role to, in a sense, be the reconvene in a world that is less globalized than it used to be?

Oscar: And Tom, you have a ton of experience, in your career understanding geopolitics at a broad level. You've both touched on the fact that it was a busy week in the world, not just 'cause of the forum, but because of the inauguration of a new administration in the US. Tom, what is that geopolitical backdrop that the new US administration is stepping into?

Tom: It's a very different world President Trump comes into in his second term. Very different than the world he left. Across a number of dimensions. Philipp, I think it accurately said, the principle dimension is fragmentation in the world. there has been increase in fragmentation and instability in the world since President Trump's last time in office. Building out blocs, if you will, of countries that are increasingly facing off against each other across a number of dimensions.

You also see a significant decrease in the coordination and cooperation among the important powers in the world. And I think that's an increasingly difficult problem in the world, and one that's changed over the last really the half decade or so. We're also, as I said, in the midst of a really increasing, important and deep and epic, if you will, competition on technology, between the United States and China. A competition over trying to seize the commanding heights, the leadership of key technologies, especially artificial intelligence, which is seen as being really important for the future, both in military applications, but also very importantly, an economic application.

That competition I think is really front and center. The world's a lot more protectionist. We haven't entered into an age of full on deglobalization, that's not true, but globalization has been significantly changed and we do see significant changes in terms of protectionism, mercantilism around the world.

And we'll have to see US policy, again, going forward here with respect to what does. What does an America First foreign policy mean in terms of international economic relationships? So, we'll see a lot of that. It's a world, and we saw this in 2024 especially, this great, year of elections, where half the world went to vote. I think there were over 70 elections on a national level, in the world in 2024. And incumbents really were badly battered, and that's a result of a lot of dynamics in the world, including inflation, including coming out of the covid crisis, but also this kind of geopolitical tensions as well. There are two hot regional wars underway today that weren't underway in 2020, in Ukraine, and in the Middle East. So, it's a very different world today, that President Trump will face than the world he left.

Oscar: So, there's a lot going on around the world, there’s a lot of change. Maybe if I could switch gears and we could talk about the economy. Philipp, when you think about the economic outlook for 2025, what are you keeping an eye on here in this year ahead?

Philipp: To me, the most important thing is to think about how these forces that we've talked about and a few others, are foundationally changing the structure of the economy. I think we need to shift from, a perspective which would've been the traditional way you think about an economy over the last few decades, including when I was in central banking. You think about cyclical upswings, cyclical downswings, how you stabilize things through policy, whether it's monetary or fiscal, and in that paradigm, you lived in a world where you had these cyclical fluctuations and around it you try to optimize policy to create, the best possible output, best possible employment while preserving price stability.

It seems to me that we're now in a much more profound transformation of the world economy. We have a deep structural aging dynamic that's weighing on the economy, which has profound implications on the available labor force. We have this technology revolution or what's being called here, the 'intelligence revolution' in a sense, is the next step in a sequence. And some people would argue perhaps the most significant, step in the sequence of technological revolutions that we've had over centuries, that this is sort of the ultimate step into the age of intelligence.

We have the very unusual geopolitical landscape that Tom just described. And you have, of course, the transformation around the energy system linked, to innovation, but also to climate change.

And you take all these things together and I, it suggests to me that this is not about just cyclical fluctuations. The question here is not whether we're going to be in an upswing or a downswing, whether interest rates go up a bit or down. This is about what do these forces do to the structure of the economy?

And when I take them on balance, these are mostly what we call an economics supply shocks in a sense that constrain the production capacity, it makes it less efficient when you have to operate in a fragmented world. And so on balance, what these forces tell me is that we're moving to a world where we're going to have sticky inflation. Central banks will struggle to get inflation, to the target. We'll have higher rates as a result in a world with very high debt stock- that's a very important piece of it- we've never really had this, this extremely high debt stock across the world. In a world, where you have higher interest rates, higher inflation on average that creates fragility around debt, sustainability, volatility in financial markets, and simply more uncertainty.

And I do believe, although it's always a risky thing to say this time is different, but it does seem to me this is, in my lifetime certainly, these are changes, that we haven't really seen like this in the context of, of how they impact the very structure of the economy as opposed to just impacting the cycle. Christine Lagarde today, or yesterday, I guess, referred to this being an existential moment, for Europe. I think you could argue that's true for almost any region.

Tom: Yeah, essentially in the context I think it is interesting 'cause there's also, in the context of. Again, as I said earlier, lack of coordination among a lot of the important global players. At the time of the great financial crisis, obviously in 2008, 2009, There was a truly global cooperation to address the challenges that, that the world faced. You won't have that today. I fear if we had, if we got to a crisis- that's the first point.

The second is, boy, the world's making a big bet on artificial intelligence. It is seen as I said earlier, as being profoundly important for national Advantage, and I'm sure it will be in military affairs. but also in economic affairs. And that really is, I think, Philipp, it's fair to say that's the big growth bet.

Philipp: Tom, Philipp has mentioned that where we are right now in the global economy, and it's important to see how countries are going to respond and not just in the short term, but they're thinking about how to. enact policies or think about, longer term time periods. coming back to, we have a new administration in the US like what do you think are going to be some of the core focuses for the administration?

Tom: Oscar, it's early days, we're only a few days into the Trump administration. I'd say a couple of things.

One is, it was as- in terms of intensity and numbers of actions - as intense as we've ever seen a president come in, frankly, in terms of, steps he's taken, announcements he's taken, I think his priorities are pretty clear. And a lot of them have been his priorities for a long time. I think he'll start with trade and economics. And this has been a focus of President Trump's really since the 1980s, and he's been very focused on the issue of tariffs, since the 1980s.

He was focused on it in his first term as president during the campaign, for president this time around, he talked about it a lot. And I think you'll see him move forward with respect to tariffs as an important tool of the United States economic policy. He didn't talk about it extensively as an inaugural address. He did put forth a kind of a broad executive order to study a range of potential economic steps, including tariffs in a lot of situations around the world. And indeed, even since the inaugural address, he's talked about implementing tariffs on a number of places, already with Canada Mexico and China, even most recently, Russia if president Putin doesn't bring the Russians to the table to discuss the war and a peace settlement in Ukraine.

And what I think it reflects is his view that tariffs are the most important tool he has in his foreign policy toolkit at this point. it's a tool. He sees as a tool of general application. And so, you see him talk about tariffs as a way to address the bilateral trade deficit that might exist between one country and another. It's a way to address, immigration issues, right?

I think the second is immigration. Again, it's been a long-time interest of President Trump's – a long-time issue that he's talked about again for decades. He's declared an emergency at the southern border in the United States and the border between the United States and Mexico. He has already taken a number of steps to try to reduce as much as possible of the flow of migrants between Mexico and the United States, and indeed from the rest of the world into the United States. So clearly trade/tariffs, immigration.

And then there are the two hot wars we've talked about in the world. And one in the Middle East, obviously, which now we're in a six-week ceasefire at the war in Gaza. And I think you'll see a strong effort there to try to extend that ceasefire. It's going to be a challenge to keep all that together; I think that'll be a focus. And the Ukraine situation, I think it'll be a focus as well of his administration. He promised during the campaign to bring it to a close quickly. Obviously, it'll be a challenge, and we're seeing some of the challenge now through his, his communication publicly, at least with president Putin in the last day or so.

And then I think China. It's the most important strategic relationship in the world. It's the most competitive. It's competitive across a whole range of dimensions. We'll have to see where that goes. I do expect there'll be some movement on tariffs as respect to China, but there's a whole range of other issues. He's put together a team who are pretty tough on China, in terms of policy.

But I think, you look at his record, you look at his longtime interests, you look at his track record in his first term, and you can predict some of the major areas, I think, which will be the focus of this foreign policy.

Oscar: We've talked a lot about the US, but we're in Europe, maybe we could come back to Europe for a second. And Philipp, actually last year you talked about there being a lot of elections. Germany, which is the largest economy in Europe, goes to vote next month. Now that's because, chancellor Schultz lost the vote of no confidence in December, and that's why Germans are voting next month for new leadership. Talk to us a little bit about the importance of that election.

Philipp: Well, it's incredibly important, but I'd say even more important is how Europe together responds to these challenges that Tom lays out, this is a very different world, than the traditional post World War II / Bretton Woods type of system that we all grew up in. This is now world with intense competition, confrontation in some cases, actual wars. There's an enormous amount at stake. There is the kind of the fight for the commanding heights of technology, which, people generally believe is going to, again, impact depending on where you end up in that fight is going to really potentially impact your growth path in a very dramatic way going forward.

So, it's an intensely competitive moment and Germany, Europe, broadly speaking is losing, I would argue the digital war. I'm deliberately using this kind of language because I think that is the urgency of the matter. It is losing the technology war more broadly. Europe is also losing the energy war it has really had to deal with this shock on the energy side as a result of the war. It has in some ways responded very well, better than many people would've predicted. there is no energy shortage problem this winter. There won't be one.

But, of course, the cost of energy continues to be significantly higher in some cases, three or four times that of the US. And that is a huge competitive disadvantage, particularly at a time when we're going to need an enormous amount of energy to fuel this intelligence age that I referred to earlier. And so how Europe responds to this pressure point, I think is as Christine said, she's essentially right, this is an existential question. And so, the German election is a big part of it, but it's by no means the only part.

I would say what you require is a forceful response on the competitive landscape. And so, to me, the real question is this shock big enough to create a kind of one of those moments of really reorientation of Europe and of stepping up and responding in a forceful way so that you can essentially catch up in this big gap that has opened. I think the magic triangle in a sense, will play out in this dynamic between technology, AI specifically, on the one hand, capital markets to fund it, you need deep capital markets to fund it. This is one of the great advantages that the US has in this competitive context. It has these extraordinary capital markets that are so flexible, so deep, so responsive, and then energy. You need energy. So, I think the kind of the holy trinity, almost as you think about a strategy to respond are these three things.

So the analogy I would put, and this is where I put the election in its proper context, in 1992, obviously the soviet Union had collapsed, chaos prevailed in Eastern Europe, and the European Union stepped up dramatically by way of the Maastricht treaty which was ratified in ‘93, but agreed to in ’92, as a way to respond to the collapse of the Soviet Union. This laid the foundation for the Euro and for the European Union as we know it today. That was an extraordinary moment in the history of Europe. And it was a paradigmatic shift in the history or a paradigmatic sort of leap in the history of European integration.

And so, to me the question is, are we seeing the beginning of something similar? Triggered this time, not by the collapse of the Soviet Union, but by a radical change, coming from the United States and a radical change in the overall geopolitical context that Tom explained. now the, the one, and here I end with the election.

And to me, one of the questions is, would this election, can this be the beginning of sort of creating a similar moment with ultimately a similar dynamic where you reestablish the leadership of the Franco-German alliance? I think the jury is out. Is this shock big enough in a sense to get Europe to be jolted and respond in a way that it did in the early nineties after the collapse of the Soviet Union.

Oscar: It's clear from listening to both of you we're at an inflection point for the global economy, whether that's what's happening in geopolitics, whether it's what's happening in technology. And so, if you're an investor, perhaps a final question to both of you, what's the key consideration that they need to think about in their portfolios this year?

Philipp: Well, I think right now it's pretty clear that there is tremendous optimism on the potential. This intelligence age revolution in the US in combination with the capital markets and cheap energy is fueling a lot of optimism in the US, that's pretty clear. And the question is, can Europe respond? I would say, overall they are going to be great opportunities in investing the US looks despite all the concerns, the world has continues to look like a very attractive place for the reasons we discussed, and I think overall you need to be prepared.

My guess is sort of steady correlations that have in the past been quite conducive to investing successfully is perhaps something that we should sort of move away from the assumption that we're going to have that, and instead expect the world to be volatile. Expect there to be tradeoffs the trade policy is a perfect example. You can do tariffs, of course you can if you're the United States, but it may lead to higher inflation. So, one needs to really think carefully what you want to do and what the implications are on policy or in macroeconomics.

Oscar: And Tom, what about you? Just for an investor who hears all this, what do you think about?

Tom: Yeah, a couple of things. I'd say, we've had obviously an elevated geopolitical risk now for a period of time. Yet the global economy has remained pretty resilient, agile. That's for a number of reasons. I think it has to do with continued growth in the United States. And even though there are challenges in China, its continued growth in China, the tragic conflicts in the Middle East has remained, at least from the global economic perspective, contained, we've had a relatively benign energy situation in the world and well supplied energy applied. We've had, the protectionist dynamic mitigated I think a bit by the role of connector countries who operate between the major, the major blocks. But so much is dependent going forward on these risks can be elevated but not striking out and harming the global economy, we'll be monitoring that. I think that's an important thing for us to monitor and understand. And so much is dependent on policy and geopolitics right now. And that's what we're going to do at the BlackRock Investment Institute.

Oscar: I know it's been a busy week for you guys, and it's been interesting, a lot of the themes that we've talked about on The Bid over many months, AI, the need to be selective in your portfolios and be nimble, the fact that inflation might be more persistent, it sounds like those were themes that you also heard about here at the forum. Philipp, I should have mentioned, you're actually in your home country?

Philipp: I am. I've skied these mountains for many, many years and hope that perhaps tomorrow I'll get a run in the morning. It's clearing up as we see it snowed a bit today and I think we're going to have a spectacular morning tomorrow.

Oscar: It's been nice to visit your home country and it's been great to hear your insights. Thank you for sharing them and especially thank you for sharing them on The Bid

Philipp: Thank you, Oscar, and I'm glad you enjoyed your time up here. Thank you, Tom. Great to be with you as always.

Tom: I think I'll pass on going up into the mountains!

Oscar: Thanks for listening to The Bid and joining us from Davos. If you've enjoyed this episode, check out our 2025 outlook where Jean Boivin discusses the macro view for the year ahead.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2025 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0125U/M-4183861

<<THEME MUSIC>>

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Polito.

Today we're diving into a critical theme for 2025 and beyond rebuilding the US Physical Economy with the Infrastructure, investment, and Jobs Act, and other policy measures, there's a renewed focus on enhancing infrastructure, reshoring manufacturing and addressing the housing supply gap. These efforts are not just about construction and development. They're about revitalizing the US economy and creating sustainable economic growth.

Joining me is Jay Jacobs, US head of Thematic and Active ETFs at BlackRock. Jay will provide insights into the demographic trends influencing the housing market, the reshoring of manufacturing, and the bipartisan support for these developments.

Together we'll explore the impact of these initiatives on the US economy, the key areas of investment, and the role of private and public sectors in driving these changes.

Jay, thank you so much for joining us on The Bid.

Jay Jacobs: It's a pleasure to be here, Oscar,

Oscar Pulido: And welcome back. It was just a short while ago that we had John talking about artificial intelligence, but today we're going to talk about the US economy. So, we'd love to hear, what your views are of the US economy, and you're using a term, the US physical economy in your conversations these days. What does that really mean?

Jay Jacobs: I actually think it's a really good juxtaposition with artificial intelligence because AI is really about the digital economy, we think about data, we think about processing that data, turning it into everything from poems to computer programs, to stories that you can create using artificial intelligence. But all of that's happening in the digital world.

At the other end of the spectrum is the physical economy, the actual shovels in the ground, building things in the US that are really important to our day-to-day lives. We think about the houses we live in; we think about the roads that we drive on, or the airports and the rails that we travel through. We think about the factories that are building things in the United States. All of this really encompasses the physical economy in the United States, which as much excitement as there is around artificial intelligence and digitalization, the physical economy is incredibly important to driving the US economy and our everyday lives.

Oscar Pulido: And when you're saying physical economy, I can't help but think of the word infrastructure. I think that's, maybe the word that describes also the physical economy. And I know that a couple years ago there was a bipartisan bill enacted The Infrastructure, Investment and Jobs act. So how has that impacted the infrastructure, investment and development in the US over the last few years since it was rolled out?

Jay Jacobs: Well, it's been a major accelerant, and I think one of the things that that bill highlighted is that infrastructure is actually a very universally held need by the United States. It's not very partisan.

This is something that people across the aisle agree with. It's what people agree with at different levels of government. This is not just about the US Federal government; this is about state. This is about local, and it's also something that private companies feel very strongly about as well. And you've seen a lot of private investment in infrastructure. So, I think this bill, this landmark bill, the IIJA which earmarked about $1.2 trillion - the largest bill ever to be invested in US infrastructure - really serves as an accelerant for a broader theme around rebuilding the United States' infrastructure. What do we mean by that?

Well, if you take a step back, the American Society of Civil Engineers gave the us a report card rating of a C minus in infrastructure, not a very good grade. That was a few years ago, and I think a lot of that spurred this realization that our roads aren't great, our highways aren't great, our bridges aren't great.

Oscar, I'm going to put you on the spot. Do you know how many bridges there are in the United States?

Oscar Pulido: Boy, you are putting me on the spot. I'm going to say 3000,

Jay Jacobs: 600,000. Do you know how many are structurally deficient?

Oscar Pulido: I'm going to say 75% of those,

Jay Jacobs: That's a little high, but about one in 13 bridges is structurally deficient, which any amount, which should be worrisome.

But it highlights that a lot of our infrastructure, which was built many decades ago, has just been under invested in and needs these trillions of dollars to be spent to bring it up to speed. The impact on the economy can be tremendous if we have less structurally deficient bridges. If we have more efficient airports, if we have more lanes and highways, people can spend less time and traffic, and goods can spend less time getting from point A to point B.

And it can really serve as this grease in the American economy engine to move things faster and more efficiently around the country.

Oscar Pulido: I learned that I need to spend more time learning about the US infrastructure. You've taught me that. you also mentioned the C minus grade, that was given to the us, which is. I think technically below average is what that grade means. So, it's clear that there's more investment needed in infrastructure in the us You mentioned private companies, and we've heard from our partners at Global Infrastructure Partners or GIP discuss that private companies have a big role to play in the infrastructure development, the investment opportunity. So, what role do private investments play in accelerating these projects in the us?

Jay Jacobs: Well, it's another really important source of funding for building infrastructure in the United States. So, let's just take New York for example, and some of the projects that have been happening around Hudson Yards and around BlackRock's headquarters here.

If you look at the seven train extension, which brings a lot of people to work every day, that was actually mostly funded by New York City. If you look at the Second Avenue subway extension, that is largely being funded by New York State as well as the Infrastructure Investments and Jobs Act. If you look at some of the airports in New York, LaGuardia and JFK, a lot of that funding is coming from private companies predominantly.

So, if you just look at the infrastructure around this area, you're seeing city, you're seeing state, you're seeing federal, and you're seeing private money, all to really reinvigorate, infrastructure in the area. And frankly, over the last 15 years or so, I think infrastructure has been a lot better in New York and other cities are starting to experience that boom as well.

Actually, under us right now is the Hudson tunnel project, which is going to, double the amount of train tracks that basically connect New York to New Jersey. That's a $16 billion project, which is largely funded by the Infrastructure Investments and Jobs Act as well. So, we're really surrounded by a lot of these major infrastructure projects, but a lot of them are getting money from different sources to really create a mosaic of money to coming in to fund very expensive infrastructure

Oscar Pulido: And you highlighted a few projects in the New York City area, so in some cases, funded by government and in some cases funded by private companies. I have seen the barges on the Hudson River that, are part of what are developing those tunnels that you mentioned as well. So, when we think about in 2025, what are some of those additional areas that you think are going to see significant, investment and improvement maybe outside of New York City?

Jay Jacobs: We really think about it as two buckets. You have infrastructure operators. These are the existing infrastructure that operate today. You could think about airports, you could think about toll roads, you could think about seaports and train tracks the existing operators of that infrastructure.

Today, we'll tend to benefit from a few things. One, we're seeing some falling interest rates, which tends to be positive for kind of these cash flowing infrastructure projects. But also, they could benefit from additional dollars from the infrastructure investments and jobs act and private spending. Now, the other bucket that I think is really interesting is the infrastructure enablers.

This consists of construction engineering companies that are helping to build this infrastructure. It consists of materials, everything from copper and cement and steel that's being used to build this infrastructure as well. These companies tend to be big beneficiaries when there's more money being spent when you need to build and repair infrastructure.

Those materials and those construction companies have to come in and build it. So, we're really looking at kind of those two distinct buckets, the operators and the enablers as two areas that could benefit from this infrastructure boom.

Oscar Pulido: When you say enablers, I'm thinking back to that conversation you and I had about AI, which is that investing in AI as a theme isn't just companies that are making the chips, for example. There are other related sectors and companies that therefore benefit from the theme. And so, it sounds like the enablers are along that thread as well that there are sectors and industries outside of just purely infrastructure defined that are going to benefit from this broader build out.

Jay Jacobs: It's a tremendous callback. When we think about thematic investing, what we really want to do is look at the entire value chain of opportunities and sometimes there's a narrow view of what is an infrastructure company and then there's a broader view of what are the companies around it that benefit.

And that's exactly right. When we think about infrastructure, those enablers are the broader lens of who benefits from this theme of infrastructure.

Oscar Pulido: Speaking of themes, one of the other themes that we've explored with guests and talked about is nearshoring and reshoring, which is a reflection of changes in the supply chains, globally, particularly post the pandemic in 2020. So how is that trend in manufacturing expected to benefit the US economy? And are there any legislative measures in place that are supporting this?

Jay Jacobs: Exactly. If you think about infrastructure as literally paving the road for goods to move across the country more efficiently, then the next layer up is who's building those goods, and that's coming to the manufacturing, the factories in the United States that frankly hadn't experienced a lot of growth over the last few decades but are starting to see a bit of a resurgence.

In fact, the amount of construction spending on factories in the US has tripled in the last four years. There's a lot more money being spent to build factories here in the US. And you mentioned it, a lot of it is post pandemic. We realized during Covid that there was a lot of supply chain risk with globally integrated supply chains.

And if you can't get goods across the world into your country, it can really slow down economic growth, but also, you're seeing more geopolitical fragmentation where, in a lot of ways it's more politically popular to be building more things in the United States as well. So, both of those mega forces are really combining to power, renewed interest in manufacturing in the United States.

The way that we see this playing out is in certain bills. The Chips and Science Act, which passed a couple of years ago, that is designed to bring tens of billions of dollars into funding the build out of semiconductor fabs in the United States. Why is this important? On one hand, almost everything we buy today has a semiconductor in it. In fact, even if you buy a toaster, probably has a semiconductor in it. So, it's a really important ingredient into all the goods that we want to make in the United States. Then secondly, this is an industry that has some of the most, geopolitical integration of any supply chain out there. The average semiconductor crosses 70 borders before it ends up in your cell phone to use on your everyday basis.

So, if one of those borders is closed or if there's a weather event or if there's anything that could disrupt the movement of that good. It presents challenges to the economy. And so, it's been, very clearly made a strategic priority by the United States to say, we want to control more of the semiconductor supply chain.

We're going to pass a bill with tens of billions of dollars to support the build out of these factories, these fabs, to build those semiconductors. And now we've already seen over 80 projects be announced in the United States to build semiconductors here. So, I think it's a really good thread between there's a need. There's a policy and there's an impact of building semiconductors in the United States again,

Oscar Pulido: And that's a really powerful visual. I'm picturing the semiconductor traveling around the world. You said 70 borders and it's so critical to our everyday lives. You said pretty much in a lot of the goods that we consume. So important for it to cross less borders so that we can get it into the economy quicker. One of the topics, Jay, lately in the US is around housing supply and the lack of housing supply. So, talk to us a little bit about how is that gap being addressed, in the US what measures are being taken that you see from your perspective?

Jay Jacobs: If you look at, really the last 10 years or so, there was about 17 million families formed and only about 10 million houses built. So, it's a really simple supply and demand problem of. You have a lot of demand, not enough supply to keep up with it.

So, it's caused all kinds of issues in the housing market. We see housing prices are still extraordinarily high. You wouldn't expect that in such a high-interest rate environment. But that's the case because demand continues to push that dynamic forward. we saw in this election cycle that both parties were really talking about housing as a topic that has been elevated to the federal level.

Again, this is a topic that it transcends all levels of government. It transcends both the public and private sphere. When you have a supply and demand and balance and it's impacting individuals, there's a lot of different ways that you can address it. Both through federal funding, through regulation, through private investment, all of those things can come together to really help solve this issue, and I think we're starting to see movement in that space for this year and beyond.

Oscar Pulido: You mentioned 17 million households formed and 10 million new homes. And what was the time period again?

Jay Jacobs: This was from 2012 to 2023.

Oscar Pulido: Okay. So basically, a little bit over the past decade there, there's that gap between supply and demand. So, are there demographic trends that have been driving that gap? Do you think those are going to continue playing out in 2025?

Jay Jacobs: The biggest thing here is the rise of the millennial generation. This is the largest generation by number of people in the United States. but if you compare them to baby boomers, only about four in 10 millennials own a home, whereas at the age of 30, about five in 10 baby boomers owned a home.

So, there's a pretty big difference in terms of home ownership with millennials. A lot of this has to do with affordability. 86% of renters say they would like to buy a house if they could afford it, but they can't. So, you have this very large generation that would like to buy houses, but largely is unable to afford them.

And as millennials continue to do more household formation, continue to see increasing wages as they progress through their careers, maybe even accumulate money through the passage of potentially $40 trillion from the baby boomer generation to millennials, you're going to see more and more demand for housing from this millennial generation.

Oscar Pulido: And, you touched on interest rates briefly, before, and the fact that, despite the fact that, interest rates have been high and they've started to come down a bit, but they've been high over the past couple years and, housing prices have remained high, which is counterintuitive, but it goes to show that there is just, so much demand for housing and not enough supply, and that's been driving that. So now that rates have started to come down in recent months. Does that help the housing market? Is that enough to start to relieve some of these pressures?

Jay Jacobs: There's kind of two fronts where it could help. On one front, on the home builders’ side, that a lot of these companies or even just individuals that build homes, have to get construction loans to be able to fund that building.

So, with lower interest rates, easier to get that funding less expensive. You should see that be additive to building more homes. On the other hand of the spectrum, on the demand side, lower interest rates can make it more affordable from a mortgage perspective. So, if we can see both supply increase from lower interest rates and demand increase, again, we think this should really propel both the public and private sphere to be able to respond to this growing housing shortage issue.

Oscar Pulido: When you talk about housing, we talked about infrastructure, again, the theme here being the physical economy in the US. What does this all mean for an investor in their portfolio? How should they be thinking about positioning for this theme?

Jay Jacobs: Again, I think this is a really good contrast to artificial intelligence, which is one of the other themes that we mentioned in our 2025 thematic outlook.

The view here is that not all themes are growth companies. Not all themes are technology companies. A lot of structural changes that we're seeing around the world impact what we would consider more value-oriented companies that come from value sectors, like materials like industrials, like utilities, companies even. So, you don't just have to think about technology as the way to play high growth. There's really some kind of interesting areas. Within the value end of the spectrum where you can still see structural tailwinds, propelling, long-term, returns going forward.

Oscar Pulido: And that's what you're describing is the broadening of the market. What we have talked a lot about the dominance of the Magnificent Seven, the tech sector and the outperformance and the concentration that it has in many indices. but quietly, over the past, several months there have been other sectors that have started to really participate in the gains of the stock market. And what you're suggesting is that maybe that's going to continue?

Jay Jacobs: That's exactly right. This is, obviously we've seen some tremendous innovation in technology, and we continue to expect that to be a major mega force going forward, but it's very narrow to just look at thematic structural growth opportunities through that technology lens.

This is why we think about mega forces through our five mega forces framework, which includes AI and digital disruption, but also looks at demographic divergence. And I think demo, as we were mentioning, demographics is a huge part of this physical economy trend. It's why we look at a megaforce like geopolitical fragmentation, which is impacting things like supply chains.

A transition to a lower carbon economy where we're seeing changing energy production as well as the future of finance and the changing role that asset managers and digital assets are playing in financing and in the capital markets. So, this is why we have a five mega forces framework. It's not just about technology. There are a lot of structural trends powering growth going forward.

Oscar Pulido: And it's consistent with what Jean Boivin, talked about when we had him on talking about the outlook for 2025. Is that. One of the recommendations, his team is talking about is thinking about the world through themes and not just through asset classes.

And you've nicely laid that out. Jay, it's always great talking to you. I hope at some point when you come back, you'll tell us if the C minus report card has improved. I know it might take a little bit of time, but maybe the next time you're on, we'll see where we are. Jay, thank you for joining us on The Bid.

Jay Jacobs: Great to be here, Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you've enjoyed this conversation, check out Jay's previous appearance on The Bid. How to invest in AI versus tech in a portfolio. And don't forget to subscribe to The Bid wherever you get your podcasts.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2025 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0125U/M-4079288

<<THEME MUSIC>>

Oscar Pulido: As we welcome a new year, we reflect on 2024 as another strong year for equities with inflation, interest rates, and the ongoing impact of artificial intelligence. Still very much in the spotlight. 2025 is shaping up to be an intriguing year for equity investors. As we discovered in the 2025 outlook from Jean Boivin, we have entered a transformative era of investing with the strong performance of equities over the past two years. In this episode, we're looking ahead to what this year holds for investors.

Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Today, I welcome back a Bid regular. BlackRock's Global CIO of fundamental equities, Tony DeSpirito. We'll discuss the factors driving the market where he sees the biggest equity opportunities and some of the challenges that lie ahead.

So Tony, welcome back to The Bid.

Tony DeSpirito: Thanks, Oscar. It's, really nice to be here again.

Oscar Pulido: Tony, you're a stock market investor and I have to imagine that you're in a good mood. 2024 was a great year for the stock market. tell us, do you think this is going to continue in the new year?

Tony DeSpirito: We've been through a pretty nice run actually. So, we've had two years in a row for the S&P 500 where it's been up more than 20%. That's actually pretty rare by historical standards. we went back and looked over the last a hundred years. Happens roughly 12% of the time that you get two years in a row like that. now three years is even more rare, of 20% plus. in fact, the only time that in the last hundred years has been in the 1990s, the late 1990s. So, I'm not expecting another 20% plus year, but I see no reason why 2025 shouldn't be a nicely positive year for the market.

Oscar Pulido: It is pretty rare to see the stock market do 20% plus returns as you point out. So, a third year would be unlikely, but doesn't mean that stocks can't still have a good year. it seems to me like there are a few topics that are going to be big drivers of whether stocks do well or not. and I think these are some of the familiar topics that we've had recently. Things like inflation, interest rates, artificial intelligence. Where do you stand on these topics and what does it mean for the stock market?

Tony DeSpirito: So, they're all important, and they'll continue to be important. So, let's go through them one at a time. let's start with inflation. I think the fed's done a remarkable job with respect to inflation, right? We've brought inflation down without triggering a recession. and that's pretty remarkable. but I don't think we can just check it off our list of things to watch and worry about.

First of all, inflation is not yet down to the targeted rate, so there's still more to go. And that last mile, so to speak, is awfully tough, is what we're seeing. Policy's also a risk, whether that's immigration policy or tariffs, depending on how they're implemented, that could be a risk for inflation. And I've seen research on this that inflation tends to come in waves. If you look over history, whenever we've hit a big wave of inflation, there's usually been followed by a second wave roughly within two years. And so that's the base rate that we're dealing with. So, all those things tell me that yes, inflation's in a great place right now, but let's keep an eye on it and let's watch it.

And with respect to rates, I certainly think a lot will depend on inflation. With respect to real rates, we do have to consider government deficits. Both in the US and elsewhere within developed markets, government deficits have grown and are large relative to GDP. One of the things that was interesting about 2024 is that interest rates, if you look at the 10-year treasury went up during the course of the year, normally you'd think that be, might be a problem for, the market, multiple. Certainly in 2022 that was, that really didn't affect market multiples in 2024. In fact, the market multiple expanded during 2024. So that's something I certainly view as potential risk out there is multiple contraction due to higher rates if they occur.

Then with respect to AI, that's been certainly the most exciting thing that's happened economically, at least since the iPhone, if not, longer than that. So, there's a lot of opportunity both from the point of view of the economy, as well as the point of view of corporations, right? And so, I think that's an exciting area for us as investors. I don't think this is an area where you want to set it and forget it. I think there's going to be lots of shifts, lots of changes. I think you need to be stay nimble. So, I certainly think of AI as a huge opportunity, for the folks, the active equity folks

Oscar Pulido: And AI is definitely one of the reasons why the BlackRock Investment Institute has used the word transformation. In talking about the 2025 outlook, we recently had Jean Bana who mentioned that this is not your typical economic cycle.

And in fact, when you mentioned inflation, how it came down in 2024 without triggering a recession, I think that was another example that Jean used to point to how different this economic cycle is from the past. Talk to us a little bit about how should the stock market investor be thinking about opportunities in this period of transformation?

Tony DeSpirito: So, I definitely agree with Jean's point that this cycle's very different, from other ones. Whether it's inflation coming down without a recession, we had an inverted yield curve historically, we would've thought of that as a great recession indicator - throw that one out the window.

Same with the Somme rule, which is that if unemployment ticks up by 50 basis points in a short period of time, that also has been a historic predictor of recessions. Again, throw that rule out. And in fact, I think what we've seen since Covid is mini rolling booms in busts. Whether that's in terms of goods, we certainly had a boom in terms of goods, during covid and then that's rolled off.

You see that in semiconductors outside of artificial intelligence. Semiconductors are actually in a recession where we overbuilt semis for autos and industrials and appliances. Now they have too much inventory. So now they have to under produce to draw those inventories down.

Same with housing. We saw a housing boom during Covid. Now if you look at housing turnover, that's in a bust. Even tech was in a bust prior to AI, and AI really brought technology out of that. So, I do think this sort of mini cycles is what we're seeing as opposed to one big economic cycle.

Certainly, we've talked a lot about the mega forces, and I do think that those are really important drivers of investment returns going forward. But when I hear the mega forces, whether that's digital disruption, a fragmenting, world, demographics, future finance, et cetera. What I hear is change. And from my active equity investor lens, I view that as a real positive for active investors because that's what we're good at, is being nimble, being active, adapting to these 'cause none of them are going to evolve in a straight line. There's going to be puts and takes along the way, and that's where we come in as active investors.

Oscar Pulido: And you mentioned these cycles. One of the boom cycles that, seems to have really accelerated in recent years was the boom around artificial intelligence. you mentioned semiconductors, which semiconductors associated with artificial intelligence have definitely seen a boom. And there seems to have been a boom in interest around technology stocks, which have dominated the headlines. how do you see the technology sector and just the AI investment opportunities evolving in the new year?

Tony DeSpirito: If you look at the early stages of AI the initial stage was all about that hardware layer. The chip companies, Nvidia, for example, big winner. Also, some of the cloud service providers like a Microsoft, like an AWS, alphabet, meta, et cetera, et cetera, increasingly we're seeing though the opportunity set broaden out. There's been a huge boom in power companies this year. Why? Because AI requires a lot of power to operate.

So, we've seen independent power producers do really well, and of course they require equipment. So, the equipment suppliers have done well. Same too with data centers, they require equipment like cooling, for example. So those companies have done well, Increasingly, we're going to continue to see that opportunity broadening out. I think a lot about the models themselves. The initial models are large language models that are mostly publicly available. what we're going to see is companies develop more narrowly tailored, smaller models that are more efficient, but that are very much focused on certain verticals. And there's going to be winners and losers in that, and that's part of our job as investors is to identify those companies.

I think about the data layer. Many companies have their own proprietary data, much like we do as a firm. and other companies sell their data. That's their business model is selling data. In some cases, that data will be replaced by AI, the importance of that data. In other cases, that data will be made more valuable by AI. Let me give you a few examples there. If you look at Reddit, that was an IPO in 2024. Very successful. What did they do to drive their earnings growth? They started to sell their data or their customer's data to the AI companies, and that's what drove their success with their IPO.

I think about companies like legal databases. It's a market where, it's an oligopolistic market where these companies sell their data and they make junior attorneys more efficient, in terms of their research. Increasingly what you're seeing is them putting AI layers on top of that database. Now it's not only the junior attorneys becoming more efficient researchers, but they're becoming more efficient at drafting legal arguments, drafting legal briefs, et cetera. And so, they can charge more for that. and so we'll see in this space, again, winners and losers. I. similarly I think about the applications and services that are being developed and will be developed over time.

When you think about software, again, winners and losers, some software will be replaced by AI, others will be enhanced by ai, and we'll be able to charge more for that. one example early on is that many companies have fixed budgets that they're going to spend on it. The more they spend on AI, the less they can spend on other things.

And so, in some cases that's hurt software companies. Going forward, what we're seeing is, AI agents being added to software. On our desktops an early example is Microsoft's CoPilot. We'll see more and more software companies come out with things like that over time and they'll try to charge for that. So, as we go through this, it's a lot of detail, but I hope you get the sense of one, why I'm so excited about AI as an opportunity, but also in particular, given all these puts and takes, why there's so much opportunity for active investing.

Oscar Pulido: Tony, we've talked a lot about the US so far. The US has, tended to benefit it seems like from the AI theme, it's had better growth in many parts of the world. The stock market has done very well. You mentioned the S&P up more than 20% two years in a row, but you have a global lens in the seat that you sit in as a global Chief Investment Officer, Tell us what is peaking your interest abroad.

Tony DeSpirito: Certainly the returns of the US market have been quite exceptional. Some of that has been driven by earnings growth. So, the US has had better earnings growth, than the other developed markets, but without a doubt, some of that's been multiple expansion as well.

So it's been a mixed story there. When I think about it, I think less about choosing one country going forward and more about choosing the right stocks increasingly. I do see pockets of opportunity where you can find similarly situated global companies that happen to be headquartered outside the United States and therefore are trading at a discount because of that. It's almost like the baby getting thrown out with the bath water, so to speak.

A couple opportunities that I've tried to exploit. One's in the integrated oil space. There are a couple of integrated oil companies in Europe and the UK that have very similar models to the integrated oil businesses in the US yet trade at very large discounts.

In the pharmaceutical space, we think a lot about what's the value proposition, it's that patent portfolio. And how long does that patent portfolio last? there are a number of companies in the US that have a problem with a patent cliff. In Europe, we're seeing less of that. And so, when we look at the duration of that portfolio, the duration of that patent, it's just on average, longer in Europe than it is in the US. Yet when you look at the pharmaceutical companies across the globe, they're trading at pretty similar multiples. So again, that's an example of one of those opportunities for stock picking.

So again, I don't think it's about choosing so much one market over the other. I think it's much more about trying to exploit opportunities like that because of geography.

Oscar Pulido: It seems like another maybe similar area of the market that is perhaps misunderstood and that you see an opportunity. I know you recently wrote an outlook about the opportunity in large cap value stock. So, tell us what is it that interests you about large cap value stocks and maybe just define when we say a value stock, what are we talking about there?

Tony DeSpirito: Yeah, so let's start with the definition. Value stock is stocks that are trading at low multiples relative to their intrinsic value. Typically, low PE stocks, maybe low price to book stocks, but stocks that are cheap for one reason or another.

And when I think about particularly the S&P 500, there's certain ways that the S&P 500 is stretched. And I think about value stocks as being the anecdote for that. So let me give you some examples by what I mean by that. Certainly, one area of the market might be considered stretched would be valuations. If you look at the PE multiple, the S&P 500, it's not at its all-time high, but pretty close -

Oscar Pulido: And Tony, when you say PE ratio, you're basically talking about the price to earnings ratio, which is a way of valuing companies or stock markets and getting a sense of whether they're cheap or not.

Tony DeSpirito: Exactly. And so, value stocks are definitely an anecdote to that. Now, you might say, value stocks are always an anecdote to that. But what's interesting in the market today is the valuation spread. So, value stocks always traded discount to average stocks.

That discount today happens to be particularly wide relative to historical averages. Another anecdote is concentration, right? I think there's been a lot of ink spilled about how concentrated the S&P 500’s become. For example, if you look at the top three stocks in the S&P 500, they now make up 20% of the index. That's a record.

If you look at the Russell 1000 Value index, which is a commonly used large cap value index in the us. the top three stocks in that index make up only 8%, and that's actually off of all-time lows, by the way. and similarly, if you look at, industry concentration or sector concentration, on a reported basis, the S&P 500 is 32% tech.

I think that actually understates the real exposure of technology. If you look over the last, a little less than a decade, the index providers have been reclassifying companies away from technology to other sectors. For example, Amazon has been reclassified from tech to consumer, discretionary, meta, and alphabet from tech to communication services, PayPal, from tech to financial services, et cetera.

And there's a list of them. If you take all those stocks that have been reclassified away from tech and added them back to the index in tech, the tech weight would be closer to 45%. I don't know that there's anything necessarily to be concerned about, but certainly from a diversification perspective, you can see how value stocks would really add diversification.

Where the tech weighting is much lower, and actually the largest sector there is more like 23%, which is financials, by the way. And then finally, if you think about trying to balance your portfolio and you put 50% growth and 50% value, the growth stocks have gone up more over the last two years, and therefore your portfolio has gotten out of alignment with your original setting.

So I think there's an opportunity there just to get back into balance. And even if you own a core index, say you own the S&P 500, even that index has become more growthy recently. So, we use our risk models to classify companies into growth, value and core. And when we do that, the weight of the growth stocks in the S&P 500 has gone way up and the weight of the value stocks have gone way down.

Again, suggesting an opportunity for investors to get back into balance, which I think is just prudence. And you might knee jerk reaction think, oh, the best way to do that is just buy an index. But look at the Russell 1000 value index, even that has gotten, I wouldn't say it's gotten more growthy, but it's certainly gotten more core than it's been historically. So, if you want to get back into balance, you really need to look to an active value manager that is stuck to a value discipline.

Oscar Pulido: You talked about the concentration of technology. You mentioned a couple companies, and I can't help but think of the term, the magnificent seven. Which have been these top companies in the s and p that have dominated a lot of performance in recent years. do you think they're more stretched in terms of price? do you think all the good news is already priced in or how do you think about the performance of that very concentrated top of that index as you go into the new year?

Tony DeSpirito: Without a doubt, you're right. The Mag Seven has dominated performance of the S&P 500 over the last two years, and it's because of fundamentals.

Those stocks have outgrown the rest of the market by a wide margin. If you look in 2023, they outgrew the mag seven outgrew the rest of the S&P 500. That said, that gap has been shrinking. And in fact, if you look at expectations for next year, that gap in earnings growth should narrow to less than 10%.

So fundamentally, yes, they've been a lot stronger, but that gap is closing, yet the valuation gap is still really wide so I would expect the market to broaden out. Compare the first half of 2024 to the second half of 2024, you see in the first half returns were really dominated by the mag seven. In the second half it was more equal and I would expect that to continue going forward. So, I do see a broadening of the opportunity set.

Oscar Pulido: Tony, we've been talking a lot about the equity market and the stock market in a very positive light, strong returns, the fundamentals, the opportunities and value stocks. But presumably as chief investment officer, you also have to think about what are the risks out there and what could go wrong. So, what are some of the challenges that you think equities could face, this year?

Tony DeSpirito: There's a long list actually, and don't get me wrong, there's always a long list. In fact, that's what markets generally do is climb that wall of worry. And we've talked a lot about a number of those things, including immigration policy and tariffs, which we mentioned could be inflationary, so there are a number of ways in which markets, could appear to be stretched.

We've talked a little bit about government deficits and what that could mean for rates and what that could mean, for markets. So, I do think, that's a risk. With respect to AI. We haven't talked about this, but there's always a risk of a digestion period or an AI pause, and that would have real, implications for the market, inflation, the potential for that to return, right?

There's a number of things that we're looking out for. I would add to that list geopolitics, it seems like the world's getting more dangerous and not less dangerous. So these are all things that we have to consider as investors. And my advice to investors, and I think if you look at the long history of wealth creation and generation, it's been by staying invested. So, I think that's important recognize the risks, do what you can to protect your portfolio from those risks, but stay invested.

Oscar Pulido: And Tony, every time that you and I have spoken, I always am impressed by the long history that you've had as a stock market investor and all the sort of fun facts you have about, historical market performance.

You shared with us even at the very beginning, just how rare it is for stock markets to be doing as well as they did the last couple years. But it is a new year, and this is often a time of reflection. perhaps any closing thoughts or any words of wisdom that, that you want investors to think about?

Tony DeSpirito: I think given where we've been with markets, having had markets that are so strong, the words of wisdoms are really about staying prudent and a reminder that it's really slow and steady that wins the race. Certainly, we've had a really strong bull market for the last two years, and when you have bull markets like that, I.

It's easy to have a fear of missing out because without a doubt it's always the riskiest investments that do the best. And so, my advice is to fight that impulse to chase things. but to stay the course and to stay prudent, stay invested, but do so in that, very sensible, prudent way. Focus on the long term, I think also been a message that you've shared with us in the past.

Oscar Pulido: Tony, thank you for sharing your outlook with us and we'll have you back at some point to see whether in fact, the US equity market continues on this, string of, strong performance. But good luck this year and thank you for joining us on the bid.

Tony DeSpirito: Thank you, Oscar pleasure.

Oscar Pulido: Thanks for listening to this episode of The Bid. Next week we'll discuss infrastructure, a critical theme for 2025. Jay Jacobs will provide insights into the demographic trends influencing the housing market, the reshoring of manufacturing, and the bipartisan support for these developments.

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Mark Wiedman: Welcome to the second episode of our series on The Bid, where we're exploring the world of infrastructure investing. I'm Mark Weidman, your host.

Last time we spoke with Raj Rao, president and COO of GIP, Global Infrastructure Partners, now a part of BlackRock for a primer on infrastructure investing. How the asset class began, what's driving its growth and why it's becoming a must have in investors' portfolios.

Today, we're building on that foundation to explore one of the biggest opportunities in infrastructure, the global transition to a low carbon economy. The shifts fueling a wave of new energy infrastructure projects worldwide. On the supply side, that means gas extraction, renewable power plants, and electricity transmission. On the demand side, we're talking about investments in electric vehicle charging stations, industrial equipment, and full energy systems. Together, these developments are creating some of the most significant opportunities in infrastructure investing.

To unpack all this, I'm joined by Matt Harris and Salim Samaha. Matt is a founding partner at GIP who oversees energy transition and decarbonization investments. And Salim leads new energy investments as GIP’s Global Head of Energy.

Matt, Salim, welcome to The Bid,

Matt Harris: Thank you, Mark.

Salim Samaha: Great to be here, Mark.

Mark Wiedman: Matt, looking out, when you think broadly about the infrastructure world, how's demand for infrastructure investing, in other words, the places to invest going to change over time?

Matt Harris: It is increasing, and in my opinion, it's increasing at a rate that is as attractive as any other asset class out there for 4, specific reasons. One, the general refurbishment that's needed in the infrastructure asset class. Two, energy transition and decarbonization. Three digitization. We've all read about AI and power convergence. Four, emerging markets where the infrastructure span in the developing world is expected to be about two thirds of what's required, all set against the backdrop of increased government debt and a lesser and lesser ability of government to fund these types of assets.

Mark Wiedman: Salim, Matt just brought up the energy transition. How big is this opportunity around the transition?

Salim Samaha: It's a pretty significant, opportunity about a $100 trillion are going to be required over multiple decades.

Mark Wiedman: A hundred trillion?

Salim Samaha: A hundred trillion! Half of that is actually infrastructure. Clearly there's going to be a cost to doing that, but there is a cost of not doing it. There can be some significant savings along the way, through improved technology and a real focus on coming up with more sustainable technologies.

Mark Wiedman: Let's dig into some of the areas where you see as most promising. Infrastructure investing in the transition, what are the top two or three sectors that you see as most appealing?

Salim Samaha: Electrification is one theme. Clearly renewable investment will continue representing about half of all transition investments. That's going to include solar, wind, battery storage. It's going to include transmission. the grid will be more distributed. And so, the need for additional transmission and distribution assets will be quite significant.

Clean fuels - a lot of people don't recognize that 80% of all energy demand is molecules. It's not electricity, and it's a significant challenge to decarbonize all of those molecules.

And then one of the things I'm most excited about are decarbonization partnerships. Anytime you're building new infrastructure, it has to be a lot more sustainable and it's going to require a significant public and private investment in order to enable that change.

Mark Wiedman: Matt, how do you look at decarbonization or the transition to a low carbon economy as part of the infrastructure world?

Matt Harris: As Salim mentioned, this a $100 trillion number, roughly half of that is infrastructure and that includes renewables, includes batteries, includes alternative fuels, EV charging, hydrogen, alternative forms of effectively powering vehicles, et cetera.

So, the enabling piece of the energy transition, is really infrastructure. We've had 150 or 200 years of building a fossil fuel economy. And I think it's really important to really understand that when we talk about a fossil fuel economy, it means that about 80% of everything we use in our lives is derived from fossil fuels. So, the complexity of unwinding that system and turning it into something that is either electrified or uses clean fuels is immensely complex and the infrastructure is what enables it.

Mark Wiedman: The transition to a lower carbon economy, lots of infrastructure, highly capital intensive. Why's so much capital needed?

Matt Harris: Well, large-scale infrastructure and we live in a globally interconnected world, is expensive. And you're talking about liquified natural gas plant or a utility scale solar farm. Or a large ethanol facility, any type of distributed electricity. These are assets at scale, and so the capital investment is significant in order to serve the population that relies on it.

Mark Wiedman: Matt, how would you locate decarbonization or the transition relative to other big opportunities in infrastructure over the next 30 years?

Matt Harris: I think over that 25- or 30-year period, Mark it's the largest because it requires a complete reassembling of our global economy.

Mark Wiedman: Hence the 50 trillion you're talking about that needs to get invested?

Matt Harris: Correct.

Mark Wiedman: Salim. Let's go back to electrification When you see the transformation of the energy system to be heavier reliance on electricity, what does that imply in terms of what needs to be built and invested in?

Salim Samaha: So, that requires the build out of solar, wind, battery storage. longer duration, storage than battery storage because there's an intermittency to the wind and an intermittency to the solar.

Mark Wiedman: Salim, where do you see the biggest opportunities in electrification for investors that you're working with?

Salim Samaha: I see it in electric transmission and distribution. We think that's a very low risk way to play electrification. And there's a massive capital need. Storage is going to be increasingly valuable. And we think electric mobility is going to be significant because the electric motors are significantly more efficient than the internal combustion engine.

So, not only can you clean up the source of the power that's being generated, you can also create energy efficiency, which reduces energy demand. And my mother taught me that if you can figure out a to save a couple of pennies that is very worthwhile long-term.

Mark Wiedman: Salim, if you were forecasting the future, in 10 years and 20 years purely on market forces, what will be the relevance of electric vehicles versus internal combustion vehicles?

Salim Samaha: For lighter duty applications such as the car that you drive every day, no doubt in my mind, electric vehicles are the way of the future because they're a lot more efficient than internal combustion vehicles and there's a lot more technology that you can pack into a vehicle because it has a lot fewer moving parts. For much heavier duty applications where you're moving huge equipment or huge materials, batteries are very heavy. They take up a lot of space that you need to move around these bulk products. And whether it's hydrogen or decarbonized diesel, those are going to be the primary energy sources.

Mark Wiedman: You talked about clean fuels before. What is a clean fuel and why would I want one?

Salim Samaha: So, what are fuels- let's start with that. You've got gasoline, you've got diesel, you've got jet fuel. and you have marine fuels. And how do you create those fuels? With a lower carbon intensity, you can use different feedstocks.

One is biofuel. So, you're growing crops such as soy and you're crushing them. And then you're creating sustainable aviation fuel. You can be taking animal fats and turning those into sustainable fuels. And what's beautiful about doing that is you can put those fuels in the existing infrastructure that we're using today which is very beneficial from a cost perspective and less disruptive to the communities because you're not rewiring the infrastructure that already exists.

Mark Wiedman: You mentioned a third category before?

Salim Samaha: It's a theme of decarbonization partnerships. So, think about mining companies. We're going to need a lot more copper to build out everything around, electrification. How do you do that in the most environmentally friendly manner. You're going to need trains that that move on electricity or hydrogen. You're going to need big trucks that move with, decarbonized fuels or even electricity. So, there's a massive multi-billion-dollar opportunity around each mine that we need, and the needs are going to be significant.

Mark Wiedman: Matt, are traditional fuels dead?

Matt Harris: No, they're not dead. They're going to be around for quite some time. But you're going to see, one, an increase in the usage of electric vehicles. And also, as Salim was describing, more and more clean fuels that can be used in a combustion engine. Those are called ‘drop-in’ fuels, obviously, they can ‘drop in’ to the existing vehicle, but they're going to be around for a while.

Mark Wiedman: Talking about intermittency, why is nuclear additive to renewables?

Matt Harris: Because it's base flow's capacity, there's no intermittency to it. So nuclear historically has been, very significant portion of the generation fleet in the United States. It's been decreasing because the cost of the facilities has been very unpredictable at these large utility scale facilities.

But what's on the horizon today is what we call an SMR, a Small Modular Reactor. So, the size is much more manageable, and these are in the pipeline, although we don't have any working yet, but nuclear would be an important base load part of the power stack.

Mark Wiedman: Salim, you mentioned natural gas before. Why is that attractive as a supplement to solar and wind?

Salim Samaha: Solar and wind, are intermittent. So, the sun's not always shining, and the wind is not always blowing. So, what, you need is something that has half the carbon content of coal and there's still too much coal in the world to make up for that intermittency and provide a base load source of power.

Mark Wiedman: What are the economics today in the OECD or the major and wealthier countries of marginally producing renewable power versus off of hydrocarbons?

Salim Samaha: Renewable power is very competitive, but then up to a point. What do I mean by that? If you're in the US you can probably sell renewable power at $40, $50 a megawatt hour, and you can make a lot of money doing that. But when you get to a point where there is so many renewables on the grid and the intermittency of those renewables becomes an issue, now you're going to need, additional storage.

So, it's not fair to then compare the cost of that renewable compared to something like natural gas generation where you have a lot of predictability around, how you're going to be generating that. And what we're seeing is the value of the capacity that these natural gas fired plants have is much more and more valuable as renewable penetration increases.

Mark Wiedman: So, just put some numbers around that. How do you see the growth of renewables and therefore when eventually you get to a place where the system has a challenge?

Salim Samaha: So typically, if you get to roughly 50% renewable generation on the grid. What's happening is the sun is shining at the same time; the wind is blowing at the same time that there may be insufficient demand to use all of the generation from these renewable resources.

And so, what that means is you have to overbuild them and that becomes very expensive. So, now you need different fuel sources that are not correlated to them, that provide value to the system to be able to meet the demand when the demand actually occurs.

Matt Harris: There's two ways that you can, in effect, manage this idea that Salim's talking about. One is base load capacity. Obviously, we want base load capacity that's got a reduced CO2 footprint. That's where nuclear and potentially geothermal can be very effective.

The second option, which is still, being worked on is long duration energy storage. So that excess electricity that Salim is talking about when the sun is shining can be stored and used later when the sun is not shining,

Mark Wiedman: So, what is long duration storage and what are some examples?

Matt Harris: Eight plus hours. There's a lot of people working on long duration storage, but we don't really have an answer yet technologically to what an effect would create that base load capacity that Salim is talking about. So, in a perfect world, you would generate all your electricity from hydro, solar, wind, maybe even geothermal, and have enough storage so that when you had excess electricity, you could store it and then use it when you needed it. But the storage capacity is not long enough to do that. So, if you had one or two days where there was no sun shining, or the wind wasn't blowing, you wouldn't have a way to meet your demand.

Salim Samaha: The are a couple of examples. One is an old technology, pump storage. You take water when electricity is cheap, and you have excess electricity. Move that up into a reservoir and then you drop the water into a turbine when you need the power. Another thing people are working on is compressed air storage.

So, when you have that excess electricity, you pump air into these caverns at pressure and then when you need to spin a turbine, you release it. And there are other innovations that, different companies are working on that are promising, but they're going to take some time.

Mark Wiedman: Permitting. Let's talk about that. Why is permitting relevant to this discussion, Matt?

Matt Harris: Because people don't want an electricity wire or a gas pipeline or a storage tank running through their backyard or their community.

Mark Wiedman: Salim, most of those constraints, those environmental constraints were imposed by laws designed to protect the environment. Part of the decarbonization goal is to protect the environment. Resolve please.

Salim Samaha: I think that's why one of the things we're most excited about is how can you buy existing infrastructure and use technologies that can leverage that existing infrastructure, so you don't have to go through the permitting process all over again, drop in fuels that Matt and I were talking about earlier is one example of that.

Mark Wiedman: What are the sectors you're long and short. You can't really short in private markets, but you get the idea - what are you long you're eager to invest in versus where would you shy away from. So Matt, why don't you kick it off? Longs and shorts.

Matt Harris: I'm not sure I'm sure short anything as it relates to the energy transition. I'm definitely long electricity, and I'm along the intersection of data and power.

Mark Wiedman: So, what does that mean?

Matt Harris: Artificial intelligence, cloud computing - you need infrastructure in the form of data centers to house all that capacity, and you also need power to run it. So, that intersection where those two pieces of infrastructure or the infrastructure value chain converge is a huge opportunity.

Mark Wiedman: Salim, longs and shorts.

Salim Samaha: I'm also very long, electrification because I like the efficiency benefits of electrification. but I'm also very long, mining, companies and mining infrastructure because in order to move into a decarbonized world, we're going to need a lot more materials. And these mining companies are going to play a central role in that we're going to need more lithium, we're going to need more copper. We're going to need more graphite, and I also think that the companies that control existing infrastructure that moves molecules today, such as the midstream companies, are going to play a bigger role in the energy transition that what they've been given credit for historically.

Mark Wiedman: So, we huddle in five years. How will this conversation be different?

Matt Harris: I would say we will be talking about the pace of the energy transition and wish that it were faster. As we talked about earlier, it's complex, it's multifaceted, it's deeply ingrained in our economy, and it's going to take time.

Mark Wiedman: I think you're going to have lots of ups and downs in the narrative around the energy transition. I think as you see more storms, as you see, people being impacted by them and migrating. I think the costs, of not pursuing the energy transition are going to become more evident and we'll continue to see policies, go up and down with world events.

Salim and Matt, thanks for coming on the show.

Matt Harris: Thanks for having me.

Salim Samaha: Thank you for having me.

Mark Wiedman: Thanks for listening to this episode of The Bid. In the next and final episode of our infrastructure mini-series, I will be speaking with Will Brilliant, global head of digital infrastructure. We're going to talk about how artificial intelligence is driving massive demand for new data and energy and the opportunities it creates for investors. Subscribe to The Bid wherever you get your podcasts.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH1224U/M-4052352

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Oscar Pulido: Welcome to The Bid, where we break down what’s happening in the markets and explore the forces changing the economy and finance. I’m Oscar Pulido.

This week, Mark Wiedman, Head of BlackRock’s Global Client Business, will guest host 3 episodes on The Bid as part of a special mini-series focusing on infrastructure. Mark will lead conversations with investors from Global Infrastructure Partners, who are now a part of BlackRock, to discuss investing insights in the world of infrastructure and how private capital will be key to the growing need for investment in the infrastructure landscape.

<<THEME MUSIC>>

Mark Wiedman: Earlier this year, BlackRock announced plans to acquire Global Infrastructure Partners, or GIP, leader in infrastructure investing.

Infrastructure sits at the heart of the world's biggest structural forces, the transition to a low carbon economy, advancements in AI and the urgent need to repair aging infrastructure, roads, bridges, and airports. With governments everywhere facing budget constraints, private capital is critical to filling that gap.

In this first episode of our infrastructure miniseries on The Bid, I'm joined by Raj Rao, Founding Partner, President and Chief operating Officer of GIP, now a part of BlackRock to talk infrastructure investing 101, how the asset class started, what's driving its growth and why it's becoming a must have in investors' portfolios.

Raj Rao, welcome to The Bid.

Raj Rao: Thank you Mark for inviting me to The Bid.

Mark Wiedman: Raj, what is infrastructure?

Raj Rao: Infrastructure is assets that touches everyone's life on a day-to-day basis. And sometimes you see them and sometimes you don't. So, these are airports, ports, rail, power pipelines, renewables, data centers, telecom towers, water and waste facilities. So, you know what it is, but how does electricity come to your house? Why is the heating in your house work? Because there is some pipeline somewhere that has transported gas to a facility that heats up your home.

Mark Wiedman: Who owns infrastructure?

Raj Rao: Most of the infrastructure in the world is owned by governments. Federal or state. I would say 80 to 85% of the infrastructure in the world is owned by governments. 20% is in private hands. Most of it is in hands of corporates because some of the biggest oil and gas companies, utilities in the world, transport companies in the world, digital companies in the own, own a lot of infrastructure. And over the last 18 years, which is when we started, GIP, the infrastructure as an asset class in the private alternative world has grown rapidly. So now a big part of infrastructure sits with funds like ours that own really large critical assets all over the world.

Mark Wiedman: What's the logic for infrastructure sitting in private hands?

Raj Rao: The logic for infrastructure sitting in private hands is that it can be managed better. Because if you think about infrastructure assets, most of the infrastructure assets are, some of them are monopolies, some of them operate in a regulated environment. Some of them operate in a protected environment. They really haven't been put through the rigor of what you would normally see in industrial company, and that breeds a completely different mindset of managing that asset, improving the operational capability of that and hence ultimately improving profitability. So, the logic for owning infrastructure is improving the service.

And I'm not saying that is universally the case because some government run assets are operated really well. The second is as government balance sheets all over the world have got stressed and you look at all over the world, pretty much every single large OECD country around has got deficits today. So how much can a government continue to fund growing infrastructure, existing infrastructure, upgrading infrastructure? I'm not even talking about new infrastructure. So that's the second reason why assets historically have transferred from government to private ownership. So, the combination of the two is the reason why it's a big growing private infrastructure community.

Mark Wiedman: Sometimes corporates even need financial help. Talk about that.

Raj Rao: A lot of times corporate needs financial help. And if you think about it, a large number of corporates are already sitting on big pieces of infrastructure within their portfolio. If you think about an oil and gas company, they want to drill for oil and gas, that's the biggest area where they spend capital expenditure on. And then to evacuate that oil and gas, they have to build a pipeline. Now actually it's not necessary for them to build the pipeline. Somebody else can do it for them, and as long as they have access to that pipeline, why do I need to own that pipeline?

Historically, corporates have owned that, but over the last 20 years or so, corporates have realized that it's a better use of their balance sheet to not to fund capital expenditure and actually spend capital expenditure where they're better off and getting a better return than owning a piece of pipe that someone else can operate.

And as long as they have use for that. It makes a lot of financial sense for them, and it then makes a lot of financial sense for us and our investors who are investing in this asset class.

Mark Wiedman: So that's where GIP comes in. What is GIP?

Raj Rao: GIP is a private equity style dedicated infrastructure asset manager, that focuses on four sub-sectors. Investing in energy infrastructure, and energy defined for us as anything that moves oil, gas, liquids, power. The second is transportation infrastructure, which is airports, ports, rail roads, think about digital infrastructure, which is data centers, fiber optic cable, telecom towers, all of which is necessary to get you to download data very quickly on your phone, or use AI very quickly, you need to have the data center capacity to do that.

And then water and waste infrastructure, which is recycling facilities collection, and then sort of incineration and disposal of all of that. So that is our definition of infrastructure and what GIP does. Invest in some of the largest infrastructure assets around the world, in these four sub-sectors, buys them, operates them, improves their financial capability, and at the end of the day, in some cases, sell them and return capital.

Mark Wiedman: How do you make investment decisions today practically?

Raj Rao: We start with focusing on the four sectors. So, it has to be the four sectors that we know, and we have built an area of expertise. We know what to look for and where we can generate incremental value and return for our investors. So, the first thing is choosing the right asset.

The second thing is we are value-add investors, a number of our transactions are with corporate partners, so more than half our transactions that we've done are 50, 50 joint ventures with large oil and gas companies, large utilities, transport companies. So, second is making sure that you get the governance right.

The third is, over the life of that asset, having a plan as to what are the four or five things we are going to really do in this company to create value? Is it de-risking it from a market perspective, construction perspective? Is it growing a market? Is it adding an incremental like to what we are doing? So have a thesis as to what are the four or five things you're going to do in the asset to improve the profitability and then execute it.

But one of the things that, I believe that we've done really well is at the time of investing already thinking. How are we going to exit this investment? 5, 7, 8, 10 years down the line? So, we deliberate a lot as to who's going to be a logical buyer and what do we need to do to attract an investor?

So those are the things that we think through very carefully. And then we have also started thinking a lot over the last eight, nine years. How is this asset going to be positioned from a transition towards net zero over the next 10, 15, 20 years? Because one thing is very clear that if what you own today and you don't reduce the carbon footprint of that, it's going to be very difficult to eliminate the carbon footprint for most of the assets - over a period of time you can, but during our lifetime of ownership, five to 10 years, if we can demonstrate that we are reducing the carbon footprint of that investment, we will attract more investors when we sell. So that's another area that we think through a lot as we are making a decision-making process.

And then we sit through in a room, debate it at length, and then come up with a value that we want to pay for it. And sometimes we win, sometimes we don't. The worst mistake you can make is fall in love with something, pay for it a lot, and make a big mistake. So, discipline is super important in how you get to a decision on an investment,

Mark Wiedman: Let's talk about two of the frontiers, the areas where you're most active in infrastructure investing going forward.

Raj Rao: One is around the transition to a low carbon economy, and then the second is AI and data centers may have some overlap. AI and data centers It's a game changer from an infrastructure perspective. I'll give you some numbers. In the last 15 years in the US there has been no growth in power. Demand and growth in power demand has been offset by efficiencies to a certain extent. If you look at the load growth, it's been flat. With cloud computing increasing and more importantly, with the advent of AI, the US is going to add growth in electricity is going to be 2.5% growth per annum. That is a massive increase in the amount of power that is going to be needed. That is a massive increase in the amount of infrastructure needed to move the power. That's just one example.

You do a normal Google search, and you do an AI enabled ChatGPT search or any of those searches, the amount of power you need for that same search is 10 x. So, the amount of power needed is huge for AI. Again, the computing capacity that you need, the chips capacity, you need the data center build out that you need to warehouse all the kit that enables you to do the fast computing that you want is increasing at a rate fivefold.

All hyperscalers put together deployed about $230 billion in CapEx for building data centers in 2023. In 2024, that number is going to be 20%, 25% higher. That number is going to grow to 500, 600, 700 billion to a trillion dollars a year going forward. That has to get funded, and that has to get built. And what is the infrastructure data center here? It's the building. It's the land, it's the permitting, it's the power, it's the cooling. This is not including the chips and all the stuff that needs to get, put in, as well. So that capacity that's going to get built in is so large that it needs to be funded.

Sounds very simple, but it is extremely complicated to get the land, get the grid, get the permits, build it, cool it, because you can't afford to have a failure here because this is 24/7. So, the availability of the data center and the cooling needs to be a hundred percent. So, you're building something here, which is designed to make sure that it doesn't fail. So, you build backup facility after backup facility to show that, if something fails, there's something else that kicks in so that all these chips remain in a cool environment.

Mark Wiedman: Let's talk about the energy transition. Why is that relevant for you as an infrastructure investor?

Raj Rao: Because the bulk of what is required for energy transition is a combination of two things. New build infrastructure that does not exist today. Or repurposing existing infrastructure to make it better and resilient in the future.

And the trend of decarbonization is irreversible. And the reality is you can argue whether is the world going to get to net zero by 2050 or not, but what is very clear, a lot of going to flow in for the world to get very close to that target.

How close time will tell, but that trend is there. And then private capital. It's a massive opportunity to build a significant piece of what is required. And we've seen this in renewables. If you thought what has happened and built in renewable capacity since 2006, so think about it this way, the amount of capital that was put into renewables in the last 10 years, double of that is going to go into renewables in the next 10.

And that's just renewables without batteries. I think about adding battery because what you want ultimately is green power 24/7. We're not close to that at the moment, but you need battery. You need all different forms of storage to get to a combination where it is a much longer than 20% load factor.

So that is one piece of the economy, but look, if you think about hard to abate sectors, steel, chemical, fertilizers, they all emit carbon. They all want to get to a point where the carbon footprint reduces. So, industry has to transform its method of generation of all of these to reduce the carbon footprint, which is going to require a lot more capital to go in, which is going to require a lot of technology to go in.

So, the space in energy transition investment is so large. Again, it's trillions of dollars and we talk about digitization being a trillion-dollar opportunity. That is the opportunity that we have today, and I'm not even talking about creaking existing infrastructure that needs to be upgraded, which also is another big opportunity.

You add all of those three together, the capital that is needed to build, repurpose, or improve existing infrastructure is so large, which cannot be funded by government, can be funded by private sector, combination of corporate. And private pool of capital, which is why the opportunity ahead of us is so large over the next 10, 20, 30 years.

Mark Wiedman: Raj, you've talked about operational improvements. What does that actually mean for one of the assets you own?

Raj Rao: Operational improvement is going inside a company, looking at how they run their day-to-day business and seeing can we change the way they operate to make it better? And if we change the way they operate to make it better, is that going to give us a financial reward? Is that going to make our customers happy? And if it actually can deliver both of that even better.

So let me give an example of Gatwick. We did many different things at Gatwick. Gatwick is in the UK. It's the second largest airport in the UK. It's on the outskirts of London, just outside of the M25. It is single busiest airport out of a single runway anywhere in the world.

When we bought Gatwick Airport, we had a plan to increase the air traffic movement at peak time to 55. We called it the ‘drive to 55’. And what's an air traffic movement? An air traffic movement is a landing or a takeoff. So, at peak time, which is early in the morning, 7-7:30 in the morning till about 9 when everybody wants to fly, we were doing 45 in an hour or 47 in an hour. We systematically worked on a different set of initiatives, and we had worked with the air traffic controller. We had to work with all the airlines. We have to work with the crew in the gate to turn things around quickly. As soon as the plane touched down at the runway, we had to get it off the runway so that someone else could land.

So, this was a series of processes that we needed to think through. What's the most optimal way for the sequence of landing or a takeoff? Is it a takeoff landing? Is it a landing takeoff? We did all this analysis. Mechanically we worked out a process to say if we do this, we will increase the air traffic movement at peak time. So it was that drive that ultimately led us to getting to 55. Now why is that important?

It has to be done in a safe way. So, to work with the Civil Aviation Authority in the UK, the regulator, to make sure everything's fine, it'll work with the air traffic controller to make sure everything is done safely. But at peak time, airlines pay for capacity. So, our ability to sell that extra slot that we've generated. So, billion pounds of value that we created just through that one initiative. It didn't happen overnight, but it needed an operational team to work very closely with everybody at the airport to drive that. That's just one example.

The second is security. And at an airport when you go through security, some people, get stressed because it takes a long time. You're stuck in queues, and you are at the end of it when you come on the other side, very disgruntled. Our plan was very simple. Let's do something that can get our customers through the security lane as quickly as possible, as de-stressed an environment as we can. And you go to some of our airports, you will see how quickly we get people through, through the security channel.

And as an airport or owner, when you have got through your clients through security quickly in a de-stress way, you've done two things. A, they're happier when they come on the other side. B, they have more dwell time. And what do people do at an airport when they have dwell time? They go and buy something. They buy a coffee, they buy a newspaper, they buy a bag or whatever it might be. And as an airport owner, that's a positive because you add it to your bottom line. So, focusing on customer service, focusing on the processes has led us to making our airport better, making our airlines happier too, because when we get clients through the security faster, our airline customers are also happy, customers are happy, and that has generated financial reward for us than our investors. So that's just two examples that really show what we are capable of doing.

Mark Wiedman: Raj Rao, thank you and welcome to BlackRock.

Raj Rao: Thank you, Mark for having me,

Mark Wiedman: In the next episode, I'll be speaking with GIP partners, Matt Harris and Salim Samaha about how the transition to a low carbon economy is driving massive demand for new infrastructure and what this means for investors everywhere.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH1124U/M-3988028

<<THEME MUSIC>>

Oscar Pulido: 2024 has been quite a year for markets from euphoria and recession fears to central banks starting to cut rates as inflation falls. And all this against the backdrop of a major election year across the globe and an ever more fragile geopolitical landscape. Volatility and heightened uncertainty are likely to remain key features as we enter 2025, making this a highly complex and rapidly changing environment for investors to navigate.

Jean Boivin: Investors look at the information that is coming and they're not just reassessing what's going to happen over the next quarter, but they're reassessing the next five years, the next 10 years. And that speaks to, we're in the midst of a transformation along these dimension that is pretty profound.

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

So, what can we expect in 2025? I'm pleased to welcome back Jean Boivin, Head of the BlackRock Investment Institute to help us look ahead to the New year. Jean will provide insights into the global economic transformation that he believes is now underway and explain how investors can navigate the five mega forces that the BlackRock Investment Institute identifies that key drivers of that transformation.

Jean, thank you so much for joining us on The. Bid.

Jean Boivin: It's great to be here.

Oscar Pulido: So, Jean, it's that time of year where the BlackRock Investment Institute publishes its outlook for the year ahead, and in this case, the outlook for 2025. in it, you talk about a global transformation that is underway. So, tell us a little bit more about what you mean by that and how does it change your view on economies and markets?

Jean Boivin: So, we're getting to the end of 2024 as we speak. 2024 for us has confirmed the fact that this has been, continues to be a very unusual investment environment. You can look at the fears that was around recession 2024 that materialize these, typical indicators that didn't work. The fail-safe indicator that failed in 2024 for recessions. You can look at inflation that has come down, but come down without growth, really slowing. And you can look at monetary policy that has reached peak tightness in 2024, and yet financial conditions that have been easier than average and have continued to ease.

So, these things are not lining up in a usual way. That, to us, speaks to exactly where you started, which is that we think this is not about an expansion and a recession or a cycle. We're really in the midst of real transformation. So that's the key word, transformation that are changing the makeup of economies that are changing the way markets are evolving and developing.

And that has profound implications, we think, on how we should be looking at opportunities. One example is that in this environment. We cannot rely on assuming that there's an underlying trend that the economies are evolving around, as we've done for decades before 2020 and spend more most of our time thinking about the fluctuations around that trend.

Instead, right now, it's really the trend itself that we're learning about because of this transformation. So, when you think about five years out, the range of potential outcomes we might be facing because of AI. Or because of the fragmentation of geopolitics or the energy transition, could lead us in very different kind of makeup of, economies, different trajectory.

And so that's the reason why, and maybe as a proof point of what I've tried to put on table here is that if you look in over the last two years, the reaction of the 10-year yield, the long-term rates in the US to short-term data is totally outsized compared to everything we've seen for the last two or three decades.

That to us means that investors look at the information that is coming and they're not just reassessing what's going to happen over the next quarter, but they're reassessing the next five years, the next 10 years. And again, that speaks to, we're in the midst of a transformation along these dimension that is pretty profound.

Oscar Pulido: And you mentioned a few things that, part of what's driving this transformation is you mentioned ai, you talked about, geopolitical instability, the energy transition. These are some of the mega forces that the BlackRock Investment Institute has highlighted as structural drivers of return.

Let's talk about the geopolitical instability one because we've recently talked with Catherine Kress, here on The Bid about what a historic year it was for elections around the world. An election cycle where a lot of incumbents did not fare well. And so that's going to bring. some, new policies perhaps as we go into the year ahead, we're also seeing geopolitical instability in Ukraine and the Middle East. So how does this impact your view on markets and economies as well?

Jean Boivin: Yeah, there's a lot of to unpack here, but there are two main things maybe I would highlight.

The first is, yeah, 2024 has been a very bad year for incumbents. You don't want to be in that situation, where you don't have much room to maneuver with typical levers of fiscal policy or even monetary policy inflation is still an issue, and a lot of desire for change. That has been the backdrop. I think that has led to a lot of promise for change.

We'll see how much change is really happening, but this is really a promise for change coming everywhere around the world in these elections, the US included. And that leads to two big implications when we think about the investment landscape.

The first one is that this continues to push towards a more fragmented world. the protectionist, momentum is reflected in all of these elections, and in the US certainly, this is throwing sand in the mechanics of the global trade engine, makes it harder to transact internationally, makes it more costly.

And so that contributes to a world where trade will be less efficient going forward and more costly. So, there’s an inflation kind of implication coming from there. So that's a big theme, one of the mega forces we talked about. The second big implication is the same one I was describing before wherein the investment landscape for decades before 2020, you could assume a steady underlying trend and then you could obsess about the fluctuations. You could also count on government that had an objective of macro stability. They didn't always succeed, but they were trying to achieve some stability, either through monetary policy or through fiscal frameworks that were meant to provide confidence and trust. I believe that one of the implications of 20 24 election cycle is that we cannot count on this.

I don't think the primary objective of government will be necessarily to provide macro stability. There's a bit of disruption coming from the political side that is more real. There's going to be action that will not, that will have achieved a dollar objective but will not necessarily be in the aim of having a stable growth environment.

And that opens the questions of where will the guardrails of stability come from? And we can frame this as a. A shift away from government providing stability to maybe markets having a bigger role in providing some of the stability. And when it comes to fiscal policy, we might be testing markets appetite for deficits more instead of the government trying not to get close to that testing limit. We might test it and at some point, the market would provide some restraint.

And when we think about measures on the tariff side, protectionist side, that could be disruptive to growth. Maybe again, this is the market that's going to restrain those instincts if we see market reacting strongly. So, it might be a rockier road that we're going to be facing, but one that ultimately gained some stability through the market, forces instead of government policies.

One place where the restraint might not be expected in this environment is if it's on the upside. So, a lot of animal spirit could be generated in this environment. We've seen it. It's not clear who's going to be taking away the punch bowl here. And so, I think one thing down the road to guard against because of this election, outcomes and so on is the fact that we might see some fraught building up. We don't think this is the case for now to worry about, but a year down the road maybe we'll have to think about this.

Oscar Pulido: And since you talk about animal spirits, I can't help but think about the amounts of money that we hear that are being spent in areas like artificial intelligence, the capital expenditures that we've seen from corporations, from the private sector of the economy.

So, let's talk a little bit about the investment needs that the mega forces create. AI being one of them but of course there are many others. Can you give us a sense for just how much are we talking about, when we think about the broader mega forces, what is the size of that investment need and how is it going to get funded?

Jean Boivin: So, we put out a publication on the AI landscape and the analysis we did there, plus if you add the energy transition needs in terms of investment that is required, the two together, if you look over the next six years by 2030, the quantum of what we're talking about is on par with the scale of the CapEx that was deployed in the aftermath of the Industrial Revolution. So, we're talking huge numbers. This is based on what the industry, the companies, are forecasting their CapEx deployment to be.

So, these are things that are seen as being realistic by each of these companies. If you add them up, this is what it comes out to. Now, we were talking about this a year ago, and you could say, well, this is aspirational. And to be clear, it's the same quantum of the industrial revolution in terms of CapEx, but we're talking about six years from now.

The industrial revolution happened over like a century. So, it's not only the scale, but the speed at which this is supposed to be happening is unprecedented. So, you could question whether this is realistic or too much optimism, but the reality is expectations were for about 200 billion to be deployed in 2024, and we are now tracking $240 billion, so 20% more. So even though that was seen as ambitious, it's happening even faster. That build out story is transformational and as transformational potentially as like the biggest revolution we've seen.

Oscar Pulido: I think whenever you take a hundred-year period of capital expenditures and an economy evolving and now say it's going to happen over a six-year window, I think that starts to qualify as a global transformation. I think now I see why you're using that term. When you talk about this transformation, it sounds like it's going to create plenty of investment opportunities. What does it look like practically the investment opportunity set when you're talking about these economic shifts?

Jean Boivin: One thing that is at the heart of all of these mega forces is that they all, and this is the title of our outlook, building the transformation they all require building, building the infrastructure, building the capacity to do it.

Right now, we're in a build-out phase. Adoption is beginning, we are not quite there yet. And eventually we're going to see a transformation. But we need to build it out first. We talked about the quantum that this means. This is true for ai. You think about the political fragmentation, globally, which means rewiring of trade patterns means investment in ports and harbor to adapt to these patterns.

So, I guess a common theme I'm building to is this infrastructure opportunity that is massive globally. That's something that is not in one region. This is in many places of the world, so that has a global aspect to it. and it's something also that is requiring a lot of funding from the private sector.

So, we're not in a situation where infrastructure will be mainly finance funded by the government anymore because we are in this kind of landscape, which we have high debt everywhere, much more constrained. So, that transformation combined with these financing needs together, I think create a big opportunity for infrastructure. So that's one.

If you then go to AI per se itself, we think this is first and foremost about the build out right now. The build out, requires scale to be able to have the balance sheet to finance the type of scale of investment needed that favors, bigger players, that leads to concentration as a result in the outcome we've seen in 2024.

So, you know, we look at the US equity market, it's extremely concentrated. If you compare historically, but at the same time, we think it's concentrated for a reason. There's a logic, it's big players that can, build this out. So, for now, concentration is a feature, not a bug of this environment. And so, another investment implication is not necessarily to be too afraid of the market being concentrated, or even the valuation in this environment. Because if you believe in that transformation, this is what you should expect. Being invested in US equities with, even in the tech more specifically, is part of what we would recommend going into 2025.

And then more broadly, we think this environment when inflation is not resolved, we'll come back maybe to that. But that leads to favoring, short-term credit over long-term duration or long-term bonds as a place where we would balance the portfolio as well.

So, to summarize all of this, the main lens to apply and where do you have to find the opportunities is maybe to step a bit away from the broad asset class and regions and think more about these thematics, these mega force and where they play out. And this is where we see where to take risk in 2025.

Oscar Pulido: Jean, you talked earlier about one of the interesting observations of 2024 was that maybe economies didn't follow the historical textbook that they tend to follow. And you mentioned interest rates were high, but financial conditionings were loose. And so, it has been interesting to just see how the macro environment plays out.

One of the things that you follow very closely is central bank policy, and one of the big questions throughout the year was, when and will central banks start to cut interest rates? They finally started to cut interest rates in the second half of the year. Can you talk a little bit about are those rate cuts going to continue or how are central banks going to navigate what appear to be persistent inflationary pressures?

Jean Boivin: So, one of the big challenges of talking about central bank's outlook, is that this is at the heart of the issue where we are, where we think is we're going through right now, which is that we're not going to recycle. It's a transformation. It's about structural change and trends. immediately, if you talk about central banks, then you adopt a frame around a cycle, central banks are about cycle. We think, in fact, this is part of the reason why we've seen very significant shift in narratives in 2024 because the temptation to apply a cyclical lens to what is not a cycle is very high.

So that's the context in which I'm approaching the outlook for central banks in 2025. Yes, they've started to ease, monetary policy, but they eased when financial conditions were already easy. Inflation has fallen, but for reason that to our mind have little to do with, the classical cycle- we haven't seen growth slowing. We haven't seen financial condition tightening, which is the mechanism by which inflation would fall, typically if it was due to monetary policy. So, I think this inflation falling that we've seen that has prompted central bank to ease monetary policy was not the result of an evolution of the cycle.

Underneath all of this, we think that there are these ongoing forces that will keep inflation sticky. And I think we're seeing even more of that over the last few months. we see inflation start to tick up again, that was our expectation. We have been at the view, and I guess we continue to be very much of the view that even though the Fed has started to cut rates in September, no matter what their expectation was, we don't think this is the beginning of a typical easing cycle. So, this is a recalibration, we might get some more cuts, but the bigger story is that I think we won't go very far in terms of cutting and inflation will reappear not in a massive way, but re reappear, constrain them in their ability to cut rates.

And that's going to contribute to more rates that are, structurally higher than they have been for, Since 2000. and also, long-term rates that I think will continue to drift up as a result. So central banks at the end of the day may be cutting a bit more, but this is not an easing cycle story. and inflation is not, resolved in our review. so that's going to be what's going to play out through 2025.

Oscar Pulido: So, what does this mean for investors who maybe can't look at the past as the playbook that they would've used if in fact we're going through structural changes, and you can't apply the cyclical lens that you've applied.

What does this mean portfolios? You've touched on US equities being an area that you still find compelling. And you talked about thinking about themes as opposed to asset classes and maybe that being a way to think about portfolios, but what else would you add to that?

Jean Boivin: In this environment, we need to be ready. And again, with 2024 illustrated that we need to be ready for a temptation to apply a cyclical lens to other phenomenon that we eventually learn are not about the cycle. Central banks, like all of us will be pushed in the direction they will have to course correct. This is something we need to be, gearing up for in 2025. And the way to deal with that is, we unfortunately are not in a world where we can like. build a portfolio, think about an asset allocation, setting it and forgetting it. Certainly not for five years, but even for the course of 2025, we need to be more active. We need to be more nimble.

And I think whenever we see markets going far in the direction of adopting a recession lens or cyclical lens. We would take the other side of this, try to temper those, temptation. That has worked well in 2024, and we think that's going to continue to be a story for 2025, but on top of being more granular, not look at asset class, look more about thematic, I think the dynamism aspect is crucial. You can do that in different ways in portfolios, but, reassessing, will be key.

Oscar Pulido: Well, Jean, now you've done the hard work of setting out the outlook for 2025 and I guess now comes the fun part, which is to see, how accurate it is-

Jean Boivin: -Or not!

Oscar Pulido: Or not! We will definitely, check in periodically over the course of 2025 with you and other members of your team at the BlackRock Investment Institute to see how it's going. Thank you for sharing, your views on the outlook here, and thank you for doing it on The Bid.

Jean Boivin: Thanks a lot.

Oscar Pulido: Thanks for listening to this episode of The Bid. Next week, mark Weidman, head of BlackRock's Global client Business, will guest host a miniseries on the investment opportunities in the infrastructure landscape. Make sure you hit follow and don't miss this exciting miniseries.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH1224U/M-4071758

<<THEME MUSIC>>

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

AI has been dominating investing headlines for almost two years, but it's not just a buzzword. It's a powerful technology that's poised to revolutionize industries and economies on a global scale. Investors are asking how will AI reshape job markets, productivity and economic growth? And more importantly, who stands to reap the benefits of this technological revolution.

Joining me is Nicholas Fawcett, a senior economist in the BlackRock Investment Institute. Together we'll explore what AI means for the broad economy and the different stages of AI's evolution. Nicholas will provide an overview of the possible changes across sectors and the strategies investors can use to position themselves for success in this new landscape.

Nicholas, thank you so much for joining us on The Bid.

Nicholas Fawcett: Thanks for having me back, Oscar.

Oscar Pulido: So, Nicholas, we've been talking about AI or artificial intelligence for some time. The BlackRock Investment Institute has, labeled it as one of the mega forces, which means it's a big structural driver of returns. We've talked about the history of AI on The Bid, we've looked into the investible themes that it creates. But curious, how do you see AI playing out?

Nicholas Fawcett: Absolutely right. It's burst into global consciousness a couple of years ago when Chat GPT came out. One of the reasons it's captivated so many people is that AI is trying to embody and then amplify or scale human intelligence. That's why it's so different from the regular ICT boom that we saw from the 1970s and the 1990s, that put a desktop computer on our desks and then a phone in our pockets.

It's the general technology that could rival some of the most important breakthroughs of the past couple of hundred years, like steam power, electrification. It's something that can be embedded in a whole range of different applications and avenues that could transform some of these things in the future.

But there's a lot that we don't know. So, we have to be really humble in, every step of the way because they're so complex, these AI models, and we don’t know how much more complex they're going to become. We don’t know how much energy they're going to need. And we don't know really at this stage what effect they might have on the economy. Is it going to transform a lot of sectors broadly? Is it going to be a more narrow impact? The world could look very different depending on the answer to these questions.

So, in order to get in the game, we think we need to have a good BAT. I'm not talking about sports, I'm talking about a framework for laying out how we see this evolving. And the BAT in question is three things, three phases if you like.

First is build-out, the second is adoption, and the third is transformation. The first phase is where we are now, the build-out phase where we're seeing, in a sense, a race to build-out AI infrastructure - data centers, the chips that are needed and so on.

The second adoption phase is really to come. It's as AI matures and firms start to accelerate their adoption of AI in their regular processes, that's going to require a lot of investment from those firms. And then third is the most interesting long-term impact is transformation.

This is where firms really could unlock the value of ai and there's a story to tell about the economics of all of that there's an important question of what it means for investors because the opportunities are here now, even if some of the kind of longer term structural changes are going to play out over decades.

Oscar Pulido: And so, you mentioned the build-out phase, which is the first of those the three phases that you talked about in BAT, as you cleverly labeled that in the build-out phase. What we have tended to see is a handful of stocks that have really dominated market performance. I'm thinking about companies like Nvidia and the Magnificent seven, top companies in the S&P 500. Is there room to go in terms of the performance of some of those companies?

Nicholas Fawcett: We think there is. You mentioned Nvidia, that's captured the imagination of the tech community because the key provider of all of these chips, underlying AI models, we don't think that rules out further growth. And fundamentally, we're only at the dawn of the AI era companies are racing to build-out ever more complex models that requires a lot more computing power than even we have at the moment. That's going to continue as the technology improves.

What we've noticed is that the underlying GPT models have become an order of magnitude more intelligent with each evolution. So chat GPT3, 4, and in the future 5, 6, 7. And each time you jump up an order of magnitude, you need a lot more computing power. And you can map out with reasonable confidence that the demand is going to be there for the foreseeable future at least. And in a sense, for the firms that are investing in this some of the large tech firms, it's a question of survival rather than should you invest at the margin in data centers or chips or so on, because those who don't compete are risking losing out all of their market share in terms of this opportunity. And the scale that's necessary in order to invest in AI requires you to be a really big player in the first place because the CapEx is so expensive, then you need to continue leveraging that scale in order to continue investing.

It's very difficult for new entrants to get into that market right now because you need a big balance sheet, and that's what these firms have. There's a lot of investor, questions that we hear about whether AI is in a boom bust cycle right now. in a sense, that misses the bigger picture.

History tells us that transformations always create winners and losers. But we think that because AI is potentially so transformational, it has a much broader potential to create quite a lot of value across a whole swathe of the economy and ignoring that could be really missing out on a lot of the gains.

Oscar Pulido: And you touched on CapEx or capital expenditures and the fact that these big tech companies are the big investors in the AI infrastructure. You mentioned they have big balance sheets, and this reminds me of something that Tony Kim also talked about when we talked to him earlier this year about this theme, which is that while the amounts that companies are spending are quite staggering, they have the cash to be able to do it. So, he thinks it's going to continue. How much more will this continue, this capital expenditure boom that we've seen? Where do you see that going?

Nicholas Fawcett: In terms of long-term projection, by 2030, for example, we could be seeing just in the US annual CapEx on the region of about $700 billion a year. That's about 2% of annual US GDP. So that's a really big number. Underpinning that is this point that tech needs, computing power needs of AI models are so much bigger than anything that we've seen before. The internet or the search engine technology, that we've seen over the last couple of decades is a lot less computer processing power heavy than AI models. chip costs just directly are going to be a big part of the increasing CapEx spend that we see.

And it's not just that, in fact, it's also the cost of data centers, these chips run like physically really hot, so you need more powerful air conditioning. You need a lot of energy in order to supply the computers. There's a whole ecosystem around the underlying chip that has to be built out too.

In fact, as Tony talked about when he was last, with you, the energy needs are potentially so big that energy suppliers may be struggling to keep up. And so in terms of the risks that we would identify, one of the big near term risks is that they simply can't find enough energy in order to supply that. That's where you see some of the large tech companies investing heavily in even nuclear power stations right now in order to guarantee consistency of energy supply over the coming decades.

Oscar Pulido: And what you're pointing out is that while we think of AI as a technology, it has implications for many different sectors and it truly is transformational. It even impacts the energy sector as well and the demand for energy. Let's stick with Tony Kim for a second, Tony's very passionate about this topic and he's talked about the productivity gains that he thinks it brings to the personal assistant market. but when does AI start to deliver productivity gains for the broader economy?

Nicholas Fawcett: It comes back to the fact that AI is about intelligence, and intelligence is embodied in more, less everything we do, it could significantly boost productivity over the long term.

We already saw a bit of that in the ICT revolution. So, from the mid-nineties to mid-two thousands in the US in particular, ICT was responsible for a big bump up in productivity growth. that's meaningful. In the case of ai, there's a lot of uncertainty, the size and the speed of productivity gains, we just don't quite know yet.

It really boils down to two things. First of all, how far does AI improve the efficiency of specific tasks that you would do within a job, and secondly, how broadly across your job does it help you do things? So some studies put the productivity boost just from doing tasks at maybe between 10 to 30%, which is quite big. Think about 10 to 30% time saving on being able to do a task. If you adopt that across every corner of the economy, then it could boost growth by one to two percentage points a year.

That's a slightly abstract number, but when, I was last on, we talked about, demographics being a drag on growth. All of the different drags on growth from the mega forces mean that economies can hope to grow, between one and 2% a year, even as it stands. So a one to two percentage point boost from AI is transformational. but the problem is in reality, that's probably a bit too optimistic.

So it's unlikely that every single job is going to be affected in exactly the same way. Some jobs are a lot more amenable to using AI than others. It could be that maybe a fifth of tasks are impacted.

But again, compared to a baseline in which you're growing somewhere between 1 and 2%, that's a meaningful uplift. Part of the answer is focusing on how AI can help us in existing tasks and existing jobs. some of the really exciting potential is for AI to create jobs that we don't know exist yet and can't even imagine existing.

That's not new if we take the advent of, motorcar, for example, people didn't ride around on horses anymore but it also created the motorway service station and motel network, because all of a sudden people could drive everywhere. It creates new jobs. And in fact, even more recently, and more prosaically, the rise of e-commerce, for example, since the mid 2010s has seen a really rapid boom in employment in warehousing and logistics in the US in particular. There's still potential for AI to create new tasks and new jobs, there's a lot of uncertainty, but that's potentially where a lot of the excitement comes from.

Oscar Pulido: And since you touched on the last time you visited us on the podcast and we did talk about demographics. And as I recall, the one of the ways that economies can try and offset that drag on growth from aging populations is through technology. Innovation and maybe some of the productivity gains that can bring. and that's what you're touching on with what AI could bring in the future. Maybe let's stick with that theme about the labor force and how it impacts workers. How does AI then change the makeup of the economy going forward?

Nicholas Fawcett: So I think AI adoption could massively change the makeup because where labor's deployed, what labor does, that could all change. Even if you don't have a massive improvement in productivity on an aggregate scale, individual kind sectors are really going to be at the forefront of all of the change.

I talked about the shifts that we've seen before, during the, advent of the motorcar. we've seen similar shifts before. just to take a case in point, during the industrial revolution, in the US the share of agricultural workers in the 1850s was about 50%. So half the economy was employed in agriculture, and by the 1980s, that had dropped to 2%. So the idea that we've seen big structural transformations is not new in history.

Another great stat that I like half of the jobs that exist today didn't exist in 1950. The idea that all of this technological transformation is going to change the makeup is pretty easy to understand and motivate.

What we've seen over the past and what we think is going to happen is the nature of our jobs is going to change so that instead of doing things alone, we do things with AI as a tool, it's not going to view everyone out of a job. It's just going to make, people more productive, within jobs, even though. Some sectors are going to change quite a bit. So, what it boils down to again, is this question of will AI create new tasks, new jobs, that we can't conceive of right now? And we think that there's a lot of scope for that to happen. And so the makeup is going to change, but it's not going to mean that, we can just do away with labor.

Oscar Pulido: We've talked about the build-out phase, right? that first phase of the AI revolution that you're describing and how it has benefited certain companies in terms of their stock market performance. As we continue along this journey with ai, what are the industries, what are the sectors that you're seeing that are going to benefit? Is it still the ones that have been winning, or does it start to broaden out a bit?

Nicholas Fawcett: Yeah, it's a great question. So this is where we come back to bat. So build-out adoption and transformation. We're still in this build-out phase, and so we still see more room for these build-out related firms, to, to benefit.

And in particular, we talked about some of the chip producers. These are complex chips. They're still going to be made by similar kind of companies that we're seeing at the moment, and we think that it's difficult to get into that market right now. So, there's still ample demand there. we also see an opportunity in the data center and physical architecture around all of these chips.

So, the upstream industries related to that, like industrials, energy, and so on. As we move into the adoption phase, that's where we start to see things broadening out. So some of the companies that can start employing AI to improve their production, and some businesses are already starting to do that.

We're seeing some firms use AI to scan earnings transcripts, so they can assimilate the collect. Assessment of companies at the moment. some people are using it for marketing kind of core centers as a replacement for shrinking workforces and also a lot in the tech industry around coding.

So you can use AI to help you code, even if you know the language already it just massively increases your productivity and those early adopters present opportunities. Now, of course. further out, in this third phase of transformation, we think that there is going to be a wide range of applications, that firms are going to build and that's going to emerge.

And really the focus is going to shift on the industries that have the most potential, the most, AI exposed. Tasks that we can try and find. And the sectors I would pick out there are things like finance, retail, education, healthcare. All areas where there are a lot of jobs that people currently do on their own that could be improved with ai, but not in a way that would do them out of jobs necessarily.

That would just make existing labor more productive. And so you could dramatically increase. I. The potential for those, industries. And we're already seeing it push the boundaries of human knowledge. So there's a widely reported example of using AI tools to try and predict the way proteins fold.

And you can use that to try and then work out how to create new medicines. That's pretty groundbreaking and we're only in the early days and already there are, a lot of examples where there's no way that humans could have been able to make this much progress just on their own.

Oscar Pulido: If you're an investor and you're thinking about the investment landscape and everything that you've touched on, how does somebody best position themselves to benefit from this megaforce?

Nicholas Fawcett: Yeah. And absolutely right. That's where the back comes in again. you don't need to wait is the most important message.

You don't need to wait for the productivity improvements to come in the real economy. Eventually, you can look around and see investment opportunities now. So it's more concentrated right now on, the build-out phase. Even with the rapid evolution of some of the top players in the sheer volume of information, that we're getting and, the limited visibility that we have in some of the emerging tech means that you need to be pretty well informed in order to make a good investment decision.

That's why we think deep expertise is really important. Especially in the environment where there could be a couple of really big winners who win big.

And so relying on broad benchmarks doesn't really fit the bill in this case. in a way it's a kind of existential point. If we don't know what the world could look like in decades to come, the benchmark of, two- or three-decades time is going to look completely different to the benchmark of today anyway.

So what it means is you need to go active, you need more granular insights into, your investment approach and try and identify what the most promising opportunities are. you also have to think about firms that haven't yet floated firms that are still private. 'cause that could be, if you get them right at the early stage, that could be where some of the biggest value gains are to be had. Knowing how to go into that requires a lot of expertise. So that's why we'd say we favor being active and taking an active investment approach, because that's the way to navigate all of the uncertainty and the expertise that you need in order to make the right decision.

Oscar Pulido: Right, be active. And this is a space that is going to continue to evolve for many years. And you've introduced us a new acronym bat, which we will, now internalize and keep in mind build-out, adoption and transformation. And maybe we'll have you back at some point, Nicholas, to see where we are along that journey. Thank you for, sharing this information and thank you for doing it here on The Bid.

Nicholas Fawcett: Thanks for having me. See you again soon.

Oscar Pulido: Thanks for listening to The Bid. If you've enjoyed this conversation, check out my episode with Tony Kim, tech and AI investing trends, a stock pickers take where we discuss the evolving conversation and emerging opportunities for investing in the AI theme.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH1124U/M-3999705

<<THEME MUSIC>>

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

We are celebrating the Bid's 200th episode, and joining us is one of BlackRock's original founders, Rob Kapito. Rob currently serves as president of BlackRock. He has witnessed the firm's incredible journey from the days of a largely US-based fixed income shop to becoming the largest global asset manager in the world. In this special episode, Rob will share insights on the history of BlackRock, the firm's growth and the evolving culture that has driven its success. We'll also look ahead to the future and get Rob's views on what lies ahead for BlackRock.

Rob, thank you so much for joining us on The Bid.

Rob Kapito: I'm delighted to be here on the 200th episode of The Bid.

Oscar Pulido: You're right, it is the 200th, episode. you have been with us before. It's been a while, since. It's great to have you back. We thought what better way to commemorate the 200th episode than to talk to one of the founders of BlackRock and to take a look back at the history of the firm and its founding. Take us back to 1988, the origins of BlackRock. I've heard a story about a bunch of founders in a room with one telephone. I think that's true, or maybe it's folklore, but perhaps you could start there?

Rob Kapito: Well, it's half true. So, we had one office and two desks and one couch. And Larry and Ralph each had a desk. Sue Wagner and I each had different sides of the couch.

But we had four phones, and I never sat on Sue’s side of the couch, we respected our responsive positions there. We started in business and interesting enough, we had helped a lot of people, previously and they all called and wanted to help. And there was a lot of congratulatory calls that you are starting your own business, and we felt very good about ourselves, but at the end of the day there was no business, there was just a lot of congratulations.

So, we recognized we really had to hunker down and execute on a business plan, which was, to go out to clients who needed to understand the risk in their portfolios because, the markets were changing. There were a lot of new securities being created that were complicated and we thought we had a better way with the analytics that we were building to understand what the risk is, and that was going to be our calling card. And then we were going to hope that someone would give us the opportunity to manage their money. And in those days, you really needed a five-year track record. And we also realized if you've only been managing money ' for, one year, no matter how much technology you have, you can't have a five-year track record.

So, we had to, go out and find a couple institutions that really gave us an opportunity and trusted us, and we kept our promises. and over the next five years we were able to add many other institutional accounts. And also, to examine how we can bring institutional quality management to the retail market. And so, we had to really study and understand what the individual investor was looking for and the wrappers that they could buy those particular instruments in and start to use our structuring capabilities to come up with a plan, and then we were able to raise money, from mom and pop, of which, we also kept our promises to. And so that's the key Oscar, to growing a business, is keeping a promise to your clients. And if you do that, you can build great businesses together.

Oscar Pulido: And so, Rob, it was certainly humble beginnings in 1988, and then 11 years later, October 1^st, 1999, BlackRock went public. So, it's been now 25 years since the firm went public. I remember the late nineties being characterized by technology, stocks and high-flying growth companies. I'm trying to imagine what it was like for an asset manager to go public in late in the late nineties.

Rob Kapito: Now, there were a lot of stops along the way before an IPO and the IPO was because we needed the currency to be able to attract more partners to come into the company. and the day we went public, of course we were very excited. It's a very stressful day, talking to institutions that would be interested in also, making a bet on us.

We were relegated to ringing the bell Friday afternoon at 4:30 on the stock exchange when there were about six people left on the floor. But when you go public, where you go public, it’s not really relevant, what is relevant is growing from that level. And so, we focused right after ringing that bell to how we were going to grow our business and keep again, our promise now to a new group of people, our shareholders.

Oscar Pulido: And that growth has come both organically and inorganically. But I can attest to some of the growth that BlackRock has attained through acquisitions 'cause I myself started my career with Merrill Lynch Investment Managers, which was one of the firms that BlackRock acquired along the way. So, talk a little bit about some of those acquisitions and what's been the thought process in making those acquisitions over the years?

Rob Kapito: It's more about the capital markets growing and being able to put in front of clients what they need, and then we either have it, build it or buy it.

So, if I go back to 1995, I could walk into a client and for a 7.5% return, which was considered a good return in 1995, I could give you a hundred percent bonds. So, if you look at BlackRock then, we were a bond manager. But over the next 10 years, as interest rates declined and the equity markets became more attractive, we needed to have both bonds and equities in order to get that seven and a half percent return.

So, what we had internally was not enough to be the best in equities. So we went on a search, and that search led us to Merrill Lynch Investment Management, which we dated for a while to see if the culture would fit and, could we form a great organization together. And as we, we bought Merrill Lynch Investment Advisors and Merrill Lynch became a 49% owner, in BlackRock. And that gave us the equities globally that we needed to get that 7.5% return.

If you fast forward again another 10 years, what you needed to get that 7.5% return was not only bonds and equities, but alternatives. So, it put us in the search to find firms that could offer alternatives on a global basis in order to get that return. So, where I'm going in this is that we're always thinking about what the client needs and can we produce it both internally or externally, and that describes what our plan was. We're not that smart, it always comes from the clients, and it also comes from where the capital markets are at the time and can we meet their goals and objectives.

And the one thing that I should have mentioned that we were continuing to build from day one all through these acquisitions was our technology product called Aladdin. And Aladdin is really the key. It's the nucleus of everything that we do. And in fact, it wasn't built for this reason, but it was one of the secret sauces of us able to do these acquisitions because the only thing where we were religious about was that all the assets, no matter who we bought or what portfolio teams we brought on, had to go through Aladdin. So, throughout the history of the firm, we have one single source of truth, only one number, and it all comes from Aladdin, where you could see the risk of your portfolios on one piece of paper. And that has become a very large and important business, where over 200 institutions use Aladdin as their technology support.

So, technology, returns, alpha broad base of products and keeping our promises. So, all of those things have been consistent, throughout the history of the firm.

Oscar Pulido: And Rob, as you took us through that timeline, you also, said a word ‘culture’, when you were talking about the acquisition of Merrill Lynch investment managers and that you were evaluating if that would be a good fit culture-wise. So, talk a little bit about as the firm has grown, have you had an intentional action that you've taken about developing the culture of BlackRock? What's your observation of the culture and how has it changed maybe over the years?

Rob Kapito: Culture is very interesting, and I think a misunderstood phrase. Every firm develops over time a culture. A culture of excellence, a culture of keeping a promise, a culture of working together as teams and understanding what the mission is.

This is a people business, like everything else. And we had to make sure that the people that we were going to bring into the firm had similar values and had a similar moral conduct. But the secret sauce is not that you try to get that firm that you're interested in to fit in with your culture. What you do is you look at that culture, make sure that you feel it's a good one, and then the combination of the two create the new culture, the improved culture. And that has been something that we've really tried to work on. And with each of those, and this is sometimes the things that bring down a firm because they, they have a merger, it becomes a silo.

People don't want to work together. It's the basics, of being partners and what do partners really mean. But in all of this, you all have to understand what the mission is. To create a better financial future for our clients, and that's what we've focused on. So, in each of these acquisitions, we've improved our culture and that is really important. We also have gone best in class, so sometimes there's overlap who gets to win.

And that's how you can continue to have a meritocracy, and you build a culture of excellence, and you make sure these are people that. are most interested in keeping their promise to the clients and they have the capacity to build.

Oscar Pulido: And it's interesting, you're saying whatever the culture was, in that, small room with the original founders of the firm, has evolved over time because you've found companies that had a culture that, you found interesting and that you thought would be additive to the firm. And then, that has then helped evolve the culture of BlackRock. Rob, we've spent a lot of time looking backwards at the last 36 years of BlackRock's history. Take us forward now, as you think about where BlackRock is headed, what excites you, what do you see in the years ahead?

Rob Kapito: I see an incredible growth in the capital markets in a different way than the private markets are going to grow. And one of the reasons for that is, countries are at deficits, and they don't have the ability to invest in the infrastructure and the technology they need to grow their country, grow their populations.

And this opens up a whole opportunity in infrastructure investing and private and public capital merging together in order to accomplish this. You might have seen our acquisition of Global Infrastructure Partners because we need to be very big in that space in order to accomplish our objectives on behalf of our clients.

The second thing is we have aging populations. Everyone talked about the baby boomers and what's going to happen and people on the east coast moving to Florida and the demographics, all that's happening. The populations are getting older in many countries, and people do not have the savings and investments to be able to retire in dignity.

And a lot of people that worked at companies, those companies went from defined benefit plan to defined contribution plan. They gave their employees the money, a lot of them kept it in cash, didn't invest it in a way that would be good for them in the future. So, we need to create a product just for the retirees so that they can live in dignity and that's really important. So, we need to have all of these different pieces to come up with something that would fit the risk profile of a person retiring. And that's why, if you're listening to this podcast, we're a fiduciary and this is, in my opinion, a noble profession.

And the reason for that is because we're really not managing people's money, we're managing their dreams. So, people have worked for 30 years, they need this money to pay for their kids' college, for weddings, for their new home, or just to live in many years where they're not going to be working. So, this is the responsibility, that's a dream. So, this is the money that they're going to need to be able to meet those dreams. So, it's a noble profession.

You used to be in the global allocation world. I was sitting at a Broadway show and a person came over and said, are you Rob Kapito from BlackRock? I said, yes. He said, 'I just want to tell you that I invested in Global Allocation 15 years ago. And I used the money to pay for my kids' education. I just paid for my daughter's wedding with it, thank you so much.' That's the client, that's where we kept the promises. This guy has worked his whole life, so it has to be an investment that understands who that client is, the risk and the rewards. That's what we do.

Every day something is happening around the globe, and we have to modify and pivot our strategy in order to keep our promises. So, it's fun, we've been enjoying it. It's been a very long ride. I'm not going to say that a lot of bumps along the way. We've been through 11 financial crises. We're still here. Our clients are still happy. We continue to grow, and it gets back to having the right culture and keeping your promises and putting the client always first.

Oscar Pulido: And it's interesting to hear you just talk about the noble profession. I think maybe when people enter the finance industry, it's a little less clear what their impact on that end client is.

Rob, you know BlackRock extremely well, and you've taken us through a little bit of a tour of its history. What would you want people to know about BlackRock? If there was one thing and they're just learning about the firm, what would you want them to take away?

Rob Kapito: I'd like them to know that the BlackRock brand, is a pristine brand, that we're a fiduciary, that we do everything 24 hours a day to keep our promises to them, to meet their goals and objectives. We understand the risk. We manage that with the appropriate rewards and that we are about the client.

I know people advertise how much money we have under management, it's not BlackRock's money, and we recognize that. Every day we come in here, we have an awesome responsibility to protect that principle and get them a good return. And I want them to know that we take that very seriously every single day. And we recognize that our whole brand is built on keeping our promise. And I intend to make sure the rest of the organization does that.

Oscar Pulido: Rob, I'm sure if we had unlimited time there are many stories over those 36 years that, we haven't heard yet, but at some point, we will have you back on The Bid to talk more about your views on the world, and you can hold me to that promise as well. Rob, thank you so much for joining us on The Bid.

Rob Kapito: Thank you. And great luck on the next 200 episodes!

Oscar Pulido: Thanks for listening to this episode of The Bid. If you've enjoyed this conversation, check out the episode with another of BlackRock's co-founders, Larry fink on Rethinking Retirement, and subscribe to The Bid wherever you get your podcasts.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH1124U/M-3981780

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Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

2024 has been the biggest election year globally on record, and here in the US in the wake of one of the most unusual election cycles in history. Investors are wondering what is next for markets and how can they position themselves for success during a volatile period.

We're recording this on Wednesday, November 6th, around 3:00 PM in New York, and today I'm pleased to welcome back Catherine Kress, head of Geopolitical Research and Strategy at BlackRock. Together we'll examine the results and the impact on markets and explore what investors can expect from a new government in 2025

Catherine, thank you so much for joining us on The Bid.

Catherine Kress: Thanks, Oscar. I'm glad to be here.

Oscar Pulido: So, Katherine, we all know this is a big year for elections and a lot of people have had Tuesday, November 5th circled on the calendar because that was the day of the US election. That day has now come and gone. So where are we in terms of results?

Catherine Kress: So, the 2024 presidential election was widely expected to be the closest race in US history. We came into yesterday expecting a prolonged vote count and significant uncertainty, perhaps for weeks, if not months. But this morning, we woke up to a clear outcome. Media outlets, broadly projected Republican candidate Donald Trump to be the 47th president of the United States. Republicans are now projected to take control of the Senate for the first time in four years. And the house as we sit here today has yet to be called.

This was a big win for former President Trump and here 2016 isn't really the right framework for thinking about his win because in 2016, Trump lost the popular vote but won the electoral college. The better comparison is perhaps 2004, 2012, when the popular vote and the electoral vote aligned. This is the first time since 2004 that Republicans have actually won the popular vote.

In the Senate, Republicans as of this recording, have at least 52 seats. They've picked up Montana, Ohio, West Virginia, they're slight favorites in Pennsylvania, which would give them 53 seats. But in the other outstanding racist, Democrats have a slight edge, so it looks like Republicans will have roughly of 53- 47 majority. And then in the house, as I noted, the race is not yet determined.

Oscar Pulido: And so, how have markets then reacted to the news and what do you expect between now and when the inauguration would take place, which would then be in January of next year?

Catherine Kress: So, markets reacted sharply to the news. One of the reasons for this is because the election is out of the way- markets like clarity.

S&P 500 futures jumped more than 2% to a record high, the US dollar rallied posting its biggest gain against major currencies since 2000, US Bond yields jumped, and Bitcoin spiked as well. These were big moves for sure, but I'd expect them to moderate over time.

As we think ahead to the coming weeks. Key dates include December 11th, that's the National Safe Harbor deadline, by which states must certify and transmit their results to the electoral college. December 17th is when the electoral college convenes, and state electors officially cast their ballots for presidential candidates. And then on January 6th, the new Congress meets to formally count the electoral votes. And then of course, on January 20th, Donald Trump will take the oath of office as the next president of the United States.

Oscar Pulido: And I mentioned at the outset that this was a big year for elections, not just because of the US election, but globally. I believe the statistics, point to 2024 as, being, a year where, many countries and a big part of the global population was, going to the polls. So as that cycle has played out, what are you observing? What have we seen?

Catherine Kress: Certainly, so it's been a historic election year, as you mentioned. More than 70 countries representing more than half the global population have gone to the polls. In some elections, like earlier this year, those in France have given way to political and market volatility. Others, like in the UK, while widely anticipated, represented historic change. One thing that's been clear is it's been a punishing year for incumbents. Across a range of examples, incumbents have been pushed from power lost their majorities. We saw this in Germany and Japan over the last few weeks, and of course, most recently here in the US.

Now, there are a number of reasons for this anti-incumbency trend, but one of the most prominent ones is the lingering economic effects of the Covid pandemic. Persistent inflation, higher for longer interest rates. Cost of living pressures, elevated unemployment rates are driving voter behavior. These types of issues have been historically insidious for politicians.

And even in the US, despite a resilient economic backdrop, inflation coming down, voters wanted change. For Kamala Harris to run as the sitting Vice President was something that's very hard for her to do. If you think back to the last 188 years, only once has a sitting Vice President actually successfully run for President of the United States, and that was George H.W. Bush. So, we've seen this anti-incumbency trend extend to the US as well.

Oscar Pulido: So, we have more clarity, as you pointed out on the election results. Not just the presidential results, but then also within the Senate. And we're still waiting on the house, but now that we have some clarity there, what does it mean in terms of policy? Do we have clarity on what policy changes, we should expect when we go into January 2025?

Catherine Kress: Sure. So, as you noted, control of Congress is key to President Trump's ability to enact his agenda going forward. At BlackRock, we're focused on policy changes in key areas like fiscal policy, trade policy, immigration, energy regulation.

We also expect a very different approach to foreign policy. So unified Republican control of Congress will be key, as I noted, for Trump to actually extend the expiring provisions of the 2017 Tax Cuts and Jobs Act, that's gonna be the central focus of fiscal policy next year. Trump is likely to propose new cuts, potentially including to corporate taxes.

Congressional budget, budget procedures allow deficit increases over the next decade, likely meaning persistent budget deficits. This is actually one of the factors we think will push up long-term treasury yields from a market perspective. On trade, Trump has proposed a wide range of tariffs, including 60% tariffs on China, 10 to 20% universal tariffs, tariffs on a range of other areas.

He will likely make trade an early priority, but implementation of some of these tariff proposals is uncertain at this stage. This protectionist stance generally would reinforce our views within the BlackRock Investment Institute around long-term themes like geopolitical and economic fragmentation, which is one of the structural factors we see keeping inflation higher in the medium term.

On regulation Trump's wind likely means some deregulation, I think markets are responding to this as well. We could see the rolling back of regulations for banking in particular. Big tech is one area that I think will remain a bipartisan focus, especially in the antitrust space. Under Trump, we would see Republicans aiming to boost energy production. Though, I'd note that US oil and gas output has already hit all-time highs under the Biden administration and ramping up production takes time.

Additionally, scaling back things like elements of the Inflation reduction Act, electric vehicle credits and the like, will be on the agenda, but for a variety of reasons, full repeal seems unlikely at this stage. Permitting reform is going to be a central focus for Trump as he seeks to expand energy infrastructure more generally. So, these are just a range of the themes we're thinking about as we consider the policy implications going forward.

Oscar Pulido: So, obviously those policy, changes and implications could take some time. You did mention that the markets have had an immediate reaction and some of that is that they don't like uncertainty in the markets, so now that we've removed a little bit of that uncertainty. But if you're an investor and you're thinking about your portfolio, what should you be thinking about maybe more medium term as it relates to markets?

Catherine Kress: So, in the near term, medium term, we see US equity supported by solid economic and corporate earnings growth, federal Reserve rate cuts. Longer term, a lot is gonna depend on how much of Trump's agenda he's enabled to enact and the shape of that. We think energy financial tech sectors can benefit partly from deregulation, as I mentioned. But multiple factors like fragmentation, as I noted, as well as supply constraints around an aging workforce, support keeping inflation above pre pandemic levels.

So, at the BlackRock Investment Institute, we are neutral long-term, US treasuries. We prefer medium term maturities and some quality credit for income, but we expect yields to rise over time as investors seek more compensation for the risk of holding bonds. The number one thing I would tell those, listening in today is that above all we advocate, staying in the markets, staying invested amidst any uncertainty that lies ahead, it truly pays to stay invested over the long term.

Oscar Pulido: Well, Katherine, we know you've been following this, story and the political cycle globally, really all, all year. And we appreciate you sharing the insights on the election results, but also what it means for the markets. And thank you for sharing those insights here on The Bid today.

Catherine Kress: Thanks Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid. On the next episode, I sit down with Rob Kapito for the Bid's 200th episode where Rob shares insights on the history of BlackRock, the firm's growth, the evolving culture, that has driven its success, and what lies ahead. Subscribe to The Bid wherever you get your podcasts.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

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<<THEME MUSIC>>

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Innovation in the investment industry is a hot topic. Thanks to the rise of things like AI shifting, investor demand, and volatile markets that are requiring more agility from investors. Today we'll be exploring the innovations driving both the ETF Market and Index investing more broadly, examining the latest trends and challenges facing investors, and how technology is playing a role in shaping these products.

Joining me live in London at our annual UK Wealth Investors Forum is Manuela Sperandeo, Head of Product for iShares in EMEA and Stuart Doole, global head of Equity investing research at MSCI, an investment research firm that provides stock indexes, portfolio risk, and performance analytics.

Manuela and Stewart, thank you so much for joining us on The Bid.

Manuela Sperandeo: Hi Oscar. Great to be here.

Stuart Doole: Hi, Oscar, nice to be here.

Oscar Pulido: Manuela, I'd love to start with you. The ETF market it’s no secret, is a growing market. It is a topic, of an investment vehicle of choice that people are using around the world. What are you seeing in terms of some of the trends that are really driving the ETF market?

Manuela Sperandeo: Innovation and, really the phenomenal growth that, has characterized the ETF industry, I think have really defined this in my mind as one of the really most exciting development in the asset management industry. And again, I think in the context of what has been driving a lot of this growth there are quite a few phenomenon which I think we can group across two big areas.

The first one is the vast and rapid change in the way wealth distribution models have evolved, the way investors consume financial products and really the benefit that the ease and convenience of the ETF wrapper has brought to this trend.

Just a couple of examples. Clearly, we are here in London. If I think about the way the broader, European market has been developing in the wealth segment, the rise of fee-based advisory and the centralization of asset allocation models that very much lend themself to building blocks such as ETFs; the rise of digital investor a lot of these propositions are built around ETF so phenomenal growth propelling that.

The second key area that has really been driving a lot of the growth in ETF in my mind, I think speaks more to the broader financial ecosystem. For example, fixed income ETF as the modernizing force of fixed income market. The way they have provided more convenient, more efficient access to the bond market.

So, this, I think, is really the dual forces one that really speaks to the consumer preference. And the second one that I think speaks more to the way ETF have really catalyzed transformation in financial markets. If I look at the state of play, we have crossed $11 trillion in assets, it's more than double since 2018. It's really phenomenal and speaks to the way ETF have been innovating, not only as a product, but a broader financial ecosystem.

Oscar Pulido: And you mentioned fixed income ETFs, I think ETFs historically have been a way to get access to the equity market, but the fixed income market now is increasingly another asset class that you can access through ETFs. So, what are some of those other innovations that you see going on within the ETF industry?

Manuela Sperandeo: The ETF industry has been innovating nonstop for the past 30 years. A lot of that I think has been propelled by technology as an enabler of these innovation. What I mean by that is advances in data analytics that have really meant our ability to build better indices.

But now, we are at a tipping point where the ETF technology is opening up a whole set of opportunities even beyond indexing. So let me give you just a couple of examples.

A huge topic for us today is around active ETFs, and so the ability now to really capture a more active portfolio construction and investment strategy into the ETF wrapper.

The second point I would make speaks about the ability of ETFs to get really granular and precise in the exposure powering a more nimble and agile asset allocation. And so, in this context I think about the better data that we have to map companies’ exposure to trends such as AI, a very important theme that a lot of investors increasingly ask us to get exposed to. And being able to standardize exposure to new segments, for example, the fixed income market, as I think investors increasingly want to slice their exposure to various segments of the fixed income markets. So, I think these are some of the trends that are really quite prevalent at the moment.

Oscar Pulido: And you said active ETFs before, which I think are two words side by side that people didn't necessarily put together, I think ETFs have been more synonymous with index investing. And so, Stewart, perhaps a good time to bring you into the conversation because MSCI plays a key role in the creation of those indexes that ETFs have historically tracked. So, talk a little bit about the innovation that you're seeing with respect to ETFs and maybe just the index investing ecosystem.

Stuart Doole: Absolutely. Obviously, you're right, indexes underlie lots and lots of ETFs. Actually, at MSCI, the biggest slug of our clients are active managers and a lot of the innovation we've seen in indexes, say over the last 10 years, has related to the underlying of an ETF, but also in benchmarks in bespoke selection universes for active managers as a second clock for an active manager who wants to see who's got the greatest skill in-house.

And I think over that horizon, and I joined MSCI around 10 years ago, the biggest contribution to the growth of indexes in the investor space has been moving from a world where you could easily get an exposure to a big region or the USA, emerging markets and, index providers supported by data and analytics have suddenly been able to match and help represent investment strategies that clients are interested in and that can span factors and styles and themes, things related to say, climate or sustainability.

And so, the way that we've taken regions and split them into countries and sectors, really enables that asset allocation process and the model portfolio process which has been another big driver of demand for these indexes.

Oscar Pulido: And some of what you're discussing, also ties back to something Manuela said about more precision exposure, taking regional exposures and breaking it down into countries is perhaps one example of that. You mentioned data and analytics. What role does technology play in the innovation that you're seeing in ETFs? We spend a lot of time on The Bid talking about things like artificial intelligence. Does that have relevance also to the ETF industry?

Stuart Doole: I think for MSCI and for a lot of players in the ecosystem, the explosion interest in and around generative AI has been a catalyst to re-evaluate what they're doing. And it provides in these tools a way to, create, a test of a what new way to automate a process or provide a better service to a client in a way that's very quick, you can get feedback really quickly and you can make decisions quickly. So, it really moves along innovation in the business. More generally for index providers like MSCI, there's a big value from ai, whether it's the generative AI or other aspects of machine learning or natural language processing, with related to, data extraction, and qc. And so that can be in the sort of traditional fundamental data space, or it can be related to new exposures, more precise exposures that need us to crawl over filings and new services and things like that.

Or it can be about processing completely new data that was very unfamiliar 10 years ago to indexes. I think circularity that goes on with the technology in that, the very technology that investors are interested in gaining exposure to is also the way that we're enabled to actually provide it to them. Without these advances in technology and AI and NLP, we wouldn't be able to build these exposures in any scalable way for them.

Oscar Pulido: So, the construction of the indexes is getting, perhaps, more intelligent, more, enabled by technology. You also mentioned that active managers are the primary users of a lot of these indexes. Manuela, you started talking a little bit about active ETFs, which is sort of a newer space, I think, in the ETF industry, and that this is one of the areas where you see some of the innovation. Maybe you can expand a little bit more on that topic.

Manuela Sperandeo: And yeah, you're right. I think historically we were not used to be thinking about these two terms together. The rise of active ETF really speaks about the confluence that we're seeing about these universes and really ETF rising as one of the wrapper of choice. To access different investment styles beyond indexing, the term itself captures different options and we tend to distinguish across three key categories.

The first one would be active management in the more traditional sense, or this would speak to the alpha seeking strategies. And I'll give you a few examples. The way investors are really looking to implement their asset allocation framework, for example, by taking small active risk away from the benchmark. This is quite relevant in the context of these models where investors are really looking at getting a little bit more beyond their traditional strategic asset allocation. Or the ability to also, get exposure to diversified sources of return across sectors, across markets, even equity style factors.

And again, these our research demonstrates can be truly additive in the context of portfolio construction So that's the first category. If I think about the second category, these are the more outcome-oriented active ETF, income is evergreen in terms of investors need in the context of retirement. And I think the structural innovation that activity ETFs bring is really around having a broader set of tools in the context of derivatives to be able to extract more income. And also, the ability to limit your exposure to market correction. So, this is the second big category.

Then I think the third one, I think that's where the more traditional ETF investors, they can really recognize the benefit of an active portfolio construction to get exposure to segments of the market which, historically were hard to reach via standard index.

So, I'm thinking about segments of the market where the data are very nascent, the size of the underlying market or maybe new market, new frontier market. I think it's very much where the dynamism of active management can be truly additive.

Oscar Pulido: So just listening to the two of you, we've talked about the assets in ETFs are now north of $11 trillion. It's obviously a growing space. The way in which indexes are being constructed is evolving and is being enabled by technology. and Manuela you're talking about now different strategies, more active approaches that are just even within the ETF.

So, it all seems to be working pretty well, but presumably, Manuela, there must be some challenges or headwinds, in the industry. It feels like any industry's always going to have something that's not working. What are those things?

Manuela Sperandeo: Clearly, it's been a high growth segment. But in the context of the broader financial markets, it is still a smaller percentage. Which is why we always talk about the incredible tailwind behind ETF adoption. But you're right, the number of product launches, the choice that investors are presented with could really pose the risk of product saturation. And I really think it's incumbent on us as an industry to really provide the level of clarity when it comes to really helping investors navigate the breadth of choice. But also, the ETF ecosystem has been predicated on very robust the trading and liquidity ecosystem. So, I think every time we think about innovation for us is very much around thinking of maintaining the product integrity when it comes to not only the construction, but ultimately the way these products trade. This is paramount as we think about the growth and the innovation in this space.

Oscar Pulido: And Stuart, to you, we alluded to the fact that ETFs historically have been more associated with investing in indexes. You've had a longer time period to evaluate how consumers use ETFs and how they consume these indexes in their portfolios. So, what changes in investor demand or client preference, have you seen that are now entering this space?

Stuart Doole: I think there are three dimensions to it. One around the growth of the user base who use indexed ETFs. Second around the nature of the indexes that we build, and then third around like the transparency that people are now demanding.

So, in terms of the kind of investors, some of the things we've talked about in terms of how indexes have changed and the granularity of the exposures, but it's also about the fact that a lot of index provider tools have generally become a bit more self-service. the data's easier to access for end clients, and that really is enabling a lot more uptake in the retail and wealth space. So that's like an entirely new category really for the widespread use of index ETFs and the rise of model portfolios is obviously super important.

In terms of the nature of the indexes, people, are looking for more differentiation. How do they make their products stand out in what can be quite a busy marketplace, I think linked to that, but also linked to how it's now a very major industry is that there's a demand from clients for intentionality. There's a lot more demand for a lot more upfront analysis and there's much less trust in what the simulation might have done. And I think that reflects both better risk processes at product providers, but also probably reflects, the rather perhaps more noisy world we live in, currently than, and perhaps five to 10 years ago.

And then finally, on the transparency side, clients are much, much more demanding about are you using the right data at the right time? Are you following the rules exactly as you said you would? Because that's the essence of what we're providing. And it's not just as you might think, oh, it's the regulators bringing in rules, we have to all put out certain numbers. It's really also a distribution and sales thing. People, I think, are used to knowing what's under the hood now through the way the technology's developed, and they're demanding of it from all the services that they get.

Oscar Pulido: Stuart, you've had a front row seat to the innovation in the ETF industry for a while. Take us forward five or 10 years. How do you see the ETF industry evolving? What changes do you see in how they will be used within portfolios? You've alluded to a few of these things now, but if you were to prognosticate even a little bit more where are we going?

Stuart Doole: From an index perspective, we're part of that ecosystem, I just think the use of indexes as one of the ways that people enter into new asset classes or opportunities, say within digital, indexes have been very much part of that story alongside active strategies and as benchmarks as well. So, no one thinks about getting into a new asset class or investment opportunity without indexes being part of the story. And I think that will continue.

There's also, generally a sense in which we will be more embedded into client systems. That could be a pension fund, bringing things in house or within the wealth space where they need to blend it with personal financial data. The other area where I think you'll see greater indexation and the use of indexes is within private assets. Historically there've been products out there, but I think, it's an area of much greater interest. It's getting opened up to wealth and retail and as a natural function of that, you're going to see a lot more indexes that give a lot of more insight and rigor to that space.

Oscar Pulido: And Manuela, what about you? If you take us forward five or 10 years, what do you see?

Manuela Sperandeo: So, if I take out my crystal ball, I can tell you that one of the vectors is absolutely what Stuart alluded to. If I think about the history of ETFs so far, this notion of establishing standards, which is going to expand to other asset classes, segment of the market, which are not index sized today. What is really going to happen is there's going to be greater standardization in the way you compute returns and so once that is codified, clearly there are going to be indices built on that, and clearly there's going to be greater access provided by ETF.

I think this is going to be standardization of calculation. There's going to be standardization of access. We've seen clearly increasing demand for digital asset. And so, I would say this is only the beginning. Every time we do see standardization also from an access perspective, we know that the ETF technology can unlock rapid growth and greater democratization.

And then lastly, the other big vector is around the use case is around the next millions of investors who are going to become ETF investors. I myself remember when I actually bought my first ETF and the magic that it was in the way I was able to access financial markets. And I see that really expanding in the way again, ETF are really becoming the wrapper of choice for these new distribution models.

Oscar Pulido: Well, we definitely talk about ETFs on The Bid, and we definitely talk about technology and innovation. We often have two guests at the same time as well. What we don't often do is record an episode in front of a live audience like we did today. So, thank you to both of you for sharing your insights on ETFs and where we're going. And thank you for joining us on The Bid.

Manuela Sperandeo: Thank you.

Stuart Doole: Thank you, Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you've enjoyed this episode, remember to subscribe to The Bid wherever you get your podcasts.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH1024U/M-3961466

<<THEME MUSIC>>

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Active equity investing isn't just about picking stocks, it's about making informed strategic decisions to beat the market or generate alpha. But what does that really mean for your portfolio, and how can you consider long-term investing strategies when faced with volatile markets?

Joining me live in London at BlackRock's annual UK Wealth Investors Forum is Alister Hibbert, head of BlackRock's Strategic Equity Team. Alister will help me explore the nuances of active investing, how to be selective when considering companies for a portfolio, and how to think long term when faced with short-term headwinds. We'll also discuss how to identify opportunities in various sectors and what it takes to stay ahead in the ever-changing market landscape.

Alister, thank you so much for joining us on The Bid.

Alister Hibbert: Thank you, Oscar.

Oscar Pulido: So, Alister, you're a professional fund manager, a stock picker, an active equity investor. I think all of these terms apply. Tell us a little bit about what does that actually mean day-to-day?

Alister Hibbert: When we start each and every day, we need to remind ourselves that the equity market is the richest, broadest, and deepest opportunity set that there are in financial markets, you know, and therefore and therefore it dwarfs the opportunities that you can find in any other asset class.

And within that equity market construct over a long period of time. And I'm thinking here, five to 10 years. Most companies will not do anything particularly surprising. They will do well, as the overall market does well, but they won't be astonishing, and they won't create one of those huge opportunities that are marked from time to time, which is what we're really looking for.

So, if we think about that, we try to ignore all of those companies, which are probably going to be relatively average over a long period of time. And then we need to find those companies, which are going to be extraordinary. Those are the best businesses that we've found are in the entire of the world's equity markets. They're typically great franchises with huge barriers to entry. And if we can identify those and own them over a long period of time, they do extraordinary things as they compound.

Oscar Pulido: When you try and focus on those, extraordinary franchises, it sounds like you're trying to be very selective as you look at perhaps hundreds and maybe even thousands of companies that are out there in the markets. What do you mean by extraordinary franchises and how do you get selective when you look at the equity markets?

Alister Hibbert: Yeah, I think that's a very important starting point. So, what we'd say is that the world changes massively over any given decade. Nearly all the time analytically, we would not have a view about how a company would look that far into the future. So, a starting perception, if you will, is that this is incredibly rare and out of all of the thousands and thousands of securities that we've analyzed over all of the years, there's clearly no more than 50 companies that we would ever focus on and believe we had strong conviction about them being fabulous franchises for the future over that kind of a timeframe. But where we find them, we think they're demonstrably enormously undervalued because the investment universe and the entire of the market is looking at a much shorter duration outcome.

So, these are special businesses, and they could be things like brands in the luxury good space, for instance. Or they could be incredibly well embedded technology companies with huge barriers to entry and switching costs and all of these kinds of things. So, there are not many, but those companies are truly spectacular. What we're looking for are companies that will grow ahead of global economy over the long term but with those high returns and those high returns being sustainable, or in fact even, likely to go up over that 10-year period. If we can identify those, we think there's an enormous opportunity there.

Oscar Pulido: So, you said the short list of companies that you look at can be about 50 companies. So, you really do start to narrow down the universe quite considerably. How do you deal with the headlines around geopolitics or around central bank policy? These are a lot of the headlines that tend to dominate the day-to-day, which is what is going on at the macro level, so how does that impact what you're doing at the individual company level?

Alister Hibbert: There's a lot of noise in markets and I think we need to be thoughtful about that. Over time, of course, there's been more volatility and more noise because of changes within the structure of the market. There are more data points about now, it means that stocks go up and down really quite violently from time to time in a way, which is pretty unpredictable to be honest over the short term. And so, when we think about these issues, we need to be very steady about it. We need to thoughtfully pick through all of these changing narratives in the market and try to understand which of these actually will have an impact on this business over a longer period of time. And if the answer is that this noise is not going to impact on these companies to any significant extent, then we need to hold steady and we need to be calm. And we need to let that volatility play itself out.

Oscar Pulido: You talk about volatility, we are in an environment where inflation is high one moment, and then it seems to be declining and maybe it's okay, and interest rates are rising and now they're declining, maybe we're in a recession, maybe not. There is a lot of volatility in the headlines, in the macro data. So, does that mean you have to manage equity or stock portfolios differently through these types of regimes that we're in?

Alister Hibbert: Not really, no. We need to still remain steady handed. This year alone, we've seen multiple of these narratives, and we describe them as false narratives. And when they appear almost overnight, they become a strong consensus and they're very easy to fall for, which is why a lot of these narratives ultimately lead investors astray.

We've had that, for instance, in April when we saw the March CPI print, people really worried about core services within that, which started to re-accelerate. Then suddenly there was the cry for sticky inflation. The question is, how do you see through that? Because that wasn't what you were seeing, it just appeared to look like that, and it fit a very overly simplistic narrative. What you really saw was that auto P&C motor insurance was very, very strong. And that's because it's the last part of the repricing chain. If you crash your car, the car now to replace it is much more expensive than it would've been. The insurers didn't see that coming, and so they needed to rebuild their price architecture. That process in the US was slowed down by national state regulators who were worried about these big increases in premiums that were required. And as a result, the real question is not 'is there sticky inflation?' but 'what's happening in auto P&C insurance?' And when you start delving at the company level as an analyst, that there's nothing strange going on, everything is understandable, the industry does not look any different from the way it was historically, and this company and these industries do not have infinite pricing power. So, it's not indicative, in a way that supports a notion of sticky inflation and therefore the answer is we have to do nothing about it. And if we do anything at all, it's just to lean in the other way. But these narratives, if you will, they appear much more frequently now than they used to. We just need to be very cautious, and we need to exercise some proper critical thinking.

Oscar Pulido: And just listening to you, it sounds like you have an incredible amount of patience and ability to maybe ignore some of the noise that is out there, these narratives that exist. And going back to that list of extraordinary franchises that you look at, these companies that have a competitive advantage – is there a psychological or emotional component to being a good active equity investor, a stock picker, that you have to possess in order to be able to ignore that noise?

Alister Hibbert: I think so. The stock market is flawed, right? And it's flawed because it's been built and the people who are active in it are humans and human beings are flawed with behavioral flaws. And that is something that you then see magnified time and time again around market moves over the short period of time and that's something that we need to be on our guard for.

So, at BlackRock, we work with behavioral psychologists to try to understand this, in particular, issues around myopic short-term decision making, which is the kind of thing which plagues active managers. I find it incredibly interesting that there's a huge contrast between fund managers who are running active portfolios in the equity market and those who work in private equity, and that itself is telling you there are behavioral issues.

And so, what do I mean by that? I mean that if we go into a cyclical downturn for a company, if we're a private equity company and we own this business and it's in a cyclical recession, that's fine, we're not going to sell it, we're going to wait until things are better, and then we'll dispose of it at that stage when all things look much better. So, you'll almost never find a private equity specialist who would sell in a downturn.

And conversely, if I go to public active equities, you'll almost never find a fund manager who won't sell in a cyclical downturn. And inherently that is all about this issue of short-term myopic decision making. What that is, of course, is loss avoidance and the market is bullying you out of your position, and you need to be on guard for that at all times. You need to try to consider where will this company be over time and be clear about the one truth, which is often forgotten at moments of stress, which is that if this is a cyclical problem for a company and it is just a cyclical problem, then over time it's all going to be sorted out anyway.

Today, if you think about your perspective over Covid, there were many stressful moments over Covid in the stock market but actually the world is fine and the world should have been long equities at all stages, but people got whipsawed by a lot of these shorter-term considerations. If it is cyclical, it's self-healing, so stop worrying about it.

Oscar Pulido: And part of why you get bullied out of your position in the public markets is that the price is public every day, so you know what your mark to market is on any given day versus the private equity investor who may not know exactly what the value of their investment is on any given day. They might have a rough estimation based on some comparables, but it sounds like the public market bullies you out because of that day-to-day transparency.

Alister Hibbert: Absolutely, and let's be clear, it's a great asset. It means that we can change our mind very quickly and very readily. However, that comes with a lot of these behavioral pitfalls, and we need to be on our guard against making sure that we're not making these short-term decisions. Why would a public active equity manager sell a company in a cyclical downturn? Because they're worried that the incremental set of results is going to be weak, that there will be earnings downgrades, and are worried about the near-term market to market loss. However, on a 2, 3, 4, 5 year, or longer basis, actually these things just won't matter whatsoever, and the risk is that the portfolio manager in that instance would sell the security for cyclical reasons and would never buy it back and therefore rob themselves of an amazing opportunity. And this nature of being whipsawed within stock markets is as furious today as it's ever been. And that is the biggest downfall for active managers.

Oscar Pulido: And so basically what you're saying is, thinking a little bit more long term has benefits and that's part of what you're trying to implement in your approach. Maybe we can come back to the economy for a second. We've been in this period of growth is still strong enough, but some people feel it's weakening, maybe we're entering a recession, it depends on what part of the world that we're talking about. How do you think about the economy overall, its impact on the equity markets, as you think about investment opportunities?

Alister Hibbert: Yeah, that's our day job is to try to understand our way through what's going on in the economy. But we would do that in a very different way from most fund managers. Most fund managers believe that we need to look at top-down variables in order to get a feel for what's happening. They make forward looking judgements frequently.

Those really don't pan out. We're sitting here now in 2024, it wasn't so long ago that we were at the beginning of 2023, and you would scarcely manage to find an economist or a strategist who did not believe that we were in a bear market and who did not believe that we were going into recession. Now, the reality is that there's an overly simplistic way of thinking about the path of the economy, and we can do it by looking at the whole system. So instead of just looking at these limited macro top-down data, we talk to all of the companies which make up all of the industries, which in their entirety are the economy.

And it's in there that you'll find the key and the message that you need in order to understand, are we going into recession or are we not going into recession? And at the beginning of 23, in our Outlook pieces, we are very clear. We said we thought that the market had bottomed in October and that we needed to be long. The market, that soft landing narrative was there and there was a very powerful disinflationary cycle manifesting. And that was informing our overall positioning, and we were very constructive at the time. And so, the question is, what do we see that others don't? Well, I think the first thing I'd say is that our ability to forecast is no better than any economist or strategist, but what we can do is talk to the companies and find out exactly what is going on. And that gives us a very high conviction, evidence-based process, and that will help us navigate through cycles.

So, if I go back to that issue around inflation, at the heart of all inflation concerns has always been the US labor market. Will wage growth decelerate to a level consistent with the Fed's target, or do we need a recession to get to that place? And that's something that we would spend a lot of time talking to companies with because it's companies that make the decision whether or not to up people's pay. And so, they would be looking at their own internal data metrics that they're looking at, the number of unfilled vacancies. They're looking at the job turnover and how many people are leaving the organization in any given quarter. And that will inform their decision making. So, we would track what's happening in the labor market, via the eyes of the companies who are actually having to make the decisions, which then eventually will form into those macro variables that people are so incredibly excited about.

And if I go back to the last 18 months, if there is going to be a recession, we will find it. We will find it in a cyclical area of the economy where things are deteriorating really terrifyingly. And that is not the case today. It was not the case in the second quarter earnings season. We've now seen September, which gives us a lot of information from conferences that companies attend. We're not expecting any major shocks coming through in the third quarter earnings season either. And if we look at big building blocks like construction or auto, it doesn't really look like there is anything particularly significant going on.

And the underlying resilience of the economy has really come from the fact that there are no imbalances in the private sector. And the reason that we have had recessions historically is because there's an imbalance in the economy, the Fed hikes rates, and then the economy has to go through a recessionary process to rebalance itself.

And you will see that either in the corporate sector or in the household sector, and you couldn't see either of those happening over the last couple of years, which is the core reason why we've gone through a strong tightening cycle, but the economy did not suddenly crash. And it's just much more resilient this time around. So, we certainly don't think there's any recession, and nor do we think there's any inflation left out there.

Oscar Pulido: And it's interesting just to hear you talk about how you use companies and the discussions that you have with companies to inform a lot of your view around the economy. So, I'm curious, when you talk to these same companies, what do they say about some of these mega forces that we've been talking about on The Bid, things like aging demographics, things like artificial intelligence? Do these structural drivers of return that the BlackRock Investment Institute has talked about, do they come up in the conversation with companies and are they influencing maybe some of the investment themes that you pursue?

Alister Hibbert: Absolutely, there's no shortage of management teams who want to explain how they're the beneficiary I promise you that has not gone unnoticed in the C-suite of the Western corporate sector. And if I go back to that core tenet of, what is it that we look for as stock pickers when we're thinking about these longer duration holdings.

Sure, we want companies with high returns, and we want them to be able to sustain those returns over a long period of time, which is why they're undervalued. They're discounting, and the share prices are discounting a fade in those returns over the long term. But we also want a good reinvestment opportunity, i.e. we want them to be able to invest and grow, at least in line with the global economy, but hopefully a little bit more. And that really is where you start seeing these themes come through.

So, it could be artificial intelligence, which is in an incredibly strong position right now. There's a lot of uncertainty about where that will be in three- or four-year’s time, but make no mistake, right now all of these companies are all in on the AI investment thematic. And even if they don't have immediate revenues to prove the return on that investment, that is not going to stop them from doing this investment so long as they believe that the large language models are going to continue to scale, this is an arms race and none of them are in a mood to give up on that and hand that opportunity set to somebody else.

You see it in other areas, weight loss drugs, with some of the positions in the companies involved, which are incredibly interesting. We think that would be $150 billion of a drug category, which would make it the biggest in history. It's a 90% gross margin. That creates an enormous amount of value for people over time. So, these trends are incredibly important. They really link into what we're trying to do because those trends are the reason why we think there's a good reinvestment opportunity, and we always have to remember it's not just high returns, but it's the degree that you can invest at those high returns that really generates the overall growth of the franchise and all of the compounding that we're looking for.

Oscar Pulido: So Alister, you've been an active equity investor for I think over 25 years, so you've been at this for a while and I guess my question for you then is, what keeps you excited about this space and as you look out to the long term, what is it that keeps you energized about continuing to look for these companies?

Alister Hibbert: It remains always the most fascinating occupation of them all, and you know that in that equity market, somewhere in there, there are the keys that can create extraordinary return potential for us and clients, and that is the reason to get up and go searching every day. If I think about these long duration compounding companies that I've been talking about – I've sat there based out of London originally as a European fund manager, now as a developed world global fund manager, but I've been watching Bernard Arnault, who's the principal owner of the LVMH conglomerate, that's home to Louis Vuitton and Dior, and all sorts of other fabulous luxury brands. Now if you go and trace that story to its origin, Mr. Arnault seems like took about $15 million from his father's French property and construction company, and he invested into some of the best luxury brands in the world playing that long duration idea of compounding wealth and it hasn't gone completely amiss that I can see that he's now worth something like $200 billion.

That is what equities have, and that is why it's a more powerful asset class than anything else you can find. Obviously, you need to be active if you're going to find those types of opportunities. And it's the search for that, which is obviously the most important thing and the most attractive thing about the job. And my wife always reminds me, you have to think about investing both as your job but also your hobby, and she's completely right.

Oscar Pulido: Equities are a powerful asset class. They provide the potential for good long-term return. But it sounds like you also have to have patience in order to see some of these returns play out, which is something, Alister, that is coming across clear that you have.

Alister, thanks for sharing these insights and thank you for doing it with us here on The Bid.

Alister Hibbert: Great. Thanks so much, Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you've enjoyed this episode, remember to subscribe to The Bid wherever you get your podcasts.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH1024U/M-3947360

<<THEME MUSIC>>

Oscar Pulido: In the transition to a low-carbon economy, the focus is often on private markets, companies that aren’t listed on the stock exchanges. These might include investments into low-carbon energy projects, clean-tech startups, government partnerships, and the acquisition of physical assets like solar or wind farms. But that’s just one side of the story.

Welcome to The Bid, where we break down what’s happening in the markets and explore the forces changing the economy and finance. I’m Oscar Pulido.

The shift to a low-carbon economy will demand more capital than any of us have seen in our lifetimes—far more than private actors alone can provide. Public markets—the securities that make up the bulk of most investor portfolios available on stock exchanges—are set to play a much larger role in this transition. So, while private markets may have a head start, public markets are catching up quickly.

In this special episode, Mark Wiedman, Head of BlackRock’s Global Client Business, will lead a conversation with BlackRock investors Evy Hambro, Olivia Markham, and Will Su about the transition opportunities they’re seeing in public markets—and what it will take to fully unlock their potential.

Mark Wiedman: Olivia, Evy and will, great to have you here on The Bid.

Will Su: Thank you for having us.

Olivia Markham: Great to be here.

Evy Hambro: Thanks, Mark. Can't wait to do it

Mark Wiedman: Let's start off by talking about the path for energy, the demand that you see over the next couple of decades. Will, kick us off.

Will Su: So, Mark, I think it's important to take a long, long look back through history to understand where we're going forward. If you look back from the year 1800 to today. Energy demand has grown by about 1.6% per year globally. That might seem really, really small, but thanks to the magic of compounding, the world today uses 32 times more energy than we did two centuries ago. And we expect that demand to continue to grow because energy is just so foundational to human progress and quality of living. So, by the year 2050, most forecasts are calling for another 15% or more of energy demand growth going forward. And a lot of that, of course, will come in the form of electrification and more electricity generation.

Mark Wiedman: Evy, what would you add?

Evy Hambro: We are facing an outlook that's shifting. we're going to see a higher rate of energy consumption per unit of GDP as we become an increasingly digital global economy. And that presents a number of opportunities and challenges. What we're faced with today is how do we effectively fund this? How do we, prepare ourselves for resilience within the context of it? And how do we make sure that the opportunities that come with it are shared across society as a whole. It's a, an amazing point in time that we're at right now because it's pretty transformative.

Mark Wiedman: When you look out on the energy mix over time, how do you see the mix of carbon intensive versus low carbon energy changing?

Evy Hambro: It's clear that the area we have come from is an environment where, low cost, easy energy was able to be generated and distributed across the global economy. Going back, you know, thousands of years, it was just burning things and closer to today, we've become increasingly efficient, at extracting the most out of the resources that we had. But I think it's also fair to say that we haven't thought about the consequences of that very rapid growth that Will referred to earlier on. And now, as a society, we are thinking about this. And so therefore things are changing. So, the mix is going to move away from fossil fuels to more sustainable sources, whether that's, renewable power or fossil fuels that have a lower level of impact on the world as a whole. I think we also need to think about where else can we get the power that we need in the future, which is that base load, highly reliable power. And so, we have to think about what's going to replace that mix that we've become so used to for so long.

Mark Wiedman: Will, what are some of the forces that are pushing up energy demand through your 2050 forecast?

Will Su: The key to remember here is that coming decades will for sure be the age of electrification and Gen AI, which has all the buzz today, is going to be just one of several drivers for that demand. You'll also have increasing penetration of electric vehicles. You also have industrial reshoring in a period where we have elevated geopolitical tensions. So, if you just look at the US for example, after World War II, our power demand has grown by about 5% per year, compounded into the early two thousands. And then for the last 20 years, it's really kind of stagnated to not a lot of growth.

But now thanks mainly to the massive investments that the hyperscaler Gen AI leaders are making, we expect electricity demand growth in the US to re-accelerate to 2 to 3% per year into 2030. And data centers, which make up only 2.5% of power demand in the US today is going to be closer to 10% by the end of the decade. So, huge numbers that we're dealing with, and there's going to be challenges along the way. We already have a bit of a power crisis in this country from an affordability perspective. But I'm an optimist, and you might appreciate this, but the word for crisis in Chinese is 'Vay-tee'. So, the first word is danger. The second word is opportunity. And there's going to be a lot of investment opportunities to have here.

Mark Wiedman: So, Will, you're laying out a thesis of a re-acceleration of electrical demand across the west. Olivia, what does that imply for actually electrifying the materials we need?

Olivia Markham: So, in very simple terms, materials are the building block of electrification and the energy transition. Think about the sheer uplift in steel demand. Rare earth demand with wind turbines, silver, aluminum with solar panels or the batteries we need, or the battery materials we need for the electric vehicles. And then we need to connect all of this electricity and distribute it via copper.

But the numbers are simple. We need substantially more materials in the future than what we use today. Bloomberg New Energy Finance, their latest report estimates $2.1 trillion to be invested into energy metals between now and 2050. These numbers are very difficult to comprehend. The sector can't fund that level of investment at current commodity prices. And we really need to think about, what are the best options that we can tackle this huge uplift in materials that we believe that we're going to see as a result of increasing energy demand and the transition more broadly.

Mark Wiedman: I thought materials were the problem. Why do materials matter to electrification?

Olivia Markham: So, this is somewhat the conundrum, right? So, materials companies are in essence carbon intensive or 'dirty' sectors. And we need more materials for the transition, which in turn means we're going to have higher emissions. So, we need to crack the code, we need to find a solution to be able to produce these materials, but in a lower carbon way. And if we can do this, we are going to be able to accelerate the transition overall. And I believe unlock a significant amount of value for companies who have been derated over recent years because of their carbon risk or their carbon intensity.

Mark Wiedman: Let's talk about copper as an example of one material in the transition toward a much more electrified society. Do current prices reflect your vision?

Olivia Markham: No, the copper price that we need to incentivize new supply, and then the sheer amount of new supply that we believe that we need in the future. And there is a disconnect and we're not seeing the investments being made because companies are essentially being much more disciplined in how they're allocating capital today than what they did in the past. It's quite interesting, BHP has just recently put out a new report on copper and they estimate that by 2050 we need to see 70% more copper demand. That's a staggering number. This is being driven by the transition by investments into AI and the power needs there, but also just traditional demand drivers. So, copper for me, essential for the transition. You can almost think of the backbone of electrifying everything around us.

Mark Wiedman: Evy. We've talked about the price of copper being too low today relative to our forecast of demand. More broadly, how do you see the markets appreciating the central relevance of materials in the energy system?

Evy Hambro: I think that we are looking at a situation today where everybody is focused on what they can see, feel, and touch. And when it comes to the transition, you look out of the window, you see the electric vehicle, you see the solar panels, you see the data centers going up, you see the wind turbines, it's really, really easy to see that.

And when you see that, that's obviously an area that you then focus on, and you orientate your investment towards. What you don't see is what's going on behind the scenes. And that supply chain is completely and utterly mispriced. all of the components that are going into these end outcomes, the materials that are going in to manufacture the components. As you go further and further up the supply chain, each of the individual sectors gets cheaper. And by the time you get to the source of it all, the mispricing is just extraordinary.

I mean, just think right now, the, the daily change in market cap of Nvidia, is often bigger than the valuation of the 10 largest resource companies combined. The supplier of trucks, Caterpillar, so the resources company is bigger than the world's biggest mining company. This sector relative to its integral role in delivering everything that we're speaking about today is trading at an irrelevant valuation, depending upon, compared to how much we need it.

Mark Wiedman: Let's talk about traditional hydrocarbons. And Will, I'm going to turn to you first. Oil and natural gas. How's that mix going to change over time? And which one would you invest the most capital in?

Will Su: So today the world uses very little oil when it comes to power generation, and we have a long-term replacement plan for more and more electric vehicles on the road as well. So, let's focus in really on natural gas. As one of the most misunderstood themes in the energy transition, natural gas releases half the carbon dioxide of coal in power generation. It's the ideal partner for intermittent renewables like wind and solar because it is available 24/7, 365. And coal of gas switching has been responsible for 60% of the decarbonization in the US power grid over the last 20 years. So natural gas is not just a bridge fuel, it's a foundational part of the energy transition in the decades to come.

Mark Wiedman: So natural gas. Where should I be investing? Where should I see the opportunity?

Will Su: I'll give you two great areas to focus on. One is production in the us. You've seen a wave of consolidation in the shale patch that we think will continue for years to come. Take for example, a company like EQT. This company has grown massively in recent years through a string of acquisitions of private companies and assets, and now supplies more than 5% of all domestic natural gas production.

So, when you have that kind of scale, you're really reducing your marginal cost and able to deliver growing free cashflow yields and dividends to your shareholders in good times and bad, but just producing the natural gas, it's only half the story.

You're going to have to move these molecules from resource rich exporters like the US and Australia towards regions with a structural deficit, especially in Asia, where economic growth continues to lead the rest of the world and countries like China and India generate 60 and 75% of their power through coal. So fun fact here, in order to move that gas across the globe, you chill it down to 165 degrees Celsius or 265 degrees Fahrenheit so that it turns into a liquid, and you put it onto a ship. That's called LNG or Liquefied Natural Gas. And the global leader for that is Shell. They handle 15% of the world's LNG trade volumes and run 11% of the world's LNG tankers. And to pull that off, you really are going to need the liquidity balance sheet and human capital that you're only going to be able to find in these multi-hundred-billion-dollar public companies. So that's the opportunity in the public energy markets.

Mark Wiedman: Olivia a moment ago, Will referred to gas as quote 'the ideal partner for renewables.' What do you think about nuclear?

Olivia Markham: I think one of the things that he didn't say is that obviously gas has carbon associated, but there is a source of energy which is base load reliable, 24/7. Carbon free, and that's nuclear. And so, I think nuclear is a very good compliment to intermittent renewable energy and is really well placed to take share of the growing electricity needs that we have out there.

Mark Wiedman: I hear nuclear is where money goes to die. Help me out. True, false?

Olivia Markham: I think this is not the case and I think it's not the case going forward because we are seeing advancements in the cost of nuclear reactors and how it's becoming much more competitive on a levelized cost of energy. So, I think in the past we've had challenges in terms of the cost of building new reactors, absolutely. We've got a number of case points, particularly here in the UK, but when we look at some new technologies and some of the SMR or small modular reactors that are coming out, we are seeing the costs of construction come down substantially. And that's also in turn, bringing down the levelized cost of energy.

Mark Wiedman: Carbon capture. We talked about natural gas as a supply of energy, but it emits carbon as Olivia has poked back at. Will, is carbon capture a feasible technology in the next 10, 20 years?

Will Su: 100% it is, and it's really interesting. Calling back to the earlier comments of the US majors shying away from some of these transition technologies they have actually become some of the leaders in carbon capture. They've invested in these vast thousand-mile pipeline systems in order to transport the carbon to the carbon sink. And the interesting thing there is some of the ideal places to store carbon away for a long period of time is actually depleted reservoirs for oil and gas. So, there's a lot of expertise in terms of handling the molecules and owning the assets to put them away. And you're already seeing some of these big projects come online in places like the North Sea. You're seeing them being planned out in places like the Gulf of Mexico, and nobody is better placed to do this than the traditional energy companies because of the years of know-how they built it.

Mark Wiedman: ExxonMobil is a company that is really leading in this department, through a big acquisition they've done two years ago. They've built out a large pipeline of carbon pipelines. They also have a lot of strategic relationships with the industrial players for petrochemicals, blue hydrogen along the Gulf Coast. In order to sign these contracts and take away their carbon for storage for many many years into the future.

Olivia, you were talking about nuclear. Nuclear needs fuel too. What do you see as the outlook for the fuel for nuclear plants?

Olivia Markham: So, for everyone listening who may not be as familiar, uranium is the fuel for nuclear and if we have a look forward and we look at the amount of uranium that is contracted by the nuclear utilities, it is largely under contracted. We are going to have to have more uranium supply. We're going to have to see substantial uranium growth if the nuclear reactors and the utilities want to deliver on their plans into the future. Now, when we look at uranium, I, I think there's been, you know, really somewhat of a price renaissance in many respects. Three years ago, we saw a uranium price of around about $30 per pound. Today the price is above $80 a pound. With contracts being set are higher levels than that.

Mark Wiedman: There's been a sea change in western consciousness, Japanese consciousness around nuclear. What's changed and what's recently moving things forward?

Olivia Markham: So, in terms of what's changed, I think people have really begun to understand the role that nuclear has to play in terms of its benefits of being carbon-free and a base load source of power, and also being very competitive from a pricing perspective. You mentioned Japan, Japan, has almost done a 180 on nuclear from being a very strong supporter of the past to shutting reactors down post-Fukushima, to now reopening reactors and extending the lives of those and uranium being very much back in the energy mix there supported by government policy.

I think in the West, some much more recent developments has been from the tech hyperscalers and the very significant investments that they are making into supporting the energy system, which includes nuclear to power their AI data centers. One of the challenges for data centers is they do need reliable 24/7 base load power, and I think for many of these big companies as well, they're very committed to their own green credentials and the commitments that they make around transitioning their own businesses and nuclear just seems like such a good solution for them and they are supporting that.

Will Su: Evy five years ago renewables were all the rage. Now we have barely spoken about them. Are we missing something here?

Evy Hambro: Mark, things go in and out of fashion. I think when we had the initial excitement around that, which was a little bit longer than five years ago, the renewable space was, accompanied by a strong tailwind of falling rates. And you saw the returns available from the renewable investment, at well above the declining cost of capital. Since then, we've obviously had gone through a rate cycle and, and rates have risen and that has compressed the returns. So, the headwind that it's gone into, has been a challenge for the space. At the same time as all of that was happening, we had some of the diversification goals from the traditional oil companies and, and they were seeking to bring renewables into their portfolios and paying high prices for those assets.

So, we had a perfect storm of good stuff, and then we went into a bad point in the cycle for the assets. Despite all of that, the deployment rate for renewable capacity around the world continues to grow. You don't read about it with the same coverage in the headlines, but the amount of solar going in, the amount of wind going in, the amount of battery storage to accompany it continues to grow and exceed expectations in terms of its deployment.

So, I'm really pleased as a citizen of the world that we are seeing this going on and clearly it will start to come back as some of the kind of challenges the industry has faced decrease.

Mark Wiedman: Let's talk about Ukraine and how the energy system and investments have changed after the war. Olivia, two and a half years later, what have we learned? What do you expect?

Olivia Markham: So, I think one thing that we've clearly learned is that we cannot become overly focused on certain countries for supply. That could be the supply of energy, that could be the supply of metals. And so, we think about the disruption that was caused in Ukraine, particularly prevalent for energy, supply into Europe. We very quickly recognized that in order for Europe to achieve energy independence, it has to build out a renewable energy system and have its own independence within country. I think it also critically highlighted to us just how important. Russia was in terms of global supply of commodities to many in the market. Much of that supply is still moving around the markets today, but we've had dislocation, and with that dislocation, there's huge value opportunities alongside that as well.

Evy Hambro: Energy investors. What is your long and your short with a one-to-two-year horizon? Olivia, let's start with you.

Olivia Markham: I think copper is a great way to get exposure to the transition. We've spent the last 20 minutes or so talking about the increase in energy demand, the, increase in electrification, how do we distribute the electricity we need the copper. What is my short against that? When people used to look at the demand potential and the growth potential around the transition. They would often look to a range of low carbon renewables companies and those companies, traded on very elevated multiples. I think there are much more interesting ways to play the exact same theme through the material. So, for me, my running short against that would probably be a basket of renewable stocks.

Mark Wiedman: Evy, what's your long and short?

Evy Hambro: I think the other one that we're going to see, it's going to significantly exceed expectations over the next couple of years is uranium. We've spoken about that earlier on there's huge potential there. The thought that, when we think about the resources space, you've got companies spending tens of billions of dollars on data centers going out to uranium companies and requesting fuel supply agreements, which might only cost a few hundred million dollars.

 I think on the other side, you know, it's going to sound like an, an odd one to say. given the infrastructure needs of the world and so on, but I think the iron ore market is challenged. There are, supply, dynamics coming into place with lots of new high-grade material. We need to decarbonize the production of steel. And there's going to be some big shifts that take place in the iron ore market in terms of pricing. But I would have copper alongside uranium on the long

Mark Wiedman: Will, your long and your short?

Will Su: Easy, long for you. Three letters. LNG. The LNG market will grow for decades to come at a rate that's way above the underlying demand and supply, because there is such a mismatch between where the resource is located and where they have to go. And again, the public markets is where you want to hunt for the companies with the liquidity and the balance sheet to pull this off. On the short side, I would just generically say that there's been a number of companies that, have enjoyed this very low to zero interest rate environment that we've had. And over time they built up perhaps a capital structure or a business model that is a bit of a house of cards if we think higher interest rates are to persist. and some of these companies will no longer be able to finance their existing business models. But I think you want to build some resilience around interest rate volatility

Mark Wiedman: Olivia, Evy will thank you energy partners, for educating us all. Thanks very much.

Will Su: Thanks, Mark. Awesome to be here.

Olivia Markham: Great to see you, Mark.

Evy Hambro: Thanks a lot, Mark.

<<THEME MUSIC>>

Oscar Pulido: Thanks for listening to The Bid. If you’ve enjoyed this episode, check out our episode on 'AI and the Energy Transition' where Will Su walks us through the sector’s pivotal role in the build-out and future of AI and digs into the potential investment opportunities and challenges.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH1024U/M-3926059

<<THEME MUSIC>>

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Today, we’ll give you special behind the scenes access into a recent global town hall at BlackRock’s Hudson Yards headquarters in New York, where Larry Fink welcomes Global Infrastructure Partners to the firm in a discussion with GIP founder Bayo Ogunlesi.

Larry and Bayo discuss the opportunities presented by their partnership, emphasizing the transformative potential in capital markets and AI. They also explore how their combined expertise can drive significant infrastructure investments amidst global economic challenges, detailing the essential role of private capital in addressing modern issues like decarbonization, energy security, and digital transformation.

Stacey Mullin: Okay. First, I should introduce myself. I'm Stacey Mullin. I'm the BlackRock Global Chief of Staff. And so, my first question for you is what do you hope for in terms of the coming together of our families more broadly in terms of our culture?

Larry: We have an enormous opportunity. The feedback from governments, from corporations, from our clients, investors has been extraordinary. The power of BlackRock, the power of GIP together does really represent an industry transformational opportunity. And, as I've spoken many times, the role of the capital markets is becoming a more, enlarged part of a global economy. The role of capital markets is driving more and more economic growth than the banking system.

And I think the opportunities to work with governments that are plagued by large deficits and trying to navigate social issues at the same time, building out their country's infrastructure just plays into a great opportunity. And that was the industrial logic behind our conversation a little over a year ago to talk about our marriage.

If we do this right, if we execute well even something as large and transformational as the partnership that we announced with, with Microsoft and Nvidia and MGX, and that's a $30 billion raise of equity. But the amount of debt being raised, the need for infrastructure debt is in multiples of the equity, and there's estimates that we're going to need trillions of dollars in doing this. And our opportunity is to really take advantage of this. And I would just say, the journey that we've had together since we announced the transaction now approximately 10 months ago, has been a beautiful journey.

Now we have to all put it together and make it work, but I've never felt more confident in the industrial logic of a transaction. And I never felt or seen the conversations, the enthusiasm that we're witnessing worldwide.

And we have developed deeper, broader relationships. And now when we can bring it all this expertise in this new revolution called AI, specifically in that one, because of the relationships and the expertise, it really becomes a pretty easy decision, that BlackRock should be their partner.

Bayo: Look, what am I excited about? I mean, the last three months since we've been actually able to do things, together has dramatically exceeded every expectation I had in terms of what this combination could do.

You've heard Larry talk about this AI partnership but I see three or four areas where I think there's tremendous potential. The first is the ability to accelerate, helping our clients achieve their investment objectives. On the earnings call, you heard Larry talk about, the need for trillions and trillions of dollars of investments in infrastructure.

Think about all the themes that are driving the future energy transition and decarbonization digitization, energy security in the aftermath of the war in Ukraine, supply chain rearrangement. All of those things are going to require huge amounts of capital, and this is all happening, and Larry's been one of the very few people who keep talking about this, at a time when no government, if you're not in the Gulf, no government has the money to invest.

The US is running huge deficits, Germany, everybody. So, it's only private capital that can solve this challenge. And so, to me that is the opportunity. And then when you look at the combination of these two businesses, we can now offer clients the full range of capabilities. You want to do a large cap transaction, a large cap fund is there.

You want to do a mid-cap transaction, a mid-cap fund is there. Look, think about the challenge that companies have today. Few statistics. In 2021, there was a trillion dollars of equity offerings done worldwide. 2022, that number was roughly $400 billion 2023, roughly $400 billion, 2024 trend to the same numbers and transactions done with private equity firms 2021 over a trillion dollars 2022, $750 billion. 2023, $500 billion this year trend into the $500 billion range.

So, if you think about a corporate trying to raise equity to invest in their core business, they can't go to the stock market, they can't go to private equity. What can they do? They call BlackRock and say, come partner with us on our infrastructure assets.

This is about growing the business. That's going to create tremendous opportunities for every single member of the team to learn, to grow, to develop, to invest, to sell assets. I just think that's tremendously exciting. So how can you not be excited about this? And this will be one of the last times I mention GIP as a legacy firm because we're all going to be one firm operating together, working together, driving growth, driving value, creating, opportunities for our clients, creating returns for our clients. And that's what I'm excited about-

Larry: having fun!

Bayo: Having fun, always having fun. I hope we continue to build on what is the best of both of these organizations. But look, it has been remarkable how welcoming the BlackRock team has been of all of us at GIP, and for that we are incredibly grateful. So, thank you to all of you.

Larry: You know, I've said this repeatedly over the years, but I think the evidence is so large now that the role of the capital markets is just driving more and more of economic activity. When I look back at our 25th anniversary with our growth rates of our stock price, with our growth rate in terms of our share of wallet with clients worldwide, it is because we are in front of our client's needs. We're evolving, we're changing, but we're evolving and changing at the same time how economic activity is being delivered.

I believe the trend towards the utilization of capital markets is going to be growing at even at a faster rate worldwide. As I said, my conversation I'm having with politicians, political leaders worldwide, it is so much about how can they build out their capital markets so they could have a strong banking system alongside a strong capital market system.

We're seeing that, if you think about infrastructure, as we talked about it, the need for trillions of dollars, it's not going to be generated from the banking industry and it can't be generated from the balance sheets of governments because of the deficits. It's going to have to come from the capital markets. And we are going to be the driver of that. And that is why I'm so excited about the future of BlackRock. here we are, a 37-year-old firm, I actually believe the next 10 years may be better than the last 10 years. And I think by having, the leadership of GIP, the team there, the inspiration that we're going to have together and the ability to deliver all this, it just gives us.

A real opportunity to show the strength, to help governments, to help businesses build out their infrastructure. So, we could play a pivotal role in lifting more human beings in more countries by delivering better infrastructure, whether it is decarbonization you transportation, better ports, and I think this is going to be an essential component of the role of the capital markets in the next 10 years.

Stacey Mullin: We will close there. Thank you so much.

<<THEME MUSIC>>

Oscar Pulido: Thanks for listening to this episode of The Bid, if you’ve enjoyed this conversation, check out the episode Larry Fink on Rethinking Retirement.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

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Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido. One year ago, we saw unprecedented flows into the money market fund space driven by uncertainty around central bank's interest rate policies. Fast forward to today and the short-term investment landscape has evolved significantly.

As rates are going down, investors are reviewing their cash portfolios once again, considering how cash and cash equivalents typically react to monetary policy shifts and thinking about what to expect over the next 12 months, I'm pleased to welcome back. Beccy Milchem, global Head of Cash Distribution at BlackRock.

Beccy will discuss the importance of actively, or better yet proactively managing cash regardless of the yield curve shape. And we'll share her insights on the mantra of putting your cash to work and how this approach can benefit investors worldwide.

Beccy, the 'Queen of cash', welcome back to The Bid.

Beccy Milchem: Thank you for having me again, Oscar, and welcome back to London.

Oscar Pulido: It's good to be back. In fact, you and I spoke in May of 2023 and at the time, central banks were raising rates to curb inflation. we had regional banks in the US that were experiencing, quite a significant crisis. We had a debt ceiling, showdown in the US There was a lot going on and there was a lot of money pouring into the money market fund space. So, catch us up now. Where are we in terms of the investment landscape that you see that

Beccy Milchem: And that may seem a long time ago now. we've been very busy in that time and, yeah, money funds have continued being a really lucrative asset class, for clients, to hang out for their cash. So, Global Money Market Fund assets now sit over 10 trillion dollars. In 2023 we saw inflows in US and EMEA based money market funds of $1.4 trillion. And whilst that pace has slowed a little bit in 2024, we're still at over $600 billion inflows year to date this year as we look out at what is being priced by the three majors in the markets. So, we have, still a lot of uncertainty as to where markets will end up.

But if you look at the end of December 2025, the market is currently pricing for the Fed to end up just under 3.4%. Bank of England just up around 3.8% and ECB around about 2% or just under at the moment. But the fact of the matter is with interest rates are falling, interest rates are still interesting.

And so that is why you've still got clients looking at making sure they are, in the right place for their cash. if we look back over historic markets, when interest rates are above one point a half percent money, market funds typically see inflows. You could say that whilst interest rates are still falling, investors are still falling for cash.

Oscar Pulido: Interest rates are still interesting. So, you've pointed out that now central banks are starting to cut rates and there's forecast that they will continue to fall through the end of, next year. But how does, the front end of the yield curve when the central banks are cutting rates, that's what they're impacting, how does, what does that mean for the cash and cash equivalent market? those investments that tend to mature in less than a year? What's the practical impact of that space?

Beccy Milchem: For investors like you and I think the main instruments that you'll use are either a bank deposit or a money market fund to invest your daily liquidity or cash, and the market will react quickly. So, when interest rates get cut by a central bank, deposits typically, pass those rate cuts through very quickly. What we've seen actually through, for both the time when money market rates were going up, central banks were raising rates, and now when they're coming down, banks have been very keen to maintain their net interest margins.

So that means that as soon as the central bank cuts, they're going to cut their deposit rates for clients on their cash. what money market funds typically do is extend duration ahead of any anticipated market movement. So, they effectively have a bit of a lag effect in terms of the. Interest coming down, the yield coming down on the money market fund product in an interest rate falling environment.

Again, if you look back historically, that has typically been somewhere between sort of 15, 30 days that they will outperform other available options, for daily liquidity.

Oscar Pulido: So just the way in which they're managed means they can perhaps keep the interest rate more interesting, to use your phrase, a little bit longer than some of the alternatives that are out there. And you've talked about, actively managing your cash or perhaps proactively managing your cash investments? Is that the case? Regardless of what the interest rate environment looks like? So, the yield curve can take on many different shapes - it can be flat, it can be inverted, it can be steep. Does it depend on what the yield curve looks like as to how actively you should manage your cash? Or is it in all of those periods?

Beccy Milchem: I think it's all of those periods. I don't think many people actually think about cash as being an actively managed strategy, but it absolutely is. And one of the reasons we have dedicated teams of people looking at this space.

When we first had negative rates in Europe, and obviously they've been in place in other parts of the world as well. we had a lot of investors talking about safety deposit boxes as the best strategy for putting their cash away. But I have I maintained that I don't think sticking a cash under the mattress is the best strategy.

Last time we met, I talked about the kind of the three pillars. That we will typically manage cash by, in which most of our clients will think about as well. So that is the first pillar being, safety or capital preservation. The second being liquidity, like having access to your cash when you need it, and the third pillar being yield.

And, at the moment, the situation we've got is that there are still so many uncertainties out there in the world. So, we've got some of the data points that central banks will look at in terms of inflation and unemployment in impacting, how they're thinking about, interest rate environment. But we've also got geopolitics. We've got tensions in the Middle East. We have upcoming US elections. A lot of these things are playing into what markets are thinking about where central banks will move, whilst investors are very focused on making sure their cash is safe and making sure they've got access to it when they need it, the yields can still move really quickly. And why we think about managing the cash so actively.

So, one example to bring this to life is the market reaction we saw around the October unemployment data in the U.S. which surprised markets. So, we were expecting the unemployment to come in around 4.2%. It's around about 4.1%. and what we saw after that was a repricing of expectations around what the Fed might do, particularly in the six-to-12-month part of the curve.

And market pricing of where the Fed will be at the end of 2025, moved by nearly 40 basis points. Now, that's quite a lot in the few days following that print of non-farm payrolls. So, what our portfolio managers will do typically is that they are assessing the markets on a daily basis. They're looking at it throughout the day, and when they see some of this repricing, they will take the opportunity to potentially lock in some of those are higher yields. they'll do that within a risk-controlled framework, thinking about all of the other market uncertainties that we've also talked about, but seeking some opportunity within the space of a money market fund regulations to add a little bit of duration where we see that benefit of yield pickup.

Oscar Pulido: And just going back to something you said earlier - I think you're right, people don't tend to think of the cash portion of their portfolio as where there's active management going on. You mentioned employment data, you mentioned central banks. We often talk about those things and then discuss what does that mean for the stock market or what does that mean for the bond market. But you've made the point that then there's also nuance that can take place in the cash market that one can take advantage of. There's a phrase that I feel like I often hear and maybe people hear, and that phrase is putting your cash back to work. And sometimes that's after a market correction, or sometimes that's after some period of instability has gone away. And when you hear that phrase, what does that mean to you?

Beccy Milchem: There's a common mantra at the moment that there's a lot of cash on the sidelines in market and that in the market, and that cash needs to be put to work. I can't argue there's a lot of investment opportunities out there, particularly you’ll hear market commentators talk about opportunities about locking in, from a fixed income perspective and investors should absolutely look at those opportunities and when the time is right for them to take risks, deploy that in a portfolio.

But I come back to the fact that cash, I think, is the only asset class out there that is relevant to every single investor in this world. Everyone has a little bit of cash in their portfolio. You and I will pay for things on a daily basis. We have to keep something readily available for that morning coffee.

So, what is important to do is just make sure that element that you are holding in your portfolio, for cash, is working as hard as it can for you. It's still not uncommon for us to find investors that are getting zero on their cash and I think all of us will agree, and you and I will probably agree this too, that where investors are focused in their portfolios is typically on the risks they're taking in their portfolios, and that's where their attention tends to be on from a portfolio perspective.

So, I just want to remind everyone to make sure that they are ensuring that their cash portion is working for them. In Europe in particular, we've seen more end investors using money market funds in the last 18 months since we last spoke. And some of that is because the benefits are being brought to them through new platforms that are making them more readily accessible.

But as someone who's spent the vast majority of their career working in cash. I'm just delighted that my friends and family knowing what it is I do these days and are actually talking to me about the asset class that I work in.

Oscar Pulido: And that's fascinating and a bit shocking. You said people are still earning 0% in cash now. That was perhaps understandable a few years ago before Central Banks started to raise interest rates, but these days, it seems shocking that could still occur. But again, I suppose then spotlights, the fact that there's a lot going on in this space that maybe people aren't aware of and maybe they're not aware of some of the innovation that might be occurring in this space.

We talk a lot about innovation on The Bid, whether it's cryptocurrency, whether it's, artificial intelligence. What's some of the innovation that you see in the cash market?

Beccy Milchem: Yeah. And I come back to that the point I just said around how you and I would use cash on a daily basis.

A lot of importance around cash investing comes down to the operational considerations, how easy it is to make that cash investment. and the fact that most of us get our salaries paid into a bank account. And then what do you do from it from there? The advancement in technology, I think is helping make cash investing easier for clients.

It's easier for them to assess the market. there are more providers out there bringing some of these solutions, including money market funds to their platforms to help investors with their cash. I think another couple of important considerations around innovation in our space.

One is I think the ecosystem that you operate in is key. And so again that technology that's able to help bring solutions to, clients, but also, I think considerations around the kind of the wrapper that the product sits in. And we are looking at innovating in this space and more to come on that.

The other it is more from a technology perspective and a blockchain perspective. So, we are looking at ways around how distributed ledger technology can help remove some of the frictions being of money market funds being used as a transferable security.

We are looking at a little bit more in the institutional client space, but in a world where high quality securities are really sought after for collateral purposes, we see government style money market funds, i.e. money market funds that invest in the same kind of high quality, securities being able to be used for initial and variation margin for collateral purposes. and clients will typically have these exposures if they are involved in derivatives trading.

Now, one of the things that distributed ledger technology should be able to do is move the unit of a money market fund much more quickly. And in times of market volatility and disruption, what we typically see is that collateral requirements tend to increase for those clients because margins move wider, by levering technology to move a money market as a security and post equivalent securities. We think that massively helps from efficiencies perspectives, but also arguably benefits to financial stability. So, you don't get as much movement and flux around people needing to access cash and move it around a system they can use the existing thing they're in today and put it somewhere else.

Oscar Pulido: So, we've talked about, evolutions in technology that you're seeing in the space. We've talked about evolution in interest rates and what that means in terms of the investment opportunity set and the need to proactively manage. Your assets, in this, kind of space of your portfolio. What are some of the other considerations that you'd want to leave investors with as we go into 2025?

Beccy Milchem: So, I think the last time we met, we talked a lot about making sure that you don't need cash on the table. And don't forget the cash element in your portfolio. Think about the benefits of outsourcing this. We have busy lives, all of us have busy lives. One of the benefits of technology is that it's helping us to make our lives slightly more efficient, or at least that's what I'm hoping. but in the same way, think about outsourcing, some of the things that.

You don't have time to do to the people that really do have time to do it. So, as I've said, interest rates are still interesting at the moment, but rest assured whether they're falling or they're lower, we've got experts who are always going to find them interesting. And I promise you that these experts aren't dull - they are still interesting round a dinner table. But think about the benefits of just outsourcing that to someone that's job. It is to look at the cash markets on a daily basis.

Oscar Pulido: And the last time we spoke, I think I used the phrase that cash is king. I think we were referring to an environment where people were flocking to money market funds, and you, corrected me and said, Cash is Queen. And I think you've earned a little bit of that nickname here in the halls of BlackRock as the queen of cash. So, thank you for sharing, these great insights on the cash market, Beccy, and thank you for doing it here on The Bid.

Beccy Milchem: Thank you So much, Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid. On next week's episode, we'll be hearing from three investors about how the public markets are increasingly offering opportunities to invest in the transition to a low carbon economy.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

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©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

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Oscar Pulido: Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido

Earlier this year, Larry Fink, BlackRock's chairman, and CEO talked about the retirement crisis and the difficulty that individuals face when planning for their financial future. Saving for retirement can be challenging due to various factors such as rising living costs, longer life expectancies, and the decline of traditional pension plans. In this episode, I welcome Lacey Garcia, CEO, and founder of Willow, a wealth technology firm, and Katie Cohen, head of Business Consulting at BlackRock.

Lacey leads her firm with a powerful mission to help next generation investors, most notably women and underrepresented groups to achieve financial security. We'll be discussing her motivations for starting Willow, the challenges she faced along the way, and her advice for budding entrepreneurs. Katie will help us understand the current retirement landscape, how that pertains to diverse communities. Some practical considerations for anyone looking to plan their own financial future.

Lacey, Katie, welcome to The Bid.

Lacy Garcia: Thank you so much for having us, Oscar.

Katie Cullen: It's a pleasure to be here.

Oscar Pulido: So Lacey, I'd love to start with you. You are the CEO and founder of Willow, a wealth technology firm, and I'm sure you'll tell us a little bit more about what that means. I'm always interested when we have an entrepreneur and somebody who started their own business, what is it that drove you to start this firm? What is that passion that is what created Willow?

Lacy Garcia: Yes, it was both my professional and my personal experience. So, in my mid-thirties, I found myself at a pivotal moment where unexpectedly I had become not just a breadwinner, but the sole provider and was facing a divorce. And I really had to take control of my finances. At the time I was somebody who was actually in financial services and was serving as an advisor, so you'd think that I had all the answers and that it would've been really easy for me to find the right trusted advisor, but I didn't have all the answers, and it wasn't easy for me.

I was really struck with how difficult it was to find an advisor. The people that I was speaking with, I felt like they didn't understand me. They were taking a very impersonal, transactional approach and I really needed somebody that I felt like I could connect with on a personal level, that I could let down my guard, that I could be honest about some of the challenges but who really could understand, me from a personal as well as a life journey, and life event transition perspective. I found myself really understanding what it was firsthand to be those data points that we'd read about we'd heard about.

I am a woman, I am thrilled to be here during Hispanic Heritage Month as I'm a Cuban-American, and I was on the younger side of things. So, I really felt completely dissatisfied, disconnected, and I wasn't getting what I needed. And I realized I was definitely not alone. There was this huge opportunity, I had felt that frustration firsthand of not being able to find the right advisor and get the advice that I needed. At the same time, we look at the data and the demographic changes, the face of wealth is changing in many ways, and more and more women, more and more underrepresented investors and younger investors really are going to be the clients moving forward and there's this massive opportunity.

For me money really is the ability to provide and to care for my family and to provide opportunities for my son. So that is what drives me on a personal level and the fact that money is emotional and there needs to be that personal connection and trusted financial professionals who are able to connect with you and provide you with the empathy, the education, the empowerment that you need to be able to take control.

So that's what we're doing with Willow, we're training advisors and vetting them on making sure that they are uniquely qualified to serve women, to serve next gen, to serve underrepresented investors, to be a coach, to provide that education and that empowerment.

And in light of it being Hispanic heritage month, I'm the daughter of a Cuban refugee, I was taught to understand and to talk about finances and talk about struggles. My father was very open and honest about all the hard work that it took to make money and how hard it was to actually grow it, because he had lost everything overnight. And also, really core to that was that you be able to trust those financial professionals that you are entrusting to help you to not only grow, but to protect your wealth. So that's also core to what we're doing at Willow, making sure that people are able to connect with those trusted financial professionals so that they can, take control of their finances.

Oscar Pulido: And Lacey, you said money is emotional and your story is one that has a lot of emotion as well, you talked about your personal situation in your mid-thirties, you talked about your family and the upbringing and how that influences some of your thinking. And it's a good reminder that individuals, when they're working with an advisor, it's not just math and statistics, there really needs to be a strong interpersonal relationship. And it sounds like that's what Willow's trying to address.

Can we talk a little bit more about starting a small business? That's no easy task. You have a son, so you're wearing multiple hats, in your life. What were some of the challenges you faced in starting your company and how did you overcome them?

Lacy Garcia: Yes, we were a little bit early, people understood that there was this problem out there, everybody knew that women, and next gen were underserved, but it wasn't really seen as a business imperative. So, there is that struggle in the beginning of knowing that you've got the solution, but getting the clients and getting those investors, to really jump on board. And I think we were very fortunate, to be able to connect with amazing clients and investors who really were forward thinking and looking at This paradigm shift that was happening in the wealth management industry and the fact that these, historically underrepresented investors were going to represent the majority of wealth clients moving forward, and that it was really time to help advisors to have a tactical solution on how to support them and obviously the mission alignment about making sure that we're getting financial empowerment to more and more people.

But I'd say this is real for so many working parents, the struggle is real - traditionally known as mom guilt, but I know that men feel this - dads feel this the same - that you just can’t be everywhere at the same time. You're juggling multiple hats. It's impossible, to get everything done on the to-do list and all the things that you wish. So, it's really, I think, critical to first of all, give yourself grace. And then also be really open and really transparent, with everyone around you about ‘okay, these are the three things that I need to make sure that I get done today. And I'm sorry that I won't with my son, I'm just like, I'm sorry, I'm not going to be able to be there, but look at what I'm doing, and this is what's enabling you to be able to do that’ right? Having those open and those honest conversations and then similarly, giving yourself grace along that journey because we all feel like we focus on the things that we didn't get to versus, giving ourselves, the pat on the back about all the things that we have accomplished.

Oscar Pulido: And Katie, Lacey's talked about the business opportunity which is that next generation of investors and the face of wealth is changing, as Lacey said it. Does that resonate with what you're seeing in the industry?

Katie Cullen: Absolutely. The truth of the matter is, Lacey's story isn't unique just to her, we see more and more with women, Next Gen, underrepresented groups that the access to financial literacy, the access to information and the lack of it in most cases, really does provide an opportunity for people to not reach their goals, to not be able to, accomplish all that they're capable of accomplishing.

Women, for example, do not feel like they have enough information to invest. They don't feel like they can make the right decisions when it comes to budgeting, debt management, some of the things that we might take for granted, and that number isn't really changing unless we get in front of those groups, give them the information, the access, the information to be able to.

Take a look at their debt management, take a look at what are their goals, what is it they most want to accomplish, and then help them, give them the resources in order to accomplish that. Lacey said it so well, she's in this industry and she herself didn't know where to go and couldn't find access to information in a number of key areas that we might take for granted. So, it is very common.

Also interestingly, in today's day and age, we're seeing entrepreneurs, like Lacey, only increasing in the female demographic. We're seeing, almost in the US 40% of all businesses are run by women. And so, this access to information, this access to helping investors be able to identify what their goals are, find the resources, in order to be able to really, meet those goals, and then be able to enjoy that when the time comes.

I think there's so much that we can do to continue to serve these underrepresented groups. What I think is really important is that we share with everyone, if you're feeling this way right now, if you're feeling like, I don't know where to turn, I don't want to know what resources are available, the truth of the matter is you're not alone. Our own research shows that 59% of women do not feel like they are prepared for retirement. 59% as opposed to 75% of men. So, if you're feeling that way, whether you're a man or a woman or what group you're in, you're not alone. And with the right planning, with the right resources, with the right communication, with those around you, you really are set up to succeed. It's just taking that first step, that's most important.

Oscar Pulido: And as you share some of those statistics, we had Larry Fink actually right at this table, a few months ago, talking about the retirement crisis that, that he sees. So, what he's outlined and the challenges that we face ahead, how do you think about that? how should people be positioning themselves for success in the future, if in fact some of the stats that you're referencing are true?

Katie Cullen: It really is a crisis, and I'd say there's a couple of things that you can think about. One is reframe the way you think about retirement. Make sure that you're clear on what your goals are. Make sure that when you share that with your family, that you're really clear on what is that you want to accomplish and what you need in order to get there.

There's five steps that you can take, and they're very accessible to everyone regardless of where you are in your investing journey.

The first one might seem incredibly simple, but we see it time and time again. People do not take the time to really get organized around their finances. Make sure that they know where their assets are, that they know what their assets are, they know what their budget is. Again, things that we might think are very intuitive, a lot of people, regardless of your level of education, your level of access to resources often haven't taken that very first step of being organized when it comes to your assets.

The other part of that though, is don't just keep that information to yourself, share it with your family. Make sure your partner knows where to find that. It is your job to make sure they know where to find that information and what to do with it, if you are the person in the family that is responsible for that information. If you're not the person in the family that's responsible for that information, then it's your job to figure out where all that is. You have to stay organized is the number one step.

The second one is establish your goals. We talk about this all the time, but a lot of people have it in their mind. They haven't broken their goals down, their financial goals, their life goals, down into different segments. Have your short-term goals, one to three years, have your midterm goals, three to five years, and then those five years plus.

Write them down and as important as writing them down, share them with someone. It's that whole idea of the more that you put it out there, the more that you're going to be accountable to those around you. We find it really does allow those goals to stick. The third thing, and that I'll mention is know your numbers. Know what your budget is. Know what your assets are, know what you need in order to retire. Make sure that you're really clear on what your numbers are and keep fresh on that information. Make sure it's something you review from time to time. You don't just look at it every now and then you're doing it on a very periodic basis.

We also want people to get invested. There is no such time as the perfect time for pretty much anything in life, let alone investing. Get started now. Even small dollar amounts can really add up to incredible assets over time. Make sure that you have some information in order to align your risk with your goals, because what works for someone else when it comes to investing isn't going to necessarily work for you.

There's a lot of incredible tools out there to help people get started with that now, and I'd say the most important thing, your journey is your own. What works for someone else isn't going to work for you. Make sure you take time to really think about what does education savings looks like for me and my family? What do I expect my retirement to look like? How do I think about longevity? How do I think about philanthropy or other things like that? And make sure your goals are aligned with the decisions you make, the way you invest.

And also, it's really important to mention, a lot of people think of money managers as nothing more than that. And while that is an incredible part of what they do, financial professionals are also people who can help you stay aligned on your goals. They can help you adjust if changes to life happen. They can help you communicate your goals, your dreams, your fears, your vision for your legacy with your family members. Enjoy the opportunity to bring a financial professional into your life and make sure that that person is there, not only in the good times, but also in the hard times with that type of a resource at your fingertips, you really are poised to some incredible success.

Oscar Pulido: And on that last point you said, financial advisors sometimes are, described as money managers but that leaves an incomplete definition is what you're saying because maybe a good financial advisor does give investment advice, but also serves as a bit of a financial coach. And I think that's what Willow is trying to do, is to put those advisors in a position where they know how to coach that next generation of investors. Lacy, would you agree with that?

Lacy Garcia: Very much so, two thirds of women and millennial and Gen Z investors are really looking for their advisor to act as a coach, to provide them with some form of coaching that's going to help them be an accountability part partner, not procrastinate, not make rash decisions. And it's funny, I'm struck all the time, I hear from people 'oh, yes, I need to get an advisor' or 'yes, I need to do that, but I just need to get my act together first, or I need to get through this period. I need to get through that.' And I'm like, no, the time to reach out is now.

Oscar, if you weren't feeling well, would you wait until you were feeling better to go to the doctor? No, because they are actually trained and care, the advisors we're working with at Willow, to actually be able to help you. If you can't find the time, they're going to help you figure out how to find the time to sit down. And if all this seems daunting and overwhelming, they're going to help turn it into bite-sized pieces so that you can sit down, write down those goals, figure out where these numbers are, and if you feel overwhelmed, as Katie said, you are not alone. The majority of Americans, no matter how affluent they are, I think two thirds of affluent Americans don't feel like they're as on top of it as they should be and struggling to know what things cost and to do the things that they need to do.

So, you're definitely not alone, but definitely bring in a professional, right? Because they can help you to get to that place where you're able to make the time, you're able to take control.

Oscar Pulido: Lacey, sticking with, Willow you're an entrepreneur and you've started a mission driven company. Katie's alluded to the growth in women owned businesses. What is some of the advice you would give to some of those people who are out there looking to start their own company?

Lacy Garcia: Well, it’s so wonderful to start and run a mission-driven company because you are passionate, right? And I think finding passion in whatever you're doing on the entrepreneurial side really helps to continue that drive that you need on a daily basis to keep running, at full speed ahead, which is the entrepreneurship journey.

So, I think some of the key pieces of advice, though, I'd give to people is that, when you're starting something, focus on providing a solution to a problem, but really focus on the problem versus just your solution. Because typically we hear about overnight successes, which we know is less than 10% of all new businesses that are started. But most companies, they may start with a good solution, but they have to listen to feedback. They have to look at the data, they have to pivot the business model. So, if you're focused on solving a problem versus just your one specific solution, that really definitely helps a lot. I think also the team, making sure that you're surrounding yourself. It takes a village. We hear that all the time. It really does take a village, and if you're starting a company, that means that it's something that goes well beyond you and there's lots of people involved and they really need to buy in and embody and take what you've started and make it theirs as well in order for it to scale, in order for it to grow.

And similarly, I think as a founder, as a CEO or in the C-suite, having those mentors, having those sponsors, having those advisors, making sure you're surrounding yourselves with people who've done it before, who've been there, that you can ask the questions, that you can get, that insight and advice from that strategic advisory board.

And then there are two other things I'd say is obviously listen to the data. Listen to the feedback. You're only as good as how the market or your customers or your clients interpret what is you're doing, that's what creates a successful company, is that ability to provide that valuable service and to grow those relationships.

And finally, you can never take no for an answer. You could never give up. You just have to get up every morning and try again. It's full of rejection, it's full of no's. Every day you just have to keep going and you only need one yes. Sometimes you only need one. Yes. It might have taken 99 no's to get to that one yes. But you got the yes.

Oscar Pulido: That's great. And the passion coming across, very clearly as you describe, what you've been doing at Willow. Katie, maybe, one last question, which is, what would you say to the investors that are out there that are concerned about their retirement, don't think they're prepared, where should they start?

Katie Cullen: Start now is the most important thing. The other thing is start even with small sums of money. The idea of compounding over time, as Einstein said, the eighth wonder of the world is real. The difference between investing for five years versus 10 years with a 10% growth isn't just a hundred percent return. It's actually 260%. This is real money. You might think when you're early on in your career, you don't have enough, and it doesn't matter- $50, a hundred dollars, $20, whatever it is, investing it sooner rather than later is one of the most important things that you can do.

And if you don't know what that means or what that looks like, ask questions. There are so many incredible resources out there that can help you figure out, what should I do based on my risk, based on my goals? But the important thing is start now and I'll leave you with this. Well, you're not alone. If you don't know where to begin, a lot of professionals, a lot of in investors that I talk to, they feel almost embarrassed. They might be a professional and they might not know as much as they think they need to know based on where they are in their life, and that's okay. We all have our areas of expertise. We all have things that we're really good at. And the truth of the matter is people want to be asked their opinion. They want to be asked for guidance. So, ask, don't be afraid and continue to learn.

Oscar Pulido: Start now. it's never too late, to get started on your retirement. Lacey, you mentioned, it only takes one yes. So, thank you for saying yes, when, we asked you to come on with, Katie. these are important topics. We appreciate you sharing it with us on The Bid. Thank you for joining us.

Katie Cullen: Thank you, Oscar.

Lacy Garcia: Thank you so much.

Oscar Pulido: Thank you for listening to this episode of The Bid. If you enjoyed this conversation, check out how to build wealth with the founders of Earn Your leisure, where they share their journey of transforming financial education. Through their multimedia business platform, making it entertaining and relatable to all.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH1024U/M-3881485

<<THEME MUSIC>>

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

The game of tennis has captivated fans of all ages around the world, but what do match points and market trends have in common? Today's guest argues that there are a number of parallels between tennis and the investing tactics one must take to outperform the market. Joining me is Ronald Van Loon. Portfolio manager in BlackRock's fundamental fixed income team. Ronald will help us explore the similarities and the differences that investors can take from this fast-paced game and how the mental game of tennis can also translate to investment strategies and beyond.

Ronald, thank you so much for joining us on The Bid.

Ronald Van Loon: Thank you, Oscar. Thank you for having me.

Oscar Pulido: So, Ronald, when people think of the sport of tennis, I don't think they're necessarily thinking about investing at the same time. And for those who are thinking about investing, I don't think they're thinking about the sport of tennis. But you would argue that there are similarities, between these two things. And I know you wrote a paper on this topic, so I'm curious what caused you to draw this comparison initially?

Ronald Van Loon: it all kicked off really by a speech that Roger Federer, gave at Dartmouth College back in June. And the speech was around, tennis lessons, that he can bring or lessons, life lessons really, that he can bring from his career in tennis to the new graduates. the speech itself is on YouTube.

It's a great speech, and there was one particular bit that I thought really stood out. Roger Federer mentions that over his full career, he won 80% of the matches that he ever played. But then he asked the graduate what percentage of the points he played, he actually made, and then he comes it's only 54%.

So that means even grand slam players only make per point only about 54% of the points they played. And I thought, that's amazing statistics, right? And most people think about Roger Federer, as surely one of the greats of the game of tennis, only makes per point about 54% of the points. That brought me to, a paper I wrote in the Journal of Portfolio Management, which is asking the same question, but now in investing.

And the question really was what, percentage of the investment choices that you make need to be correct in order to make positive alpha or positive access return. And also, there the percentage was, remarkably low, much lower than people originally thought. So that's how I met the analogy between the two efforts.

Oscar Pulido: And Ronald, when you refer to Alpha, that's basically that ability to outperform the market. So, you're saying there's a parallel between Federer's comment around the percentage of points that he won in his career and then how that applies to decision making and that ability to outperform the market. So how do you square Federer's statistic? I mean, he is one of the greatest tennis players of all time. How is it that, that can be the case when he's only winning a little bit over half of his points?

Ronald Van Loon: Yes, it's really the nature in the game of tennis. Tennis is quite a unique sport in that it offers a lot of opportunities to score. And tennis is quite a unique sport, - in a single, match, you have multiple sets, multiple points. That's also the reason, for example, why, in the rankings you have these periods when a certain, small set of players tend to dominate rankings. 'Cause there's so many ways of how to express that skill per point skill across, multiple games, multiple sets, and so forth. And that's quite unique.

The second bit is of course, Federer, even though he only has 54% of the points that he wins, he applies it in a very consistent and in persistent fashion. Now, that's also a bit of an analogy really to investing. I.

Oscar Pulido: Right. You're saying that the sport of tennis is just unique in terms of how many times during a match you can apply your skill. And so, I think you started to talk a little bit about how this then applies to the world of investing. What, why is this similar to an investor who's trying to outperform the market?

Ronald Van Loon: Yeah, so investing shares certain characteristics, really with tennis, and that also is that you have a lot of opportunities to score right in the investment markets themselves. They're volatile, they're enormous breadth of opportunities. there's a lot of choices to be made across, asset classes across securities, and also through time.

So then if you look at the investment horizon that people care about, which is usually multiple years and break that up into all the investment decisions that make up that period, you get to the same scenario. You get a lot of opportunities to score. That means also in investing as in tennis, you need to be right a remarkably small percentage of the time in order to lead over the long term to consistent results.

And that really is what the paper was about. What we did was we worked out what percentage of the investment decisions need to be correct over the long term to come to a successful investment track record. And the number we had to work it out for across some of the public markets in equity and fixed income, you have to assume some transaction costs and so forth, but the number we came out could be as low as 53%. So, it was really remarkably close to what Roger Federer mentions in tennis.

Oscar Pulido: Right. So, to clarify, you're saying that to generate alpha and to generate outperformance, you need to be right only, I think a little more than 53% of the time in order to be successful. And again, that parallels with what Roger Federer talked about in that commencement speech. So, help us understand how did you get to those numbers and what do you mean by an investment decision? What is an example of one of those decisions you have to try and get right?

Ronald Van Loon: It's fairly straightforward. So, what we did is we started with, some of the public markets. And looked at the variability or the volatility of returns and started to measure them over different frequency over which people make decisions. That can be monthly, quarterly, annually, or weekly or whatever period.

You then need to add, two elements to the mix. One of them is transaction costs, right? Because do eat into returns. You need to make some assumption, about that. And then, the second bit is skill. How do you measure skill? And in this paper, we took to kind of two extremes. We started off with a no skill case where every decision is a 50/50 decision, whether or not it's successful on the other end of the spectrum, you have 100% skill case where all investment decisions work out to be correct. And then you can start interpolating between these two extremes and run simulations and so forth. And then work out what is the percentage of skill where you flip to a positive access return. And in the, some of the public markets, that can be as low as 53%.

Oscar Pulido: So, we've talked a lot about the similarities between tennis and investing, which is that you have a lot of opportunities in which you can show your skill or make a decision. And it turns out the percentage of time that you have to be right is maybe surprisingly low to be deemed, successful. But maybe we could flip this a little bit and, talk about the differences between tennis and investing and how do these matter?

Ronald Van Loon: I can highlight two, really, one in favor of tennis, one in favor of investing. The one in favor of tennis really is transaction cost, right? In investing, we have to pay a transaction cost every time we execute on a decision. In tennis, Roger Federer, right? Does not have to pay the umpire, every time he takes a shot. That's clearly in favor of tennis, and you would argue well, perhaps that's a marginal effect. But if you look at it over many decisions, these transaction costs do add up. So, it's an important thing to manage in your investment process, and it's clearly a benefit for tennis. So, 15 love for tennis there!

In investing, the second difference, I would say is, is probably the fact that the, there's an asymmetry in return, not every point is of equal importance in investing, right? You can make some, simple analogy in tennis. Let's say if you lose the first point and then make the second point, you're back to deuce. In investing, let's say first decision, is not correct and you lose, let's say 10%, second decision is correct, and you make 10%, you're not back to where you started, which is the effect of compounding. And that's of course a unique thing. So, in investing, really you have that kind of asymmetry in returns, and that's probably more so than in tennis.

So, every point, upside versus downside is important. So, you can have an investment process, for example, where you have many decisions that turn out to be correct ones and work for you in your favor.

But that can be perhaps a handful of decisions that have really large drawdowns that negate that or vice versa. So that upside versus downsides is really very important in investing. And you have an element of that as well in tennis, right? So, it, not every point is the same, you have these crucial points in the game that can really turn the game on its head or switch direction. Break points or points in tie breaks and things like that. but it's probably more so in investing. And by the way, I have to say Roger Feder, I did have to look this up as a master in converting these crucial points. He converts 71% of its match points, for example, much higher than, 54%. but yeah, as I mentioned in investing that part of the equation is probably more so managing the upside to the downside. In tennis, that's called winning the big points. In investing, we call it convexity.

Oscar Pulido: So, Ronald, maybe, continuing down this analogy between tennis and investing, I'm not a huge tennis fan, but I know enough that there are different types of shots that you can take in tennis, there's the forehand, there's the backhand, there's a volley, there's the overhead smash. How do these different types of shots apply to the different types of investments that an investor can deploy in different market environments?

Ronald Van Loon: Yes, that's right. I guess in tennis, if you look at the best players, really, they have a very wide arsenal different shots that they can apply and they can apply them, the appropriate shot for the appropriate environment, right. Whether it's grass or hardcore or clay. Also, depending on the weather conditions, and of course, depending on whichever opponent they are facing. And really top players really have an unusually wide array of shots that they can play, there are also some things that they need to do consistently at every game. Like think about, for example, the techniques around the turf. There's not much variation in it. That's really around consistent application training

And I think some of that translates over to investing quite well. I wouldn't necessarily make the direct analogy between this shot overhead is perhaps equal to that type of strategy. That's maybe a bit too far. But I think where the analogy does translate over quite well is, the necessity of having a wide array of investment techniques and investment approaches to your arsenal as an active portfolio manager, and particularly around, there's a variety of different market environments, whether it's a pool market, a bear markets high interest rates, low interest rates, there's a variety of different environments.

And as a good active manager, you need to have the different investment techniques and different investment approaches and apply those at the appropriate time in the appropriate scenario. And I think this is really where the analogy lies between the tennis and investing and about having the breadth of resources and knowing when to apply which technique to which investments environment.

Oscar Pulido: Right, so different shots in tennis are appropriate at different times of the game, depending on where you are on the court and where your opponent hits it. In the same way that different investing tactics might be appropriate depending on the market environment and what's in front of you, and that helps you determine how to navigate your portfolio.

Ronald Van Loon: Yeah, that's where you have a portfolio. that can be, positioned for a variety of different market environments, whatever may come.

Oscar Pulido: And Ronald, if you're an investor listening to this and whether you're a tennis fan or not, what should you be taking away from this conversation or this rally, if you will, that you and I are having that they could apply to their own investments?

Ronald Van Loon: Yes, I think Roger Federer's speech, one of this kind of life lessons, is called, it's only a point. And what he's trying to say is that in tennis, you shouldn't dwell on the kind of the past points that you might win or lose. Always look forward, look on the consistent and persistent application of your edge on the point to be played.

And I think some of that translates into investing quite well actually. If you think about how to gain an edge in the markets from an active management point of view, it's around trying to get the alts in your favor by getting slightly more investment decisions right than you get wrong, trying to skew those alts between the upside and the downside of the return, managing that complexity. And once you have that edge, it's really around the consistent and persistent application of that in the markets. And I think that's a strategy that Roger Federer highlights in tennis.

Oscar Pulido: I think he also talked about in that speech, the mental aspect of it, that ability to lose a point, but then have to think about the point ahead and put the loss behind you. Perhaps for an investor, it's similar thing is being able to forget about that loss, think about the investment ahead, and that there's a mental aspect to being a successful tennis player and also being a successful investor, would you agree with that?

Ronald Van Loon: Yes. I think what he mentions really is that the relative differences in skill between the top players and the grand Slam tournaments is really quite marginal, and it's really around the application of that skill, the discipline around it and the practice. He mentions a lot, right, the practice that goes into achieving that 54% I think a lot of that translates over to investing, quite well.

Oscar Pulido: I think you also said he practiced a lot for the speech that he gave you. You made a comment to me about, the preparation that, he put into, similar to the tennis matches that he would play over his career. I.

Ronald Van Loon: Yes. I think in an interview afterwards, a journalist asked him about, how did you prepare for this speech? And he mentioned, he prepared for it for six months. that's amazing. And I think it's a true show of character, I think, and how he approaches not only tennis, but also presentations.

Oscar Pulido: Well, I'm curious if he read your paper that you published in the Journal of Portfolio Management, and to the extent that maybe that served as a little bit of inspiration, but, Ronald, we've been talking a lot about, tennis. I have to ask, are you a tennis player, or do you enjoy watching tennis? Do you have a favorite player that you follow?

Ronald Van Loon: Yes. I don't play tennis much myself. I have to be honest. I do watch it. It's a fantastic sport. I do a lot of other sports, and I like to watch other sports as well. one particular element that I like is, I like sports, data analytics. Of course, it's a new field that's, very exciting. what I particularly like is Trying to tease out the human story behind the numbers. And I think with that 54% that, Roger Federer mentioned, there's a big story there.

Oscar Pulido: Well, I'm not much of a tennis player myself. I think I'm part of this growing legion of people playing pickleball, which is a, perhaps a much is an application of tennis, but I know tennis requires a lot more running and is a bigger court. Ronald, we, really appreciate this interesting take that, you have on how to draw parallels between sport and investing, and we appreciate you sharing it with us here on The Bid.

Ronald Van Loon: Thank you. Thank you for having me.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you've enjoyed this conversation, check out the episode with Tom Becker and Kate Moore, A Cruel Inflation Summer, where we consider how consumer demands have shifted and how their desire for experiences such as Taylor Swift's Eras tour have impacted inflation around the world.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0924U/M-3867195

<<THEME MUSIC>>

Oscar Pulido: AI investing is a hot topic of conversation. We recently discussed AI and tech investing with Tony Kim and his insights from his annual Silicon Valley tech tour. But how should investors be considering both tech and AI in their portfolios - as part of the same allocation, or should they be separate?

Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido

Jay Jacobs, US Head of Thematic and Active ETFs at BlackRock joins me to discuss whether investors should consider AI and tech as separate allocations, different investing approaches to AI and specific sectors to explore within the AI ecosystem.

Jay, thank you so much for joining us on The Bid.

Jay Jacobs: Thank you for having me.

Oscar Pulido: Jay, as we have five mega forces that we've been talking about that the BlackRock Investment Institute highlighted as structural drivers of return over the long term. These include things like, the aging population, the transition to a low carbon economy, and also artificial intelligence. So, when you hear artificial intelligence being dubbed a mega force, do you agree with that?

Jay Jacobs: Absolutely. And there's a few reasons why this is a mega force. I would say one reason to just brute force it is going to have trillions of dollars of impact on the global economy. So, it's big, it's powerful.

But I think secondly, this isn't just a narrow theme. This is something that is going to impact a wide range of sectors and industries as they start to adopt artificial intelligence. I think that's critical to any megaforce is that it should really have broad implications.

And then I think the third reason is that it's going to impact investor portfolios. Whether you intentionally allocate to the AI theme or not, the impact that it's having on the technology sector, the impact it's having on the energy sector, this means that it is going to impact basically all portfolios in the world one way or another. And it really is important for investors to consider that impact as they build their portfolios for the future.

Oscar Pulido: So, Jay, I'm curious to hear, what are you hearing in terms of the sentiment towards this topic from the investors that you meet with?

Jay Jacobs: there's a lot of excitement around AI right now, and I think a lot of this stems from the fact that we've really hit a new catalyst for artificial intelligence. Now, taking a step back, the idea of artificial intelligence has been around for a very long time. The Turing test, which was designed to determine if something was a computer or a human, was created in 1950. We've even had, Siri on our phones for over 10 years, but now we've hit this inflection point with ChatGPT and generative AI platforms that make it more accessible and frankly, more useful than ever before. So, I think a lot of investors are just trying to figure out, what does this mean, what does this mean for my portfolios, what does this mean for my everyday lives and how do I prepare for this?

Now what we've seen, in these first few months of this AI revolution though, is a lot of focus on just a few names, a lot of kind of concentration on household names in the AI space that's common in early days of a technological revolution. But you're starting to see now more interest in thinking about what's next, what's inning number two for artificial intelligence from an investing lens and from what this means for my everyday life.

Oscar Pulido: And we've learned a lot from folks like Jeff Shen about the history of AI and while it feels very recent to us as investors or the topic being talked about in markets, it's been around for a while, but it still feels to me like we're early in the theme in terms of capturing the investment opportunity. I don't know if you'd agree with that. And maybe if you do, how early in the theme are we?

Jay Jacobs: We're still in really early stages of the AI theme. Chat. GPT was released to the world in November 2022. We're a year and change beyond that at this point, really powerful mega forces can take decades to fully, I develop and have the full impact of it felt. So, what are some of the other things to evolve over the next decade or so? I think one is they'll continue to fine tune this technology. Large language models could get more complex and more nuanced than ever before. two, we're seeing the growth of data at an exponential rate and at its very fundamental basis, AI is just about leveraging data to generate more valuable outputs.

And the third thing is that we're getting more computing power than ever before. The semiconductors are getting more powerful. We're seeing hundreds of billions of dollars invested in data centers and really aggregating all of this compute into artificial intelligence. So, if you have better models, more data, more computing power, you really start to see exponential growth in artificial intelligence and an exponential increase in the value of artificial intelligence.

So, you put that all together and the fact that we've been at this for 20 months, 21 months, it's still very early in this mega force.

Oscar Pulido: And from your observation, what are the industries or the companies that have been most impacted by this early stage, mega force, either positively or negatively?

Jay Jacobs: Well, some of the earliest companies are in the technology space, which are actually in the software space because you could think about how, generative AI creates content, some of that content can be actually coding and programming languages for software development. So, some of the companies that have been the earliest adopters of artificial intelligence are just software companies.

Legal and consulting services, so if you can get more efficient in creating documents, more efficient in creating PowerPoints, more efficient in creating strategy documents, those segments of the economy have been affected by this already. But also, if you could look at the healthcare space, we see a ton of opportunity for artificial intelligence, how hospitals are managed to get more efficient, usage of doctors and nurses and medical devices. You look at pharmaceutical development, which is really an exercise in data, in terms of getting all this genetic and personal data and understanding how different drug compounds are going to interact with that to develop revolutionary drugs, there's billions of dollars of opportunity there as well.

So, this isn't an exhaustive list, but if you just take it as technology, healthcare professional services across legal and consulting, you're already talking about hundreds of billions of dollars of opportunity across the economy.

Oscar Pulido: And I know you're not an AI skeptic, but believe it or not, there are some of those people out there and it's natural whenever we have new technology that is unknown and we don't really know the future ramifications, but what do you say to somebody who is a skeptic or when you think about some of the industries that maybe have been negatively impacted so far.

Jay Jacobs: I guess that I would question the nature of the skepticism. I think it's fair for people to say this technology will take time to be adopted, that some of the use cases might be more valuable than other use cases, that maybe, we're being overpromised artificial intelligence in the short term.

But if you really take a long-term structural view of this theme, there's just a lot of conviction that this is going to have a major economic impact. You can see it when you use these tools, how there's really a brilliance, almost a magic to some of these artificial intelligence tools. A quote that I love is that any substantially advanced technologies indistinguishable from magic, that's where we are with generative AI today. Whether you're asking it to write a poem about financial investing or if you're, asking it to develop some strategy document for you, it's really a very powerful tool. And so, I think we learn how to harness this magic and make it an everyday tool, the use cases and the economic impact are going to be massive.

Oscar Pulido: There's a lot of interest, there's a lot of evolution. It seems like when you want to invest in AI, people think about investing in technology and I'll, maybe I'll just invest in the technology sector. are those the same things? If you want to invest in AI and just investing in the tech sector,

Jay Jacobs: A lot of AI companies are in the tech sector, but the tech sector isn't just AI. And one of the terms we use, and apologies, this is like a business consulting, a term here, but MECE 'mutually exclusive, collectively exhaustive.'

This is how the sector world works. Every company has to be tied to one sector and every sector has to be unique in that no company can be tagged to two sectors. So, what that means in the artificial intelligence space is sometimes you have companies that are in the consumer discretionary space, but actually run really powerful cloud computing platforms that are essential to AI, or some companies maybe create software, which is really useful to AI, which is in the tech sector, but other companies might be tagged as a communication services company. So, if you just look at AI from a traditional sector lens, you're not necessarily capturing all the right companies that could exist outside of IT. And you're also going to capture companies within IT that are not AI: printer companies or companies that are, developing glass for smartphones.

Oscar Pulido: So, it's more nuanced is what you're saying. While we like to Break things up into nice, neat categories and definitions, when you talk about something like AI, it sounds like it can cut across numerous sectors.

Jay Jacobs: It does. So, you really have to look from the bottoms up with a fresh lens of identifying what are the AI companies around the world today, regardless of sector, regardless of geography. But really try to understand where these companies fit in the AI value chain.

Oscar Pulido: So, you mentioned the value chain and the AI space can cut across sectors. And so, when you think about the investment opportunities, where should people be looking?

Jay Jacobs: Right now, a lot of people are looking really at the mega cap tech names, specifically in the United States. And some of these companies have the most resources, the most data, the most software engineers, but that's really a very concentrated and limited view of AI. If you look under the hood, I think one of the most compelling opportunities right now is in the infrastructure layer of AI. What we mean by the infrastructure layer is semiconductors, digital infrastructure, even power infrastructure.

Because it's still early days, there could be different platforms that succeed in AI. There could be different products that succeed in AI, but regardless of what platform or product or a large language model of artificial intelligence wins, we know there's a common need, which are those semiconductors, the data centers, and the power.

Right now, AI is going to really drive a lot of power, demand growth. It's going to drive a lot of demand for semiconductors particularly. General processing graphics, processing units, it could even drive a lot of demand for things like copper and other materials that are necessary for data centers and digital infrastructure. So, it's really about not just trying to predict the winners 10 years from now, but who are the companies that form that base layer of infrastructure today and are benefiting from this build out.

Oscar Pulido: And that's consistent with what you talked about earlier. You just said copper. you talked about semis, which is the technology sector. But I'm recalling a conversation that we had with Will Su from the fundamental equities team and his discussion around AI was the demand for energy, that it's going to create. And we talked about data centers as well. So I go back to this question that when you think about AI and investing in AI, it is really different than just investing in the technology sector. Maybe you can elaborate, a bit more on that.

Jay Jacobs: It is. And so, part of that is really thinking across the entire AI value chain. You absolutely have technology companies that are some of the leading voices and developers and products in the AI space today, but if you look below that, that there's companies involved in real estate that are involved in AI.

These are the data centers that own valuable properties that can host, cloud computing services and a lot of compute power in them, and have all the security and, cooling that's necessary to run those. you can look at the energy companies that are going to be supplying power to those data centers.

You can look at companies that own transmission lines that are going to connect the power to those data centers, the semiconductor developers. It's really this entire ecosystem. And so, what I would really suggest that investors do is not get laser focused on just mega cap tech. You really have to look broadly across the economy to understand what is feeding into artificial intelligence.

Not just what is feeding into it, but also what are some of the critical choke points. I think energy could be a choke point. We really have to rapidly scale energy production in the US to be able to feed all these data centers. The physical real estate itself is a choke point. It takes time to build new data centers.

It takes permitting, it takes licenses, it takes materials and labor. Even semiconductors where you see really long supply chains, where there's wait times for some of these really powerful semiconductors, that's a choke point as well. So, it's about considering the entire value chain, it's about looking at who's benefiting in the value chain today, which is really that infrastructure layer. And it's about understanding what are those pivotal choke points where there can be really powerful economic pricing because these companies really have a scarce resource.

Oscar Pulido: As you're describing AI I think of it as a technology, but you're making me think of it more as a theme, that really touches on a lot of parts of the economy and a lot of different sectors.

And so, if you're an investor and you're building a portfolio, it sounds like you have to think about an allocation to AI as distinct from an allocation to tech. And maybe should investors be incorporating both of these in their portfolio or how would you ask, how would you think an investor should think about allocating in this space?

Jay Jacobs: Well, it’s not necessarily either or, but I think because there's overlap between the technology sector and AI, people just have to consider, what is that intersection? we know that investors that are looking just broad benchmarks across US equities or global equities are going to have a lot of tech exposure 'cause these are some of the biggest companies by market cap. But if you really want to have granular exposure to AI and really benefit from this mega force, you have to really make an intentional allocation.

So, one way that we're seeing investors do this is selling down technology exposure and replacing it with an artificial intelligence basket. That's just one way to fund it, we see other people maybe even selling down core exposure and buying an artificial intelligence basket. but you really have to think about how these two areas are intersecting because there is overlap between the two.

Oscar Pulido: And is there a geographical bias when you allocate to AI, do you, inherently allocate more to one part of the world than another? Or is it pretty diverse geographically as well?

Jay Jacobs: Right now, the artificial intelligence theme is very US driven. it could broaden out and you could see more companies around the world enter into the AI space as this theme develops. But if you look right now, the leaders across these different parts of the value chain from some of the chip designers, from some of these LLM platforms, to the data centers, to the energy, a lot of that still is very US focused today.

Oscar Pulido: But presumably the second order effect the beneficiaries of AI are probably more global in nature, and maybe in that case, not just in the US.

Jay Jacobs: Oh, absolutely. technology is a huge export from the United States. If you look specifically at the tech sector, 60% of its revenues come from overseas. So, I would absolutely expect that artificial intelligence will be one of those exports going forward. in a lot of ways this is part of the artificial intelligence theme is this global race for artificial intelligence. And I think if you look at valuations today, a lot of what's baked into some of these artificial intelligence companies is the expectation that this is a global theme, not just a US theme.

Oscar Pulido: And Jay, you spend a lot of time, talking about this theme and thinking about it and helping investors think about how to allocate in their portfolios. But what's that one thing you would want to leave the audience with when they're thinking about artificial intelligence in their portfolios.

Jay Jacobs: I think the one takeaway for investors is to really consider, do they have exposure to the full value chain of artificial intelligence? I'm willing to bet most investors have some exposure just because of how dominant some of the mega cap tech names in the United States are in broad us, US or global benchmarks, but likely investors are missing that longer tail of artificial intelligence names. Again, the semiconductors, the digital infrastructure names, some of the energy names that are going to benefit from this theme. So, it's really, you have to look across the entire value chain rather than just a concentrated handful of mega cap tech stocks.

Oscar Pulido: And you alluded to this, but the BlackRock Investment Institute has also recently talked about the fact that there's a lot of money being invested in this space in AI and all the value chain to use your term, but the return on investment from that might not be immediate. It might take some time before companies benefit from that investment. And I wonder, do you share that viewpoint and how long do you think people have to wait before we really start to see that return on investment?

Jay Jacobs: It depends on what part of the value chain you're looking at. if you look at this massive amount of Capex that's being spent by some hyper-scalers to develop artificial intelligence models, they're spending money today on building data centers, on securing energy, on getting semiconductors.

So, some of those companies are making money right now in artificial intelligence. I think where some of the lag is going to be is in the enterprise or government or in the consumer space, really starting to use these artificial intelligence products, the output from all that Capex, that could take time. It takes time for people to change their habits, it takes time for enterprises to adopt a new technology, to feel comfortable with it, to roll it out to their employees, to encourage its use. There will be a lag, but I think it's a well-deserved lag in the sense that its people taking their time to adopt a new technology and understand how to best use it.

Oscar Pulido: And perhaps, tying it to your comments about the investment opportunities, the companies that are benefiting from it right now are maybe the ones you hear more about. They're getting an immediate benefit, but the ones that have more of a lagged impact of it, it might be the future investment opportunity when it starts to improve their productivity and, when it's accretive to the growth of the overall company.

Jay Jacobs: I think that's right. If we look at today's winners, it's really focused on those artificial intelligence infrastructure companies. It's the semiconductors that are. Very powerful data processors that are powering kind of the training behind these large language models. it's the data centers that are in short supply as we look to rapidly scale computing power across the country.

it's some of the energy companies which are finding really a new growth avenue that they haven't had for the last 15 years in terms of. Growing energy demand from artificial intelligence. Those are today's winners that are collecting revenue really in this near-term timeframe. But if we look longer term, you know that healthcare use case for pharmaceuticals, it might be five years before we realize profitability from that.

Because you have to develop a new drug, you have to develop a new drug, cheaper or better than before. By harnessing this artificial intelligence power that's going to take a little bit of time. So, there's absolutely a, a. A different timescale that some of these companies are operating on in terms of when they will realize the benefit from this theme.

Oscar Pulido: And Jay, how are you finding artificial intelligence? Enter your day-to-day life or has it yet? do you find yourself. Using it or being impacted by it in your personal life or maybe even in your work life.

Jay Jacobs: I'm never going to create an itinerary for a trip again. I, that is something I fully outsource to, to the large language models. even writing emails, it, it takes a little bit of rewiring how you think about using this new tool.

I think we take for granted tools sometimes, we, we know how to use calculators, we know when to use calculators. We know how to interact with them. in a lot of ways AI is just another tool, but we have to get used to it. We have to start thinking about how we use it in our everyday lives to incorporate it, and then we can start to really enjoy the productivity gains of outsourcing some of the less efficient tasks we do, and creating more time for the more complicated, nuanced tasks that we do every day.

Oscar Pulido: In fairness, you might be a little bit ahead of me in terms of the adoption of AI in your everyday life. I still feel like I'm coming up the curve.

But I'm sure we'll hear more about the applications of AI in the world and how to think about it in investor portfolios. in the meantime, Jay, we really appreciate you joining us on the Bid.

Jay Jacobs: Thanks, Oscar.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0924U/M-3850136

<<THEME MUSIC>>

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

AI is experiencing a transformative moment, powering the phenomenal run in public markets led by companies like Nvidia, but the investment opportunities certainly transcend that small group of names. So where are the most compelling opportunities? How can AI investment not only build wealth, but contribute to a more efficient future?

Tony Kim is a portfolio manager from BlackRock's Fundamental Equities team and is at the forefront of technology and AI investing. Tony will help us explore the evolving conversation around AI among industry leaders, his response to AI skepticism and the investment potential of quantum computing. We'll also discuss how Tony's passion for technology and history relate to one another.

Tony, thank you so much for joining us on The Bid.

Tony Kim: Thanks for having me. It's a pleasure to be here.

Oscar Pulido: Tony, earlier this summer you hosted your 11th annual tech tour where you and 36 other BlackRock colleagues took a bus more than 300 miles over five days, to meet with leaders of over nearly 30 technology companies in San Francisco and Silicon Valley. I have to say that sounds a pretty fun trip. not surprisingly, AI was a topic that, you talked about a lot. this is a space and a topic that has been changing quickly over the past year though, so I'm curious, how has the conversation evolved over that past year?

Tony Kim: Yeah, as you mentioned, this is the 11th year we have done this. The first nine years there was some talk of AI, but generally very little, very company specific. Last year, and this year, AI has dominated, the conversation. In fact, it was a topic of discussion in every single meeting.

What also is emblematic of, especially this year is, as you mentioned, the rapid change of AI and how AI has basically taken over, the entirety of Silicon Valley. There's been a huge pivot, and this has dominated the strategies of every single company that we visited on this tour and basically across the entirety of tech.

What's changed is in the last 12 months is that intensity has come even clearer into focus and the strategies are becoming more apparent more definitive. The commitment and focus is higher than it was even last year, which was like really the first year we really saw AI come into its own.

Oscar Pulido: It's fascinating to me that in the first nine years of your tech tour, AI was barely a mention, or you said it wasn't a focus. But now the last two years, it's really the only topic of discussion.

Tony Kim: Yeah, it is really the only topic of the discussion because in the prior nine years, AI was more a tool something in the background. Operationally a few companies were using it. It is now, at the forefront of every company, and it's really changing the foundations of, the software industry, the semiconductor industry. It's cascading to the power and energy industry. it's also changing just the very product and services that all tech companies are building to. That's the sea change, and it's been remarkable how that's changed in 24 months.

Oscar Pulido: So Tony, it turns out we were able to join you on this tour, and as you were, meeting with different, industry leaders and company leaders, we actually were able to get some, commentary from them. So first we will hear from Arsalan Tavakoli-Shiraji, co-founder of Databricks, who has been an AI believer since this company was founded 10 years ago. He also is struck by the recent pace of change.

Arsalan Tavakoli Shiraji: The pace of change has been incredible, right? If you talk about, let's say a year ago, 18 months ago, nobody really was even talking about AI. And now all we talk about is, what are GPUs going to be used for? What are all the different systems? How do I harness AI? It's been a while since I've seen something that has so much excitement from industry, yet still is so nascent that it's in the research phase.

Oscar Pulido: So Tony, clearly in public markets, AI has been powering the phenomenal run, in stock markets, particularly companies like Nvidia and a handful of other mega cap stocks. But the investment opportunities certainly transcend that small group of names. So, you're a tech investor, where are you finding the most compelling investment opportunities?

Tony Kim: On one hand, one dimension we should think about AI is, there's a stack of products and services.

And at the bottom of the stack, there is the chips and the infrastructure, the cloud infrastructure. And a lot of the investments, especially last year and this year, have been going to build that foundation. Basically, a rebuilding of the internet, of a new computing infrastructure, which is, AI. There is then another layer, let's call it the Intelligence layer, which is the data and the models themselves, the foundation models. Those are being built and are increasing in capability. And then on top of that, there are software infrastructure and software applications and then services and solutions that combine all of this with the AI intelligence. That is now also starting to be put together of new applications that are leveraging ai.

So, you have these three layers: this infrastructure layer, this intelligence layer, and then this application layer. And the investments you start from the bottom, and you move up to the top. And in 2023 and 2024, a lot of the investment and a lot of the stock price reaction has been at this bottom layer of the stack. However, it takes time for us to move up the stack and, as we progress into year three, year four, year five, we will continue to start seeing opportunities of companies in that intelligence layer and of course finally in the application layer, which has not been as beneficiary of this first wave of AI, which we saw at the bottom layer of the stack and infrastructure.

As investors, we are looking across all of these layers of the stack The market will evolve over time, but we are seeing, at least in 2023 and 2024 for sure, a huge focus and emphasis, of building this foundation of the AI infrastructure.

Oscar Pulido: Tony, you talked about the tech stack, but maybe tell us a little bit more about the end markets and the end users that benefit from that AI spend?

Tony Kim: I'd say the first end market is around these big cloud AI computing companies, building this infrastructure and all those companies that are associated with that, that sets the foundation. That infrastructure spend then gets leveraged into, let's say, the first end market will be consumer. And it just so happens that many of these big infrastructure companies have big consumer businesses: search, social, e-commerce, shopping. And I think you'll start to see AI come into the consumer market and this is a market of what I would call personal assistance.

The second big end market will be around businesses, enterprises that will then, again, leverage this infrastructure spending and bring AI into companies.

The third is the end market for the real world; cars, airplanes, the military, robots, et cetera. The instantiation of AI into the physical world. These three additional end markets, again, I would say we're in very early stages of adoption, first inning or less in many cases. But they all leverage the same infrastructure that is being invested right now at these big foundational models and foundational compute layer. And then that gets amortized and leveraged across all of these, ultimate end markets for consumers, businesses in the real world.

Oscar Pulido: Tony, when it comes to CapEx spending - or capital expenditures - essentially what corporations are spending on that new computing infrastructure, I think that's the term that you used, Google has said that the risk of under investing is far greater than the risk of over-investing. A lot of the big tech companies have committed to massive amounts of capital expenditures towards ai, yet it may still not be enough as Hock Tan, President and CEO of Broadcom shared.

Hock Tan: The amount of money that is involved, we haven't even begun to quantify. And one could imagine the level of spending required both on computing engines, on software models, on infrastructure and power in particular, could possibly be larger than what we all are thinking of at this point. And that's why I say we are probably underestimating the amount of dollars in CapEx, in investment, we would need to make in order to reach that goal, that aspirational goal of what you call AGI convergence in artificial intelligence.

Oscar Pulido: Tony, are you worried at all that the capital expenditures on AI might not deliver the return on investment that people think it will?

Tony Kim: In one singular answer? No. However, Wall Street and investors are obviously asking that question now about ROI of AI and the issue is the two- and 10-year question. Maybe in the next two years, we are overestimating the impact of AI, but in the 10 years we might be underestimating the impact of AI. I would generally agree with that - if we are trying to match investment dollars in and profit out in the near term, that is a mismatch.

Clearly, companies are spending more than the dollars that they're getting out right now, the two-year problem. But in the 10-year duration the potential, benefits and returns that we can get are maybe we're underestimating that. I would generally say I would agree with that statement. You can't match this spending with the revenue and returns linearly, one for one. But, as an answer to your question, I'm not really concerned about that. Your comment about Google and the risk of under investing, I would also agree with that.

The big three hyperscalers, Amazon AWS, Microsoft Azure, and Google. And all three have very, very large cloud computing businesses that they've built over the last 15 years. That has been the engine of growth for many of those companies. But those clouds businesses represent the cloud of the pre-AI era - the SaaS revolution, the cloud computing era of moving compute from customers premises- on-prem -to the cloud. This has been a tremendous tailwind that's driven these companies for the last decade or more. AI has come and we have to rebuild a completely new computing infrastructure. AI then will be instantiated in all these new application end markets.

So, if you are one of these big three companies and if you do not invest, and you so happen to pause or slow down and your competitors continue, you run the risk of falling behind. And if one of your competitors also, builds an AI capability, a technology breakthrough that that leapfrogs you because you're not investing that these are existential potential risks to the current business as currently constructed in the prior era. And so, in a way, it is not only the potential long-term benefits from AI in terms of the returns that come with that, in my opinion, there are certain existential questions if you do not continue to invest, you run the risk of falling behind, which then impacts your current core business.

So that, again, goes to this two and ten year- are you only trying to optimize for the near-term profit, or are you ensuring your position in the long-term future?

And just one more thing about the CapEx, it is a lot of money. I did an exercise, I was adding up the top 10 spenders just this year, it's roughly $270bn of CapEx, of which the top four is $230bn of CapEx plus or minus. So, there is a lot of spending going into this year, but when you look at the balance sheets and cash flow and profitability of these companies, they can afford it. It doesn't seem excessive to me. The other thing about the spending is it's a lot of money, but it's also the moat - this capital that is required to build these most advanced AIs for these companies is also the moat.

And so, this very nature of the CapEx intensity it's also a feature, it's also the 'moat', the defensibility. That all goes in hand with this long term strategic and existential risk. But it creates to me bigger, longer enduring 'moats' and duration.

Oscar Pulido: We heard similar excitement from Rodrigo Liang, co-founder and CEO of Samba Nova.

Rodrigo Liang: You look at all these innovations that are happening across the board, whether that's accuracy, whether that's multimodality, whether that's performance and speed. Wow, that's efficiency, right? You see this innovation across all of these different ways that the models are operating, and I think you're going to only see it accelerate, It's a tremendous time for innovation. It's tremendous time for technologists and we're really excited to be in the middle of it.

Oscar Pulido: And Tony just hearing you talk, you obviously have a very long-term lens on the benefits of AI. You talked about that 10-year window. It makes sense now, why in a recent article in The Atlantic, you were dubbed an AI optimist. it's clear just from the comments that you're making that, that think that's a fair, label to attach to you. What would you say then to the AI skeptics, or those that are questioning its viability?

Tony Kim: In terms of the AI skeptics, I think this goes back to this two in 10-year discussion. From what I see, many of the skeptics are wanting this perfectly matched investment with return right now today. You're not going to get it; it's just not matched. And then that would shift the discussion to then, do you believe in this, the longer-term returns and benefits?

And, I think I would say one of those is the strategic and existential because you can't just assume that the current status quo will be sustained. The second is then what are the long-term benefits that could come, and the returns that could come with ai. And here it does require some leap of faith, some imagination, some creativity of thinking of what are all the possible outcomes and changes that AI can have to business and to society and to productivity.

I do believe it is the means to an end that the investment justifies the potential return. And these are difficult to counteract the skeptics right now because we just don't know when and what those will be and what magnitude

Oscar Pulido: There are of course, a number of companies who are innovating by supporting the AI revolution, not by developing large language models, but instead things like quantum computing to assist with faster AI computations. And we heard from Fariba Dinesh, she's COO of PsiQuantum, a company building the world's first useful quantum computer, and asked her about the potential for quantum computing.

Fariba Danesh: I think the most opportunity for quantum computing to contribute to humanity is, climate and drug development. Because chemistry is quite complex and chemical problems are not something we can simulate today, and computing has contributed to that very little over the years. So, with quantum computing, there's enough compute power where you can actually simulate these very complex mechanisms that happen with bond energies, et cetera, et cetera. Quantum computing is uniquely good for quantum type mechanisms, which of course chemistry is all about that.

Oscar Pulido: And so, Tony, speaking of quantum computing- which I know is a theme that you've been an early supporter of- what are the investment opportunities in this space? It feels like it's something that's been getting less attention than straight AI focused companies.

Tony Kim: Absolutely. Quantum computing represents a next generation of computing. The last 50 years we've been, and we currently are still, in the classical computing era. And I would say these next five years is going to be absolutely incredible in classical computing, driven by AI and what Nvidia, is spearheading and building these clusters of AI computing power, and this is all classical computing. And we are barreling toward AGI and these super nodes with this unimaginable computing power. But they're all classical, what we call, the binary, classical computer,

However, parallel to this, it's been a long while coming and we are now at the precipice. The dawn of, let's call it the, a parallel, it's not replacing classical computing, but it sits adjacent to it, a quantum computer, which, functions very differently to a classical computer. And I always say it's more mimicking nature. You look at the real world and nature. And it's driven by quantum mechanics and to harness that capability, we can build computers of unimaginable computational capability to run very specific kinds of problems that classical computers cannot solve. Problems such as advanced simulations, optimizations, security encryption, factoring numbers and these problems, classical computers cannot solve, and we are within the next five years at the precipice of breaking through a utility scale quantum computing.

So, if you just fast forward, let's say to 2030, on one hand, on the classical computing side, we will have probably computers and AI supercomputer nodes that could approach a million GPUs per node creating and enabling the building of the most advanced AI models humanity's ever seen. Parallel to that, we could have a breakthrough of utility scale super quantum computing, and through a company, let's say, like PsiQuantum, would sit parallel to this AI supercomputer, classical computer and solve unimaginable problems and also create and help generate unimaginable data to also help train the AI supercomputer.

So, what is coming, I think in the next five years, they call it the end of the century, we could have, exponential scale up in terms of computing power, both classical AI as well as quantum. And that is what's exciting. And if you could have one company that breaks through, you could have an open AI-like moment for the quantum computing industry.

Oscar Pulido: Tony, perhaps one final, question as you're talking about the future of what AI could bring, it reminds me that you're not only a prominent, technology investor, but that you also have a passion for history. So, tell us a little bit about why these two passions intersect and relate to each other.

Tony Kim: Yeah, I love history, it might not seem obvious. I have an engineering background, but my true passion has been history. I also look at historical figures either be it Napoleon or Caesar, and Alexander the Great and their strategies. Also, I look at the history of math, physics and computer science, quantum mechanics, the history of encryption and the computer with the enigma machine trying to crack the Enigma machine. All of these kinds of past historical events, historical breakthroughs, they're very formative in how I also look at the future, and the technology. And actually, I quite live in analog world. even though I am living and working in the most advanced technology, I'm more of an analog person.

Oscar Pulido: Well, something tells me somebody's going to be reading about you in a history book one day, Tony, you were at the forefront of the AI revolution and helping people see what was coming. So, thank you for sharing your insights and thank you for doing it here on The Bid.

Tony Kim: Thank you very much.

Oscar Pulido: If you've enjoyed this episode, check out my conversation with Will Sue on AI and the energy grid solving for AI's power needs where we discuss how investors should be considering their allocations to account for AI's growing energy demand.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0924U/M-3846763

<<THEME MUSIC>>

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Taylor Swift has been making headlines lately, but not just about her music or her NFL boyfriend. Economists around the world have been attributing the rise in costs of services and inflation in a number of countries to her worldwide Eras tour.

However, Swift herself can't be held fully responsible for some of the shifts in consumer spending habits that are influencing the prices of goods and services. There are many other macro and micro forces at play in driving, spending behavior and inflation trends around the world. Joining me are Tom Becker and Kate Moore.

Tom and Kate are senior investors at BlackRock with decades of global macro and thematic investing experience between them. Together we will discuss the changes in consumer spending behavior, the future path of interest rates, and what signs investors should be on the lookout for in the latter half of 2024.

Tom, and Kate, thank you so much for joining us on The Bid.

Kate Moore: Oh, Oscar, it's great to be here with you.

Tom Becker: Super Oscar, good to see you.

Oscar Pulido: Tom, let me start with you. Every week at BlackRock there is an investor forum where an investor such as yourself asks a question to the rest of the BlackRock investment platform. And the question is meant to create some discussion and some debate about a particular topic. You recently asked a question about Taylor Swift and her impact on inflation.

So, I'm curious, explain why you used Taylor Swift as a jumping off point to discuss inflation, and what did you learn from your fellow BlackRock colleagues?

Tom Becker: Yeah, Oscar. My daughters were quite happy with the framing of the question because they thought it would help to elicit some more input from the platform. And I think that proved to be true. It was a question that I asked in terms of structural drivers of returns, at BlackRock we call those mega forces. I posed the question as Taylor Swift, maybe a mega force. And it was a really good way to engage people. If we look over the data over the last couple summers, the Eras tour has been not just a phenomenon for music lovers, but it's actually impacted some of the economic data. This summer she went through Europe, in May three concerts in Stockholm led to one of the top three readings of services inflation ever for Sweden. Moved over to Wembley, did some concerts in London. There was an all-time high of accommodation prices, in that month's CPI.

And so you're seeing echoes of this Eras tour go into the macro data. The question I asked was along the lines of, what central bankers were thinking in Europe, which is, are we out of the woods with this high services inflation? In Europe they decided, yes, those policy makers looked through those high prints and started cutting rates. And I guess that's a question are we seeing this phenomenon of high and elevated services, inflation, this catch up post pandemic reopening, which Taylor Swift with her in-person concerts embody is, are we through that phase of the post pandemic reopening?

For the last two years, US consumers have definitely shaken off the high policy rates, economy has grown beyond the wildest dreams of policy makers and forecasters over that period. And I think as we head into the fall, out of August, I think it's just an interesting question to get a sense from the platform, how are they thinking about the reopening? How are they thinking about the state of the consumer? And I think the platform had a couple really interesting answers, or things that I really hadn't thought about.

One, services are tricky because it's a low productivity part of the economy, and so when you get extra demand for services, the likelihood that's inflationary is a little bit higher.

Number two, we still haven't caught up to the trend of services spending that the economy was on pre pandemic, and so there might still be some catch up even though we're in our third summer of reopening.

And then number three, a really interesting point, which is just that the Swifties and this Swiftflation maybe encapsulates this larger phenomenon of micro communities, where you've got people virtually connecting, showing their affinity to certain artists or to hobbies or different aspects. And when they meet in the real world, their willingness to pay is very high. And so, you're going to see that come through in the inflation data.

Oscar Pulido: And since you mentioned the Swifties, they would definitely say that Taylor Swift is a mega force to the question that you posed, earlier. But what you're describing as you talk about strong services spending and how that's creating inflation, this is a continuation of what started when the world reopened from Covid.

And so, what does this mean in terms of the soft landing that policymakers are trying to achieve and that markets are hoping also is achieved?

Tom Becker: That's the million-dollar question. and I guess you could reframe it as has everything changed? It's always hard in, in economics and in markets that think this time is different. But there are elements of the post pandemic restart that I think, we have to be cognizant of.

Like you said, everybody is rooting for the soft landing. Markets have embraced the soft-landing various times over the last couple years, this summer particularly. But I think from our perspective, on our investment team, there are just some mathematical challenges with nailing the soft landing that we're not really sure have been met yet.

First is nominal GDP. So, the nominal amount that economies are growing. it's just much higher post pandemic, it's not just in the US where it's growing five to 6% a year. It's higher in Europe, it's higher in Japan. That makes it harder to get real GDP and inflation into the right zone. So that's the starting point, is the economy just growing, at a faster clip.

But then when you look at the services versus goods dimension and Taylor Swift being kind of part of that services economy, services inflation is just running much higher than it was pre pandemic. Like two times higher in a lot of developed markets, that's got to come off. There are some headwinds to doing that. You hosted Mike Penske on this, podcast about some of the challenges related to the insurance sector. and I think that's a big input into services, prices. But then you've also got this open question of if the labor market is strong, if people keep spending, what's going to bring those services, price inflation down fast enough.

And then on the good side, you've also got the challenge of mathematically goods were in deflation for the last couple decades, but that was a period when China was entering global markets. You had more globalization. We're unwinding some of those multi-decade, trade relationships. And so even if just goods inflation stays around zero, the math gets hard to get to 2%.

And so, I think this is going to be a long journey. Markets definitely think we're there, but we've had some false starts before and I think that could be the case this time in terms of, really just sticking the landing on the soft landing.

Oscar Pulido: What you're describing is a scenario where inflation seems to be persistently higher, and there's a number of mathematical reasons why it could remain, persistently higher.

And so, Kate, perhaps to bring you into the conversation and to hear your perspective, is there a big gap between the perceptions of inflation and the reality of, inflation?

Kate Moore: Oscar, I think it depends on who you ask what is reality in terms of inflation and what is perception? And let me just say this, like right now, as we sit here, in the third quarter of 2024, I think the gap is closing. perception is coming closer to reality, and I think a lot of media stories haven't really helped, especially in an election year. I think we may be close to out of the woods, but maybe not quite there. And I'll tell you two things that I'm really encouraged by.

First, a New York Fed survey that came out this summer where consumer expectations for one year forward inflation is around 3%. That kind of takes us back to levels, consumers were talking about in 2020. Similarly, there was, some data out from the conference board where the median, inflation expectations were at the lowest level since the start of the pandemic. So, there's this enormous improvement, and I think that kind of does reflect the reality, this disinflationary trend.

But I think there's a real tendency for consumers to anchor their expectations on items that they frequently purchase. food and gasoline, economists and economic data watchers, those of us on this podcast right now, I think in terms of one year change, like how are prices today relative to where they were one year ago? are prices up less than in August of 2023? And the answer is yes, but I think consumers often compare today's prices to the last time they felt prices were reasonable. So, in many cases, that would be like in 2019 or before the pandemic, they remember that the cost of, certain food products or the cost of gas, and that really impacts their perception.

There is this perception in the economics community, in the market’s community things are getting better. But on the consumer side, there's still a lot of anchoring to the last time prices were attractive. And I just want to make this other point here is that, given the fact that inflation is oftentimes listed as the number one concern for voters, and we have a very important election in November, not just for the president, but for many seats down ballot. Even if we're making demonstrable progress, I think higher prices are still weighing heavily on how voters, are considering policy and the policy they want to support, for 2025 and onwards. I think there is a little bit of a gap. Things are improving as kind of Tom was mentioning, but some of that gap is warranted because we are all anchoring on different points.

Oscar Pulido: And Kate, in your day-to-day, you look at the equity markets and you're looking for investment opportunities in equity. So, based on what you described, around inflation and this closing gap between perception and reality, what industries and what sectors are of interest to you?

Kate Moore: Let me just say, I, this year, 2024 has been more of a single theme market, or at least it's felt like that way. the market has clearly been in a love story with the AI investment theme, over the last maybe 18 months, and I think for really good reason.

AI and AI related companies, particularly in the semiconductor space, have posted yet another strong quarter as we just finished, second quarter earnings. They're beating analysts’ expectations, they're raising guidance. And these companies that have really been driving the market forward are also the companies that have been the most fundamentally sound in this market. So there has been, a huge outperformance, and very concentrated outperformance. It has been based on real fundamental earning strength.

But I think like after these huge waves of outperformance over this last 18 months, we saw this a number of times throughout the summer, there have been members of the investment community that are asking themselves, is it over now? has all of the good news been priced in?

We continue to have this view that there is a kind of a multi-year investment theme in the AI and AI related technology disruptors. That's not to say that we won't have periods of exuberance and, subsequent pullbacks like we had over the course of the summer, but you do have to be a little bit of fearless, and I say have strength in your belly here, with the longer term investment thesis and understanding that these technologies are going to meaningfully change, work across all different types of. industries, productivity and efficiency.

The other thing I would say is, we're looking at derivative themes around AI and, technology as we try and consider, what the long-term opportunities are, and I would say we look at the power grid and energy infrastructure, heightened data center demand. We look for companies that are making investments in AI right now that can improve their efficiency. I'm very optimistic about the broadening out of AI and AI related themes, that, have really dominated the market in 2024.

Oscar Pulido: And that's consistent with something that, Carrie King, who we spoke to, a while back, talked about the opportunity for, equity market gains to broaden out beyond AI and beyond the technology sector.

Tom, maybe I could come back to you the picture that you've painted is one where, inflation is stubbornly high and maybe could stay there just based on some of the things that you outlined. So, we've talked about this environment of interest rates then needing to stay higher for longer, but how much higher and for how much longer. It feels like there's actually now discussion about interest rates going in a different direction. How do you think about that?

Tom Becker: Sure, Oscar, I think there, there are three more Fed meetings this year. In a fortnight, the Fed looks to be set to, to cut in their September meeting, jay Powell guided there at Jackson Hole. So, I think, the first cut of the cycle is coming, the European Central Bank, the Riksbank in Sweden, the Bank of England, the economies where they've had this Swiftflation over the summer. They've looked through this, central banks are not going to wait until inflation is below target to ease and that's the direction they've been headed.

But I think given the shifts in market pricing that we've seen in August, the question is whether kind of front-end rate markets maybe need to calm down a little bit in terms of pricing, this sustained 2024, 2025 easing cycle, which looks like a cycle you would expect if the economy is much weaker than it has been. As Kate said, we've got an election November that's one of the policy meetings, or the fed's going to have to decide if the data is strong. I think it might be back to December for the, for them to go with their second ease of the cycle.

Oscar Pulido: And Kate, you mentioned how you know, for every consumer, the perception of inflation really is dependent on, the goods that they buy, so maybe talk a little bit about your views on consumer spending for the rest of 2024.

Kate Moore: Yeah, sure. And actually, I'm just going to pivot here really quickly and talk about corporate perception of in inflation because that's had a really big impact, I think will have a big impact, On the economy and on business activity. the people who run companies are also consumers. And actually, when you look at CFO and CEO, confidence, they reached an a significant low. People were not optimistic about the economy or their ability to really expand their sales when inflation was peaking and you saw that get the worst, in kind of the summer of 2022 when CPI peaked. But there's been a significant improvement in terms of CFO and CEO optimism, as inflation continues to improve. And that's really good news for the sustainability of the US economy because if companies are feeling better about prices, they may feel better about making investment decisions.

Now of course, the election will come into play and if there's a significant change in policy or regulation, that impacts in a given industry, that will impact how corporate decision makers end up spending and their Capex plans. But I still feel pretty optimistic here. Inflation is having impact not just on consumer behaviors, but also on the corporate.

The consumer concern around inflation is fading somewhat, but we're getting a lot of news from consumer companies that there are being more value conscious, that consumers are focused on getting, the most they can for their dollar, and making sure that they are really spending their dollars on goods and services that are the highest priority for them.

Like before anyone freaks out and takes a couple anecdotes from companies about value-oriented consumers and thinks that means that the consumer part of the economy is weak. I just want to remind everyone; we should go back to the pre pandemic era where we applauded consumers for being smart about their decisions.

And I think we're in another environment there where, corporates are making good decisions, but they're feeling more confident, and consumers are being value oriented.

There's just one more point I kind of want to make around the interest rate environment and that is, who stands to benefit the most from lower interest rates. Quite a lot of equity strategists and, people who are hopeful for small companies to outperform have talked about how punitive high interest rates have been for small companies. And so certainly as interest rates come down, that's going to benefit small companies.

But if Tom and I are right and the economy is actually in pretty good shape and the Fed is not going to have to slash interest rates, but will be trimming at a measured pace to balance out the economy, we're not going to see hugely lower rates over the very near term, and I would note that the companies with very strong balance sheets and high free cash generation, which are generally larger companies are still going to benefit in this environment.

Oscar Pulido: And we've talked a lot about sort of inflation and the economies, but let's bring this to an investor who has a portfolio and is thinking about what to do in their portfolio. Tom, what. What does that mean for the end investor? When we think about all the developments that we've discussed?

Tom Becker: In terms of What we're looking on, the go forward is really, signs from the labor market, how resilient are people's expectations about their job security, because that's front and center in terms of how people spend their wages is not just the wage they earn, but their expectation of kind of keeping that stream of income. So, I think we're really looking closely at the labor market, prints in the next couple months.

the services spending is really front and center to the US economy. It's a services-based economy. we're pretty, we feel pretty strong on that, but, always open to, to revise our views based on the data.

And I, I think something that, we're positioned for in portfolios, that's a little bit contrarian and might have some impacts down the line is What might a weaker dollar do, in terms of inflation going forward? So, we've been in this really strong, upward, strong dollar environment for multiple years now of us exceptionalism.

There's a bit of a blank space here, with the dollar having some trouble over the last couple months. What does that do to commodities? What does that do to goods prices? I think that's something we'll be looking at closely given positioning, underweight dollar, I.

Oscar Pulido: And Kate, similar question to you. What does this mean for investors? You've talked about a broadening out of equity markets from, maybe what has been dominated by one sector to multiple sectors. And I think you, you said maybe even smaller capitalization companies could benefit if rates start to come down a bit. But what else should investors be considering?

Kate Moore: Yeah, I think there are a couple things related to some of my thoughts around CFO And CEO confidence.

So, one of the things I focus a lot on Oscar is, what do companies tell us? What is the tone of the message that they're giving? So, this is not just the concrete guidance, but also how they answer investor questions and what it feels like their overall sentiment is. So that's something I'm going to be watching very closely.

Labor statistics are also really important. we've had a slowdown in terms of the overall, employment situation, but we haven't had any significant layoffs. I think that's an area I'm going to be watching very closely if we move from a slowdown in hiring to an increase, I. Layoffs. I think that'll raise some flags for me and make me a little bit more con, concerned around the consumer.

And then the last thing I would say, and something we haven't really mentioned as we've been talking very much about kind of the US at this moment is what happens, on the global stage and particularly geopolitical developments. We know that in general, geopolitical risks have very short shocks for the overall market. But it does impact corporate decision making, it does impact government policy, and it can have impacts on supply chain, something we don't want to see return, since we are now much more happily in this disinflationary period.

So, I'd say the guidance, the economic data around the labor market and any shift in the labor market, and then what goes on, in terms of geopolitical conflict are going to be front of mind for me.

Oscar Pulido: You've both shared a tremendous, amount of insight and you've very adeptly, been able to incorporate some nice Taylor Swift song references. I've been paying attention.

So, I'm going to end where we started, which is we'd started this discussion with Taylor Swift and her impact on inflation. Tom, I think you have three daughters, and you mentioned them at the at the outset. So presumably you have a favorite Taylor Swift song, and I'm also curious if there's an artist That perhaps recently or back in the day, you went to go see and you were willing to pay a high-ticket price for.

Tom Becker: Yeah. 1989 is the, the soundtrack of, our household. Has been for a number of years, and it's somewhere between bad blood and welcome to New York, depending on kind of the mood, we're trying to strike. In terms of, back in the day, Dave Matthews Band actually. so, a bunch of high school friends and I, paid up and went out to the Meadowlands, to see that concert. and that was a, a really great summer event.

Oscar Pulido: And Kate, I know in previous episodes that you've joined us on you always have musical references. I know you're a big music fan, so you must have a favorite Taylor Swift song, and you must have a cool concert story of, a ticket you paid for.

Kate Moore: Yes, and yes, of course. Oscar, I've got both of those things for you. So, I will tell you, my favorite Taylor Swift song actually is Renegade with Big Red machine. I think it's a beautiful song, really awesome duet and, maybe not to play, to hype you up to go out in the evening, but I think it's one of my favorite Taylor songs.

in terms of concerts, what would I pay big tickets for? as you noted, I love music, and I love live music. And as I'm thinking about this, there was, an era where there were some great music festivals that I probably would've paid any amount of money to go to.

And I'm thinking of the Horde Festival. The Horde tour, like 1993 to 1996. I think in 1993 it was Big Head Todd, The Samples, Widespread Panic with Blues Traveler In 94, it was the Allmans, Black Crows played in 95. So that is really the era I would've paid anything because they were all day Music festivals with bands I just loved.

Oscar Pulido: That sounds like a value oriented, consumer, when it comes to. Music purchases. I can, already tell that people are going to have a little bit of a hop in their step, when they listen to this, and they're going to get some great perspectives on inflation, the economy, and what to do in their portfolios. Tom and Kate, thank you so much for joining us on The Bid.

Tom Becker: Thanks Oscar.

Kate Moore: Thanks so much, Oscar. I look forward to sharing my playlist on future bids.

Oscar Pulido: Thanks for listening to this episode of The Bid. Next week I speak to Tony Kim, a portfolio manager who is at the forefront of tech investing to talk about the latest trends in Silicon Valley

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Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido,

Stevie Manns: And I'm Stevie Manns.

Oscar Pulido: Stevie, welcome back to the podcast. You and I have been recording the best of summer series. We've already picked two episodes that really stuck out in our minds over the past year. It is time to do the third and final of our best of, and I'm going to turn it to you to, give us that pick.

Stevie Manns: Well, as a previously self-confessed AI nerd, I thought we should take it back to the very beginning when we did our episode, A history of investing in AI featuring Jeff Shen from our systematic active equity team where Jeff really gives us the history of AI. It didn't just start at the end of 2022, this huge boom that we've seen, one in investing, but two in innovations has really been going on for such a long time, behind the scenes. What did you think of the episode when you recorded with Jeff?

Oscar Pulido: Yeah, I agree. when we asked Jeff to take us back in the timeline of AI, he wasn't just taking us back, a couple of years. He was taking us back decades and even further back in history, which, you'll hear in just a second.

But, he also highlighted for us some milestones along the way of when AI really started to appear more on the radar. And again, this wasn't just a couple years ago, this is when we started to see machines beating humans in some games that are very well known. Things like chess, things like Jeopardy. and the game Go, which I had never heard of until Jeff alluded to it. And it's basically a board game that dates back a long time, but you'll have to listen to the episode to get a sense for how many moves you can actually make in the game Go. The sheer quantity is a bit mind blowing, but then gives you an appreciation for why it was important or why it was a milestone when the machine beat the human.

Stevie Manns: Jeff really gave us some great context as to, where it's come from, what we're seeing now and hopefully, I think, to where it's going.

Oscar Pulido: Why don't we have a listen to the episode?

Stevie Manns: Let's do it.

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Oscar Pulido:

Jeff, thank you so much for joining us on The Bid.

Jeff Shen: Thanks for having me.

Oscar Pulido: So, Jeff, I'd like to start by asking you to talk a little bit how you got started in this field of systematic investing and then what is your interpretation of some of the most recent developments in artificial intelligence?

Jeff Shen: Absolutely. So, I started in graduate school, got a PhD in finance and had been in the investment world for the last, 25- 30 years. I'll say that it's certainly been extraordinarily exciting to see some of the most recent developments. Some people like to call it the age of AI, the age of big data, the age of machine learning, and we're going to get into a little bit of what all of these things mean. I'll say, given what's going on in the world, this is certainly a bit of a golden age. We've also never seen so many developments in different algorithms to interpret this interesting data. And then eventually relative to the investors I think the most important thing is how do you make sense of all of this data and what you can do with this data and eventually lead to a better investment outcome?

 Clearly, we're going to get into Generative AI, large language models, If I have to step back a little bit, we've been looking at numbers for the last 40, 50 years. And large language model or natural language processing in general certainly allows us to be really smart readers of any of the texts out there. Whether it's earning transcript, whether it's a broker calls, whether it's news articles. Now we can read smartly as an investor. And I think that's a revolutionary step that can impact how AI can be applied in the investment world.

Oscar Pulido: And that's interesting that you use the term, golden age for data, for technology and how it's maybe helping you do your job. But maybe if we could just, take a step back and tell us a little bit about maybe some of the technology milestones that led to the development of artificial intelligence. Just wind the clock back and help us understand where we've come from.

Jeff Shen: Now we can wind back the clock a lot if we want, because when you think about artificial intelligence it is really a field that encompasses many different subfields, if you go back to logic, go back to Aristotle, or if you go back to normal distribution, At the same time, the artificial intelligence field as we know it today probably can date Back a bit around 1940s and about 80 plus years of research and development. When we think about in 1969, Marvin Minsky and John McCarthy were given Turin award. A big part of it is actually about how do we think about representation? How do we think about reasoning in a machine intelligence way? And when we say machine intelligence, essentially you can really think about an intelligent agent would get a bunch of inputs and then the agent would go through a rational set of calculation- what we call algorithm. And the output will be a set of rational actions and behaviors that is actually desirable in a particular type of environment or context.

The development here is about better input, meaning better representation, better sensing technology, better algorithm, how do you process this information better? And also, how you measure the success is really to think about the output or the behavior coming from this kind of, intelligent agent, whether that can learn in a new environment, whether it can adapt to a new environment, so how good the output is. So, it is really about better sensing, better processing, or better algorithm, and then eventually leading to better output.

Oscar Pulido: I didn't realize you would take us back to Greek philosophers in winding the clock back, but you also made the point that a lot of the research and development has been taking place over the last 80 years. Certainly, a long period of time there've been advancements in this field. Have there been certain breakthroughs or milestones that triggered a shift in the investment trends in artificial intelligence where it started to get the attention of those who wanted to again, invest in this field and weren't just observing it from afar.

Jeff Shen: Yeah, I think the investors', attitude towards this field certainly have gone through I call it a potential three phases. Initially, there's always a sense of skepticism. How can an intelligent system be better than humans in behaving or delivering certain output?

So, there's a certainly a phase of skepticism, which is normal for any type of new technology. Then I think it can go through a bit of a period of hype. There's a lot of excitement, maybe sometimes too much excitement, and then that may eventually lead to a bit of a crash of excitement in any type of new technology.

And I think for AI, I'll say that back in 1950 s, there was a prediction that AI system would beat the world champion in chess in about 10 years. So, you're thinking late 1970s AI would be able to beat the world champion. That did not happen until 30 years later. we all know the story of Deep Blue and Gary Kasparov in 1997.

So initially there was certainly a bit of hype then in the 1980s there was certainly a bit of an AI winter and that caused a lack of enthusiasm in the sector. And then clearly, given some of the latest development, I think right now we're certainly seeing quite a bit of excitement, quite a bit of hype. So, I think, from an investment perspective I would like to think a thoughtful approach in any of these technologies, it's important, because there could be hype, there could be skepticism, there could be crash. It's always important to think about what is really going to impact, the future, what is really going to survive some of the hype, and I think the thoughtful approach is certainly an approach that BlackRock likes to take.

Oscar Pulido: And presumably this cycle that you highlighted, and I'd never heard the term AI winter, but I get the sense, of course those are periods where there was more pessimism towards this technology, but a lot of technology goes through that cycle, perhaps that you've described the hype, the pessimism so with respect to artificial intelligence, why is it that it has reemerged as a viable investment opportunity? I think it's safe to say we're out of an AI winter.

Jeff Shen: Yes, the 1980s is quite behind us. I want to take us back a little bit to think about some of the games that AI has actually delivered. I talked about the 1997 chess match. Deep Blue won over Gary Kasparov the World Champion back in that day. People also may remember that 2011, the IBM Watson system actually end up winning Jeopardy. and we thought Jeopardy's a very human type of endeavor and, for folks in Asia, the game Go has been around for a couple thousand years.

And the Google DeepMind developed this algorithm called AlphaGo. And that essentially, it is an AI system, that actually defeated Lee Sedol who was the world champion back in 2016.

If you don't know what the game Go is, it's a game with a board and you put black and white pebbles on top of it. And the whole objective of the game is to occupy as much territory on the board as possible. The difficulty of the game is that the number of possibilities of the moves is more than the atoms in the universe.

What Google DeepMind did was trying to use essentially what we call is machine learning. It is actually learning, along the way. So to a certain extent, the chess, what they did was a bit of a brute force. They imagined all the possibilities and they went for it. The game of goal, the issue is that you cannot get to the end by imagining all the possibilities.

The beautiful thing here is really that the machine came out with some of the moves that the human Lee Sedol in particular thought was pretty dumb moves, but it turned out to be brilliant moves10 minutes into the game. so, that was a surprise in a sense that it won without mimicking human. It won because it went with a machine way of thinking about what's most rational move under the circumstance and it was adaptive along the way. So, I think that was probably the most surprising part when we see artificial intelligence, that was probably the manifestation of the artificial intelligence because it had nothing to do with human intelligence.

Just to dwell on this, they developed another system called Alpha Zero, which did not even know the rules of the game and essentially self-simulated, so it was playing against itself try to learn the game. That was a major breakthrough because it did not rely on any of the prior human knowledge and it basically self-simulated, so played against itself such that it knows the objective eventually want to occupy as much territory as possible. Other than that, it did not know anything and, it ends up actually winning, against some of the world champions. so that's the part that's most exciting.

So, I would say that some of these big triumphs of AI systems that actually defeat, human or world champion in particular games certainly has been an extraordinary excitement, both in terms of thinking not only what AI can do, but also, the potential for AI system to surpass human capabilities.

That's certainly creates a lot of excitement, but also creates some level of anxiety. And I would say that leads both towards potential opportunities, but also there's quite a bit of a risk that people are considering.

Oscar Pulido: And so just bringing it back to the investment landscape, what are some of the types of companies in the AI space that are attracting the attention of investors?

Jeff Shen: I think, right now generative AI, especially, related to large language model is certainly all the excitement. Language is so central to our civilization, to our culture, and if you have a AI system that can have language, essentially at its own disposal and being able to not only mimic a human, but also, in a lot of tests, you can see that it's actually, whether it's a AP test for some of the high school graduates or some of the GMAT or GRE type of test, it certainly has demonstrated very strong capabilities. That part is actually generating a lot of excitement.

I think the second part is also if you're providing tools for the AI revolution whether it's chips or whether it's systems, whether it's cloud computing. So, the tools companies are also benefiting, from this overall AI trend.

That's probably the two big ones. Clearly, the outlook for this space is there will be certainly a few winners, but I think there's also could be quite a few losers because this is a very competitive space.

Oscar Pulido: And on the generative AI, side of it that you mentioned, as artificial intelligence becomes more mainstream and more people talking about it, one of the things that gets raised, and I think you touched on this, there's ethical concerns, there's questions around the biases that might exist in the data that AI is processing, there's data privacy concerns. So how do you see these generative AI companies dealing with those issues, or are they waiting for public policy to step in and regulate this in their own way?

Jeff Shen: Yeah, I'll come back. regulation second. I think just looking at the state of the world I’ll make a couple of observations.

One is that biased data will lead to biased output. Data integrity is very important and making sure that the data is covering all different aspects of the world so that we can get a more balanced output. So, I think the integrity of data is certainly critical for the success of the AI system.

The second part is some of these algorithms that's been run are extraordinarily powerful. Millions and billions of parameters that's actually being put into the system. The challenge there is really that the transparency aspect of it is actually very difficult to achieve just given how complex these systems can be. Probably some people may have heard about the neuro network that is underlying a lot of these generative AI systems. When you get into the billions of parameters, it's very difficult to figure out how the decisions is actually being made, that level of transparency can be of concern.

So come to the regulation. I think this is also the field that the industry, the technology is certainly ahead of where the government policies are. And this is actually where education for the policy makers, making sure that people really understand not only the power, but also the risk associated with the systems are very critical.

I think it's also a competitive game whether it's a competition within the industry, competition around the globe, it’s also forcing industry to need to go very fast. On one hand, this is a very powerful tool that can be transformational in a lot of industries, certainly in the investment industry. At the same time, the regulation is one or two steps behind, so I think that's the conundrum that we face.

Oscar Pulido: And so, Jeff, you took us back many years in terms of the history and some of the milestones that we've seen that have helped the development of artificial intelligence. You're using this in your day-to-day job as a systematic investor in present day. So, take us forward into the future. What are some of the developments that you see happening in AI and what are the investment opportunities for investors?

Jeff Shen: I would call out three things that I think for people to think about. I'll say that big data. Big model and big crowd on the big data front there's certainly a lot more data available and from an investment perspective, this is certainly about how do you take as much data as possible in your decision making. And it's a scale game, it's a bit of a race, on how much data you can absorb, how much data you can process. But I think the race is on, and I think that's also where the excitement can be because if you can measure things, you can make better decisions. And data is really the new oil for the AI system.

On the big model front, we talk about generative AI, we talk about large language model. These models are getting to be more and more powerful, also more and more flexible. I'll give you one specific example today we can measure many things; we can also combine them in a way that is actually optimal. So, it is not only about measure many different things in the economy in the world, but it's also combining them so that you can form a holistic decision through a big model by combining features together. So, I think from that perspective the big model not only allows you to combine different things in efficient fashion, but also allow you to tackle multiple objectives. You may care about, the investment outcome you may care about, draw down characteristics. You may care about the climate impact. So, this kind of big model really allows you to combine things in efficient way, but also allow for considering different objectives.

And the big crowd aspect of it. If you think about how generative AI is actually coming from. The human input is becoming more and more important in getting the AI system to be better. So, it is interesting that even though we call it artificial intelligence, human intelligence is actually quite important element of artificial intelligence. So, I think this idea of human in the loop is certainly something that I think is here to stay. We are making the system better and to allow the system to produce more rational response.

The new world it's not only about generating new ideas, we can see that from a generative AI perspective we can generate a lot more. But I think the human input here is also really allows us to think about how we judge these things. How do we discriminate the good output in relation to mediocre output? So, I think the human, aspect of it is actually also evolved from going from purely at a job of generating things to one that's also about discriminating different outcome. So, I'll see that big data, big model, and big crowd, are some of the exciting things as we look forward.

Oscar Pulido: Well, that's an easy way to remember your outlook and that last point, is a good example of just as technology evolves and it appears to be displacing humans in, what they do, humans adapt and humans contribute to that technology and work alongside, that technology. So, I'm going to go out on a limb, Jeff, and say, this is not the last time we're going to talk about artificial intelligence on the podcast. So, we look forward to having you back at some point in the future. And thanks so much for joining us today.

Jeff Shen: Thank you so much, Oscar.

<<THEME MUSIC>>

Oscar Pulido: So, Stevie as the self-professed AI nerd, I have to ask you now, listening to that episode again, what do you think?

Stevie Manns: I loved how engaging Jeff is. he was so pleasant to listen to. I could just listen to him talk about it all day, you know when someone is just so passionate about a subject. It was so much fun to listen back. And also, I recently got back from a trip to San Francisco and in fact, Silicon Valley, where one of our portfolio managers from our fundamental equities team, Tony Kim, he does an annual tech tour and he goes around Silicon Valley and looks at companies that he's considering investing in. And I was lucky enough to join him ' cause we're doing an episode on it in September. It was fascinating to be in the room with some of these CEOs, COOs, people who are leading the charge very directly in these tiny offices in Silicon Valley. So I'm really excited to bring that episode to our listeners.

Oscar Pulido: And that is interesting because, Jeff in the episode alludes to the 1980s being this AI winter, this period where the skepticism towards AI was, pretty pervasive.

And I didn't even think that was a period in time that had occurred, but it just goes to show some technologies go through some period of skepticism I think we're past that period now for AI. And it sounds like you have some great color, that we're going to hear about in this episode.

So, that does it for our best of summer series. Next up, we're back to our regularly scheduled programming in September, and as Stevie just alluded to, we will have a special episode on the biggest trends coming out of Silicon Valley with our fundamental equities portfolio manager Tony Kim.

Thanks for listening to The Bid, and don't forget to subscribe wherever you get your podcasts

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

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MKTGSH0724U/M-3706451

<<THEME MUSIC>>

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Stevie Manns: And I'm Stevie Manns.

We are continuing our summer series with a look back on some of our favorite episodes, and last time I picked a favorite. So this time Oscar, it's your choice. What do you have for us today?

Oscar Pulido: Well, I'm going to pick the episode on Japan. It was called Is Japan At An Inflection Point and we recorded it with Belinda Boa, who is one of our lead investors in the Asia Pacific region at BlackRock. And the reason I like this episode is that as long as I've been working in the markets, Japan has been this big stock market, this big economy that has been out of favor and people forget that Japan was the story of the 1980s. The Nikkei peaked almost on the final day of 1989 and Japan was all the rage. And then it was like three decades of a lot of heartache and underperformance and a lot of false dawns a belief that Japan at some point would recover in terms of stock market valuations instead of in terms of stock market performance, in terms of economic growth. And again, a lot of false dawns. But now, and these are dangerous words when we talk about markets, it does appear that this time is different. We're seeing real change in Japan. We're seeing more inflation, we're seeing wage growth, we're seeing corporations that are behaving in more shareholder friendly manners in terms of increasing ROE in terms of increasing the dividend payments to their investors.

And when we talk about the mega forces, Japan has a lot of them kind of intersecting with them, one of which is. Demographics. Japan is an older economy. But as a result of that, they've been on the forefront of technological innovation in order to become more productive given their aging population. So I've just heard of Japan as this area of high potential investment opportunity, and it's really now starting to come to fruition.

Stevie Manns: That was a very intelligent summary, which makes what I am about to say feel rather silly in comparison, but I feel like Japan has been the hot new vacation destination for the last couple of years. it's been Italy or Japan.

And also, the TV series Shogun that came out earlier this year has brought Japan into focus for a lot of people. and I'm also a really big Tokyo Vice fan. So I, for one, I'm very excited to book a trip to Japan…

Oscar Pulido: They're known for their hospitality. that's for sure. So why don't we take a listen to the episode.

<<THEME MUSIC>>

Oscar Pulido: Belinda, thank you so much for joining us on The Bid.

Belinda Boa: Hi Oscar. Thanks for having me.

Oscar Pulido: We're here to talk about Japan, and I'm wondering if before we zoom in on the present and the reason that people are talking about Japan so much today, I wonder if we could zoom out and think about some of the standout moments that Japan has had over the past few decades and how have people thought about Japan just as a market to invest in?

Belinda Boa: Yeah. Japan was the poster child of the 20th century. Post-World War II, it grew a massive agricultural hub in the sixties. It was known for its engineering and its innovation in the seventies, and by the eighties it was actually the second largest economy in the world. And the reason why I say that is not only that the economy was thriving, but so was the stock market.

December 1989 was the peak of the Japanese stock market, and at the time, Japan was 45% of the world's market capitalization, it's now six. Not only did it have an incredible run, it became an asset inflated bubble economy.

Post December 89, just one year on from that, about 2 trillion was roughly knocked off the market capitalization of the exchange. That was roughly half its value. And from there it entered two decades of very low economic growth, deflation and stagnation.

And the reason why it's so important is that, when you have an environment of stagnation and deflation, for as long as Japan did, it creates a strong incentive for both corporates and for households not to invest and not to spend.

And so Japanese investors historically have been some of the most risk averse in the world. Households today, still, most of their assets are in cash and in deposits. And up until recently, even corporates had very high cash balances. Lack of investment also meant that there was a lack of growth in the market. Roll on to the end of the nineties and beginning of 2000, the Japanese government, put forward some aggressive policies, some of which worked, but only for a short space of time. It was only in 2013 when Abenomics, which was really the economic term for the late Japanese leaders, revival of the Japanese economy had sort of three errors and the focus was monetary policy, flexible fiscal and then a structural reform story.

And the idea there was to reinvigorate growth to bring back inflation into the economy. So up until recently, we haven't seen any of that, but that's why I think we're so excited about this transformational story that's playing out in Japan because we are now seeing in the economy some of these efforts by policy makers and by corporates, which are really turning around what has been a very disinteresting environment for Japanese investors.

Oscar Pulido: Belinda, you mentioned a couple of really interesting things across that timeline that spans a few decades. I wrote down two numbers- 45 and six. You mentioned Japan was nearly half of the world's market cap back at its peak in the late eighties, and today it's less than 10% at single digits, so that suggests that Japan has lagged a number of global stock markets over the last 30 plus years. But you're painting a picture that things are getting better, maybe talk a little bit more about this renewed investor optimism that really started in 2023.

Belinda Boa: Well, Japan has been both unloved and under owned in global portfolios. And Oscar, you're right, there was a good reason for that. When you're in a deflationary environment with a lack of consumer confidence, a lack of spending, both at the corporate level and at the household level, it doesn't generate the sort of returns that you've wanted, and that's been the environment that actually characterized Japan. But there are some really big shifts that are happening, and I want to just focus on three of them.

Firstly, the macroeconomic environment. I mentioned that Japan has been in this deflationary spiral for a long time and for the first time, since mid 2022, we are starting to see inflation come back. This is going to have a profound impact on the behaviors of households and corporates. Because as opposed to always being in a cost cutting exercise and worried about costs and not spending, actually, we are now seeing companies able to increase their prices. The impact of that is that we're seeing margin expansion. So, this is profitable for companies and also, they're able to spend not just on their own CapEx, but on wages.

So, we're seeing wage inflation, you look at CapEx, you look at wage inflation. The numbers at the end of 2023 are at multi decade highs. So, the macro environment is significantly different to where we've been and the impact that it's having on corporates, on households, I think still has a long way to play out, but it's very important because it's so different.

Secondly, Japan is a diversifier. When you look at the rest of the world, we've been in an inflationary environment where inflation has remained stickier for longer, rates are higher for longer, and Japan's policy is very different to the rest of the world. But that may change going forward. what's also important to note is when you look at the stock market, it is very diversified. The US stock market is very concentrated in a number of tech names. Even A ex J when you look at Korea or Taiwan, has a very big concentration in semiconductors, and Japan is far more diversified. So, when you think about a global portfolio allocating to Japan, they really benefit from the resilience of low correlation driven by the macroeconomic policies, the economic environment, as well as the diversification of the index.

And then lastly, not only are we seeing investors globally interested in Japan, but also there's been a very big shift from the government in terms of launching, a tax savings scheme for households. This is to encourage households to allocate from their significant cash holdings into securities. And while I think this is going to take a long time to play out, and we do understand that this is not only an allocation to purely Japanese equities, it is a very big shift from the environment we've been in where, like I said, households have held very large cash balances.

Oscar Pulido: So as of this month, we believe that the NISA scheme, which is going to be launched, is going to actually provide a separate tailwind to the Japanese equity market from domestic investors. You just reminded me I was going through my bookshelf this weekend and I came across a book that I read post the Financial Crisis in 2008, and it was titled This Time is Different and the authors were making the case that financial crises actually have repeated themselves over time. So actually 'this time is different' are four very dangerous words to utter when it comes to financial markets because we tend to see a lot of these false starts and I think Japan has been characterized like that, before where you saw some of these ingredients that you mentioned maybe in place and then nothing manifested from it. But you've talked about inflation, you've talked about the role that it plays as a diversifier, policy changes, and so maybe this time, in fact really is different in terms of Japan's revival. Can we talk about the geopolitical landscape and how does that affect the renewed interest in Japan?

Belinda Boa: This is a theme that we speak about a lot, particularly in this part of the world. We have been over the last decade in an era which can be described by geopolitical moderation, a globalization, and those terms, we're not speaking about anymore. We're in a world of global fragmentation. We are calling it the world in three, where we have the countries aligned with the West, countries aligned with China and the East, and then there is a large block of neutral political countries. These countries we think are going to benefit massively from the shifting trade patterns and shifting in supply chains.

So, when I look at trade numbers, trade's not declining. Trade is just shifting, and it's been driven by politicization, by a need for security. That's true for governments, it's true for companies as well. And we look at Japan, which has been very politically stable for many years. It has very close ties and allies in the West. And so as global companies are looking at rewiring their supply chains, we are seeing, companies looking at Japan as a market that could benefit from this. We know there are very large companies which are signing contracts to build manufacturing plants and large R&D centers in Japan. There are also domestic companies that are doing the same. And while this is going to take a long time to play out, we believe because of its political stability that Japan is one of those countries along with some of the other multi-aligned countries that are set to benefit from this rewiring of supply chains globally.

Oscar Pulido: And you made the case that Japan is a more diversified stock market maybe than some of its developed market peers. I think you talked about the US and the peers in Asia as well, having more of a tech concentration. So, talk a little bit more about Japanese companies and. Businesses, what is it that makes them unique for investors to consider?

Belinda Boa: There's so many unique stories that are really playing out now, some of those opportunities actually are driven off the headwinds which Japan has faced over the last couple of decades. Japan has had a declining workforce since the middle of the nineties, and that's because of its aging population. It actually leads the world in a graying population- they call it a silvering population. And as a result, it has actually been focused on developing, medical technologies and factory automation to deal with the fact that they're going to need to address labor shortages. As a result, there's some global companies, which are leaders right now in this space, not only to provide those type of services and factories as needed in Japan, but also globally.

An example of that would actually be railway operators. They're using AI to monitor remotely and to improve the efficiency of the railways. This is an area which is growing, not just domestically in Japan, but also there is a need for this globally because Japan is now not just unique in an aging population with a tight labor market and labor shortages.

Medical services and products is another area where we are seeing Japan has been focused. Also because of its aging population, but there is now a regulation which is coming through. So as of April, doctor's hours are going to be regulated in Japan. The need to have medical services and products which will be able to alleviate the hard-working hours of doctors, is now a regulatory requirement. So, we are seeing investing in this infrastructure. And we think that there's going to be a global need for this, so again, we are seeing the need of some of these unique investments that Japan has made over the last couple of decades now playing out in both innovation and leadership for aging populations.

Oscar Pulido: So, Belinda, when you went back through the timeline of Japan over the last few decades, you touched on some economic reforms that started about 10 years ago. they were called Abenomics, and this was when Prime Minister Shinzo Abe, introduced economic reforms, and I think they didn't quite deliver the impact that they were intended to. You've touched on some more targeted, regulatory reforms in your comments around healthcare, savings schemes that individual investors have, but usually at a country level, there are some more significant reforms that need to take place for a country to really experience this revival. So, can you talk a little bit more about those?

Belinda Boa: Yeah, corporate transformation, so this is a unique story to Japan. It's one of the biggest themes that we have had in our portfolios over the last year and a half. Japan used to have a significant number of conglomerates. Or complex organizations with a number of listed subsidiaries. they were both difficult to analyze, but also a lot of these were not profitable or had very low growth prospects. When Abenomics introduced, the third era was very specifically directed at this corporate reform. We have seen a number of companies restructuring, and spinoffs of non-core business. And that's actually generated, improved multiples for the companies, higher profits, and clearly the equity prices have reacted as well. This is just the start of this transformation. There are many more companies that are going through that right now. So, we do believe that there is still a huge amount of embedded value that can be unlocked from these corporate transformations going forward.

But look, it's not only the government policies like Abenomics, which have helped with this corporate transformation story. We've also seen the Tokyo Stock Exchange, which has called for better capital efficiency of companies. And by that they are focused on making sure that companies, stop hoarding their cash and spend their time looking at how to spend it and how to improve shareholder returns. So, it's focused at the end of the market where book value companies are low. that was a reform that was actually introduced in 2023. As of a couple of days ago, the Tokyo Stock Exchange has taken it one step further and they have decided they're going to name and shame companies that fail to report on how they're going to release value for shareholders and how they're going to improve their book values. That has actually been one of the most significant themes that we've been invested in over the last number of years, and it's playing out. And while I think there has been progress, we're seeing change in multiples, we're seeing business models improve.

There's still a long way to go, Oscar, when I look today at the Top Ex, which is the broad index in Japan, roughly half of the companies still trade below their book value. And what that means is they trade below the value of their assets. So, there's still a lot of upsides here, in terms of corporate transformation, it's one of the bigger opportunities and themes we've been invested in.

Oscar Pulido: And it sounds like what you're describing takes some time to play out. It doesn't happen in a week or a month or maybe even a year but makes this an interesting market then to follow for the next couple of years as things like what the Tokyo Stock Exchange is doing come to fruition. And you mentioned where you're sitting, we should mention that you're recording this, in Singapore at a rather, late hour of the evening to accommodate us. But you're the head of active investments in the Asia Pacific region for BlackRock. So how do you think about the role of an active investor when you're looking at the Japanese market?

Belinda Boa: It's a good question, I feel biased answering it, but let's be clear. We believe that Japan is going to have a larger role in global portfolios because of all the things that I've mentioned going forward. And whether that is a role in terms of just broad index exposure or whether it's an active exposure, so relative to a benchmark, or even a private exposure. I just believe that because of this transformational story that is playing out, we are going to see more interest and more investment in Japan as a whole.

However, because of this massive transformation that we are talking about, and because Japan is ripe for stock picking, Tokyo Stock Exchange had 3,900 companies listed on the exchange at the end of December. It is deep, it is liquid. As I've mentioned because of this transformational story, not all companies are ripe for the changing business model environment and are going to benefit from some of these things. So, I'd argue that this is one of the few markets where you really do want to be active, so that you can be on the right side of that trade if you want to enhance your returns in Japanese equities.

Oscar Pulido: Right, it's a large market with a lot to choose from and perhaps some inefficiencies that are going to start to correct themselves in the years ahead. So, an active investor has a good playground from which to choose from. Belinda, you're probably familiar with the five mega forces that the BlackRock Investment Institute has put out, and we've talked about them on the podcast.

You've actually mentioned a few of them in your comments. You talked about artificial intelligence, aging populations, and geopolitical fragmentation. Other mega forces include the future of finance, and the low carbon transition, as you think about. Japan, what are some of the most compelling mega forces that you think impact that country?

Belinda Boa: Yeah, the one I probably haven't spoken about is this transition to low carbon. It is front and center for Japan, and interestingly, it has been probably long before sustainability, the term became popular globally. And the reason for that is Japan has had to focus on the scarcity of natural resources, and its social values given the changes that I've mentioned from demographic perspective. It is a country that has faced unbelievable earthquakes and tragic tsunamis over the years, and there is a deeply felt duty to both protect and preserve the environment in Japan. That combined with the country's expertise in engineering and innovation has meant that it's actually developed energy efficient industries years before the rest of the world was starting to look at that. It was the first place that developed the hybrid electric vehicle. It also has this deep sense of renewables, and in fact, plastic bottle recycling, it has been running at over 80% in Japan for over the last decade. That is significantly lower in other countries, so just examples of how focused the country has been in terms of the theme around sustainability.

But more important than anything else is the fact that we are seeing both public and private companies aligning with the government's commitment of 150 trillion yen to building a sustainable future in Japan. And that means we're going to see more leadership and more innovation from companies around the theme of sustainability coming out of Japan. And they will thrive in that environment.

Oscar Pulido: So, it sounds like almost all of the mega forces are somehow interweaving in the Japanese investment opportunity based on what you're saying. Belinda, I know that you're actually from South Africa. you spent part of your career there, you've worked in London, you've worked in Hong Kong, now you're in Singapore, you have this great global perspective. I'm just curious, when you go and visit Japan, is there anything that, jumps out at you in terms of the economy, the industries, the companies that you're looking at that you'd want to share some perspective.

Belinda Boa: I've traveled to Japan for years, Oscar actually one of my first trips to Japan, I wouldn't have even considered going to Hong Kong or Singapore as Japan was really the hub. It was the hub of Asia, that's, where business was done for Asia. I remember one of my first couple of trips to Japan, I needed someone to walk me through the station because there was no way that I could navigate the station, it had no English language. I'm sure you know that from your trips as well. But one of my more recent trips to Japan, I stood in a queue at immigration for an hour and a half. And that is not speaking about any inefficiencies in immigration in Japan, it really was speaking to the number of tourists that were coming into Japan. It has become an absolute global destination for tourism. Certainly, in Asia if you speak to anybody, their number one choice of destination is Japan. and Japan, when you look at the numbers, is seeing a real boom post covid in terms of tourism. That's true because it's a fantastic cultural hub, it's a shopping hub, it's got beaches, it's got magnificent skiing and not to mention all of the incredible food.

I mention that because for a lot of our investors globally who have not seen and felt on the ground the transformational story that I'm talking about, it is an incredible destination to go to. And lastly, it is now 35% cheaper than it was a year ago because of the yen depreciation, I think tourism's going to continue to boom. It's an open politically stable economy in our part of the world, which is, looking for the story of transformation and as it plays out, I think getting a feel for it on the ground is going to be super important.

Oscar Pulido: You're right! I have had that experience of walking through the train station and feeling a bit lost, fortunately I was guided by somebody. But it gave me the sense that there's a lot about Japan that I don't know, and you've helped fill in some of those blanks today. Belinda, thank you so much for your views on Japan, and thank you for joining us on The Bid.

Belinda Boa: Thanks Oscar!

<<THEME MUSIC>>

Stevie Manns: So that was your conversation with Belinda, Oscar. Any further thoughts that come to mind?

Oscar Pulido: Again, I just think that, uh, Japan is probably an unknown to a lot of investors. It's a big stock market though, and it has been a big stock market for years, but it hasn't had the headlines that it has today from an investment perspectives and listening to the changes that are going on there that Belinda describes, again, having been associated with the markets for many years, I've heard this story once in a while and over the past 20, 25 years, but it's happening in terms of stock market outperformance in terms of real change in corporations.

So it's rare for us to just focus on one specific country, but it is one that has, again, a lot of these mega forces that are impacting its trajectory, and it's one that you could have ignored it for about 30 years and been forgiven for doing that, but it's really hard to ignore it anymore.

Stevie Manns: Completely agree and I for one, will be brushing up on my Japanese in my language learning app. So Kanpai to you, Oscar!

Oscar Pulido: Ha! Which means?

Stevie Manns: Cheers!

Oscar Pulido: Oh, very good. Good. Well, you're ahead of me on your Japanese language skills, so I'm just going to leave it there and maybe let you do the outro again.

Stevie Manns: Thanks, Oscar. Well, next up on The. Bid again. We've got the market take coming out on Mondays in August, and then it's my turn to pick a final episode to, finish off our summer series, so thank you for listening to The Bid. I'm Stevie Manns.

Oscar Pulido: And I'm Oscar Pulido.

Stevie Manns: And subscribe to The Bid wherever you get your podcasts.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0724U/M-3706448

<<THEME MUSIC>>

Oscar Pulido: Welcome to The Bid. where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Polito. Today I'm pleased to welcome a co-host, Stevie Mans, the bids producer.

Welcome, Stevie.

Stevie Manns: Thank you, Oscar. It's nice to be in front of the mic for a change…

Oscar Pulido: and it's nice to have you back on the podcast. one of the times that we had you on was last summer when we did our Best of summer series, and we're bringing that back again this summer. This is an opportunity for us to highlight some of the episodes over the past year that we found really interesting.

And so I'm going to give you the honor of kicking us off with, your episode that first comes to mind as best of this year.

Stevie Manns: Thanks. Oscar. So my first pick is Gen AI through a COO lens with Rob Goldstein and Lance Bronstein, I love this episode and I've really become a bit of an AI nerd over the last year and change. I'm absolutely fascinated by it, as well as being, I think, the right amount of terrified by it too. It just feels like I'm watching a thriller movie. I'm excited, I'm on my toes wondering where it's going to go next. And what I loved about this episode was Rob's framing it as the biggest thing since the Industrial Revolution. And for me that really put it into perspective of what we are witnessing and that this is such a poignant moment in history. But Oscar, you were part of the conversation. I'd love to know what you thought of it.

Oscar Pulido: Yeah. I guess picking up on what you said, Rob has been associated with BlackRock for a long time. He's been associated with the technology industry for a long time, as has Lance, and they both were very excited about where AI is right now and the potential for it to, I. Bring productivity gains and these aren't just productivity gains that somebody out of college is benefiting from if they're working at a company like BlackRock.

This is Rob and Lance actually giving examples of how they've used it to draft up memos for board meetings, and there was the interesting story that they talk about of how they shared a first draft of this memo with some pretty discerning editors in. Both Larry Fink and Martin Small, who are the CEO and CFO respectively at BlackRock. And Larry and Martin actually not realizing that it was an AI written memo, that first draft. So to me that was like, wow, these guys are actually using it themselves. and these are folks who really know the tech industry. So that really caught my attention.

Stevie Manns: I couldn't agree more. Shall we take a listen again?

Oscar Pulido: Let's do it.

<<THEME MUSIC>>

Oscar Pulido: Lance and Rob, thank you for joining us on the podcast,

Rob Goldstein: Awesome. Great to be here.

Lance Braunstein: Thank you.

Oscar Pulido: Lance, this is your first time, I think you're what we refer to as a longtime listener, first time caller. And Rob, it turns out a little fun fact is that you were actually the first guest on the first ever Bid podcast that we recorded, the topic was around FinTech, the sort of intersection between finance and technology, so it's very appropriate to have you back.

Rob Goldstein: I actually assumed I was coming to get my royalty checks. Is that not what's happening here?

Oscar Pulido: We know you've been busy, so we took a little bit of time in welcoming you back. That was about five years ago, you didn't spend a lot of time talking about AI on that episode at the time, but a lot's changed. It's 2024 and AI is top of the list of topics that we've been addressing on the podcast, and this is a really great opportunity to hear from two business leaders at BlackRock about how it's impacting the business.

So, Rob, maybe I can start with you. I'd love to hear your perspective on Gen AI, and just how it's evolved over the past year because it seems like things are evolving quickly.

Rob Goldstein: Taking a bunch of steps back, AI as a concept is not a new concept. In fact, sometime in the 1950s MIT started its AI lab. So as a broad concept, AI's been around for a long time.

So, it's January 2024, but if you really think about it, from the period of time, more or less of Davos last year, so in January 2023 till now was actually, in my opinion, one of the most extraordinary times in the history of technology.

And there were major, major, major step functions in terms of technology, but more importantly, it's less that there's sort of new math. It's this confluence of data, compute power methods that have existed for a long time all coming together in a way that effectively has enabled or really started the transformative journey to enable English to be how people interact with computers.

People have grown accustomed to interacting with computers in certain ways, they've grown accustomed to interacting with them, with a mouse, with a keyboard, through your phone, with your thumbs. But for the first time, there's enough data, there's enough compute power, there's enough technology to fit models that enable you to talk to a computer, and to have it talk back to you. That capability, that step function is actually, in my opinion, one of the most transformative technology step functions we will see in our lifetime, this is going to really change how people think of technology.

Oscar Pulido: I'm glad you mentioned that AI is not A new concept. It's popular now, but that it's something that's been around for decades, and we actually talked about that on a few episodes, last year with some of our investment leadership. People like Jeff Shen and Brad Betts, who talked about, Dr. Steven Boyd and, the AI labs that we've set up. I'm also fascinated that you've been in the industry and with BlackRock for 30 years, very close to technology, and that you're saying in the past year is some of the most transformational change that you're seeing. So, how does that impact the financial services industry. You're the COO for BlackRock so you're the pacesetter for change. so, what are financial services company doing to try and stay up with that change?

Rob Goldstein: It's actually a super fascinating question because when you go to meetings and start talking about this stuff, people want to start talking about humanity, robots, when are the robots taking over humanity. So often I'm the one saying that's super important, but we need to focus on this through the lens of being in our jobs in a company.

The way I like to think about it, this whole concept of language and English being the way people interact, is a very different way technology is used and it's a way that really impacts work patterns. It's a way that really impacts how companies view productivity, efficiency, those broad concepts.

I'll give you a couple of examples. Lance and I were, leading a group of people as we presented this to the board. We wrote a presentation, and in the presentation, we spoke about a variety of the aspirations that we had for BlackRock, but the key theme is that all of the technology tools we build, people should be able to just type in what they want the tool to do, and the tool should be able to do that. That's number one.

Number two is we produce a lot of client reports. performance evaluations, credit write-ups, prospectuses, whatever it is. That first draft why can't that be done by a computer? Normally the work pattern would be someone would then take that away and four days later you'd get a draft of the letter. Why can't, right after that meeting, we get a draft of a letter that's from a computer and then we all comment on it.

So, what we did for the board presentation is we wrote a PowerPoint presentation explaining what we were going to do, the strategy, the risks, all of those components, everything you would imagine. Then, we actually fed it to ChatGPT within what we call a walled garden, basically our own version of effectively running the ChatGPT models, but within our own infrastructure, so we're not leaking any information. So, we took that presentation, put it through the model, and we said write a 1000-word executive summary, because in addition to submitting a PowerPoint presentation, we also would submit a, an executive summary more in like Microsoft words, something that's more, literal than a deck.

I got the memo coming out of it, and I gave it to two people who are among the most critical people in terms of looking at memos. One was Larry Fink, and one was Martin Small, our CFO. Martin came into my office and Martin said, I don't know why you didn't mention this, it's missing this, the tone's a little, you should be more confident in what we've done. And I was like, 'Oh, Martin, it was written by a computer.' He was like, 'Oh, really?' He had no idea. And then with Larry, it was the same thing. 'Hey, the tone of this is off.' And I said, Larry, it was written by a computer. We could set that tone.

I could have said, 'Here's a PowerPoint presentation, here's 10 memos. Give me a memo in a thousand words that summarizes this PowerPoint presentation in the tone of these other memos.'

And I think if you look at it through the lens of A COO, the productivity that unlocks is beyond imagination. If you look at it through the lens of a normal person in terms of helping you in daily life through being able to talk to a computer and have the computer talk back to you, it really is a remarkable, transformative opportunity.

Oscar Pulido: And that word productivity, the two of you are senior leaders and any time saved is very helpful, but it helps people across an organization. The example you just gave time saved and being able to invest it elsewhere. And Lance, you sit at the forefront of the technology platform that BlackRock runs and what has what Rob has discussed around the evolution of gen AI mean for an organization that has a tech platform that employs engineers, what do those engineers do now when the gen AI tools can do the kind of stuff that Rob described?

Lance Braunstein: Before I get to that, let me riff on the idea that this is really expansive. So, when we say that this will impact productivity across job families, we mean that quite literally. We talked about executive presentation, getting to a first draft of a PowerPoint, a Word document. But imagine getting to a first draft of an application. Having a software engineer, not start with a blank slate, but say, do the thing that is like this other thing that we've done before, or an analyst summarizing broker, documents or a salesperson summarizing all of the interaction notes. The idea here is that this democratization of data and models really is expansive across the enterprise. It's every job family, HR professionals, legal professionals, compliance professionals will work differently. How does this impact the technology world? in a couple of ways. So, if you have a technology platform, it will change the way that you think about the user interface and the user experience.

First, the standard will become a chat interface, exactly what Rob was describing, which is an English language, natural language interface to the computer rather than code or rather than complex application navigation.

Second, the way that you think about your information architecture, this is the way that information and data interrelates changes. So instead of having to navigate four different applications to determine my risk to book a trade, now I can simply ask a chat interface like 'Tell me what my risk is and on the strength of that risk rebalance my portfolio in the following ways.' That changes the navigation paradigm in a pretty profound way.

And then finally, I think this notion of democratization of data and models is really powerful. The idea that more people will participate in a broader set of data-driven decisions than they have historically. And I'm not talking about data scientists, and I'm not talking about PhDs. I'm talking about every single person involved in the investment life cycle now will have more data at their fingertips than they ever have before. That is hugely powerful.

So, if you are at the helm of a technology platform, thinking about the interface, thinking about the democratization of data, thinking about your information architecture, changes.

Oscar Pulido: I have two kids, I'm listening to you both talk and you're describing this world where, things seem a little bit easier. Like I can get to a more advanced part of the work or the project sooner. And when I think about my kids, part of how they learn is trial and error. They learn from mistakes that they make, and we learn from our mistakes. So, is the environment that you're both painting one where it's different in terms of how you develop talent because they don't get to learn as much from their mistakes? And maybe I'm not thinking about it, right, but what does that mean for talent development in an organization?

Lance Braunstein: First, I think it's what Rob said a minute ago, this notion of getting to a first draft sooner. Part of the power of these large language models is prompting the model often in a very precise way. So, like when Rob talked about tone, you could create the initial draft and then go back and say, I'd like it to be in the tone of this other document, or I'd like you to refine this into a set of bullet points, et cetera, et cetera.

So, in terms of development and learning, the idea that you could get to that first draft of your term paper of your science project faster by harnessing more data and more models, I think is a powerful learning tool. That is not cheating and getting to the Wikipedia of result sooner, it is actually harnessing more information.

Then the interactivity that you have with that first draft or with the model, I think is another learning opportunity. So, the ability to prompt in an increasingly precise way to me, drives a greater analytic mindset. Rob and I talk about this notion that we all are going to become developers, when you think about the human computer interface becoming a prompt in English, that means all of us are writing code. We may not think of it as code, those prompts may not look like code, they may look like an English language sentence, but they're code. And they will generate code in some cases. So, the precision with which you have to prompt the computer increases over time. So that learning to be more precise, more analytic, more data-driven, is a talent opportunity. It's a learning and development opportunity.

Rob Goldstein: Lemme just add, we try very hard to be tech optimists and it's amazing how many things through the years you could point to as given this new technology, this means humanity's going to become much more stupid and humanity is doomed. But I'll give a couple of examples through my own personal lens.

So, my dad was a financial advisor my dad growing up would work almost every night, but at nine o'clock, he would stop working because it was not polite to call people at home, after nine o’clock, and once email came about, if you get an email at nine o'clock and you don't answer it by like 10 o'clock, you're considered rude.

So, everything just adapted, and if anything, expectations change. It created a huge productivity boom in theory. As opposed to having to FedEx documents, you can now email documents, that's a productivity boom. But it didn't seem like the amount of work went down, just expectations changed. And I think what happens with technology is as it empowers this new productivity and these productivity step functions, it brings with it changing expectations.

People can look at these technologies through different lenses. I look at it through the lens, I think there's going to be a giant productivity boom. I think there's going to be a giant expectations boom. And I think that how people get smart will change. I don't exactly know how, but I know that humans are very adaptable. Technology's a tool that actually makes them even more adaptable. And I think that combination, I have confidence that people are going to get smarter, not less smart.

Oscar Pulido: You've given examples of the productivity boom, right? You mentioned the board presentation and the memo and, but now you just talked about the boom in expectations, and you touched on your dad being a financial advisor. That's a very client-oriented profession as most of financial services is. So, talk a bit more about how does this change what clients. Expect now that generative AI is more interwoven in business.

Rob Goldstein: Absolutely. And, if you zoom out for a second at the state of the industry, on the wealth side, most clients have websites or apps that they could access. They could see things in real time, but the truth is you get reporting once a month. And on the institutional side, it's equally the same, if not even more so once a month.

 Oscar, if I said to you in the year 2030, do you get reporting, once a month? I think you'd be, 'hmm, I don't think so.' Ultimately, you could imagine, every day, every hour, every trade, whatever, if you want a summary of your portfolio and how it's changed, you have access to one. I think it's going to be very hard to fulfill that expectation with people. I think it's going to be very easy to fulfill that expectation with technology.

And that is why that English component, the ability to talk to the computer in English and have the computer talk to you in English, that is why that is a whole new unlock with regard to technologies that will be profoundly impactful in terms of the Day-to-Day lives of people, in ways that are unimaginable.

Oscar Pulido: You both mentioned this point a couple times, so worth reiterating that the language that you use to interface with computers has been coding languages for many years. But what you're saying is that now it's English is that language to interface with the computer and the coding goes on in the background, but by, having that shift, more people can interact with the machines that are increasing productivity in businesses or the economy.

Lance Braunstein: Yeah, that's correct. the question often comes up because we've lowered the barrier to the human computer interface, do professions like software engineering, software development, system engineering, data analytics go away? I believe the answer is A hard no. Not only do they not go away, but the burden that we put on our servers, on our computers, as we expand the aperture of the user base- in this case, the prompt engineers, who is every human who will interface with a large language model- actually grows the burden on resilience, scale performance security increases.

So, the need for really talented engineers who could construct the backends. of all of these systems that now have quite an elegant low barrier to entry as a co-pilot or a chat, I think that need grows over time. Now I am like Rob, a tech optimist and pragmatist, I am thinking the hard next 12 to 24 months, there are jobs to be done, they will be enabled by these generative AI technologies and these models, but they are jobs that we could predict.

Rob Goldstein: If we were having this conversation pre covid, the technology that we would be talking about was autonomous driving. And it was like, why would your kids get a driver's license? Don't buy a new car. Everything is going to be autonomous driving.

Then if you think about what happened, you basically had a once in a hundred years, scenario, where two people couldn't get into the car with each other unless they were in the same family pod. So, if ever there was a time for autonomous driving to take over, it would've been then. Instead, what happened was driving trucks wound up being so in demand that in certain countries, they had to call up their National Guard to actually drive trucks because it became a matter of national security and national infrastructure.

And I think as you listen to the subtext of what Lance and I are saying here the subtext is, this isn't about the computer alone, it's about the person being much more empowered, much more productive by the computer, but the person in a very similar scenario to autonomous driving, still being part of that process, still being the critical control, still looking at what the computer is doing. I think where people get confused is they look at a world with no people, we look at a world with people who are enabled to be better by the power of the technology.

Oscar Pulido: You've both touched on the fact that you're both tech optimists and I think, it's always good to end and pragmatists. but always good to end on an optimistic note. I think as we talk about any topic. So, I'd love to just get your thoughts on, the next year or two, what lies ahead, like what haven't you discussed that gives you even more optimism about ai, in a business setting?

Rob Goldstein: I have a vision that I believe will come true. Which is right now there's this concept of the prompt engineer, no one knew what that was a year ago, now it's going to be the job of the future. I have a different perspective on it, I'm very fortunate, I have two children. One of them is graduating this year of college, and one of them is a sophomore in college. And I think for my daughter Sadie, who's a sophomore in college by the time she graduates, I believe two things. One, the concept of a prompt engineer won't really exist. And two, whatever it was supposed to do, she will naturally know how to do from being in college for the next two years. This goes back to your question about training, sometimes you're training yourself and you don't even know it. I think a lot of what we're talking about here is just going to be natural. It's going to be in the water, and we won't even know it.

Lance Braunstein: And I would just extend that Getting everybody into generative ai, teaching them the concepts, teaching them the prompting. Is going to enhance our ability to just run a better investment process to be a better technology company. The thing that excites me in this next year, and I am really thinking about from now, is getting people more into ai. Getting people like hands-on into co-pilots and chat assistance and enabling them to get to that first draft that we described earlier, faster with higher quality. That's thing one. I think thing two is there will be a number of jobs that we want to automate, that we want to create greater automation.

And again, not in the, not to, to the exclusion of the human supervisor, but getting those rote tasks to a greater place of automation, I think is immediate and exciting for me. So more of us becoming sort of gen AI enabled and empowered. And more of us doing the highest value work rather than the rote tasks that is near and present and super exciting for me.

Oscar Pulido: And it sounds like more people becoming students of technology,

it sounds like the evolution in AI is going to push everybody in that direction. And guys, I want to thank you for, joining us, on the podcast as almost the professors of technology that we will look to, I'm sure down the road. Again, Rob, Lance, thanks for joining us.

Rob Goldstein: Great. Thank you.

Lance Braunstein: Thanks.

<<THEME MUSIC>>

Stevie Manns: So that was, your conversation with Rob and Lance, Oscar. Listening back, do you have any other takeaways?

Oscar Pulido: I guess my takeaway is that even in my own day-to-Day, I'm still learning how to benefit from ai. I'm starting to use it in some of my, day-to-day, but I still feel like I'm not quite fully there in terms of understanding all of the power that it could bring to efficiency and productivity, even for me. And I have to think I'm not the only person who feels that way.

Stevie Manns: I, totally agree with you on that. I'm thoroughly enjoying how it's making my day more productive, where it's giving me time back. but one of Rob's comments that I thought was really interesting was that these AI prompter jobs that we're seeing pop up right now.

They're a bit of a fad. They probably won't be around because people are learning. And once people learn, then those prompter jobs will be irrelevant.

Oscar Pulido: Speaking about how it affects the workforce. Like even Lance who oversees an army of engineers at BlackRock talks about how the development of AI isn't about needing fewer engineers. It's just about what skillset they need to possess in order to use the tool more effectively. So Stevie, this is the part where, I usually record the outro of the episode, but I'm going to give you the honor this time.

Stevie Manns: Well, thank you Oscar. next up on The Bid, we're highlighting a new short form series from the BlackRock Investment Institute Called Market Take on Mondays in August here on The Bid, and you can find that in its own feed by searching for Market Take. And then it's Oscar's turn to pick his favorite Bid episode as we continue our best of summer series. Thank you so much for listening to The Bid. I'm Stevie Manns.

Oscar Pulido: And I'm Oscar Pulido.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0724U/M-3706445

<<THEME MUSIC>>

Oscar: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

What are the principles of stoicism and how can they be applied to investing to build long-term wealth? Darius Foroux, author of the newly published book, The Stoic Path to Wealth, brings a fresh perspective on how the time-tested wisdom of stoicism can be applied to achieve financial success in today's volatile markets.

As we dive into the intersection of ancient philosophy and modern wealth management, we'll discover the ways in which stoicism can offer a path to not just wealth. Also, to a more fulfilling and tranquil life.

Darius, thank you so much for joining us on The Bid.

Darius: Thank you for having me.

Oscar: Darius, congratulations on your book, the Stoic Path to Wealth, you talk about common tactics for saving and investing. In it you talk about how your family immigrated to the Netherlands and that had an impact on how you thought about saving and investing. So, tell us about that experience and how that contributed to you wanting to write this book.

Darius: Yeah, so I have a classic immigrant story. My parents came to the Netherlands without money, and they had to build their life from zero. And throughout my childhood, we always lived from paycheck to paycheck the topic of money was always present in our household. That gave me a negative feeling when it came to money because there were always fights about money.

But the thing is that I never lacked anything. At least I didn't feel like I was lacking anything. My parents bought everything with borrowed money, so there was a lot of pressure on them. So, growing up I had the very strong desire to become wealthy, so I didn't have to worry about money anymore.

Oscar: In the book, you introduce us to some prominent stoics. And talk about their philosophies on life and then you go into how that matters for building wealth. So maybe talk a little bit about these individuals and why you think it relates to investing?

Darius: I started investing in stocks in 2007. At the time I was in college, and I also worked at a bank This was before the financial crisis. So, in the Netherlands you could get a four-week training and you would become a mutual fund advisor.

I thought that was a hot shot and I thought I could also invest my own money. And within a year the crash happened and I lost about 60% of the money that I invested and that experience was so painful for me that I stopped investing altogether until 2015, and throughout the time I kept studying, investing, went to grad school, specialized in finance, gained more knowledge, but despite all of that, I still wasn't investing because the pain was still present. So, when I discovered the works of Marcus Aurelius and Epictetus and Seneca and Musonius Rufus, some of the famous stoics, I instantly connected the philosophy to finance because the philosophy is nothing more than a reminder to focus on what you control and ignore what you don't control.

I thought to myself, what is my biggest challenge in life? It's that I am not building wealth at that time. I discovered the philosophy and every time that I was reading the stoics, I always was thinking, how can I use this to become a better investor?

Throughout the years I realized that more knowledge wasn't really the answer. It was better emotional control, and that's what the stoics really helped me with.

Oscar: And it makes a lot of sense. managing your emotions, focusing on what you can control, Stoicism definitely feels like something that if you can adopt it will help you over the long term. But I think it's quite hard maybe just for the average person to all of a sudden, be able to adapt that into their investing style. So, what are some of the practical techniques that you think investors could adopt to start mastering their emotions and learn a bit of what you learned during that time period?

Darius: The most sustainable path that you could follow as a stoic investor, is to start by focusing on what you control, which is your skills. If you want to become a consistent investor, you also want to become a consistent earner.

So, without earning a good living and without income, you always struggle and live paycheck to paycheck. This is what I love about stoicism, it challenges you to become the best version of yourself and to become better at what you do. And when you do that, you generally also get better rewards in your career.

That's how I approached it as well, I start completely focusing on the thing that I controlled the most, which is my effort to become better in my case as a full-time writer and author. As I started doing that, I started to earn more as well. And with my earnings, I started to invest, but in very small sums because the second step in my experience and looking at stoicism is to get comfortable with short-term losses because the biggest mistake that I made in 2007 was that I took all of my savings and I put it in the market, and I started to track it every single day.

I couldn't let it go. when it went down so much, the pain was so big I stopped investing for all these years. So, this time around, or in 2015 when I started on this path, I really made a consistent effort to start investing with small sums so I could just keep tracking it as well, but with more indifference and with more distance to the market. When the market goes up, I should be in balance, and when it goes down, I should also be in balance and not react because I consider myself a long-term investor. I need to pick a strategy and stick to it, no matter what the up and downs are in the market.

That's the second step, when you form the habit of investing and also when you're comfortable with taking losses. As a long-term investor, I think taking losses is just temporary, when you stay the course, you keep investing and over the long term, as the economy keeps growing and markets keep going up, your investments will rebound. And from there you can just let your money compound and do the work on its own.

Oscar: It is interesting you're saying accepting losses is something that you have to be able to do, in order to be successful. Although I think you admit that in 2007 and 2008, it was hard for you to do it first, but perhaps something that you've gotten better at. I think when people hear that I need to accept losses, that sounds like a failing, but you're saying it actually benefits long-term wealth creation. Is that right?

Darius: Yes, a hundred percent because if we fear loss, we can never stick to a strategy. And if we can't stick to a strategy, we can never build long-term wealth. We'll jump from one strategy to the other because we think, oh, maybe I'll find another strategy where I won't lose money. And as we all know, even the S&P500 goes down by double digits and 20, 30% every several years. But when it comes to our emotions, it doesn't feel normal at all, especially if you have a lot of money on the line. You feel like it's the end of the world and you want to sell. It's very difficult to stay the course without training, and I think that's true for all things in life. If you are an athlete and you haven't trained, it's very difficult to perform when you have a game.

In a similar way as an investor, it's very difficult to not sell during recessions or during even pullbacks if you haven't trained yourself. stoicism really helps you to not only get comfortable with losses because you can meditate on it and visualize yourself losing money, but also when it actually happens, especially in the beginning when you start investing with smaller amounts and really focus on building the habit of investing.

And in my experience, I think that's the most important thing. Most investors don't even see themselves as investors. They see themselves as someone who invests. But if you invest regularly, you should look at yourself as an investor. And what does an investor do? They just invest and they just stay the course.

Oscar: And you mentioned also indifference and distance from the market, which is what a stoic would practice. But it's interesting because we live in an era where information is around us all the time. So, it would seem hard to do that, but it. Sounds like if you can master that, you're going to have more of a focus on the long term.

Darius, you mentioned a few prominent stoics earlier, Marcus Aurelius, Seneca, a few others. You also talk about in the book this concept of a stoic edge. So, tell us a little bit more about this concept and how you think that edge can serve to protect a person's time and mental wellbeing.

Darius: So, one of the concepts that successful investors often talk about is having an edge when it comes to beating the market. Now, I think as an individual investor, the goal should not be to beat the market. I feel like it's great if you can do that, but the goal is to build wealth. And to profit from the wealth that's been created in the stock market.

If you look at the different types of edges that professional investors may have, whether it's a size edge, or if it's a quant edge, those types of edges are not attainable for the individual investor. And in fact, I think most people don't even care about having an edge. They just want to build wealth in a similar way that I wanted to build wealth.

The stoic edge is something that everyone can acquire by simply working on managing their emotions and following the stoic path of wealth of earning money, forming the habit, getting comfortable with losses, and letting your money compound.

Once you're able to do that successfully, I feel you've acquired a stoic edge because when other investors are looking at hedging their portfolios or looking at other asset classes or trying to sell or trying to time the market. As a stoic investor, you can just stay the course, sit tight and just keep buying no matter what happens.

Oscar: Right, and that's an edge that you think a lot of people can acquire. it may not be easy, but it is somewhere where they can acquire an edge to, as you say, not really focus on beating the market, but on building long-term wealth. Darius in the book you talk about a couple of principles, and you've touched on a few of these, but I'm thinking about, invest in yourself, accepting losses, also compounding your money. Maybe elaborate a little bit more on those principles and why you think they're important.

Darius: I think compounding your money always sounds great on paper. And when we start making the mental calculations, we can think of how much money we could earn in the future. But it only works if you really say goodbye to the money that you invest today.

So, one of the mistakes that I made early on also as an investor, even when I started on this path, was to invest my money and later on would think to myself, oh, maybe I could use this for down payment on my house in a few years.

As a long-term investor, I don't think that's the right move, because if you want to invest in the stock market, I feel like the best thing you can do for yourself is just to say goodbye to that money and that forces you to invest with money that you won't miss, that you won't need in the next one, two or three years. And that is really a mindset because when you really look at it that way, you don't even think about touching it anymore.

And then another technique that I've learned from stoicism, but also from famous investors is to trust your judgment more.

And one of the things that I learned, particularly from studying Stanley Druckenmiller during the .com boom, he stayed away most of the time, and then towards the end he hired someone and basically let the other person influence his judgment. Druckenmiller later on admitted that he didn't trust his judgment enough during that time, and they lost a lot of money during the crash of 2000, 2001. So that's something that even the most famous investors, sometimes have difficulty with.

So, if you just learn the basics of investing and pick a strategy that you really understand and that you really feel like you know what is going on under the hood, then you should feel confident enough to trust your own dec decisions and your own judgment. During those moments, you are really your best friend.

Oscar: I'm thinking towards the end of the book. You talk about, be like granite as you think about these principles, in your life and as they apply to investing, investors have to be very self-aware, they have to resist the pendulum swinging between fear and greed. But when you say be like, granite, what did you mean by that?

Darius: I feel like that's the ultimate goal as a stoic investor when you are so consistent. And like a rock that the waves keep hitting on and you just stay put and you've picked an investing strategy, and you just keep on investing and investing. And the way that I came up with that phrase was, I remember after the crash of oh eight, I was reading a column on online and.

The person was arguing that if you have the guts to invest in the stock market now you must be made of granite. And that always stuck with me. I always thought, what does this person really mean is there's so much uncertainty. Okay, I get it. But you could always argue that there's always something going on in the world, whether it's a war or an election, political unrest, a looming recession, interest rates going up or down. So, I think it would be an illusion to wait for the perfect moment to invest. The perfect moment to invest is always now or whenever you can. Whenever you have the money, thing you can do is to be like granite and just stay the course no matter what happens.

Oscar: They always talk about the stock market climbing the wall of worry. it seems to always exist. So being like granite will allow you to. Perhaps see over that wall and what comes next. Darius, if, someone wants to take what you're saying and apply more stoic approaches to their investing day to day, what are just some practical things that, that they could start doing now?

Darius: One of the most important ideas from stoicism is to live according to the golden mean or the middle way, and it's really a lifestyle which avoids excess. That's also a difficult thing to apply in life, especially if you're used to spending most of your income or always having the desire to upgrade your lifestyle, for example.

And the stoics really reminded us that it's okay to have the desire to improve your life, even to earn more, Money ultimately also buys freedom. So, this is why so many of us invest not just to acquire more money. So, I think it's possible to live like a stoic by adopting the golden mean, plus at the same time having the desire to become wealthier. And if you look at a day to, on a day-to-day basis, how we can apply that is to just find more balance in life.

A funny way to practice that is with your diet. Mosonius Rufus said that the best way to practice self-control and moderation and living in the middle is by eating in moderation as well. A lot of folks don't connect their diets with their finances, but I really think those two things are correlated because if you are better at managing your appetite, or not managing your appetite, but just making sure that you, are not over satiated and that you just, make sure that you have a moderate diet. Then I feel like that will translate to your finances as well.

We want to earn, but we also want to go on vacations and have some rest. So, living in the middle, I feel is one of the best things you can do, just not only for your mind, but also for your finances.

Oscar: Well, Darius, congrats again on the book. I think everything in moderation has typically been a piece of advice that, that I've also heard, across my life. And I didn't know 2007, 2008 Darius, but the Darius that I'm talking to today seems very much in balance and very much in control of his emotions. So, thank you for joining us on The Bid.

Darius: Thank you. Appreciate it.

Oscar: If you've enjoyed this conversation, check out our episode entitled Do You Foster a Culture of Growth featuring Dr. Mary Murphy, where we discuss how leaders and investors can cultivate a growth-oriented culture to drive innovation, resilience, and adaptability.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0624U/M-3638530

<<THEME MUSIC>>

Oscar Pulido: The BlackRock Investment Institute recently published their 2024, Midyear Outlook where they consider the macro and market outlook for the remainder of the year. They highlight the potential for an economic transformation on par with past technological revolutions driven by five mega forces, three in particular, could drive a surge in investment in the coming years. The rise of AI, the low carbon transition, and the rewiring of supply chains. Yet this unfolds against a backdrop of high inflation rising interest rates and record government debt levels presenting a complex landscape for investors.

Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido. Joining me is Vivek Paul, UK Chief Investment Strategist for the BlackRock Investment Institute.

We'll discuss the rise of AI and its potential to deliver a productivity boom, the role of private markets in infrastructure, how geopolitical dynamics are influencing investment strategies. And finally, how investors can position themselves in this unprecedented era of change.

Vivek, thank you so much for joining us on The Bid.

Vivek Paul: Thanks, Oscar, for having me.

Oscar Pulido: So, Vivek, I know that the BlackRock Investment Institute has recently published the mid-year outlook, and there are three major themes that, have been outlined. So perhaps you can tell us what those themes are and how you think they will play out.

Vivek Paul: Absolutely Oscar, so that this is a really exciting moment in investing right now because we are on the edge, potentially of some huge transformations when it comes to AI, when it comes to moving towards the low carbon economy, when it comes to geopolitical dynamics and mega forces that you and I have talked about in the past. And all of those are uncertain. This is an environment where plausibly a bunch of different scenarios could play out. So that's the background, that's the backdrop against which we have formulated these three themes.

And the first one is about getting real. It's about this idea that there is a transformation occurring when it comes to the real economy. And if you think back over the last 10, 15 years, a lot of it's to do with the financial economy. It's to do with the path of interest rates, seemingly ever lower or central banks coming to the rescue. What are they going to do next? This is an environment now where it's about the real economy. It's about incredible cash flows being generated by some companies because of some of the transformations that are occurring. It's about being able to spot the winners and the losers, which maybe be are even more outsized in their difference than before, because those who can really ride these transformational waves can have phenomenal returns. Those who can't, those that get left behind, don't have the safety net of those central banks in quite the way that they used to in the past. So, this idea of getting real is that first key theme, which I think really sets the scene. The second one is about leaning into risk, and that's really important because I mentioned the idea that the potential future outcomes can be very different and there could be a bit of a temptation to sit on the sidelines and wait to see what plays out. That's not what we think we should be doing right now. We think we should be leaning deliberately into risk. Being deliberate about time horizons. What do we know? Even if the future's uncertain, there are things that we know about the coming six to 12 months. We lean into the idea of a concentrated AI scenario where we see some benefits from some of those big names who have done really well. We think that can continue and, potentially because of the idea of a productivity boom later on, we can continue to have a lot of interest from investors in terms of some of those key names. So, the idea of leaning into risk in terms of time horizon in terms of the type of exposures we're talking about.

So, we have been playing this environment in a deliberately concentrated manner. So even though some of those core indices are really concentrated now, we'd be even more concentrated still because that's where some of the opportunities are. And then being really deliberate when it comes to the idea of where the opportunities are across public and private market assets and the type of exposure we want to get. So, this is an environment which rewards being a little bit more dynamic and active in terms of getting some of those exposures. So, this is, again, another thing that we need to lean into that risk.

And the final point, I guess the final, the third theme is this idea of spotting the next wave. And this is all to do with those scenarios I was talking about at the start. There could be a bunch of really materially different world outcomes that could occur and being understanding, you know what they are.

What are the catalysts? When do we need to shift portfolios? That really could be a huge source of future potential benefit. We need to be able to potentially transform our portfolios depending upon what we learn over the course of the coming months and the coming years. So that idea of leaning into those scenarios, not just being afraid of sitting on the sidelines, leaning into risk, and getting real, they are the three themes that we think really matter today.

Oscar Pulido: Now, you didn't mention AI, but you did talk about the real economy, which leads me to believe that maybe that's where we can start and maybe talk about AI within that first theme because this is a trend that over the past year and a half has really capture a lot of headlines and companies that are associated with AI are seeing their stock market valuations surge. Perhaps the question is, do you see the potential for AI to continue to bring on these productivity gains that the market seems to indicate are happening?

Vivek Paul: So, I think the real key point here is that firstly, this AI transformation is a real thing. This is happening now; we're seeing outsized earnings already. So, this is not just something that could happen in the future, this is transforming the real economy now. But I think. A really key point is that there is uncertainty. We need to acknowledge this, so there is a world out there, as you suggest, where there are real broad productivity gains across the entire economy, and maybe that has transformational impacts on. The idea is that's the reason why growth is higher relative to what we've seen in the past. It might be a reason why inflation is lower relative to what we've seen in recent years. So that is a possibility, but it's not a certainty. And I think that is really crucial right now. So, the point is that could occur and the fact that could occur is part of the reason why we are seeing such phenomenal performance from some key names, in the course of the last 12 to 18 months, as you suggested Oscar.

And in terms of where we are right now, we would lean into the notion of that for the next six to 12 months. This concentrated AI story really could continue that we could really continue to see some outsized performance by some key names, and whether or not that then broadens out into broad productivity again, is a possibility. But it's not a certainty. The fact though, that it's a possibility is part of the reason why we have that conviction over the next six to 12 months.

And I just want to pick up on something you said with regards to, the amount of outperformance and the size of those valuations. We wouldn't see this as bubble territory now. This is an environment where the earnings have kept pace with those fantastic gains in stock prices for many of those big names. So, this is an environment where earnings have delivered, that means we're not in a bubble, that means we continue to see a strong runway for some of these companies ahead. And there is that possibility that it broadens out across the overall or the overall economy.

Oscar Pulido: Right. So, what you're saying is that a lot of these AI names, these companies have seen their stock prices go up a lot, but so have their earnings. So, the valuations are, still very reasonable and it's still a theme that you're recommending within portfolios.

Vivek Paul: So, Vivek, what are some of the implications of the advancement of AI on investor portfolios and perhaps thinking outside of technology, are there ways to invest in the theme of AI in a more diversified manner as well?

It's a great question, and I think when you're thinking about AI, one of the things we talk about in the outlook is the idea that there are going to be some distinct phases when it comes to the AI investment opportunity set. There's going to be this build out phase, but then the idea of the expansionary phase where it potentially goes beyond just the names who have benefited so far. I think it's exactly what you're talking about, Oscar. I think there are potentially future huge implications for the likes of healthcare, for the likes of financials. This is stuff that goes beyond just a few limited names.

More broadly, when you're thinking about a potentially transformative impact like AI, you need to be thinking about the potential, the stack of where the opportunities might lie. So, if you imagine, thus far it's really been those names who have been able to provide the sort of hardware sort of solutions, the idea of chips that are needed in order to see that sort of spurt of activity. But what about the next phase? What about the next phase when it comes to the software, what, when it comes to the apps that we're going to all have on our devices, on our phones, and that can be transformative across a whole number of different sectors.

This is part of the point that we were making earlier when we were talking about the idea that there could be a productivity boom, it could have economy wide effects, and that's something that will be priced into market sooner than we actually fundamentally see those things transpire.

Oscar Pulido: So, Vivek, when we talk about AI, I think we all believe it to be this big productivity enhancer over the long term, and I, think you would agree we're going there. But in the near term, and I know this was discussed in the mid-year outlook, is that it could actually be inflationary in the near term because there's just so much infrastructure that you need to build out in order to support it. In fact, Will Su who we recently had on the podcast, from our fundamental equities team talked about just the raw demand for energy that is required. So, can you elaborate on that a little bit more?

Vivek Paul: I think it's a great point, and I think that is something that really, as we are learning more about what this could be, I think it's something that's coming to the forefront of our minds. So, I agree with the point that, the conventional narrative has been that eventually that could be this huge productivity benefit, which maybe is a deflationary force, but in order to get there. We need to see spending; we need to see real money being put to work. And if historical guys are anything to go by, there is a lag between spending that money and then seeing those productivity benefits come through.

So that means that in the nearer, maybe this is actually an inflationary force before it is deflationary to the point you made. And I think, that could work in just the lagged effect way that I talked about, but also imagine bottlenecks that could occur, the amount of power that we might need to kind of service.

This huge transformation might mean that maybe the areas where actually there are bottlenecks that occur in terms of those data centers, the ability to produce the amount of energy that we need and that could contribute to, to contribute to those inflationary forces too.

Oscar Pulido: So, AI as a theme seems to be, at least in today's markets concentrated to a few names, but what you're saying is that going forward, there could be a lot of different ways and a lot more diversified ways to invest in this theme across sectors and geographies. Vivek, we recently spoke to David Giordano, on the importance of infrastructure in helping the world economy in the low carbon transition. He also talked about the role that private capital will play in helping fund this infrastructure. You talked a little bit about private markets in, one of your opening comments, but how should investors be thinking about private markets in their portfolios?

Vivek Paul: Private markets are crucial to understanding the opportunities here, and you can think about the opportunities in the private markets, maybe as an advanced preview of the huge companies that could enter the public markets later on. Maybe they don't, maybe they do, but to limit ourselves only to the public markets, to capture some of these transformations, I think would be missing a trick.

We would explicitly lean into private market assets. When we build portfolios over the long run, we typically have a sizable allocation to private assets. And within the growth private market space, we particularly like infrastructure opportunities. They cut across several mega forces that are, playing out across the broader economy. You mentioned, I think the transition, the amount of energy that is going to be driven from renewable sources is likely to go up over the course of the coming years, is something that is central to our transition scenario that we have that is going to need a lot of infrastructure spending.

The idea of demographics. Demographic headwinds and tailwinds exist across the globe, and typically we find, and we write about this in the outlook, that as those demographics, point in a certain direction, you end up seeing more need for infrastructure in those regions. And another mega force that we've been talking about, the idea of geopolitical dynamics, the idea of reshoring dynamics that are going on. Again, that's going to lead to the need for infrastructure spending. And this is all against a backdrop where many developed market economies don't necessarily have a huge amount of headwind for governments to fund some of that infrastructure need.

So there's a real opportunity here for private capital to play a role in reshaping the future economy. So, the headline answer to your question is, if we only limit ourselves to the public markets, there are great opportunities there, but we are not seeing the full picture and I believe in the portfolios we design, we'd have a greater allocation to private assets that many see is typical.

Oscar Pulido: And as you talked about, private markets, you actually, you mentioned mega forces and we've talked about ai, which is one of the mega forces that the BlackRock Investment Institute has highlighted. you talked about demographics. you also talked about the transition to a low carbon economy. Let's talk about geopolitical fragmentation. Which is another one of these mega forces, and it is causing a rewiring of supply chains around the world. So, what does that mean for investors when we see this rewiring of supply chains that's going on globally?

Vivek Paul: So, I think it means that we need to be a little bit more granular in terms of the opportunity set that we are going to lean into,

For instance, we look at the US and China, we look at the EU and China, and there is a structural dynamic that exists that didn't exist before. This is an environment whereby the typical supply chains we came to rely upon for so long are being questioned because of reasons to do with national security to do with competition, you name it. That's happening. So, what's happening is the economy is dealing with that. Supply chains are rewiring, and you look at countries such as India, such as Mexico, who stand to benefit from being a node in the middle between two of those great superpowers to actually profit from the ability to sell into local markets, between the US and China. So, there are some geographical dynamics that directly occur as a result of this. And this is part of the broader thinking around geopolitical tensions and dynamics.

And more broadly, if you think about this and the influence over geopolitical dynamics on the broader macro, this is a force that kind of contributes to inflationary pressures. This is part of the reason why many of the scenarios we have, have interest rates a little bit higher than we've been used to. This occurs at a macro wide level. This has an impact there. It also means that there are particular opportunities we can lean into at a regional and geographical level as well.

Oscar Pulido: Right, on that last point, the reason it has implications for interest rates and inflation is that reshoring has been this trend that, means companies are a little less focused on putting their production in the lowest cost location and perhaps putting their production in a, more, politically friendly and perhaps closer geographical, location. And that can have inflationary. consequences though to the end goods that they produce.

The other, topic when we talk about geopolitics that we have to discuss this year is elections. It's one of the biggest election years on record in terms of the number of countries that have elections. We've already seen this year, Mexico, France, India, the UK, where you are, Vivek, and of course we have the US election later this year. So, how are investors preparing for the potential policy shifts that come when we see changes in government.

Vivek Paul: The first point is that some of these policy shifts that could occur are really sizable, right? And that this contributes to this environment of huge uncertainties, contributes to this world where there are multiple different potential ending zones for the way in which the global economy looks.

And just taking a couple of those, examples. we are recording this Oscar in the week where we've just had the UK election. We've just had the second round of the France selections, and these are big, sizable moves and they have potentially really meaningful impacts in terms of the policy here domestically, but also more broadly globally.

But what's interesting, I think when we're thinking about these policy shifts, is as much as what is not being said, as is what is being said. I'm coming come back to the point we were making earlier when we were talking about the geopolitical dynamics, the potential impact on inflation, some of the policies that are being touted in the American election, lead to potentially really meaningful inflationary pressures if some of the tariffs that are being talked about actually were enacted.

Now that is sizable and that is in the public domain, and that's being debated, but what's not really being debated, particularly in the United States, is the fiscal dynamic. The fiscal pressures, both of the leading parties are actually pursuing policies, which is likely to not necessarily place any brakes on terms of the size of government spending relative to the income it gets in. And what does that mean? That means that there could be subsequent pressure in the long run-on bond deals in those regions. So again, that directly translates into an investment view. So, understanding what the dynamics are, understanding what the policy shifts could be, trying to think about the long run positioning that you take is critical to understanding the investment outlook right now.

Oscar Pulido: And it speaks to one of the themes you talked about, which is the world economy has a lot of different scenarios and. And pathways that it could take. and some of that is just due to elections and the potential policy changes that come as a result of that. Vivek, when you're an investor and you're hearing about these three themes, what should they be thinking about? what is that message to investors who now want to think about what to do in their portfolios?

Vivek Paul: I, think the really crucial one is there is a lot of potential outcomes out there. there, there is uncertainty. But this is an exciting time to be investing because leaning into risk mean there are potentially huge opportunities that we can capture. Maybe we need to do things in a little bit of a different way. Maybe we need to be a bit more dynamic. Maybe we need to think about building blocks that aren't the ones that we used in the past, but this is an exciting time. This is a time to lean into risk. This is a time when the real economy is being transformed. and I think it's exciting. it's not easy, but it's exciting.

Oscar Pulido: Well, Vivek, I know you've been busy, working with your colleagues on developing the midyear outlook and now getting the message out. So I hope you find some time to relax this summer and see how the outlook plays out. And I'm sure we'll have you back to talk about the end of 2024 and then looking ahead to 2025. But as always, thank you for joining us on The Bid.

Vivek Paul: Thanks, Oscar. Thanks for having me.

Thanks for listening to this episode of The Bid. Next week I'll be speaking with author Darius Foroux about the stoic principles of investing as we consider how investors can get ahold of their emotions to build more wealth and become better at investing. Subscribe to The Bid and don't miss the episode.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0724U/M-3696156

<<THEME MUSIC>>

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

In this special episode, we've asked some of our listeners to send in questions about their retirement concerns. Here with me are retirement experts, Ann Ackerley, Senior Advisor on retirement, and Liz Koehler, head of US Wealth Advisor Engagement here at BlackRock.

Together we'll answer your questions about saving for retirement and give you some strategies to consider to help you become retirement ready,

Anne and Liz, thank you so much for joining us on The Bid.

Anne Ackerley: Thanks for having us.

Liz Koehler: Great to be here.

Oscar Pulido: So, Anne and Liz, it's great to have you both on. It turns out you're both experts in a topic that I think is of interest to pretty much everyone, which is retirement. I think we all aspire to get to retirement at some point.

Now, when does it happen? How does it occur? What do we need to do along the way? Those are the hard questions, and I think they're also very personal questions to different individuals. So today we're going to hear from different callers from around the country, with their questions about retirement, and they're going to hear the sage advice that both of you have. But maybe before we hear from our callers, I'd love to hear, what you are seeing in the retirement landscape?

Anne Ackerley: Great. Thanks Oscar. I think one of the big things that people are starting to focus on is what actually happens when you get to retirement, and you know you have worked hard and saved and you wind up with a nest egg.

Then the question is, well, how do I spend my nest egg? And that can be challenging, right? Because you may not know how long you're going to live, you may not know what the markets are going to do, you may not know your expenses. And so, you've got to figure this out. And that's one of the things we're very focused on, is how do we help people in that part of retirement?

Liz Koehler: So, look, I think this idea of retirement can be scary for a lot of people. It brings about a lot of big questions, big thoughts. And it is very personal, but the good news is we're starting to see more and more conversations about people thinking ahead and planning ahead, and really thinking through what they want their retirement to look like.

And it's quite different. Some people may choose to keep working part-time or do something in a whole new chapter of their lives. One other thing I'll mention is there are generational differences that we're seeing for sure, in terms of what retirement actually means to different generations. So, it's, it's an exciting dynamic topic, but we should talk about it more.

Oscar Pulido: Liz, this sounds like the conversation you and I had in Australia about the differences between different generations. And Anne, what you touched on is what Larry Fink talks about in his letter that it, the, the rethinking Retirement. It's not just about saving for retirement, but also spending in retirement. But why don't we hear from the callers who have their very personal questions? And let's go to our first caller. this is Annabelle from Virginia.

Annabelle: Hi, I'm Annabelle and I'm a 28-year-old artist. Saving for retirement was never modeled well for me. And my question is how do I start planning for a realistic retirement when I'm juggling more pressing expenses like high rent prices and student loan repayments?

Anne Ackerley: Hi Annabelle. That is a great question. I actually have two adult children and one, my son is a musician and he's about the same age as you. So, I have had this conversation a fair amount, over the last few years.

I first would just want to acknowledge this is hard. You're starting out, you're working, you're following a passion. And as you said, you might have high rent, high expenses, student loan debt, and yet people will tell you, well, you need to start putting money away for retirement, even though that is way, way far off in the future. So let me make a couple of suggestions. One, I do think it's important to try to save as early as you can, as early and as often as you can.

So, once you have some money set aside for emergencies, which is pretty important, you never know, when you might have some kind of emergency, any small amount that you can begin to save is important because if you can put it into the market in some sort of investment, you can get that compounding over time and that, that is really important.

I tell my son all the time, 3% of your salary, if you could do it, do it, 4%, whatever you can save and get it into the market. If you're lucky enough and you're working for somebody who offers a 401k plan, I would say participate in the 401k plan. Try to get the match.

But if you are like 57 million Americans that actually don't get offered a workplace retirement plan, try to open up an individual retirement account, an IRA, put a little bit of money in it and invest in the markets, I do tell all my family and friends invest in a target date. You sound busy. You sound like you're doing a lot of things, and so a target date does it for you. It's age-based asset allocated, and it'll, takes risk when you're young and as you get closer to retirement, it will automatically take risk off the table for you look for things with low expenses, and that's probably the best way to get started.

Oscar Pulido: What about you, Liz? What would you tell Annabelle?

Liz Koehler: Yeah. Thank you so much, Annabelle for calling in. I would say a few things. One, continuing to be as intentional as you can be around budgeting and spending, and there are some great tools out there that can help. I think trying to focus on paying down that highest interest rate debt first can be really helpful.

I couldn't agree more with Anne on contributions and consistent contributions to those retirement accounts. And also, that just small steps and small amounts add up over time, right? Einstein called compounding the eighth Wonder of the world for a reason. Don't be afraid to review and revisit your plan just to make sure that you're staying on track.

And then I would say just maybe one more quick quote from Warren Buffet on investing. 'We don't have to be smarter than the rest. We have to be more disciplined than the rest.'

Oscar Pulido: And Annabelle mentioned she's 28 years old and retirement is a long-term journey, so some of the advice that you're giving is really some basic tactics to take to invest for the long term. So, it's never too late. and Annabelle certainly has a long journey ahead of her still.

Why don't we hear now from our next caller, this is Evan from Arkansas.

Evan: Hi, my name's Evan. I'm 45 years old and I'm looking to make up a little lost ground toward my retirement. I recently turned my home into a short-term rental as a way to create more income. What I'm wondering is how to best invest that income to make up for lost ground. And the other question I have is what will I need to retire at 65, 20 years from now?

Liz Koehler: Great. Thank you so much. I would say just to get us started, consider maximizing those contributions to those retirement accounts. 401Ks IRAs, if you want some of those additional tax benefits. Roth IRAs, Roth 401 Ks, health savings accounts, all really great strategies. You said your 45, so keep an eye out for that 50th birthday when you can also do something called catch-up contributions.

The IRS allows for about a $1000 in IRAs and $7,500 for 401k plans, but they're called catch-up for a reason because a lot of folks are thinking as they approach retirement about what they can do to increase their savings and investing for the future. If you have a longer time horizon, thinking about more stocks in your portfolio could be a good strategy.

But you want to make sure you stay diversified and think about managing the risk overall in your portfolio and maximizing those savings. It sounds like you're doing that. but again, thinking about the power of compounding and using different strategies to maximize your savings. And then I'll just say it again, like revisiting, reallocating, funds to make sure you're staying on track and sticking with your plan are all pretty important.

Anne, I'd love to hear your thoughts.

Anne Ackerley: Sure. Well, Evan asked one of the hardest questions, I think, which is, how much do I need? And obviously that's something that everybody thinks about.

So, what I would say, Evan, is there is no one answer - a magic number. But I think if you begin to think in annual, expenses. What do I spend annually or what do I spend monthly? That can help you start to think about, well, if I need, and I'll make this number up, $30,000 a year to live on. You can use a calculator, there's tons of them on the internet, to back into at 65, how much money would I need? That can begin to give you a sense of, am I anywhere close to that number or am I not close to that number?

Another thing I would say you want to factor in that you will probably be eligible for social security at age 62, that's the minimum age that someone can take their social security. If there's any way at all for you to delay that even up to the age of 70, those payments increase. And it's a big increase. The difference between getting social security at 62 and getting it at 70 is something like a 77% increase in a monthly payment. So, trying to factor into that thinking too.

I mean, you're only 45, so you're ways away from that, but your social security payment plus this monthly income that you can generate from your nest egg is really starting to give you a sense of what your annual income would be in retirement and is that enough for you?

And if it isn't, then you'll want to start to make some adjustments and you've got, time to do that. I'd also say, as we're living longer, starting to think about, well, maybe 65 isn't the age, or 62 isn't the age, maybe you will want to work longer. That's obviously a personal thing and up to everybody. But as we live into our nineties, maybe even a hundred, we might want to extend our working life, have that next chapter that could be different.

Oscar Pulido: And you mentioned income a few times. You even mentioned that at the very beginning of the retirement landscape and that need to spend in retirement. So, let's say a little bit more, I know this has been an important topic for you, this concept of retirement income?

Anne Ackerley: Sure. Well, we know the number one financial fear in the United States is the fear of outliving your money. We do a survey every year called Read on Retirement. We have over 60% of the people who respond to that fear, outliving their money. And so, we have spent a lot of time thinking about, is there a way to give people lifetime income? Some sort of income that they can count on every year.

And we've come up with a solution today, it's only available in 401k plans, but I would say to Evan, you know, we know that employees want it. We know that employers want to try to provide some sort of lifetime income. So, if you're working for an employer that has a plan, ask them, are you going to offer, you know, some sort of lifetime, monthly income and then invest in that?

Oscar Pulido: Well, you've given Evan a lot to think about. Liz, you gave him an early, birthday present, 50th birthday present with some good advice on Catchup contributions. And, and Anne, you mentioned a few things, which was just budgeting, thinking about. What those expenses are going to look like in retirement so that he has a better sense of what is that number that he needs.

You also talked about delaying social security payments. That's a way to actually then, bump those up if he were to delay them. But let's go to our next caller, because that was Evan. we're going to stay in Arkansas, but this is Laura from Arkansas.

Laura: Hi, I'm Laura. I'm from Arkansas. I am divorced. While I was married, I was a stay-at-home mom. Now that I'm back in the workforce, I want to start planning for my financial future. Where should I start?

Liz Koehler: I'm happy to kick us off here. first of all, please don't be discouraged, right? It is never too late to start investing for your future. So that's a really important message to, to make sure that you take away. Few thoughts. One, I would say a great place to start that we talk about is starting by gathering a lot of your financial documents just so you have them all in one place and you have a sense for what you have, right?

So, whether it's investment accounts or insurance plans or estate documents, just great to have them to be able to review and assess. then I think from there, being able to assess your plan and think about your goals, you know, what are your short-term goals, what are your medium and long-term goals? A lot of times an investment professional can really help with that, thinking through what those goals are, and then also being an accountability partner.

And then I would say the investment piece, right? And then again, we've talked about it's small steps, it's getting started, it's being consistent, but it can really add up over time and being able to review and evaluate and I would just say, I think I've heard this, that the best antidote to anxiety is often action.

And so sometimes it is just taking that next small action to see what you have, assess, make goals, and get started. But Anne, I don't know what you'd add?

Anne Ackerley: Well, I think I would add that this often can be challenging for women, whether women have been staying at home and are divorced or they go back to work, they're often responsible for caregiving, whether it's for children or for elderly. And so, saving for retirement can, can be challenging.

I think you gave a lot of great advice. I guess I would also just say, talk about it. One of the things, we don't tend to talk that much about money and finances in this country. I think, people get nervous about it. But you might have friends, family, if you have questions, try to ask people. And I think as you said, small actions sometimes can just get you started. Women tend to be less confident about investing. I would say ask questions, start small and, you'll be okay.

Oscar Pulido: And Liz, you said that don't be discouraged. it's never too, late to start. And again, just as some practical advice that, is consistent with what you've also said to Evan and Annabelle, but, starting small, over time that that pays dividends. So, let's go to our, next caller. this is Mike from California.

Mike: Hi, I am Mike. One thing to hear a lot about is diversification when it comes to retirement, and I would like to know what are the most effective ways to diversify while saving for retirement?

Anne Ackerley: So that's a great question. diversification, critically important. I'm sure you've heard that, age old saying, don't put all your eggs in one basket. And that can apply to a lot of different times and things in our life.

Diversification means not investing in just one thing. As I said earlier, you know, I'm a big fan of the target date fund. It's age-based, it's asset allocated. It allows you to take risk when you're young. My view is people are very busy and unless you love investing and lots of people do, and lots of people do it themselves, but there are solutions out there that can help you with all that diversification and essentially do it for you.

But I know, Liz, you have some ideas on asset allocation and diversification?

Liz Koehler: Yeah. Thanks Anne. I couldn't agree more with what you said. And maybe just to expand a little bit on this notion of diversification, a few different ways to think about it. One could be the types of securities that we invest in. Stocks, bonds, cash, alternative investments.

Another could be geography, right? US. International another could be the types of sectors or industries that we invest in, whether it's technology, healthcare, et cetera, or the types of strategies that we actually use.

So, there's a lot of different ways to think about diversification. It all matters, it's all important and I'm really glad you're asking the question. and just one other illustration that we sometimes use as we're thinking about diversification is this idea of, of pencils. You're probably laughing, but I'll explain. so, if you invest in one stock, for example, for a long time, think of it as holding one pencil in your hand, but then you think about investing in a number of securities. Could be stocks, could be bonds. A group of them think about holding a whole bunch of pencils in your hand. The idea simplified is that that bunch of pencils is a lot harder to break. It's stronger, including through different. In this case, market cycles, let's say. And so just one way to think about the power and the importance of diversification as it relates to managing your risk and hopefully getting a better return over time.

Oscar Pulido: The good news is Mike started by saying that he's heard a lot about diversification, so it sounds like he's hearing the correct message. And then both of you reinforced that and Anne, you touched on target date funds being one of the ways that he can implement that in a practical manner.

And then you used the word busy, I remember when we last spoke or one of the last times we spoke, you use that word a lot, that people are busy. There's just a lot of things going on in day-to-day life and planning for retirement can just be one of them. So, if you can find ways to simplify the journey, try to take advantage of that.

Well, I'm Oscar from New Jersey. I also have questions about retirement, but maybe I'll ask them to you at a separate time. I imagine many others will approach you seeking out your sage advice. Anne and Liz, thank you so much for, sharing this advice and thank you for doing it on The Bid.

Anne Ackerley: Thank you.

Liz Koehler: Thanks for having us.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you've enjoyed this conversation, check out our episode entitled Women in Investing Strategies for Financial Empowerment, and subscribe to The Bid wherever you get your podcasts.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

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Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Latin America is a region at the cusp of a transformative era as a region. It's become a hotbed of discussion for investors worldwide, as it undergoes a remarkable convergence of forces from a new era of high rates and macro risk to the rise of Nearshoring in Mexico and the demographic changes shaping retirement.

Today I'm speaking with Axel Christensen, Chief Investment strategist for Latin America for the BlackRock Investment Institute. Axel will help us explore how the tectonic shifts in demographics and the strategic embrace of infrastructure spending are creating a mosaic of investment opportunities and what makes Latin America an epicenter of global change.

Axel, thank you so much for joining us on The Bid,

Axel Christensen: Oscar. Thank you for having me.

Oscar Pulido: So, Axel, you're the Chief Investment strategist for Latin America for the BlackRock Investment Institute. You spend a lot of your time in Latin America, and it's a region that we haven't talked a lot about on, The Bid. So, I'm excited to understand a bit more about the investment opportunities, and perhaps just a broad question to start, which is, what are some of the headlines that are shaping the investment landscape in Latin America?

Axel Christensen: Latin America, first of all, it's a region, several countries, a lot of similarities like, common language, some cultural heritage, but a lot of differences as well.

So, some of the headlines that you probably see regarding Latin America recently have to do with elections, have to do with, how Latin America is finding opportunity in some of the mega forces- we can talk about that-how Latin America is becoming a very interesting place strategically for geopolitical powers like the US and China. A lot of interest recently beyond the usual headlines around perhaps sports or food.

Oscar Pulido: Right. And you mentioned it's a big region, it's diverse. there's a lot of different countries. So, let's talk about the mega forces, we've talked about the mega forces with respect to a number of different regions around the world. As a reminder, these are things like, the transition to a low carbon economy, diverging demographics, the future of finance. How are these mega forces impacting the landscape in Latin America?

Axel Christensen: It's a great question, Oscar. If anything, they put Latin America at the forefront. Let me give you a couple of examples.

One of the mega forces has to do with, geopolitical fragmentation. The fact that, after Covid we saw that we had a lot of dependency in certain supply chains or responding to an increase in tensions between the trade of the US and China. Latin America and some specific countries like Mexico are standing out as alternatives to provide more security in that supply chain.

So, there’s a lot of discussion about how Mexico can attract capital in key type of industries. Of course, some that already exist, car manufacturing, but also some new industries like semiconductors, which usually has been something going on in Asia, not so much in Latin America.

So, nearshoring, friend shoring, geopolitical fragmentation, very, very involved in Latin America. Let me mention another one, actually two, for the price of one, Oscar. South America is the place in the world that has the largest reserves of critical resources that we need for two things.

One, to allow us to transition into a lower carbon emission global economy. So, if the world is serious in trying to meet those objectives there's going to be tremendous demand for resources like copper, lithium and other minerals that are abundant in places like Chile and Peru, and somewhat in Brazil as well.

A lot of demand is going to increase investment in that it's going to provide governments with more financial resources to do more. But it's not just the climate change, but also think about AI and how AI is demanding a lot more electricity to have all these super chips functioning. And guess what, copper, again, lithium is very much connected to pick up in electricity demand as well. So, Latin America focal point of a lot of these mega forces, Oscar.

Oscar Pulido: And you mentioned the electricity demand from AI, we had Will Su from our fundamental equities business recently, and he talked exactly on that point. He used terminology in terms of quantities that I had never heard before, just to really bring home the fact that there is a lot of electricity demand that is going to be required. And you're saying in Latin America and in South America in particular, is where these resources exist that will help with that, supply of electricity.

We had Larry Fink also here, not so long ago, and he was talking about his annual letter. One of the themes that he talks about in there is infrastructure, and the need for more infrastructure development and spending around the world. So how does that impact Latin America's economic growth?

Axel Christensen: That's a great question, Oscar. And actually, it links very much into what we were discussing just a minute ago. All these opportunities I mentioned near shoring and Mexico and Central America. The demand for these critical resources in South America will require investment.

Take, all this investment in new production, especially in the northern part of Mexico, you need more electricity, that means more investment in say renewable, energy generation. in Mexico. Mexico will require more supply of water to be able to carry out a lot of these investments. A lot of them are very, intense in water use.

We go to South America, all these mining projects, to get the copper, to get lithium, they don't show up overnight. You have to go through investments, not only in the operation in itself, but also affecting the communities that are around these projects as well. To provide them with housing, water supply, education. And then you have to take these things that tend to be up in the mountain to ports. So, you need ports and roadways. So, you know, to get these mega forces to become real opportunities, infrastructure is going to be the key word there. And so, Larry is spot on and hopefully Latin America will be a very good example of how that infrastructure will, help these mega forces take place.

Oscar Pulido: Right? And infrastructure, being a global need is what Larry's talked about, and you've specified how it could benefit, the Latin America region. You've mentioned Mexico a few times, I know you spend a lot of time there understanding what's going on the ground in the economy. You've talked about Nearshoring, so maybe just say a little bit more about that. How does this trend towards Nearshoring really like impact the workforce in Mexico?

Axel Christensen: Mexico is in a unique position. Not only is it the Southern neighbor of the U.S. but it has been going through, several decades now, a very close integration. If you look at car manufacturing, actually, cars go back and forth, the border between the US and Mexico many times, as they're being built and, finally make it to the US to be sold to, US consumers. So, there's already a very strong basis of manufacturing and integration, logistics, the challenge, and I guess the great opportunity for Mexico to scale up to, go to more sophisticated value added, not just in cars, which by the way it's not, cars, how they used to be, there's a lot of technology in car manufacturing today. But the opportunity is to scale that up, and to have Mexico be a very good alternative to some of the Asian economies that produce semiconductors to provide, for instance, data centers as well. so that full integration with the US, building on what already exists, not only because of the, near location that it has, but also Mexico benefits from, a favorable trade situation with the US and Canada for that matter as well.

No other country has that. Let me give you another example. Electric vehicles built in Mexico are covered by the same credit regulation here in the US that provides consumers, electric vehicles built in Korea or in Germany don't have that. So, Mexico has really a very good opportunity to take this advantage and, make this dream become a real opportunity, Oscar.

Oscar Pulido: And as part of scaling up their manufacturing, you mentioned technology, the role of technology, and I think earlier you talked about semiconductors and how that's typically been something produced maybe in other parts of the world, and you're seeing some of that production in Latin America as well. So, feels like maybe there's a move up the value chain that exactly that you're seeing across the region. We've talked about demographics, globally and how some parts of the world are aging, some parts of the world, perhaps that's not as pervasive. Where does Mexico fit in that continuum? What are you seeing about demographics in Mexico and how is that shaping the retirement discussion in a country like Mexico?

Axel Christensen: Mexico is probably closer to the younger population group of countries, which a majority of emerging economies are. But things will evolve for it to be closer to perhaps where the US is or more developed countries.

It has the benefit of what we call the demographic dividend. That means as younger population goes through school and makes it to the workforce, that really bumps up the economic growth. So, there’s a potential, for further growth in Mexico just because of this. demographics change. But at the same time, it's already something that Mexicans are talking about, looking at how can we shape, our economy, our financial markets to take care of retirement going forward. And, as we learned looking at other countries, having the working population, taking care of retired people is not enough. We need to be able to develop markets and alternatives to allow for people to save, to invest, and to help them face retirement with, dignity, with a clarity on their financial wellness once they've decided to stop working.

Oscar Pulido: And I know I asked you the question specific to Mexico, but as you make your way around the region, is the importance of that retirement discussion something that you hear in other countries in Latin America?

Axel Christensen: Definitely! There's a lot of focus in several of these countries on looking at pension systems, seeing what's working, seeing what has to change, reviewing some of the parameters. Are people saving enough? Are people retiring at the right age? We're living longer. Does it make sense to still retire at the same age that perhaps our grandparents were retiring? How can we also develop working opportunities for people that decide to work longer and perhaps retire a little bit later, so a lot of questions around that.

Not a lot of easy questions 'cause there's a lot of demands in the short term. But this is a discussion, Oscar. It's very important to set your eyes on the long term. Because you want to be taking the right decisions today. So not just us, but our children or eventually our grandchildren also are able to have a great retirement as well.

Oscar Pulido: So, let's bring it to a portfolio. I'm an investor, I'm interested in Latin America, and maybe focus on Mexico maybe as a starting point, given some of the positive trends that you've highlighted. How does an investor, think about an investment in Mexico and their portfolio? How do you think about the context of everything else that they're investing in?

Axel Christensen: So, Mexico, of course, we want to be looking at the nearshoring opportunities. There are industrial companies that already are part of the manufacturing supply chain with the US, that's a very great starting point. We talked about infrastructure. Companies that will be providing electricity, the roads, the houses that this new investment will provide as well.

But why stay at Mexico? Let's continue down towards South America. We have Brazil, for instance, beyond some of these critical resources on the mining. It's a huge market. Looking at how their population, their middle class has been growing, how that middle class is demanding more services, financial services, housing, home improvements. That in itself is a great investment opportunity. And then Brazil also stands out to be one of the major food producers in the world. So, to the extent that geopolitical fragmentation not only has to do with manufacturing supply chain, it also has to do with securing food to your people. So, Brazil is really, leveraging on that opportunity.

And then you have places like Chile, like Peru, we've mentioned in terms of their opportunity regarding, demands of critical resources. And then let me cover the whole regions, there's a very interesting number of, companies that are starting, in Latin America. They're very digital. They're very, technology based. Be it digital banks. It might be payment systems; it might be delivery systems. What's interesting is they're developing and deciding to list themselves as companies directly in the US they're seeking specialized investors. So, when we invest in Latin America, don't just keep yourself to the region. You can find plenty of very interesting Latin opportunities listed here in the US as well.

Oscar Pulido: Right. So, it sounds like there's, some critical natural resources that exist in the region, but there's also a lot of innovation going on, in the region. So, Axel, any final takeaways for, investors when they think about the Latin America region?

Axel Christensen: First of all, it's, a great, area of opportunity. We talked about how Megaforces touch in several aspects of, the region. I also want to highlight the diversity of opportunities. It's not just Mexico. It's not just Brazil. it's also other countries that provide in each of their own different. Industries, different type of companies that are really excellent at what they do. And then just the region itself and what it's also providing to the rest of the world. Some very interesting startups, and not just startups, they're becoming real companies nowadays.

Oscar Pulido: Right And sometimes that innovation is making its way to the US in terms of a US listing. Actually, I mentioned we, we haven't talked a lot about Latin America, in. On the podcast, so I appreciate you, making the trip to New York and giving us a little bit of a tour of the region, this summer for those who want to, learn a little bit more about Latin America.

We have the Copa America, soccer tournament, which is not just Latin America countries, but it's primarily Latin America country. who's your country? Who are you rooting for?

Axel Christensen: My country is my home country, Oscar. I'm originally from Chile. Chile will be playing a difficult group, including World Champion Argentina. in the coming days. I'm rooting for Chile. Chile has been going through a bit of a bump in terms of their great performance in some Copa Americas in the past.

Oscar Pulido: Well, they were the 2015 and 2016 champions if I remember. So good luck to Chile. Thank you for joining us on The Bid, Axel.

Axel Christensen: Thank you for having me, Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you've enjoyed this episode, check out Geopolitical Insights with Catherine Cress, where we discuss the structural shifts that are redefining global dynamics.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0624U/M-3652026

<<THEME MUSIC>>

Oscar Pulido: Infrastructure is experiencing a transformative moment, owing to the rise of remote work, the digital revolution, urbanization and a changing energy landscape driven by AI’s increasing demand for data centers. So, what opportunities exist for investors and how can infrastructure investment not only build wealth but contribute to a more efficient future?

Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

David Giordano is Global Head of Climate Infrastructure, at BlackRock. David will help us explore the major structural forces driving this change, and we’ll also examine the role of private capital in bridging the financing gap for new energy investments and how changes in supply chain strategies are influencing the infrastructure investment landscape.

<<THEME MUSIC>>

Well, David, welcome back to The Bid. It's been a while, but it's great to have you back on the podcast.

David Giordano: Thank you very much. It's great to be here.

Oscar Pulido: So David, infrastructure is very topical right now. In fact, Larry Fink, talks about it in his annual chairman's letter, it's one of the main themes. So tell us a bit about how we got to this point, why is infrastructure so topical?

David Giordano: Thank you, Oscar. It's really an exciting time to look at the landscape and see the opportunity set that exists around infrastructure investing right now, and particularly around the transition to the decarbonization of our economy. We like to call it the golden age of infrastructure, I really like to think about this right now as the age of implementation. Having spent 25 plus years investing in renewable energy and being around the industry. We've never been at a place where we've had such fantastic alignment around public policy, around consumer demand, and around the technological innovation and maturity that we see in the industry right now.

Just last year we invested $2.2 trillion around the energy transition. That number is going to grow to $3.5tn by 2030. As we get into the 2040s, it's going to be $4.5tn. That creates a massive investment opportunity for private markets to really fill the gap to fuel this broad transition to a decarbonized economy, and particularly around creating carbon free sources of electricity generation.

So, a really exciting time, but it's also going to require a real, all of the above approach to this because it's not just about the generation, it's also about the transmission and the distribution and the decarbonization of energy intensive businesses like steel, like cement, hydrogen will play a role, it's really going to be an entire ecosystem around the macroeconomic trends to really drive the transition that's going to require this massive investment.

Oscar Pulido: Sounds like there's a lot of moving parts there, and you mentioned a couple of numbers, one of which was four and a half trillion dollars, which is the annual amount of investment that is going to be required in the 2040s to assist with this energy transition. There's another big number that comes to mind, which is the global population. Today, it's 8 billion. It's forecasted to go to 10 billion by 2050. I think a big reason for that is emerging markets and just the demographics in those countries. So I wonder if you can talk about how emerging markets will address the need for more infrastructure, and what opportunities does this present for investors?

David Giordano: Yes. This is a great opportunity to bring private capital into emerging markets and really create an opportunity to facilitate not just clean energy, but more importantly probably energy access as you think about those markets, and I really think in emerging markets, we have an interesting opportunity from an energy perspective to leapfrog some of the technologies as well. If you think about phones, emerging markets largely skipped landlines and went right to the mobile network. I think we're going to see some really great advancements on the technology side, whether it be microgrid, or other technologies that will facilitate this energy access as we go to a broader electrification of our use of energy. You know, electricity is set to grow to become the primary source of energy, broadly and emerging markets are really going to be leading the way in this space.

I think the key to investing into these markets is really, thinking about where public capital and private capital can really work together.

And we've taken advantage of some opportunities to create blended finance and I think that blended finance, if you think about that term, the goal of it is to really catalyze private capital to come in and invest into projects just like they would invest to them in those projects in the developed world. And as we look to the growth across these areas, I think it creates an enormous opportunity to participate in what will be, one of the most important things from just an overall, global stability perspective because that access to energy and, low carbon energy in the developing world is going to be the biggest driver to meeting our decarbonization goals across the economy.

Oscar Pulido: David, you mentioned global stability and what comes to mind is geopolitics. The geopolitical landscape is something that we spend a lot of time talking about, and when we talk about those topics, things like energy security and nearshoring come up. So, what do those things mean for infrastructure?

David Giordano: It's a great point, Oscar. And as you think about this and you break it into those two components, you've got, the nearshoring, the onshoring of manufacturing. And this is really, if you think post pandemic, a desire for the economy to have a much more diversified supply chain.

And really as you think about the energy transition, that has diversification built into it as well. And when we think about that transition, it is an all of the above solution. And so there will be fantastic opportunities to actually support that nearshoring and onshoring of manufacturing with clean energy, reliable energy, and low-cost energy.

It's also going to create opportunities more broadly across the infrastructure landscape. It's going to be ports, it's going to be airports, it will be roads and highways as well to support the reconfiguration, if you will, of the supply chain.

That also then plays into the second point you made, which is around energy security, and you think about, Europe post Russia's invasion of Ukraine and it really highlighted the need to have a diversification of supply for your energy. And so again, that solar, that's wind, that's natural gas too.

As we go through this transition, nuclear will continue to play a role and in some countries, play a more prominent role. And all of this again, fits into that broader theme, that broader opportunity set for infrastructure investing.

The other thing I'd highlight too, as you think about the policies, a big part of the policies has been about encouraging investment in domestic supply to support the transition. And if you think about, something like solar modules and then you look at a wind turbine, which has a much more diversified supply chain, I think all of these things start to fit together into, a much more secure and certain energy future and a decarbonized one.

Oscar Pulido: And David, just to clarify for my own edification, when you say diversified supply chain, do you mean the way that we're powering supply chains or do you just mean that there are different component parts coming from a lot of different sources in the supply chain?

David Giordano: Both. The way that we're powering supply chains on the one hand, but on the other hand is where are the component parts coming from to build out these power plants, and if you look at what is at the core of something like the Inflation Reduction Act here in the United States, at the core of it, it's really inspiring manufacturing. There are additional tax benefits associated with domestic content that creates an economic benefit for a project that can utilize that domestic content. So, it all fits in together into one broader ecosystem.

Oscar Pulido: And so, David, maybe just switching gears for a second, you alluded to this a little bit just a second ago, the term private capital came up. In fact, one of the reasons Larry Fink touched on infrastructure in his annual letter was not only the need for it, but also how to finance these projects. And he touches on how governments are going to be challenged to finance these projects on their own and that private capital will be needed in order for this infrastructure build out to come to fruition. So can you talk a little bit more about the role that private capital is going to play as we transition to a low carbon economy?

David Giordano: Private capital is going to be essential Oscar in really facilitating that transition. And so again, as you think about, a deglobalization effort, if you will, around the geopolitical landscape, that plays into what we were just talking about as it relates to diversifying the supply chain nearshoring and reshoring of manufacturing. And so again, all of those pieces fit together.

We also have incredible stress on governments right now, just in terms of the debt service that they will have to be paying. And it's forecasted over the next couple of years, many of the largest economies in the world would be paying more in debt service than they are in defense spending. That means that they're not going to be able to finance the infrastructure needs on their own, they're going to need private capital to play a role in this.

And private capital is really well positioned to invest in the development and then the long-term ownership of these projects and really be, that facilitator of investment into these long-term infrastructure opportunities.

Oscar Pulido: So, you're saying that this infrastructure investment that is needed is almost too expensive for governments to handle by themselves, so this is why the role of private capital is going to step in to assist?

David Giordano: Yes. that's exactly right. There is just no scenario that you can paint and say that governments can absorb all of the capital needs on their own.

And private capital is in a great position and there's a huge demand from institutional capital providers to have access to those types of investments.

I think the other piece to this, as you think about it, is, government has some role in the financing side of it, but really, it's more important that government sets up the right policies, has the right regulations in place to really facilitate the transition at scale.

We were just talking to some of our partners in the industry and it's estimated that there's about 40 gigawatts of projects in the United States that have signed interconnection agreements but are unable to go forward with construction because they don't have their local permitting in place.

And so, government’s role, yes, there's a financing component to it, but more importantly, it's about setting up the right institutions, having the right processes and regulations in place to really create then the efficient flow of capital into these assets where there's quite a bit of institutional money that is looking for access to those uncorrelated to public markets, cash flows.

Oscar Pulido: So David, we're talking about megaforces. We touched on geopolitical fragmentation, there's another one that comes to mind, which is demographic divergence. In fact, we recently had a conversation with Peter Fisher and Nicholas Fawcett about this exact topic, demographic divergence. Essentially talking about the fact that populations are aging very differently in different parts of the world. And so this has an impact on demographic shifts, on urbanization, and it makes me wonder how does infrastructure then play into this?

David Giordano: So, look, as you think about the demographic shifts and you think about the differences between, the developed world and the developing world. We were recently at an event with the president of Kenya where the average age in Kenya is 19 years old, that’s vastly different than looking at a country like Japan or even the United States.

And as we think about that, that also implies, further urbanization, which means it's not just going to be, centrally generated power that's going to be able to facilitate that growth in urbanization. We're going to need to have the structure in place to facilitate, behind the meter, which, by that I mean rooftop solar and battery energy storage that's localized. Generating power at the distribution level, being much more responsive, having a smarter grid, smarter metering to inspire behavior to use power more efficiently. Energy efficiency, which is not something we've talked about, but that plays into, this broader infrastructure need to support the energy needs of that population growth.

All of these need to work together to really make this feasible and ensure that there is reliable, inexpensive, and clean energy available to support that growth.

Oscar Pulido: Well, I have to say I know there are countries that have a younger population than the developed world, countries like the US and Japan, but I had not heard a statistic like the one around Kenya that you just mentioned. And it really brings to life that divergence in demographics that we talk about. Uh, I also start to think about how the world has evolved over the last few years post the pandemic, rise of hybrid work, the rise of video streaming, of course, the rise of artificial intelligence. How does this reshape the demand for infrastructure projects

David Giordano: Yes, Oscar. it's a really great point and as you think about the investment opportunity, right? There was 35 billion, spent on data centers last year. That number is going to approach 50 billion by 2030. we're just going to continue to see massive investment as we see the growth of artificial intelligence, but also the broader use as you point out streaming, increased remote work, it's just going to continue to put more pressure and create more demand around data, going back to the our earlier part of our conversation, the increase in manufacturing capacity, more broadly dispersed through throughout geographies is going to increase electricity demand.

And as we think about that, it creates opportunities to invest then in the generation technologies that can meet that demand and can meet it at low cost and with low carbon intensity.

I think the other thing to think about with this too is, it's getting a lot of press lately, if you think about the average search you do, on your computer and then you think about, putting in an artificial intelligence prompt. AI actually requires about 10 times the energy as the regular Google search, if you will. And so, if you extrapolate that out, by 2026, we estimate that demand just for data centers will equal the demand of Japan. Just to put it in context, it's going to be a massive shift, it's going to create investment opportunities in data centers, but it's also going to create a massive shift in the way we generate and use electricity.

Oscar Pulido: And so, David, you've given us a lot to think about here in particular, when people hear infrastructure or maybe they think about roads and bridges and, and maybe they stop there. That's sort of the more traditional way of thinking about infrastructure, but, uh, you've made the point that it's much more than that. It's really thinking about how are we going to power this digital revolution that we're experiencing. So if we bring it back to the end investor who's thinking about infrastructure, what should they be considering when they're looking at the investment opportunity set?

David Giordano: Oscar, I think as you think about infrastructure investment opportunities. you want to think about a couple of key components, and it's really based on the fundamentals.

First and foremost, you want to, be focused on infrastructure where you know that is in the fast movement of demand, right?

And we've talked a lot about power demand, and as you think about how are we going to meet those demands, it's an all of the above solution. So just sticking to the energy side, you really want to think about all of the areas that are going to provide that reliable, low cost, low carbon energy. And that really is technologies ranging from classic wind and solar investments, natural gas is going to play a key role in facilitating the transition, especially as we have more and more coal retirements.

I think as an infrastructure investor, you want to keep your eye on what's happening in the nuclear world. You know, SMRs and other technologies are going to continue to progress and reach commercialization. But you really want to see the trends. I think you want to focus on cost, and I think you want to focus on reliability and really pay attention to the demand fundamentals, and then look for attractive investment opportunities with that sort of foundation.

Oscar Pulido: Well, I have to say, David, you have put a lot of structure around infrastructure, meaning that I think you've helped us understand all the different components of it, the broader definition that exists, and I'm kind of left thinking back to some of the numbers that you shared, the fact that over 2 trillion a year is invested, uh, in this space right now, it'll be in the three trillions a year by 2030, and in the four trillions by 2040. So, this promises to be an important topic for many years to come. Thank you for sharing all these insights, and thank you for doing it on The Bid

David Giordano: Thank you very much, Oscar. it was a real pleasure and an honor to be here.

Oscar Pulido: Thanks for listening to this episode of The Bid. Next week I’ll be talking with Axel Christensen about Latin America’s Strategic Economic Shift in the Global Market.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0624U/M-3645533

<<THEME MUSIC>>

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

India is a nation that's not just on the cusp of an economic transformation. I. One that is also redefining the global economic order. It has recently become the world's most populous country overtaking China and is projected to become the world's third largest global economy by 2027, there's a number of factors that are helping India cruise its way to the number three spot, including a demographic advantage, geopolitical realignment, and a digital revolution.

 As we turn our gaze eastward, we'll ask what is driving India's growth and what hurdles may yet lie ahead.

I'm pleased to welcome Gargi Pal Chaudhuri, Chief Investment and portfolio strategist for the Americas at BlackRock. And Tara Iyer, Chief U.S. macro strategist for the BlackRock Investment Institute.

Gargi and Tara will share their insights on India's economic strategies, equity inflows, and what global investors need to consider when looking to take advantage of investment opportunities.

Gargi and Tara, welcome to The. Bid,

Tara Iyer: Great to be here.

Gargi Chaudhuri: Thanks for having me, Oscar.

Oscar Pulido: Gargi, I'd love to start with you. We're going to talk about India and the rapid growth that it is experiencing. In fact, the growth rate in India for many years was faster than pretty much every emerging market except China. Although in recent years, India's growth rate has now surpassed that of China. So, talk to us a little bit about what are the factors driving this growth and what challenges does it present?

Gargi Chaudhuri: This is so exciting for me to be here to talk about India because as many of you can tell from the accent, it is where I'm from, and to come to talk about it in an investment context is such an honor.

So, the IMF forecast for India is to have a growth of about 6.8% in 2024, and about 6.5% in 2025. the world GDP is about three and a quarter percent, the emerging market, GDP in that same period is about 4.2%.

What's really exciting to many of us is that over the next five years, India is going to or is expected to be the third largest economy. And, if it grows at its current pace, it's going to double the, $3.5trillion GDP that it's currently at by 2030. But I think we have to look a little bit harder and understand why all this is happening.

I think about it in sort of five dimensions. The first is demographics. Not only is India the most populous country, but what's important is about 65% of that population is below the age of 35, and about half of that population is below the age of 25. So, it's a young population, it's a population that is, going to enter the workforce and be really productive in the years to come. And that is very different from how many of the developed markets look.

The other one that I focus on a lot is infrastructure and the huge amount of investment that's going into infrastructure in the next few years. There's about 35 kilometers of roads that are going to be built per day between now and March 2025. So that's about a little more than 18 miles for those of you who are not, so familiar in kilometer terms. You won't have to spend as much time in traffic if infrastructure's great - which growing up in India was certainly one of the things that I didn't love! There's a huge amount of pro industrial policy, huge amount of government spending.

Then, one of the things that I'm sure Tara's going to talk about is around friend-shoring, the impact of supply chains moving away from other countries to India when we look at the export as a percentage of GDP in India, you've already seen that come through in the export number.

And then lastly, central banks across many EMS are cutting rates. But in India as well, the RBI, which is the Reserve Bank of India, is expected to begin their cutting cycle Again, another aid to growth and to consumption.

Oscar Pulido: You've laid out a really interesting macro landscape that we can delve into a bit more. And I think you said the economy will double in size by 2030?

Gargi Chaudhuri: Yes.

Oscar Pulido: If it continues to grow at current rates, which I think is an interesting visual just to quantify the speed at which it's growing. You also mentioned that India is now the world's most populous nation. So, Tara, I think that happened pretty recently. And so how does this demographic advantage for India factor into their economic strategies?

Tara Iyer: As Gargi mentioned, India's population is very youthful. Why is this important? Because the demographic divergence in India is so different from that in advanced, some advanced economies, populations are shrinking in countries or slowing in the United States, in Japan, in China and many countries in Europe.

And the demographic divergence across countries really creates these shifts in the economic and financial landscape. So, from an economic perspective, if there are fewer workers in the economy, it can limit how much economies can produce, and this limits their growth rate. It also has inflationary consequences, and that depends on the dynamics of demand and supply.

Older populations, it has been shown in the data, they consume services, but they also demand more healthcare and social expenditure. But on the other hand, labor supply shrinks in countries with these, adverse demographics and compared to countries with more of a demographic advantage.

And all those being equal, the shifting balance between demand and supply can lead to inflationary pressures. This can pressure the fiscal situation in countries with a more unfavorable demographic dividend than others, because it means lower tax revenues from workers, and it can pressure public finances because governments have to spend more on healthcare and other social costs.

In terms of India's economic strategies, it should be able to take advantage of its youthful population by upskilling them and increasing the productive capacity and really driving growth by investing in its young population.

Another thing that India is trying to do in terms of programs is increasing women's labor force participation. India's labor force participation of women right now is relatively low compared to many economies. And increasing labor supply of younger women in the workforce will allow it to further harness its demographic dividend and spur future growth.

Oscar Pulido: So, it's clear that the younger population of India is a tailwind to growth. it's a larger working age population and it puts less constraints on fiscal policy relative to developed markets. Another trend that I'd love to get your thoughts on when we talk about India is digitalization and specifically how it impacts the financial sector. So, can you talk a little bit about how this is also another tailwind for growth?

Tara Iyer: When you go to India, you see everyday transactions such as shopping for groceries, to paying bills, to making cross-border transactions, things that were done a decade ago in a more inefficient manner, these are done digitally nowadays. And one key reason why digitalization has taken such a stronghold in economies, because of the rise of the unified payments interface, or the UPI for short.

It started 7-8 years ago, and the UPI has been successful, in part because 75% of India's 1.4 billion population holds a mobile phone. 90% of India has a unique id. Less than 50% of the population had a unique ID just a decade ago. So, the UPI scheme has been successful in terms of streamlining payments.

Digitalization has several economic implications. I think the first is that it really allows the underserved population in rural communities in India to enter the financial system. And one, key stat that I think is very interesting is that 85% of the population in India is now financially included, and this is, this compares to 20%, just a decade ago.

UPI can also be used across generations. it's used by the tech savvy young, and it's used by older people alike - it really transcends, generations. There's my grandma, uses digital payments nowadays to pay her taxes. and she's very happy because she doesn't have to travel, she's 87.

So, the UPI paves the way for a consumer credit boom in India. This consumer credit boom is one of the key reasons why we think the consumer sector can provide interesting investment opportunities in India. And generally, I think their investment opportunities rise and following the trends of increased financial inclusion and how the UPI is able to reach underserved communities in different parts of the consumer segment alike.

Oscar Pulido: And I've heard UPI mentioned now a couple of times, and you mentioned the financial inclusion going from 20% of the population 10 years ago to now, 85% of the population. It sounds like it's more pervasive in terms of how it impacts people's lives. So, the good news is you've both laid out some really positive, forces that back the India story. this is not news though, to a lot of investors. In fact, we've seen flows into India, equities being quite strong.

Gargi maybe to come back to you, valuations in India, as I understand, are a bit higher reflecting this enthusiasm. How do you look at the investment opportunity in India relative to other emerging markets or just relative to stock markets in general?

Gargi Chaudhuri: I'll go back to the first point that you made around flows. there have been about $7 billion of inflows of the last 12 months, which is just U.S. investors that are using ETFs that are linked to the country of India and getting that exposure. And this is pretty rare when we think about that single country exposure to other countries. $7 billion is a pretty high number because the next largest number in that single country space is about $3 billion.

But to your second point, there obviously has been over the last five years reflection of this incredible story of digitization, of infrastructure, of, demographic dividends that has played out in the market.

So, if you think back to pre-Covid, from five years ago to now, what the Indian equity markets have done, it's up about a hundred percent in that five-year timeframe. Which is in line with what the U.S. market has done. But then if you look at the broad EM indices, obviously India is an EM country so you can compare it with broad EM indices, which are up a fraction of that, about 20% approximately in that same timeframe. So, there has been a valuation story that has taken place.

Now, what drives valuations of a bond, a stock, a country, a sector etc? A big part of that is expectations of earnings growth, and part of that expectations of earnings growth comes from the underlying growth of the economy.

So, this 8% growth that we have seen, the approximately 6% growth that we expect to see, all of that is also going to manifest its way into earnings growth. And that's what's been priced in the market. And I would say that investors have only just begun to pay attention to that, especially US investors, as well as domestic demand has only just begun in that way. And we think despite these valuations that have certainly moved, most US investors still don't have India in their portfolio in the size that they should. I think those are tailwinds that are yet to materialize over the medium term.

The last thing that I think is really important and maybe not understood as much is what you get as an investor when you invest in India versus many other EM countries. So, when you invest in India, because of the way in which the Indian stock market is set up, if you allocate to India, you are actually getting a much more diversified basket than you would if you allocate it to other single country EMs. You're getting that diversification built in as opposed to many other EM countries where you might just get metals and minings or you might just get financials. So that diversification is a big reason that many investors are choosing to allocate to India.

And then I'll also say from a portfolio construction standpoint, adding Indian equities also have that growth, the momentum, important qualities that are really important when growth is scarce. So having that growth momentum qualities in the Indian equity markets is really important. And we think, investors across the globe will continue to gravitate that way.

Oscar Pulido: And your point on sector diversification is a good one. We take for granted if you live in a developed market. So, Tara coming back to you, another theme that we talk about when we discuss India is geopolitics. And specifically, in what is a more geopolitically fragmented world, India has taken a multi-aligned approach to different superpowers around the world. Talk more about that and specifically how it impacts the economic policies then that it pursues.

Tara Iyer: We live in an increasingly geopolitically fragmented world. Trade barriers have tripled since the beginning of the financial crisis. They've increased in new record highs in certain commodity markets. Global trade has plateaued since the financial crisis and global FDI - foreign direct investments - has plummeted, geopolitical risks are a key market concern, and among certain surveys, they're written among the top market concerns at this point.

Some key geopolitical trends that we are monitoring in this fragmenting world are increased tensions between certain superpowers, we are navigating an increased technology competition. We are seeing increased tensions in the Middle East, and more scope for emerging market political crises.

In terms of the increased technology competition, there's greater competition over the use of artificial intelligence. We've seen the boom of that quantum computing, semiconductors and usage of military technology. India is relatively well positioned to take advantage of some of the diversions that we are seeing in the world.

It's taking fewer sides, compared to many other economies. It's more of a multi-aligned state, such as many other emerging market economies, and it's really positioned itself, for example as a country that wants to secure affordable energy for its masses. And some of its alignments are based on that.

India's become a leader in digital payments and has positioned itself as a country that's willing to share knowledge with some other countries, including those in Africa and some other countries is pursuing selective alignments with, in terms of sharing digital knowledge.

Oscar Pulido: And so, Gargi, coming back to you, you talked about the flows into Indian equities, and you said something about the part of the portfolio that maybe it's not as well owned as it could be. So how should investors think about this as part of a portfolio?

Gargi Chaudhuri: I love this question because it's my privilege and honor to help investors navigate two economies, which are going to be additive to their portfolios in the next few years.

And if I think back to the past how investors, especially, US investors and certainly, same of international investors as well would get exposure to countries such as India or other emerging market economies, would be through a broad EM index and over the last five years, I would say post pandemic, certainly with the rapid growth of India stock market opportunities, India right now is about 18% of the index and that's doubled over the last five years where it was 9% of the index. even if you went via that broad exposure, you would certainly get a fair exposure to India and that's wonderful.

More recently, we've seen a lot of investors move to a benchmark that is EM excluding China. And if that is an exposure that you choose to have, again, you have a larger exposure to, India in that basket more and more. As I mentioned earlier, we've seen about 7 billion of inflows into single countries, in single country India exposure. More and more what we are finding is that investors are choosing specific countries instead of that broad EM exposure because investors are recognizing that not all EM countries can be painted with the same brush.

I'd also say that investors, when thinking about India can think about much like they do in the rest of the world. Think about large cap, mid cap, small cap, so getting exposure to those really big companies and you have indexes that do that. And then you have some of the indices that give you access to the smaller cap markets and.

I'll also say that's something that's very exciting that's going on in the Indian market right now is the inclusion of Indian government bonds. In broad EM markets. So that's something that has been taking place and we'll get to that max, 10% or so allocation over the course of the next year or so the max allocation's about 10%, and I think that's another massive opportunity for investors not just to have access to the Indian equity markets, which is what we've been talking about, but now over the course of time also have access to Indian bond markets. And then finally, the private markets as a way of getting access to private opportunities in India.

Oscar Pulido: So, Gargi you always are very enthusiastic about this topic and, for that matter, every topic that, you come and talk to us about. But I know part of that is probably because you were just in India last month. So, tell us what did you see while you were on the ground?

Gargi Chaudhuri: So, I was home last month, visiting my parents. I tried to go home to India, to Calcutta, India about two to three times a year. This time in particular, it was amazing to see in Calcutta the impact of the infrastructure to actually see it with my own eyes. what was most exciting for me was the underground subways and the coverage, which the underground subways or the metros have that connect the suburbs to the cities. you won't waste as much time sitting in traffic because you are connected underground. And that to me is so exciting from just a productivity standpoint.

Oscar Pulido: A great little anecdote of, infrastructure, the benefits of good transportation, which I think we all, appreciate as we make our way around different cities. But it certainly sounds like India has a productive road ahead. And I want to thank Gargi, both you and Tara for joining us on the. Bid.

Gargi Chaudhuri: Thank you for having us.

Tara Iyer: Thank you for having an Oscar

Oscar Pulido: Thanks for listening to this episode of the bid. If you've enjoyed this episode, leave us a review and consider sharing this with a friend and subscribe to the bid wherever you get your podcasts.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0624U/M-3610624

<<THEME MUSIC>>

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

The world remains abuzz over artificial intelligence, but rapid advancement and adoption of the technology is poised to drive a significant increase in power, demand, and this demand could redefine energy consumption as we know it today, we ask the critical question. Is the energy sector equipped for the AI power revolution?

Today I'm joined by Will Sue from BlackRock's Fundamental Equities team. Will is one of BlackRock's leading voices on all things energy. He'll walk us through the sector's pivotal role in the build out and future of AI, as well as dig into the potential investment opportunities and challenges Will, thank you for joining us on The Bid.

Will Su: Thank you, Oscar. Great to be here.

Oscar Pulido: So, Will, we've talked about artificial intelligence on the podcast a lot, and it seems like there's no limits to the growth of this technology except the fact that it consumes a lot of energy and maybe that's the constraint. Tell us a little bit about why AI consumes so much power.

Will Su: The simple answer to that extremely complicated question is that information processing is energy, and we are processing more information today than we've ever thought of, even from just a few years ago. At its most fundamental level, computations are just moving electrons around a semiconductor chip, but when you multiply that very small electric current by trillions of calculations, the energy demand adds up very, very quickly.

I think Rob Goldstein mentioned this the concept of AI is not really anything new. The MIT AI lab was started in the late 1950s, we did have a breakthrough moment in 2017 when a team of researchers wrote a paper about the transformer, which then became the architecture for today's large language models or LLMs. Now, these models are being trained on trillions of parameters and tokens that make them high quality, high capacity, and able to contextualize the questions that they're being asked.

And just to give you an idea of how big the computational power we're talking about is here. ChatGPT4 was trained on about 70,000 Zetta flops of compute power. That's 70 trillion trillion operations per second. Mind bending numbers. And as that number grows over time, that's why we're seeing this recent interest in meeting the power demand of AI.

Oscar Pulido: Did you say Zetta flops? 'Cause I'm going to need a glossary. I think as we talk more about artificial intelligence, it feels like the terminology is new to a lot of people. And when you talk about power and the quantity, help us understand like, how much are we talking about on a global scale?

Will Su: So as anyone who tried to model this out can tell you it's very hard to have a lot of confidence for 10, 20 years down the road when you're looking at something with such exponential growth. That being said, we did build our own model because as they say, all models are wrong, but some are useful. In building this model, it's helped us understand what the key variables are and maybe how the shape of that future power demand might look like.

And the punchline is, we think there could be up to 1000 terrawatt hours of incremental electricity demand for AI by 2030, and that would be about 3% of global electricity. And keep in mind that the internet today already consumes 2 to 3% of global electricity for things like data centers, networking transmissions and increasingly for blockchains. In aggregate you could see total internet demand, including AI, make up 6 to 7% of global electricity demand by 2030.

Oscar Pulido: And how is the world going to manage that power demand because it's incremental on top of what is already the demand for power, right?

Will Su: Right. I think we can first dig a little bit into what is driving that AI demand. There's really three roughly equal buckets in our 2030 outlook.

One is for training. So that's the power that it takes to train these very large models. And again, just to give you an idea of the scale in 2022 Chat GPT-3 came out. It was trained on 175 billion parameters and 300 billion tokens. And the amount of energy it took to train could power about 90,000 US homes for a year.

Now you fast forward to 2023 when Chat GPT-4 came out, that model was reportedly trained on 1.8 trillion parameters and 13 trillion tokens. And the energy it took to train that could power 2.5 million U.S. homes for a year, and these models are getting bigger by the day.

And the good news there is with each generation of semiconductors, each generation becomes about 50% more power efficient. So, it takes half the amount of power for one calculation. It's not enough to offset just how quickly the models are getting bigger, and then remember, more players are entering this game, globally, not just in the US but also in Europe and Asia. So, you add it all together and training really represents the bulk of the power growth that we see for AI in the coming few years.

The second bucket for demand is something called querying. So that's when consumers, businesses, and other computers start to ask questions to these trained large language models. And in our model, we think you could see up to 30 billion AI queries per day by 2030. For comparison today, we make about 10 billion internet searches per day. But you have to remember that not all queries are created equally, right? A text-based query takes about the same amount of power as an internet search, but an AI generated photo takes up to 30 times more power, and a 60 second AI generated video takes up to 7,000 times more power than a text query. And video is big, it's 57% of all internet traffic today. So how the consumer adapts to AI video is really one of the key variables that'll determine just how much energy we're going to require to power AI.

And then the third bucket is really for data center operations, mainly for cooling, because when you're doing trillions of calculations per second, these chips run really hot.

So yes, 1000 terrawatt hours by 2030. That is a big number. I think it's a challenging task to meet that demand, but not an impossible one.

Oscar Pulido: And maybe you can expand there because you shared a lot of numbers. you said the word trillions a couple times. the percentage increases that you've cited, particularly when you talked about how we use artificial intelligence to query, was quite large. So, what role do renewables play in this energy demand? I'm thinking about things like wind solar, are they the major component or are there other, sources of energy that we're going to rely on?

Will Su: So, renewables are by far the fastest growing source of power generation. In the last 20 years. They've gone from almost nothing to 13% of global power generation. And they will continue to grow at a very fast pace.

Without a doubt, renewables are going to play a big part, in powering AI, but also in powering this overall theme of electrification of our energy systems. Now renewables have one really big drawback when it comes to powering AI, which is intermittency. Right? Let's zoom into the Ercot grid in Texas, which is the largest wind market and the second largest solar market in the U.S.

So, it has a lot of renewables, and if you just zoom in on a typical day, the solar power tends to peak out between 8:00 AM and 7:00 PM when the sun's shining. And the wind peaks when the wind speeds are the highest, which is usually from midnight to 7:00 AM when you wake up. Peak demand really happens in the hours of 8:00 PM to midnight. That's when people are at home relaxing, watching TV, streaming, checking their social media. And you'll see that during that period, natural gas demand really increases to meet that gap that can't be met by wind and solar.

And this is probably a good time to talk about nuclear, which people don't think of a lot, but it's actually today the largest source of carbon free power generation. It makes up about 9% of global power.

But I think as governments around the world start to realize how much electricity growth there's going to be, there's starting to be a change in thinking. And in countries like South Korea, Japan, Italy, and here in the U.S. you're seeing regulators extending previously planned shutdowns of nuclear plans, and even in some cases, allowing them to restart after they've already been shut. So definitely don't count nuclear out in this low carbon way to power AI going forward.

Oscar Pulido: So, it sounds like the, the demand is so significant that it is causing even some sources of energy that in the past that felt like, were becoming less of a priority to reenter the focus. Ultimately what you've said is there's a lot of different sources of energy that are going to help, power the AI demand. You mentioned nuclear gas, but also renewables. And if I could focus you on the US for just a second, artificial intelligence is not just the US topic, but it is the part of the world where the build out is really gaining a lot of momentum and therefore, how is the U.S. thinking about the power supply for artificial intelligence?

Will Su: we really should talk about one of the biggest unsung triumphs in the energy transition so far, which is the U.S. Power grid has decarbonized itself by a third. Over the last 20 years, and about 60% of that came in the form of cheap and abundant natural gas as a result of the shale revolution that allowed us to substitute out much more polluting coal.

 You saw a coal share in the last 20 years drop from 50% to 16%. Natural gas went up from 19% of U.S. Power generation to 42. The other 60, the other 40% came from renewables. So, renewables, again, grew from almost nothing 20 years ago to 14% of the US power grid today. So, there's already a really strong track record of partnerships between natural gas and renewables to combine and help us decarbonize.

Now, when you think about AI, and you think about data centers. The U.S. has about one third of the total data center capacity in the world, and I'm very confident that share will grow over time because we have the leading technology companies that are leading this AI revolution. And then we are also blessed with abundant resources, both traditional and renewable.

If you look at a map of where these data centers are located in the U.S., you'll see that they're mostly in these big clusters that are located close to population centers. So almost half of all data centers in the U.S. are in Virginia. They're almost all in this six square mile tiny area called Data Center Alley near Arlington.

There's other big clusters like Hillsborough, near Portland, Oregon. there's also growing clusters around Ohio, and you'll see a problem if you juxtapose that map onto one where the renewable resources are best in this country. The source of greatest solar radiation is in the southwest U.S., so that's places like Southern California, Nevada, New Mexico, and where the wind speeds are the highest are down the middle of the U.S. In the windy corridor that goes from the Dakotas down to Northern Texas.

And they don't really overlap with where the data centers are located today and where the most growth is likely to happen in the coming years. And then to make matters worse, this country's really falling behind in making long distance transmission investments. We're making one eighth the mileage of new transmission lines than we did 10 years ago.

That's a result of a number of regulatory and economic challenges with interstate infrastructure, and this is where natural gas is going to come in. It's a proven, mature technology. It's much cleaner than coal. It plugs easily into different grids, so it shapes my view that I think at least half, if not more of the incremental power for AI in the U.S. will come from natural gas and the balance will mostly be met by new renewable developments.

Oscar Pulido: Data Center Alley doesn't sound as glamorous as like Silicon Valley, but it seems like it's also very important. Let's come back to your role as an investor. You spend your day thinking about companies to invest in, and if you follow the markets over the last couple years, it's been all about technology. But we're having a discussion about the energy space, and so presumably that means there's investment opportunities in the energy sector. Where are those?

Will Su: Absolutely. So, as a value minded income investor, I have thought for a long time that energy is an undervalued sector because the market under appreciates both the volume and the duration for which the world needs oil and gas for the decades to come.

And I think this recent focus on how do we power AI just shines yet another spotlight on how power hungry our world really is. And over time, I think that will help this sector rerate higher. Now, aside from that, I think the energy sector actually might be one of the most underappreciated beneficiaries for all the technological gangs that'll come with better generative AI.

Some of the world's largest supercomputers are actually owned by large energy companies. Why? Because they perform a number of very computationally intensive tasks. Things like asset optimization, algorithmic trading, four D seismic imaging for new resource discoveries.

And I'll give you one specific example, which is the industry is using more and more of what's called a digital twin. So, this is like a virtual replica of a real-world asset, something like a refinery or an offshore platform. It's just got so much data inside of it that you can do a lot of really interesting and exciting things. Things like predictive maintenance, fixing things before they break, things like stress, testing them for severe weather events or identifying methane leaks and reducing emissions that way. So, I think there's more than one way to win with energy when it comes to the theme of AI that's greatly underappreciated by the market today.

I think the other sector that deserves some airtime here is utilities. So, utilities are a yield driven high dividend paying sector that's been somewhat out of favor in the last few years in a rising rate environment. But as the U.S. Grid goes from not having much growth for the last 20 years to needing to grow one to 2% per year going forward, there's a big opportunity for these utilities.

It'll come after an initial period of heavy investments now, which utilities will win depends very strongly on what regulatory regime and what geography they operate in.

Oscar Pulido: And it's interesting just to hear you talk about energy and utilities. I'm reminded we spoke to your colleague Carrie King, who reminded us that while it has been a very tech-driven market, in the last couple of years, there are opportunities that are starting to appear. And you're zooming in on the energy and utility sector as a function of artificial intelligence and power demand. But for an investor who is looking at this space, what should they be considering as they think about investing?

Will Su: The energy sector contributes about 10% of the S&P 500's net income, but it makes up less than 4% of the index by market cap. And I think that valuation disconnect is driven by this persistent, and in my view, misplaced fear that this sector has no long-term growth. Because I think as we sit here talking about breakthrough technologies like generative AI, it is important for us to remember that there's many different poles for incremental energy demand in this world, and all or nothing approach to energy just isn't going to work.

We have to find ways to help the traditional energy sources become cleaner and more responsibly sourced. At the same time, we scale up our renewables portfolio together, and only together will they be able to power the world forward in a pragmatic energy transition.

Oscar Pulido: Right, the world is evolving, where the demand for energy will come from is changing. With the number of statistics that you've been able to cite about the energy sector and artificial intelligence, where does this passion come from? How did you get interested in this space?

Will Su: Oscar, I'm having flashbacks to 16 years ago when I started my career at a large investment bank in the equity research department, and my recruiter said, you can either join the internet team or the energy team. And I had no hesitation. I said, energy, it's supply-demand driven. It's quantitative. The world needs this stuff. And you fast forward to today, and I think the internet index has outperformed energy by about 1,100%. But if you gave me a time machine to go back, I will make the same choice over again.

This job has taken me to really exciting places all over the world. Offshore Norway, the Permian Basin in Texas, the Bakken in North Dakota, or deep into the Amazon jungle in Guyana. That's a country that's going to go from the second poorest in South America to having the same GDP per capita as Brazil in less than a decade because of their resource development. So, it's been a really thrilling ride so far and I look forward to more of what's to come.

Oscar Pulido: We're glad you made that decision 16 years ago and that you would make it again, if you went back in time. Thanks for sharing all this insight on the energy sector, on artificial intelligence, and thank you for doing it here on The Bid.

Will Su: Thank you, Oscar,

Oscar Pulido: Thanks for listening to this episode of The Bid. If you've enjoyed this episode, check out our episode with Rob Goldstein and Lance Bronstein. Where they discuss AI through a COO lens and what business leaders are considering as AI is advancing.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0524U/M-3571844

<<THEME MUSIC>>

Oscar Pulido: American consumers often seen as a bellwether for the global economy have been largely resilient and healthy, despite sticky inflation and higher interest rates. But can this resilience continue as difficult market conditions persist. Welcome to the Bid. We break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

In this episode, Lisa yang, portfolio manager and co-head of the Consumer Industry Super group within BlackRock Fundamental equities, joins me to give a pulse check on consumer resilience and the implications to the equities market. Lisa, welcome to the bid. Lisa, thank you so much for joining us on The. Bid.

Lisa Yang: Thank you so much for having me today.

Oscar Pulido: So, Lisa, we actually spend a lot of time on The Bid talking about saving and investing. But today we're going to talk about spending and consumption, and we're going to look at it through the lens of the U.S. consumer primarily. So maybe tell us a little bit about the sentiment that the U.S. consumer has right now, and is that the same in other parts of the world for consumers in other regions?

Lisa Yang: Yeah, Oscar consumption is vastly important to the U.S. economy. It makes about two thirds of GDP, and at a high level, the U.S. consumer is healthy, but there are some signs of weakening.

On the positive side, retail sales and consumer spending are still healthy, the labor market remains really strong, unemployment rates are below 4%, and wage growth is really robust at 5%. On the negative side, interest rates have remained stubbornly high, and savings rates are at decade lows.

Consumer confidence has also been declining, and that's across income groups and across age groups. Consumer confidence actually recently hit a two-year low, and it's driven by a few factors. So firstly, on the margin, people are a bit more negative about the job market. We've seen a lot of public layoffs from industries fromtech to autos, and while the rate of inflation has come down, price levels themselves are still really high. Take food as an example. Food prices are 30% above where they were in 2019. That puts a lot of pressure on U.S. households, especially lower income, U.S. households who spend more of their income on food.

We're seeing and hearing from a variety of different consumer companies, that consumers are more focused on value. We recently had a fast-food chain report and on their earnings call they mentioned the word value 60 times. That's quadruple the number of times from the prior quarter. So broadly the U.S. consumer is still spending, but they're spending more on promotions and they're down trading to cheaper options.

Now if we move outside of the U.S., there are two countries that are really important for global consumption, and that's China and India. And these two countries are seeing very divergent trends. China consumption is still sluggish, and that's driven by a weak property market and limited government stimulus.

Consumer confidence is low and that's driving people to save rather than to spend. And when they do spend, they're being more discerning, they're being more price sensitive. Now this does pose a challenge for many multinational consumer companies because they've really benefited from this decade plus of prosperous growth from China pre pandemic.

And now these companies are looking to other places for growth, and one of those places is India. India consumption has been really strong, and India is also the beneficiary of structural growth drivers. Their population is increasing India's population, eclipse China's for the first-time last year. It's also a really young country, half of the population is below the age of 30, and there's also a lot of room for per capita consumption to catch up to other countries. So, we feel that spending in India has a robust runway.

Oscar Pulido: So, India seems like, the most constructive consumer market of the three you mentioned, the U.S. perhaps a bit more mixed, it's been strong, but some signs of weakening.

You touched on inflation and consumer confidence that has been declining and then, and then China perhaps seemed like of the three, the one that has the most headwinds. But, when you look at spending patterns, whether this is in the U.S. or globally, are there differences between what generations, different generations spend their money on?

Lisa Yang: I think the different generations are much more alike in the way they spend than they are different, but there are some macro and micro level differences that are certainly notable. I do want to caveat this by saying that these are really broad generalizations. Gen Z alone is comprised of 70 million people in the U.S. so there's a lot of variance even within that cohort.

But at a high level, the younger generation has less spending power than older generations did when they were in their twenties and early thirties. That's driven by the fact that the cost-of-living inflation has far outpaced wage growth, and also by the fact that younger people have more student debt.

This is a more educated population and they've taken on more student loans. This makes big ticket items such as cars and homes, really less attainable for the younger generation than it did for the, for the older generation. It's also led to more value seeking behavior, and that's helped to fuel the growth of off-price retailers and discount platforms.

The younger generation also spends more on experiences. They tend to value experiences over physical goods. Now I think some of that goes back to the affordability issue. If you can't buy a home, if you can't buy a car, you want to spend your money on other things that bring you joy, such as traveling or going out to eat.

I think another driver of this preference for experiences is social media. Seeing friends and family take exotic vacations certainly fuels a sense of FOMO or fear of missing out.

The last macro level difference is that the younger generation is more tech savvy. Gen Z are digital natives. They're very comfortable shopping online, getting food delivered, ordering car services. And so, in that sense, it's really important for consumer companies to have digital distribution and really excel at digital marketing so that they can reach that end consumer.

So, it's really important from a consumer company's point of view to have these forms of digital distribution and to really excel at digital marketing so that they can reach that end consumer. Yeah, there are also some micro level differences. I'll name two as an example. So, the younger generation prefers their coffee cold. They like ice coffees and cold brews over hot coffees. They don't smoke cigarettes, but they vape. So, bringing it back to what we do as investors, it's really our job to contemplate all of these macro and micro level differences and determine which companies are best positioned to benefit from these themes.

Oscar Pulido: Right. And Lisa, you, you are an investor who looks at the consumer sector, which is a pretty broad ecosystem of, on the one hand essentials that you have to buy. I am just thinking about food and beverage. you need to eat, and you need to drink. And I'm just thinking of staples that you need in your life. And on the other hand, you mentioned experiences, travel and leisure, which is kind of at the other end of the, of the spectrum. So do consumers equally weight the purchases they make in these categories, or do you see them skewing in one direction or the other?

Lisa Yang: Yeah. Essentials by their very nature have been resilient in the context of very high inflation. So, for consumer staples companies, it's been a really favorable environment where growth has been bolstered by pricing, although that is now fading. Even within the essentials category, volumes are slightly negative, and that's because prices have just reached such high levels, consumers are increasingly shopping in these value channels such as discounters and club warehouses, and they're down trading to private label.

Now on the discretionary side, we really have to distinguish between goods and services. Services have been really strong, and by services I'm referring to experiences such as traveling and going to a theme park and going out to eat. There's been a structural shift away from goods to experiences, and that certainly took a pause during the pandemic, but it's rebounded back really strongly and helped to fuel the growth of the services sector.

Take travel. U.S. airlines reported air traffic up 30% in 2023. The live music industry is also booming. The top 100 global concerts saw sales increased 50% in 2023, and 24 is expected to be another stellar year. Discretionary goods, on the other hand, are still challenged. Apparel is back to normal, but consumer electronics, home goods, furniture are all still negative.

Now, remember, consumers loaded up on these products during the pandemic and we haven't yet hit the replacement cycle for some of these products. The replacement cycles can be anywhere from three years to 10 plus years. On top of that, housing-related categories are also facing some structural headwinds.

Mortgage rates are the highest they've been since the year 2000, and that's depressed housing turnover and housing affordability, and certainly negatively impacted home improvement stores and certain housing categories.

Now bringing this back to investing, we always want to balance the fundamentals with valuation. And as investors, we're increasingly looking at opportunities within that discretionary goods basket because we think the market may have gotten too pessimistic on some of these stocks.

Oscar Pulido: And even in that discretionary goods basket, it seems like there's a lot of different types of companies and, and sub industries. So as, as somebody who's a portfolio manager and a research analyst looking at these types of companies, what, what are some of the characteristics that you and your team look for in these consumer-based businesses?

Lisa Yang: Yeah, that's the beauty of the consumer sector is there's a large variety and there's really something for everyone.

So, if you're looking for income, you can buy tobacco stocks that have dividend yields as high as 10%. If you're looking for growth, you can buy a restaurant company or a luxury company. If you're looking for defense or downside protection, you can invest in staples, you can get U.S. exposure, EM exposure, global exposure.

There's really a large variety. And in a similar vein, there's a variety of different investors here at BlackRock, ones who are focused on the U.S. market, the EM market, growth teams, value teams, and everyone brings their own view to the table. And it's not uncommon for different investors on different teams to come to totally opposing views on the same stock.

And that's okay. But at a high level, we're looking to invest in businesses that traded a discount to their ability to grow and generate strong returns on capital. Ideally, we want to invest in a business that's in a growing category that's gaining market share. We like businesses with a wide moat and a unique competitive advantage, and we want to invest with good management teams that have a history of strong capital allocation, and we want to buy those businesses at a discounted valuation multiple.

Increasingly in today's environment where we are seeing some signs of weakening in the consumer, we're looking for more resilient businesses. So, some businesses have really strong competitive advantages that allow them to grow regardless of the macro environment.

Take the beauty category as an example. There is a global beauty company that's been able to grow in the China market, even though beauty category in China is currently flat. And that's because they have really strong brands. They've invested a lot behind those brands and they're gaining market share. Other businesses are countercyclical. They outperform in weaker economic times. That's because they offer a really strong value proposition, think fast food restaurants and club warehouse stores.

Lastly, we're more focused on businesses with strong balance sheets. These businesses are a lot more resilient in downturns, and they often come out the other end in a stronger position because they're able to buy weaker competitors or weaker competitors exit the market completely.

Oscar Pulido: You touched on a number of characteristics that you look for in, in these companies, and ultimately you said resilient businesses, ones that have a wide moat, a competitive advantage that are growing market share. But the consumer sector also has a lot of fast-changing trends and tastes can change pretty quickly. How do you keep up with that fast-changing environment and still try and invest for the long term?

Lisa Yang: Yeah, we've seen disruption in the consumer sector really ramp up in the last decade, and that's driven by lower barriers to entry. So, if you can remember a time before social media, the primary way in which a brand reached a consumer was through television ads.

So back in 2010, a 30-second TV spot might set a brand back a few hundreds of thousands of dollars. Today, you can buy an ad on a leading social media platform for just 50 cents to a dollar per click. Alternatively, if you're a celebrity or if you're an influencer, you can launch a brand on social media at no cost and instantly reach millions of people.

And so social media has really made it much easier to reach consumers. Distribution has also changed a lot. Back in the day, you have to go into a store to buy a product. Retailers offered at most 200,000 different products. Then e-Commerce came along and now the leading e-commerce company offers hundreds of millions of different products, and so they've really democratized distribution and made it so much easier for smaller brands to be sold.

Now while the barriers to entry have come down, the barriers to scale are still high. Take spirits. As an example, in the U.S. we've seen a lot of new smaller spirits brands be launched in the last decade, but only a handful of them have been able to scale, and that's because it still requires a lot of resources to get to a certain size.

Bigger consumer companies have increasingly taken to buying these smaller brands as a source of external R&D and using their variety of resources to help those small brands scale. On the topic of changing trends, there's certainly been a spectrum of durability of trends. I think that the best consumer companies have a really great pulse on the consumer, and they're either driving trends or they're quickly adapting to changing trends.

We tend to be more cautious on fad driven areas such as fashion apparel. Ideally, we want to be levered to longer-term structural themes. An example is the increasing popularity of Mexican food and beverage in the U.S. That's driven by an increasing his, Hispanic population and changing consumer taste.

That structural theme really gives U.S. confidence in the longer-term outlook for some of our investments in Mexican concept food and beverage companies. Stepping back, one of the most important aspects of fundamental analysis is really to determine the durability of a company's growth rate. And being hyper aware of disruption and changing trends is really important in doing that.

Oscar Pulido: It was interesting, as you were saying, back in the day before social media, I was thinking back in the day, I used to go to a shopping mall, and you haven't said that term at all in this conversation, but I, I think I know why obviously times are changing the way people consume and where they consume and where they consume their advertising. The other thing that is changing is technology. You, you touched on that a bit. We've talked a lot about artificial intelligence on the podcast and its impact across industries. So how is it impacting either the consumer itself or maybe how the companies in the consumer sector are doing business?

Lisa Yang: Unsurprisingly, digital native e-commerce companies have been very quick to deploy GenAI. We have a leading U.S. e-commerce company which recently launched something called Gift mode, and that's a different way of searching for the right product. You input a few attributes of the person you're shopping for, and they use their algorithm to surface the best gift ideas for that person.

Another leading e-commerce platform has used GenAI to summarize product reviews. Instead of scrolling through pages and pages of product reviews, you can very quickly see the key positive and negative attributes of a product. This is a win-win for the consumer and the e-commerce platform. It makes it much easier for the consumer to find what they're looking for, and it makes it much more likely that they shop with that e-commerce platform.

So, in that sense, I do think that Gen AI will further advantage e-commerce over their brick-and-mortar peers. Another area where GenAI is having a notable impact is marketing. Marketing is vitally important to consumer companies, and GenAI gets us closer to this concept of personalization at scale.

That's really tailoring each advertisement to the individual. So, say for example, we have a chocolate company, and this is purely hypothetical, but, for example, they know Oscar, that you're into health and wellness. They will advertise the fact that their chocolates are organic. They'll look at me and say, Lisa, we know you love a great deal, so we'll advertise the fact that our chocolates are competitively priced.

We're also seeing GenAI attack the more traditional parts of marketing, such as market research, idea generation, ad creation. There's a large U.S. beverage company that was an early partner of OpenAI, and last year they released an ad that they had created in collaboration with GenAI. And it's a really stunning ad. Highly encourage you to take a look at it. It's called Masterpiece and it brings to life some of the most famous works of art around the world, including an Andy Warhol painting of one of their products. So, I think that's a great illustration of combining human insights and capability with GenAI.

Consumer companies are still at the very early stages of harnessing the powers of GenAI, and it's really our job as investors to determine which companies can use these capabilities to further differentiate themselves and elevate their competitive advantage.

Oscar Pulido: And Lisa, you're a consumer yourself, so you're shopping and thinking about things to buy and how does that influence the investment decisions you make in your portfolios? Do you tend to, in invest in brands that you like and, and avoid, investing in those that you don't? Just how do you sort of wear those two hats of being both a consumer and an investor? How do those two worlds collide?

Lisa Yang: I think that's what makes consumer investing so fun and dynamic. I can't tell you the number of times I've looked up who owns X, Y, Z brand based on an interesting brand that I've seen read about or heard about.

I do think it's really important as a consumer investor to be a consumer, and it's certainly a great excuse to go shopping and try new products. But at the same time, I don't want to over-extrapolate my preferences and my biases. As an example, I'm personally not a fan of the way energy drinks taste. I'm a coffee person through and through, but that certainly hasn't stopped us from investing in energy drink companies.

Oscar Pulido: Right. Consumer preferences can, can vary widely. So, your consumer tastes are just one subset of that and you're trying to sort of understand broader consumer preferences as well.

Lisa Yang: Exactly.

Oscar Pulido: Well, Lisa, thank you for spending your time with us here on the podcast. A little bit of a pun there, I suppose, given the topic that we just discussed. And the U.S. consumer as you mentioned, is two-thirds of the economy and the U.S. economy being the largest in the world. So, what the U.S. consumer does is important to follow. Thank you for joining us on the podcast and we look forward to having you on again in the future.

Lisa Yang: Thank you so much for having me, Oscar

Oscar Pulido: Thanks for listening. If you've enjoyed this episode, check out our last episode with Carrie King, where she discusses equity opportunities beyond AI.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0524U/M-3566390

<<THEME MUSIC>>

Oscar Pulido: AI is all the rage, and its unparalleled potential has powered stock market returns over the past year. So, what are investors missing beyond AI? And as the economy moves further away from the covid pandemic, how are changes in the business cycle unearthing opportunities in other sectors of the stock market?

Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido. On this episode of The Bid, we'll speak with Carrie King, U.S. and Developed Markets CIO for BlackRock's Fundamental Equities Group. We'll shine a light into forgotten corners of the US equity market to uncover what may be some underappreciated sources of return.

Carrie, thank you so much for joining us on The Bid.

Carrie King: Thank you for having me.

Oscar Pulido: Carrie, in your role as a Chief Investment Officer within BlackRock's Fundamental Equities Group, you look at the equity markets every day, and so I'd like to start with what have you seen over the past year in equity markets? It seems like technology, stocks, and particularly those associated with artificial intelligence have been leading the way. Do you see a change on the horizon in that respect?

Carrie King: So, over the past year, I'd say a handful of mega cap tech companies and internet stocks, have driven about half of the return of the market during that period. Some of those companies doubled and tripled over the past 12 months.

But what I want to do is share some context with you. Remember, and I think a lot of market observers don't remember this, that same cohort of companies, the mega cap tech companies, had a big fundamental setback in 2022, and some of those companies saw their values halved in that year. And so going forward, we think that fundamentals for these companies will normalize, and that this normalization of their growth rate will leave room for other parts of the market to catch up, and therefore we'll see more market breadth.

Oscar Pulido: You mentioned 2022. And perhaps a good reminder that these stocks can be volatile and while perhaps recent memory is that they've only been going up, there are some, periods here in to not too recent past where they've also gone down. So, volatility is something that is very prevalent with this group of stocks.

Carrie King: So, this handoff, what it reflects is the internet or tech specific business cycle that had been out of sync or has been out of sync with the rest of the market. So really what's been underpinning the market that you don't see at the headline level is two very different business cycles going on at the same time. And as this normalizes, again, we think this will lead to a broadening out of the market.

Oscar Pulido: Talk a little bit more, if you could, about this concept of two different business cycles. I always think of there's just one going on, but what do you mean by that? And how does that impact market returns?

Carrie King: So, what's behind this dual business cycle is COVID, really. On the one hand, the revenues of technology companies really accelerated during the pandemic as life as we all knew it pivoted online. In response to this Covid-induced increase in revenues, these mega cap tech companies were benefiting, had an aggressive investment in their infrastructure and in their people to keep up with this accelerated Covid-driven demand. And then what happened is once the pandemic started to ease and revenue started to moderate, they were met with a bloated cost structure.

So, in 2022, you had revenue growth starting to moderate, coming down from the covid kind of hyper level growth levels. Right at the same time, the cost structures were bloated. And oh, by the way, let's remember the interest rate environment, the Fed funds rate went from zero to four and a quarter, so you had a trifecta of events that led to a very difficult period during 2022. And as I said earlier, many of those stocks, those mega cap tech stocks, were cut in half in that environment.

And so, the strong performance that you alluded to over the past year or so really marked a return to normalization coming out of that sort of, covid-induced business cycle. And so right when they started to then rein in costs, these mega cap companies, you saw the growth rates start to moderate. So that is what helped drive increased profitability over the past year. And then, oh, by the way, let's not forget AI entered the scene.

So, you had that big cycle driving mega cap tech. Now let's talk about the rest of the market. Outside of these mega cap tech stocks across that same timeframe, many sectors were having the exact opposite effect. Think about it, their revenues suffered, amid covid-related shutdowns, right? So, we saw this in brick-and-mortar retail, we saw this in travel, and we saw this in parts of healthcare, like elective procedures. For example, you weren't going to the hospital to have something done that wasn't an absolute necessity during covid. So, these companies all suffered a covid-induced falloff in demand, the exact opposite of what the internet companies experienced.

And now what we're seeing is many of these companies are still recovering today from that dropoff in demand. So, for example, hip and knee replacements, which were delayed during the pandemic are back on, consumers are still playing catch up on missed travel and experiences. So that's where we're seeing spending. So net, as these two different business cycles are starting to normalize to, we're putting COVID in the rear-view mirror. This I think is what will allow the market to broaden out.

And let me punctuate that with some numbers. Our analysis shows that earnings growth for these mega cap tech companies could decline from near 30% levels this year to the mid-teens in 2025. We're not bearish, but we think that's a normalization of earnings growth at the same time. The earnings growth rate for the remaining 400 plus companies in the S&P 500 should advance from single digit growth to double digits in 2025.

What you're seeing is a more head-to-head race in terms of earnings growth. And we think that broadening will lead to some stock picking opportunities for fundamental investors.

Oscar Pulido: So, it's fascinating. COVID was obviously an important inflection point, is what you're saying. And it created these two different business cycles. It impacted the market, benefiting some companies more than others. But now as we look back on COVID now a few years behind the opportunities are broadening out?

Carrie King: Exactly right.

Oscar Pulido: And so, when you think about the stock market. not the tech companies, everything else. I suppose there's a better term for that, but if I just think about everything that you've described, not in the tech sector, where are those best opportunities right now?

Carrie King: So, where we're seeing a lot of value for investors is two specific areas: in healthcare and in industrials.

In healthcare, what we're seeing in terms of earnings growth, the sector had declining earnings in 2023. We see that accelerating to positive in 2024, and even higher growth in 2025. So, there's earnings momentum there. But there are a lot of other things we like in addition to healthcare besides the earnings momentum. One is the demographic tailwind, populations are aging in the US and elsewhere, and we all know that as you age, you consume more healthcare- demographic tailwind. These companies largely have very high-quality characteristics. They have strong balance sheets, they have strong cash flow, so we love the quality part of the equation. And the earning streams tend to be more stable. If you look at the 11 sectors in the S&P 500, this is a sector with the most resilient earnings in times of economic stress. And the icing on the cake is this sector also has a lot of innovation. Just think about the GLP-1 drugs that you've heard a lot about. GLP-1s are the drugs that are addressing the pandemic of diabetes and obesity in the US and elsewhere. So, on top of all that, the sector's trading below the S&P 500 average, and it's trading below its own long-term average. So, we see a tremendous amount of value in healthcare.

So another area we see a lot of interesting tailwinds is industrials. So, we see several tailwinds that should underpin increased CapEx spending, in this sector. And some of the trends that are underpinning our favorable view include catch-up from years of underspending on infrastructure.

One source, the American Society of Civil Engineers, calculates that there's an infrastructure spending gap of about $2.5 trillion. And we've seen bipartisan action from the federal government to help fund upgrades. Deglobalization trend is another great tailwind that we're excited about. This is happening as companies are relocating manufacturing operations closer to home.

We're seeing this in the semiconductor space is one example, and we think that should continue in the future. Global decarbonization is another tailwind. There are efforts underway to build out new eco-friendly energy systems, and again, we're seeing government funding support these efforts.

And finally, there's increased interest in automation, so we think. The prospects of a shrinking workforce, given aging demographics, will propel spending for industrial and technological efficiencies as companies continue to seek productivity gains against that demographic headwind.

Oscar Pulido: So, you mentioned healthcare and industrials, and it's interesting as you were talking about healthcare, it felt like I was listening to Tony DeSpirito, who I know you work with closely within the Fundamental Equities business. And when we've had him on as a guest, he's talked about the long-term opportunities in healthcare.

When you talked about industrials, you mentioned infrastructure, that's one of the topics that Larry Fink talks about in his annual letter to investors. And I think you mentioned a few of the mega forces as well that we've been talking about in the podcast. Demographics and decarbonization. So, now those sectors then, therefore, sound like there's a lot going for them, but are there any risks that you're monitoring, with respect to either those two sectors or perhaps other sectors outside of the tech arena?

Carrie King: It's a great question. And so, one area that we're closely monitoring is the consumer. So, on the one hand, the consumer looks fantastic. The job markets very healthy, wage growth now exceeds inflation. It's a great position to be in as a consumer. And spending's been very resilient, but we are starting to see signs of stress that raise the red flag, shall I say. So excess pandemic savings are largely spent away in the U.S. Credit card debt in the US is at all-time highs and we can see from recent earnings reports from banks not only this quarter, the past couple of quarters as well, that credit card delinquencies are starting to tick up.

And this is particularly apparent I think for the low-end consumer. And then, tack on high interest rates -- that's definitely having an impact on some purchasing decisions across the economy. So again, this is most acute among the lower-income group, but even high-end consumers, we can see are starting to get more discerning with big ticket purchases. So, we're looking for companies that can maintain and grow market share against this backdrop, and we generally prefer providers of, or I'm sorry, prefer providers of experiences over goods, because this is where consumers are continuing to prioritize their spending. So, for example, in the fourth quarter, if you look at their earnings results from hotels, restaurants, leisure, these companies enjoyed nearly 90% year over year earnings growth, and profit margins that are still just returning to pr- covid levels. In fact, just this morning, a large hotel chain reported earnings and surprised investors to the upside with the strength and its room growth. So, this is continuing.

Oscar Pulido: So, the consumer is an area that you're monitoring, and it sounds just some headwinds that are starting to present themselves. You also mentioned interest rates going up a few minutes ago, and presumably that has a lagged impact on the economy and the consumer, and maybe that's part of the reason that you're flagging it. Carrie, so far, we've focused our discussion a lot on opportunities within the US and perhaps you can take us outside the borders of the US and talk a little bit about some of the opportunities that you're seeing internationally.

Carrie King: So really three main areas I can talk about. One is our platform in Fundamental Equities is very excited about Japan. So, we see a strong case for Japanese equities right now after decades of economic stagnation and deflation. Why is that? We're finally seeing strong government support, we're seeing corporate reforms, and we're seeing unprecedented steps by the Tokyo Stock Exchange. And these forces are all working in tandem to underpin Japanese equities. So, we're very bullish there.

Oscar Pulido: That's consistent with what Belinda Boa, who is another colleague of yours and who's also been on the podcast, has said about some of the things that are changing in Japan and, making that stock market more of an interesting opportunity. So, Carrie, go back to some of the other international opportunities that you mentioned. I think you said there was a couple.

Carrie King: Yeah, so, let’s shift and look through a sector lens. So, when we're evaluating large integrated oil companies, we definitely see better value in the European large integrated oil companies versus the US peers. So, if you look at the European oil companies, they're of similar quality, but they trade at much more attractive and generous free cash flow yields than their US counterparts. And then the other area where we're seeing value outside the US is in pharmaceuticals. So similar to integrated oil, we favor the European, large pharmaceutical companies versus the US peers.

This is interesting. The major US drug makers have anywhere from 30 to 70% of their revenues facing patent expiration in the next three to five years. So that's the highest, level of exposure that we've seen in 15 years. Obviously, this presents some steep revenue risk for some of these companies. And it highlights the importance for active stock selection. So, consider this: roughly one-third of the US healthcare sector if you're measuring it using Russell Healthcare indices, is made up of large cap pharma companies. So, the indexes are heavily exposed to this patent expiration wall that's coming in the next three to five years.

So, our teams and our active process have steered clear from patent expiry exposure through stock picking. So instead, we focused on areas innovation like as I mentioned earlier, the GLP-1 platform companies, and we focused again on the European competitors who have a much more attractive patent expiry profile.

And then within that backdrop, the drug distributors are another area of interest and attractiveness. So, these companies actually benefit when large-cap pharma companies lose patent protection. So, what they do is they'll distribute an increasing volume of generics which have a more attractive margin profile.

So, index trackers can't see these patent cliffs coming and the large impact that they'll have on the index level. So, we've been very attuned to this as active investors and able to manage around these patent waves.

Oscar Pulido: Carrie, we've deliberately tried to focus a bit more on the sectors outside of technology and outside of the more artificial intelligence-oriented companies that have really been characterizing the market over the last couple years. But presumably your team also has a view on that particular area of the market and there must be opportunities maybe they look a little bit different than the past year or two. So, tell us about what does get you excited in that space?

Carrie King: So, in terms of technology and what's been leading the market, absolutely. We have a ton of excitement and interest there as well. So, our platform has been largely overweight semiconductors, and that's been the way we've seen those as the picks and shovels to rolling out this new exciting generative AI technology. But we've been evolving our thinking as this market's moving so quickly and we've developed a greater appreciation for the data. So, it's the data that feeds these generative AI models and so we expect investors will continue to start to ascribe more value to companies that own data, that sell data and that store data.

Examples are market data and intelligence providers and companies, other companies involved in financial information and analytics. The technology's being deployed so rapidly that we're watching it evolve, and we're looking to capitalize on any change. And active investing is a really great tool to capitalize on this change because the technology indexes are very concentrated in few companies, so we can be very nimble and deploy our expert insights across other companies.

Oscar Pulido: So artificial intelligence as a theme is one that you think will persist, but perhaps the individual companies that benefit is going to change as time goes on, and that's where your kind of insights can come in and identify those.

And Carrie, your insights, you've been an investor for over 30 years, and so with that perspective, what would you say to somebody who is a newer investor, in the markets and they're entering the markets at a time when AI and all this innovation is taking place. What are some words of wisdom that you would share?

Carrie King: So, I think every enduring investment process needs to be grounded in a valuation framework. Just buying the best company on the block isn't always the best investment. So, I think being rooted in a disciplined valuation framework will help you discern if the price you're paying for a company today reflects the long-term value.

Oscar Pulido: You're right, we live in an environment where news is coming at us fast, we see headlines, we hear about a popular company, and that might be a great investment. But what you're saying is also pay attention to the price, the valuation, sometimes the hype might be reflected in the price and there might be a better entry point and that's a little bit of what your 30 years of perspective gives is knowing to look into those details.

Carrie King: Exactly. And I will leave you with a final note on what I've learned over 30 years and it's sad that it took me so long to realize how important this is, and it's your people. People are your most important and your most precious commodity. So, nourish their souls, nourish their hearts, nourish their brains so that they're at their very best. And that's great for everybody.

Oscar Pulido: Carrie, thanks for bringing your 30-year investment perspective and helping us dig a little bit beneath the layers of the stock market to understand more of the nuances. And thank you for joining us on The Bid.

Carrie King: My pleasure. Thank you.

Oscar Pulido: Thank you for listening to this episode of The Bid. If you've enjoyed this episode, check out a stock picker's guide to 2024 where Tony DeSpirito highlights his views on the stock market for the coming year. Subscribe to The Bid wherever you get your podcasts.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0524U/M-3538768

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido. Joining us today is our CEO and Chairman Larry Fink. For more than a decade, Larry has written an annual letter, not only to focus on critical long-term issues, but also to start a conversation about finding solutions.

This year, Larry is considering the challenge of retirement, why it has become an increasingly difficult proposition for too many, and what opportunities exist and will be developed to help people achieve their financial freedom. Larry, welcome to The Bid. Larry, thank you so much for joining us on The Bid.

Larry Fink: It's wonderful to be here and be a participant in The Bid.

Oscar Pulido: So, Larry, it's, it's that time of year again. It's the time of year where you release your annual chairman's letter, and this is a letter that you write to raise attention to the issues that you think. Deserve more attention over the longer term. The letter goes to investors, to company leaders, to governments, really to a wide array of stakeholders.

And the letter this year focuses on retirement and specifically rethinking retirement. So curious to hear your views over the last few years. How has the retirement landscape changed and why is this an important issue right now?

Larry Fink: Well, let me just comment on the context of letters. they're getting much harder to write. but over the course of 2023. The conversations I was having worldwide was an elevation of conversation related to retirement. And how, not just in the US but other countries have to think about retirement and a whole different way. It has been evolving, and the raw reality is as we moved more and more to a defined contribution framework, we did not elevate financial literacy at the same time. A defined contribution puts a responsibility on the individual. A defined benefit plan puts the responsibility on a corporation of government.

And so, as we have evolved the retirement system, I think the inadequacies of financial literacy now is really having a demonstrable impact, on how people live. And part of my letter, I talked about hope and fear as we see in so many of the developed economies, the aging of populations which I've mentioned, people are getting closer or nearer to retirement. In so many instances, they just don't have the adequacy of savings to live in retirement in dignity, specifically in the United States. Social Security, which is a foundation of retirement, but it is only one part of having a retirement where you could live in dignity. In actuality, if all you are is dependent on your social security, by definition, if that's the only source of your income, you're living in poverty, if you had no other savings.

And so, when we designed our system, we had these three pillars, four pillars, to really try to ensure that there's adequacy when we are focusing on retirement and adequacy, that we could live in retirement with dignity. That is being lost by many people. And in fact, in the United States, as my letter suggested, we're talking about a substantial level of the US and my letter doesn't have good answers for those people it's a very large, policy issue that we have to address as a country. And I try to stay away from policy issues in the country and in every country. The letter was suggesting conversations, and I think that's the most important thing.

In building BlackRock over these years and throughout my entire career, I remain to be an incredible optimist I'm actually more optimistic about the future than ever before, despite all the pessimism we're seeing and more importantly as we read our news sources, the preponderance of information that we're reading today is just full of awful negative things. A lot of people get frightened about reading how terrible things are. actually, I get a little more optimistic about it. Because they're in front of us, and generally we solve problems. We build a better future by addressing our problems. When we address them, we fix them, we improve from them. Sometimes it takes way longer than we ever wanted it to be, but let's be clear, we do improve.

If you look over the course of my career, how the US has improved and other countries have improved, being an optimist, especially in financial markets, have proved to be a good outcome. Being a pessimist out of any one periodic time you may have good success, but over the long run.

I believe in capitalism, that in the long run it's the best, economic model in the world. But what disturbed me as I wrote this letter, we never talk about retirement. It is not a conversation we're having, and that is why it's becoming a bigger and bigger problem. If individuals had better information on how to navigate it over their 30- or 40-year journey of work, they then can build the adequacy.

And then importantly, in my letter and we talked about Life Path Paycheck and to me that is the biggest transformation for defined contribution plans where we transformed what typically is in a defined contribution plan when you retire you get a lump sum, most people have no idea what to do with that. And importantly, people really are concerned about, what is my monthly paycheck?

By the annuitizing of the backend, you are receiving a monthly payment. And that's why we call it Life Path Paycheck. And so that gives you a lot more understanding of, okay, here's my cashflow, here's what I can afford, also we have created, a digital experience in which we could show you if you add $10 more a month to your retirement, what can that do to the ultimate outcome? In addition, we could show you should you retire at 60 or 62 or 65 or 67 or 70, what that other outcome will be, how much money would you have on a monthly basis? So, all of it in my mind, helps the journey of accumulation for retirement.

It informs the participants in a whole new way. It provides more certainty, and through more certainty, it creates more hope and less fear. And I believe this is going to be the key characteristic of retirement.

So, all of this is about education informing with a real purpose of providing more hope for more people in the world so they could have more dignity in their life. and with more dignity, you know, what happens? People actually consume more, it's good for the economy.

Oscar Pulido: And Larry, as you said, you're trying to start a conversation on retirement and you're certainly doing that. And part of the reason you, I think, feel some urgency is you mentioned aging populations, which we've actually spent some time with colleagues from the BlackRock Investment Institute talking about this exact topic. There's a fear that on the part of companies and governments, that as the population ages, particularly in the developed world, it drags on economic growth, it drags on productivity. In your letter though, you've used the word hope. You say that you have more hope for the future, and that, in particular, the capital markets have a role to play in helping investors save for retirement. So maybe you can talk a little bit more about that as well.

Larry Fink: The US has been blessed by the ingenuity in the financial markets to create the most substantial, capital markets of any place in the world.

And one of the foundations of what the capital markets have done to the majority of people in the United States was if you are in need of a home mortgage, that home mortgage is not sitting at that bank or that institution that it was originated. It is packaged into a mortgage-backed security, and it's part of the capital markets.

The reality was the capital markets drove down the cost of mortgage finance, and that is the beauty of the capital markets. That we have a country that has a strong banking system and a country that has strong capital markets generally are the most robust economically. And the United States has the most robust capital markets. If you think about the markets in 2008 and 2009, during the great financial recession, there was a lot of fear. If you look at the rebound in the United States post 2009, was far faster here than any region in the world.

In the United States we had the capital markets and so as the banks were told that they have to raise their capital standards as other banks were trying to rehabilitate their balance sheets out to the financial crisis, more and more economic activity, flowed to the capital markets. And that is the main reason why we rebounded as a country faster than Europe, faster than anywhere else in the world. And it actually took Europe five to seven years longer than the U.S. to rebound because they have a much weaker capital market.

In addition, getting back to my conversations about retirement worldwide. Most policy makers are looking at the United States capital markets with true envy. They're witnessing that U.S. Corporations generally traded at two to four, multiple point higher than in Europe and other places, and much of it has to do with the retirement system here in the United States. And the U.S. investors are willing to put more of their savings into equities. They have more hope. As I said in my letter, if you're fearful of the future, why on earth would you put anything in a long-dated asset? You'd keep it all in the bank.

So, one of the big observations is the US economy has historically just been more hopeful than most places in the world and so in my conversation with many of the governments, they're now saying, how can we develop our own capital markets link to a retirement system because they want to build out their corporate champions, they want to build out their economy. They see the magnificence of our mortgage securities market and how that brought down the cost of home ownership in terms of mortgage rates, all of this. And so, the conversations we're having related to the development of the capital markets, with the retirement is totally linked.

Now, if I may, let me go back to this whole concept of aging and technology. And I've had conversation with the heads of state on this issue, especially the heads of state of declining populations. It is imperative that these countries embrace AI, robotics, and new sensor technologies. This is the only way these economies going to be able to grow and be more productive is to be advancing AI and technology even more rapidly. So, if the estimates of how powerful AI can be we can build and increase productivity in these countries with a smaller population. And if you can build productivity through technology, actually the wealth of the declining population grows up.

And so, to me, we need to be embracing technology more than ever before. And to me, this is going to be a very interesting dilemma and paradigm; how each country is going to be navigating the expansion of technology in their own society, and how does that play out with a growing population versus a declining population. So conventional wisdom has always been declining population is bad. I could make a statement if you are a big believer in the advancements in technology, a declining population actually makes the advancements of technology within the society easier to do. And the advancements of technology can most certainly elevate productivity, and when you elevate productivity will elevate wages. That is one of my futuristic views. but it's all interconnected.

Oscar Pulido: Well, and I'm glad you raise AI technology because actually in the letter. You know, the other big topic that you discuss is the urgent need and focus around infrastructure. So, you know, you mentioned AI. I think about topics that we've covered on the podcast, like cryptocurrency, there's a whole host of new technologies, Larry, that are changing the way we live and work, but they also change the physical world in terms of how we consume energy, in terms of how we think about transportation.

So, coming back to this topic of capital markets, which is sort of a common thread throughout the letter. What is the role that you think capital markets are going to play in funding the infrastructure needs of the future?

Larry Fink: In my letter, I talk about deficits and the debt, GDP with some other countries. And I don't believe fiscal stimulus is going to be as broadly used as they have been for the last 23 years. In fact, I would argue the fiscal stimulus is these deficits that are being accumulated by this country and other countries. But more importantly, the U.S. are at unsustainable levels.

Getting back to growth, the only way we could get out of these deficits is growth. How are we going to grow? We need to be focusing on more public, private type of deals, pipeline, the financing of any new technology, digitization, power grids. it's going to be financed through the private sector, through the capital markets. If you understand the cost it's going to take to digitize an economy to decarbonize at the same time, making sure that you have adequacy of power at any given moment. I talked about energy pragmatism, so you have to have both hydrocarbons and more sustainable, energy sources.

But I do believe the role of infrastructure. Because the enormity of costs in doing this We're just going to be hitting the J curve where this is going to be very much accelerated, and this is one of the reasons why I'm so bullish. The amount of capital that's going to be necessary to build this out, it's going to continue to stimulate the economy.

One thing we've learned most recently that with all the AI's potential, at the present technological level, it is really costly. The algorithms to do AI require so much power. These new data centers are going to be responsible for ab absorbing as much power as a small city, and we're already witnessing energy shortages, power shortages. If we are going to reach the full potential of ai, that means we're going to have to develop better power grids, we're going to have to have much better sources of power, and all of that is just very expensive. The role of the private sector through the capital markets can play an enormous role in this. It doesn't have to fall on the backs of state and local government financing or federal government financing.

And so, we are seeing tremendous opportunity. Even this past week, the conversations I'm having on the intersection of power in AI, the reason why we're having all these conversations, everybody who is thinking about this dilemma, 'We need capital to do this. We need hundreds of billions of capital to pull this off.' And now if you overlay the whole idea of decarbonization, we need to develop new technology to bring down the green premium or we'll never decarbonize.

And so, the amount of capital that's necessary is enormous, both here in the developed world and in the developing world. This is probably one of the more exciting parts of the overall global capital markets, how we are going to move society forward both in a way of having adequacy and power and developing relatively cheap power from non-carbon-based sources. The fundamental problem of non-carbon-based sources like wind and solar, it's intermittent. We can't afford just to have intermittent supply. So, the need for Consistency and power, dispatchable energy, having energy flowing all the time, and the amount of capital that's going to be needed to do all this here in the United States, but everywhere else in the world is going to power the global economy is going to be the next horizon. And all of this is just so exciting.

Oscar Pulido: Larry, you've used the word hope a lot in your comments, and you've talked about how, despite all the headlines that can at times seem scary, you're optimistic. So, what is the message that you want to send to the younger. Generations maybe, who are just starting to invest and thinking about the future and also, to the pre-retirees who are maybe just at the front end of starting their retirement?

Larry Fink: Focusing on the long term, not the moment, think about your objectives and your game plan to me is critical. We built BlackRock in the idea of focusing on the long term, focusing on big macro trends over tens of years. Being in the market all the time is really important. there are a lot of people who were good at market timing, okay? Then you could go in and out of the market. But the majority of people have no ability to market time. And this is why we constantly try to remind people your liability is 30 to 40 years. You need to be thoughtful about that. It's not about the ins and outs of the markets, and I know the financial press talks about the markets today, what's hot, what's not? It's all garbage. It doesn't matter. What matters is being consistently in the market, consistently investing for the long term is going to have a far better outcome.

Oscar Pulido: Larry, it's always good to hear what's on your mind. I have to say, I was actually struck by the very beginning of your letter where you tell a personal story about your parents and how they meticulously saved and invested for retirement. So, I know these are important issues, and in particular helping others, save and invest for retirement the way your parents did. Thanks for starting the conversation, and thanks for doing it here on The Bid.

Larry Fink: Thanks for having me, it's great to here.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you've enjoyed this episode, check out the episode. Larry Fink on the Power of Capitalism.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0424U/M-3540354

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host Oscar Pulido.

Amidst the backdrop of unprecedented inflationary pressures. Most people might not think of insurance as such a key input to their overall consumption basket, but the impact of the insurance industry is felt far beyond what individual consumers pay for individual policies and extends broadly throughout the supply chain as a necessary input for many industries in the production process. So, what can this link between inflation and insurance tell us about the future path of inflation and how can investors use this learning in their own portfolios?

Today I'm pleased to welcome back Mike Pensky, portfolio manager within BlackRock's Multi-Asset Group. Mike will help us understand the connection between insurance and inflation, the possibility for rising insurance premiums to persist, and how investors can position their portfolios in a new market regime.

Mike, thank you for joining us on The Bid.

Mike Pensky: Thanks for having me, Oscar.

Oscar Pulido: And I should say, Mike, welcome back. It's been about a year since we had you on, and we're going to talk about inflation and insurance and how the two are interrelated. But perhaps let's start with inflation, which is a word that we hear a lot about, but we spend less time talking about how it's measured. So maybe you can tell us a little bit there as a starting point.

Mike Pensky: So, Oscar in one sentence, determining inflation levels it involves systematically tracking and analyzing changes in the prices of a representative basket of goods and services over time to really understand how those prices are changing at the overall economy level.

So, think about a basket of goods, you go to the grocery store, you have a shopping cart, and you put a bunch of items into that shopping cart that you regularly consume. So today you go, and it costs a hundred dollars. Next year, you go, and you buy the exact same basket of goods and suddenly that basket of goods cost $102.

So that represents a 2% increase in the value of that representative basket of goods. Of course, within your shopping cart, you can look under the hood and you can see, some items maybe went up by 5%, maybe some items dropped in price, and you can really get a sense for how prices are changing and what's driving them.

Economists do that at an economy wide level, they look at a representative basket of what overall consumers buy, whether it's a good or a service, and they try to evaluate how the cost of that basket of goods and services is actually changing at the overall economy level.

Oscar Pulido: What you described sounds like a pretty straightforward process, but in a big economy, I imagine there's a lot of goods to try and keep track of and one of those goods is insurance or maybe it's a service or it's kind of a combination of both. How does insurance interrelate with inflation? I know there's been a lot of headlines about rising insurance premium, so maybe that's part of it.

Mike Pensky: Insurance has made national headlines in the last year or so for a couple of reasons. So, first of all, we've seen insurance prices or what we call premiums come up meaningfully just in the last couple of years. So, if you look at the property insurance component of the CPI basket, it's actually running now at about 4% year over year increase at the highest level of roughly the last 10 years.

And this is at the same time as we've actually seen overall inflation levels come down in the last two years. The second reason why we've seen it in the national headlines is that especially in places like where I live in California, there have been many news stories of major insurers pulling out from renewing policies in particular for property insurance. Of course, we're not the first ones to be talking about this, but the story really started with insurers pulling out from natural disaster-prone areas, especially those that have recently encountered increased wildfire and flood risk.

Lately, we're seeing insurers actually pull out of other areas where those risks are lower, but really where there's just higher density of populations living close to each other because of the concentration of their exposures.

One thing that has been common in all these situations is that there have been elevated asset valuations, rebuilding costs a bit much higher, and quite frankly, natural disasters have become a bit more frequent and as a result, have lowered the insurer's profitability when they encounter these, when they encounter these events.

I'll give you a personal example. My family and I, we live in San Francisco in about a central part of the city as possible, so we're not the most natural disaster-prone area of even San Francisco very far from floods and quite far from wildfires. Arguably, we do have some density in our neighborhood, but like most homeowners and actually drivers of cars as well. When we saw our insurance prices reset this year, they went up. They went up by about a hundred dollars or more. That's a bit painful, but there's one thing that I really should clear up as a direct part of the inflation basket, that grocery cart that I talked about earlier, property and car insurance don't actually make up a very big component of the overall consumption basket. It actually only makes up about 3.3% for an individual consumer on average in the United States.

One thing that is underappreciated by many people is that insurance is actually a very central component of the production process for goods and services in the United States. This is really because it's a necessary input for every component in the production process, and this is because it's a very central component of the production process, whether you're a goods manufacturer or a service producer.

Take the example of a restaurant owner. You provide a service, you provide food, you provide hospitality, entertainment, and you charge customers for this. Essentially, that comes into the form of revenue. Of course, you have costs on the other side. You have food costs, employee wages, equipment, rent, and of course insurance. So ultimately, your profit that you earn is the difference between those revenues that you get and those costs that you pay. Now, as your prices go up, that means that your profit starts to decline. So, we actually saw this recently the pandemic where labor costs were a major component of rising cost pressures for producers of goods and services. So, what typically happens is that if you see your profitability go down because of price increases, you'll start to think about passing those costs onto your customers through higher prices. And what's amazing is that we actually see this effect economy-wide, and we study this regularly to help us position our portfolios.

So going back to insurance, it's one of those inputs costs as well. So, if your property insurance prices start to go up, you're likely to pass that out on through the production process through the form of higher output prices as well.

Oscar Pulido: So, Mike, the restaurant example actually resonates. It was, pretty vivid. I'm picturing myself going into one of these places and they have all these costs. you said employees rent insurance. I've always thought employees and labor were the biggest cost for any business, including a restaurant. So how important is insurance then, as an input cost? How impactful is it and how do you measure that at an economy-wide basis?

Mike Pensky: To answer your question, in short, Oscar, insurance is a very central component of the United States production process for goods and services.

To get a better sense for this, we use something called input-output tables, which really tell us how the inputs and outputs of various industries relate to each other. And really, it's something that the US government publishes through their economic statistics frameworks. Within these input output tables, within one of the more granular formats, we can look at something like 380 different industries and understand what inputs of one industry are related to the outputs of another.

So let me give you an example of a traditional car manufacturer. The data might tell us that 15% of the value of the production of that car might come from engine manufacturing. Another big component might come from transmission manufacturing and so forth. each of those inputs has its own sub inputs as well. So, this really goes down the chain.

Oscar Pulido: And Mike, just to clarify there, you said. 15% of the value of the car comes from the engine. is that 15% of the cost of producing it is from the engine or does it mean something else actually?

Mike Pensky: Oscar, ultimately what that 15% relates to is how much of the value of the car on average economy wide can be attributed to the 15% input of that transmission manufacturing. One thing that is really interesting, and this is much more of an important point, is that when we look across those 380 or so industries at the economy level, we find that insurance carriers rank at just about number 15. That puts them at roughly 3% of the share of the relative importance at the overall economy level. That's on par with really critical industries that we typically think of like banking goods, transportation, petrochemical, manufacturing.

And what's really interesting is that if you play that input output game of trying to understand how much that pass through might ultimately mean for the importance of insurance overall, it retains its importance in its relative ranking even as other industries shift around. So, this tells you that even as individual consumers insurance might be a really small part of our basket of consumption at the overall economy, it has very central importance. And one thing that is also really interesting, and we found this and highlighted it in a blog post that I co-authored with my colleague Tom Becker, is that property insurance innovations tend to foreshadow future service inflation.

And this is because of what we've just been talking about, premium changes they transmit through the production process and ultimately result in higher output prices. So, when you put this all together, this means that large impending property insurance price increases are likely to be passed down the chain and you might see higher upward increases in prices in overall services within the United States.

So, we talked about insurance being a central part of the US production process. You might be wondering what is not that important. And these are things like amusement parks and breakfast cereals, while they make me very happy, not really that important at the service and goods production in the United States.

Oscar Pulido: So, Mike, you've made a compelling case about why insurance is so central to the inflation story in the economy. And I guess my question then is, how quickly do we see these rises in insurance premiums when oil prices go up and down. I feel like that kind of, affects our gasoline prices pretty quickly. Or sometimes you hear about, droughts and that causes commodity prices to move around pretty quickly. Is it the same for insurance or does it happen a little bit more slowly?

Mike Pensky: So, insurance is a little bit different from other industries, and mainly that's because it's a very regulated market. So, this means that in many areas, insurers are actually statutorily limited in how much they can increase their premium. Despite the high rates that we've already seen, so give you an example of California where I live here.

Insurers must get approval for increasing their premiums beyond certain levels, even though there are some rules now in the works to try to amend that. There are processes by which these increases might also be contested, and so as a result, it might take time for those increases to actually happen. So even when you thought some of the insurance price premium rises might already be done, you might continue to see them filter through because of the limits on those step changes that could actually happen.

So why this is really important is that in effect, gradual changes can take a longer time to impact inflationary pressures in the United States. So as a result, not only might we see a slower burn of persistent increases insurance premiums, but also given those lagged pass through effects to other services and goods that might also increase inflation over a longer period that many might expect.

Oscar Pulido: And Mike, I mentioned that it's been about a year since you joined us on the podcast. When you joined us last year, you were talking about geospatial data, and how you're using big data to help, investors in their portfolios. How are you applying that to the insurance space and just some of the insights that you're trying to derive.

Mike Pensky: That's a great question, Oscar, and just to remind everybody about what we mean by the term big data, my colleague Josh Kazdin, said this very eloquently in the last discussion, but we use all sorts of generate, but we use all sorts of data to generate insights in alpha, and it can come in different forms, traditional, big and alternative. So traditional data is something that we've used in finance research for decades. This is things like financial statements, macroeconomic releases, industry reports. They can fit neatly into a spreadsheet and are fairly easy to understand and interpret. Big data refers to both the size of the dataset and the computing resources needed to process it.

So, moving from the megabytes of A PDF that you might download in a few seconds to terabytes or petabytes of data that require a lot of computing resources to be able to understand. And then finally, alternative data. It can be big or small, usually strange, unstructured, harder to map to really understand how to use it.

Just to give you an example, newspaper articles or broker reports that are just a collection of sentences that somebody wrote is a traditional form of alternative data. Of course, our geospatial data that we talked about where we pull satellite images is another example of both alternative and big data.

It needs to be processed, transformed, mapped to be useful, to interpret and actually make investment decisions. So, since we're talking about insurance. Geospatial is actually again, a data lens that we can help us to gain some, since we're talking about insurance, geospatial data is again, a lens through which we can gain some insights about the space.

So, one thing that we have recognized is that lower availability of private insurance could actually make certain regions of the country more vulnerable to the negative economic impacts of future disaster events. Traditionally, the federal government has really backstop the largest US natural disasters, and so we can actually use historical disaster relief data to explain some of the recent pressures that we've seen within the private insurance markets.

So, if you look at spending by the Federal Emergency Management Agency, we call. FEMA The regions where private insurance have been pulling out the most, so these are places like California, Florida, Louisiana, in some cases, Texas.

They're the exact same parts of the country that have had the highest historical funding, that have had the highest historical federal spending on disaster relief. Of course that's not an accident.

These are areas that have seen many more large national disasters and also lower private sector insurance availability has led to the federal government needing to backstop some of these areas. So, we also talked about really the need to understand the macro fundamentals, but from an investment perspective, we also really need to understand what the market is already appreciating.

And so, we spend a lot of time trying to understand how much of the market has already priced some of these insights that we have. For that we use some other tools, for example, natural language processing and in, in one sentence, natural language processing is another example of alternative data, where we use computers to read thousands of documents, whether it's newspaper articles, broker reports, to understand what the collection of market participants represented within those documents. Think about a particular topic. So, in this case, relating to insurance. What we are finding is that the potential for the persistence of inflationary pressures, especially relating to some of these issues relating to insurance premiums, are really not well understood by common market participants, and that gives us a lot of confidence that it's not yet priced by markets.

Oscar Pulido: As you started to use some of that terminology, natural Language Processing and alternative data. You've reminded me of some of the conversations we've had about artificial intelligence over the course of the last year with people like Brad Betts, who I know also is based in San Francisco, like you, Mike. So, what does artificial intelligence, or how are you applying that, in the big data that you're analyzing, or are you? Is that something that's on the horizon?

Mike Pensky: So, AI is definitely a tool that can provide very rich interpretations from large sets of documents, and it's something that we are starting to leverage as well. Really moving beyond the traditional way of counting words and looking at the pers, the. Accounting words and looking at their frequency to, in a much more romantic way, actually having conversations with the market as represented by a set of documents.

So, in this way, what we can do is we can upload a large group of newspaper articles of broke reports and start to ask that collection of reports in an aggregated way. What does the market believe is going to be driving inflation going forward? What are the causes, what is appreciated, and what the market may not yet know.

Oscar Pulido: Mike, you've made this compelling case of how insurance is such an important input to the economy and how, it is prognosticating, higher levels of inflation going forward. So, what does this mean for investors and particularly in their portfolios?

Mike Pensky: So ultimately one thing to recognize is that the issues in the insurance industry are likely to move beyond just insurance itself. So, we talked about how increases in prices for insurance are likely to continue for some time, but also that they might pass through the economy through the input cost channel. This is going to lead to inflation staying stickier at higher levels for a longer period of time. Already in the world where inflation doesn't appear to be heading down to the 2% target rapidly, it becomes an even bigger challenge to overcome, yet an additional pressure that might keep inflation at a higher level.

So, from a portfolio perspective, the way that we tend to think about this is that higher inflation for longer likely means that you need more compensation, more return for holding bonds over longer maturities. So said in a simpler way. Higher interest rates for longer maturity bonds.

 So as a result in portfolios, we're underweighting those longer duration bonds to benefit from the notion that yields will likely rise for some time on the backend of the US treasury curve.

Oscar Pulido: And what you're saying is consistent with actually some of the comments that we've heard from our colleagues in the BlackRock Investment Institute of we're in a new market regime, that means higher interest rates and higher inflation than what we've been accustomed to. Mike, thank you for once again providing this interesting lens on the economy that it seems like only you can provide. And thank you for joining us on The Bid.

Mike Pensky: Thank you, Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you've enjoyed this episode, check out how geospatial data can inform investing where Mike Pensky and Josh Kazdin explain big data and how investors can use it in their decision-making process.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

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MKTGSH0424U/M-3501816

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

The BlackRock Investment Institute has outlined five mega forces that are shaping the macroeconomic landscape and demographic divergence is another one of them. The aging of populations will limit how much major economies can produce and grow, leaving governments with less tax revenue to support rising retirement and healthcare expenses. The impact of fewer workers could result in lower corporate profits and higher government debt unless economies adapt to mitigate these pressures. So, what does this mean for investors and what risks and opportunities does this megaforce create?

I'm pleased to welcome Nicholas Fawcett, senior Economist in the BlackRock Investment Institute and Peter Fisher, head of BlackRock's Global retirement initiative. Nicholas and Peter will help us uncover the impact of this megaforce on global economies and the potential risks and opportunities investors should consider. Peter And Nicholas thank you so much for joining us on The Bid.

Peter Fisher: Nice to be here.

Nicholas Fawcett: Thanks for having me.

Oscar Pulido: So, as both of you probably know, for several months now on The Bid, we've talked about the five mega forces the BlackRock Investment Institute has been talking about, today we're going to talk about one of those, and that's demographic divergence. Nicholas, perhaps I could start with you, which is why is it that we're considering this a mega force? Can you give us some of the terms and definitions to help understand what it is we're talking about?

Nicholas Fawcett: Thanks Oscar. You'll remember that when we talk about mega forces, what we're really talking about are big structural changes that are going to shape our economies over the next couple of decades. And these affect everything around production, the way we produce things, what we produce, and ultimately who produces it.

And crucially, that affects the investment landscape. It raises, opportunities and of course, it also raises risks. We think that investors need to pay attention to them now, even though they're going to play out over the course of several decades. As far as demographic change is concerned, what we're really talking about is the fact that populations are aging- life expectancies on the up, birth rates are coming down. And when you combine that together, it means that working age populations, so give you a definition, it's those age between 15 to 64, in general, are shrinking relative to the size of the overall population. For a lot of large economies, especially in developed markets, that means that workforce growth over the next 20 years is going to be much lower than it was over the past 20.

In fact, in some countries it's actually going to shrink quite materially. And the numbers are big, so just to take a case in point, if you look at the UN's projections for the working age population of China, it's set to shrink in the next 20 years by 140 million. Now, that's the combined total population of Germany and Italy. These are big numbers, the key thing is that presents an economic challenge because taken by itself, slower workforce growth means slower economic growth overall. And something needs to change in order to alleviate that kind of constraint. So those are the facts. The population's aging.

With workforces either shrinking or growing less rapidly than they were in the past, there are some key implications that we need to think about from the investment landscape. We think there are three important debates to be had- population aging is the fact, but how it plays out really is, a matter for discussion.

The first is, does aging actually slow growth or are there things you can do to offset that? The second is what happens to inflation? Is all of this aging going to result in more inflation in the future or less? And then finally, what's that going to do for government debt? Are government's going to have to borrow more as a result of aging.

Oscar Pulido: Peter- Nicholas talks about, the fact that an aging population could slow growth. It's worth mentioning that Larry fink in his recent annual chairman's letter talks about this demographic slowdown, and so it sounds like it is a big global issue for the future, but let's just come back to why should an aging population slow growth in the first place?

Peter Fisher: Well, we measure economic growth by changes in hours worked, plus changes in productivity and then we add in new investment spending. And so when the working age population, the core workforce, starts to shrink, it's really hard to get more hours worked going because you actually have fewer hours work tend to come in, now there's some adaptations that countries can make. But so other things equal, you shrink the working age population, you shrink the economy, it's pretty direct.

Now, what countries can do to adapt is try to find other sources of workers. You can bring in more immigrants, you can increase the participation rate- people who are standing on the sidelines of the labor force, you can bring them into the workforce. That normally we think of happening cyclically in economy when the economy gets strong. You can push out retirement ages, get people to just keep working longer. And those are all ways you can add hours, or innovation and productivity, you have to get more out of each worker that you put in.

And so, these forces are how countries will adapt. a couple of quick examples. One, think about Australia and Canada as the champions of immigration, these countries just keep bringing new workers in and in, skilled workers, legal immigrants bringing them in, and that grows their economy. They both would already have declining workforces without all that immigration. Even a country like the US and the UK, we would be having a shrinking working age population without immigration, we're already past that point. Another way to think about this is two countries that both have really stark shrinking populations, Korea and Italy. They both have been shrinking. They're going to keep shrinking for the next 20 years. Korea has much higher productivity than Italy. So, the Koreans are deploying more robots per worker than most countries in the world, they're in the top three in doing that, so they're adding to productivity another way. So those are different ways different countries adapt to this relentless force that if the working age population shrinks, the economy is also shrinking, other things being equal.

Oscar Pulido: And you shared a basic math equation at the beginning of your response and an important input was hours worked. If you have a declining working age population, all else equal, you have less hours worked, then that means less growth, but then you mentioned the number of ways in which countries can offset that. And you talked about immigration, you talked about productivity, we spoke with Belinda Boa recently about Japan, which is enjoying this Renaissance and economic growth and higher inflation, but they've also been dealing with the declining working age population. So how have they combated that?

Peter Fisher: Japan's had a shrinking working age population since 1994, and right after the bubble burst in Japan, that Belinda discussed, and we had a banking crisis then they've experienced the shrinking workforce, which was part of the deflationary environment that Japan found itself in.

And from 1994 to, I think around 2011, the working age population contracted about 10%, and hours worked declined by 10%. You need to go back and realize that's the world's second largest economy that just lost 10% of its mass. That's a really big number. Now, they were able to stabilize that, as Belinda described a little bit with Abenomics, Prime Minister Abe had some structural reforms. In hindsight, the one that's really astounding is how effectively he got women into the workforce. Female labor force participation went up by 16% over just a decade, and female retirement rates were pushed out by three years. That helped stabilize hours work to actually raise it a little bit and then stabilize it, which is a big part of how the Japanese economy is stabilized.

Oscar Pulido: Japan though, experienced deflation. You touched on that, that as the working age population was shrinking, it was deflationary. Nicholas to come back to you, you would actually argue that perhaps that was an anomaly that actually declining working age populations should be inflationary to an economy. So, tell us a little bit about why was Japan different and why is your view that the more common scenario is inflation?

Nicholas Fawcett: This is where things get really interesting, and in fact, that's the second key debate about the impact on inflation. Intuitively you would think that if we're talking about slower growth, as Peter just described, that's going to push down on inflationary pressure because there's just less demand. But here the problem is a completely different one. We're talking about less supply, so because there are fewer working age workers, the overall production capacity is lower than it would otherwise be, and so you can't produce as much from that working pool. As a result, people produce less as an overall group. You tend to find that with older workers on average are more likely to be retired. And so, as workers, overall get older, the total amount of production goes down.

But that's a view from the supply production capacity in the economy. Demand keeps on going. People don't just stop all spending when they hit retirement. In fact, even though they may change the nature of things they consume, they may consume more healthcare and social care, overall, in terms of value of spending it, it's actually pretty smooth over people's lifespan. The key thing is really what happens to the balance of demand and supply as a result of this. If demand proves quite resilient and supply capacity is going down, then that puts demand out of line with supply. And so, there's inflationary pressure that builds up. And Japan's a really interesting counterpoint to that.

But in a sense, Peter's already given the answer for why, it doesn't necessarily give us a good guide to what's going to happen in the future. Japan had a lot of other things going on at the same time. It had the financial crisis, banking crisis It also had its population aging around a period where globalization was on the up. That meant that a lot of Japanese producers could outsource production, especially in manufacturing, to other countries and escape the constraint of having a shrinking working age population. And so, on net, the Japanese circumstances is quite different to the one we see for other developed market and the large economies in the future.

That's why we think that on net the implication of population aging in the future is going to be inflationary. Now, what does that mean for monetary and fiscal policy? Well, central banks are going to face more persistent inflationary pressures in the future. They're going to have to respond to that with tighter monetary policy raising interest rates. And that's very different to the experience we saw before the Covid pandemic in the 2010s where they had to do the opposite. They had to cut interest rates to bring low inflation back up to target. Now, for governments, we think aging spells more debt. slower growth means slowing tax revenues, to cover spending. And all the while rousing interest rates just mentioned before means the governments are going to have to spend a lot more on interest costs than they previously did. And the numbers here are pretty stark.

Take the US for an example, the US Congressional Budget Office projects that within the next few years, the US Federal Government is going to spend about the same on interest payments as it does on Medicare. That's a pretty stark comparison. And cutting spending in other parts is going to require really difficult political decisions, and that's all against the backdrop of aging populations, probably meaning more spending on healthcare and social care than is currently the case. So, there's a real tug of war going on here, big trade off, and the big picture is that all of this means that government debt is on the up.

Oscar Pulido: Right. So, the working age population is getting older. that's causing inflationary pressures that causes interest rates to be higher, all else equal. And that challenges the fiscal position of a lot of these countries that are experiencing that aging of the working age population. So Maybe Peter to come back to you. What does this mean in terms of investment opportunities? Where are there sectors or countries that are benefiting from this demographic divergence?

Peter Fisher: Well, before I jump to the sectors, countries and companies will adapt. We've seen that in enough places. And I want to emphasize, we investors have to adapt to and learn to look for different things. A really simple one is we've normally, for the last 50 years, thought about cyclical changes in the unemployment rate as a really good guide to how strong the economy is. Unemployment rate goes up and down, it tells us how strong the economy's doing.

Or, if you have a persistently tight labor market, the unemployment rates always really low and there are not many changes in it. So, there's not much information content in that. So, we investors have to start looking for other things.

Now, the first thing I think we have to look for is how do companies source labor? If you've got a tight labor market, companies are going to have to have their own strategy. Maybe they have to bid up younger workers and pay more for that. That may just be the cost of doing business, and so we have to watch what happens to company margins. Now the sectoral impact, Nicholas has already mentioned one, the healthcare sector, people get older, they're going to spend more on healthcare. I really enjoyed, a couple months ago we had a group of investors, talking about the longevity opportunity, and a young equity investor was saying, you have no idea how much money people have to spend on cataract surgery and hearing aids. And I assured him, I knew exactly how much older people had to spend on cataract surgery and hearing aids.

It's a big opportunity for someone. Now, there's another flip side of that, which is longevity itself as an industry. There are huge amounts of money going into investments in startups and drugs to make people live longer. The obesity drugs are an example of that. They're going to take down all sorts of morbidity problems we have from heart failure and heart attack. People are healthier for longer; we're all going to live longer. That's an industry in itself that is an investment opportunity. There are other ones like big changes in demand for real estate, old people like me don't move around as often as my son and my daughter do.

Oscar Pulido: So, adaptability is a key theme. There are trends that have been in place for many decades and perhaps that's made us think about certain sectors or certain economic data points. Differently and we need to adapt. You mentioned the unemployment rate, that it's maybe not going to provide as much information as it has in the past when you have a tighter labor market.

We've talked a lot about, aging working populations, and mostly developed markets. Although Nicholas, you also mentioned this is a trend in China, but there are also countries that have younger populations and there are working age populations that are still growing in certain countries. So how do you think about the investment opportunities in those parts of the world?

Nicholas Fawcett: Yeah, absolutely right. So, if you look at Indonesia, India, Saudi Arabia, South Africa, amongst other economies, these are going to experience pretty rapid working age population growth over the next 20 years. They're aging in a general sense, average age is going up and at some point in the future, that working age population growth is going to come to a halt. But compared to the other economies we were talking about earlier; they have a better dividend at the moment.

In terms of how they translate that into stronger growth in the future, it really depends on a lot of, catalysts that enable them to take advantage. One of them is how effective they are in translating growing, working age population into growing actual employment.

Peter mentioned before, people sitting on the sidelines, not really looking for a job or in jobs. That's a big problem for some countries. The share of people actually in employment or looking for it is really low compared to advanced economies, there's a huge amount of catch-up potential there, but they really need to harness that extra workforce.

Or it might be in another really important part, which is, what we would call, productive ca, capital productive capacity. So, things like machinery, transport infrastructure, hospitals, schools, energy investment, especially with the low carbon transition over the next, couple of decades. These countries have to be able to harness the investment needs for all of that capital to be built up in order to take a full advantage of a bigger working age population.

Some countries are going to be much more effective than others in taking advantage of that demographic dividend. And that's where some of the investment opportunities are really going to lie in our view.

Oscar Pulido: And just hearing you say the word dispersion brings me back in in recent episodes where we've talked about this is a new market regime, the need to be granular and dynamic and, and these mega forces will play out over many decades. So actually, given that, given everything, you've said as you think about demographic divergence and its impact globally, what would be some parting thoughts that you would want investors to think about as they think about the world aging?

Peter Fisher: Well, where I started with the engine of growth, we are really going to need to focus on innovation, realized productivity. Not just gee-whiz technology, that's fun, but is this actually producing more output? Is this making workers more productive? Real innovation that gets embedded in the economy, that's going to be where we have to look for returns as investors.

And so, we have to switch and we're going to be a little less sort of momentum in the economy as a whole unless we can find returns coming from innovation. And I thought it was really interesting what Belinda said about Japan being a laboratory for innovation on a tight labor market. And that's the transition but from what both Nicholas and I were talking about, the 1990s where it was all blah in Japan and they weren't, didn't have any momentum, and now they're really ahead of us. They're figuring out what innovation you have to do to keep growing a company where there's so few workers and so they're on the front foot on a lot of robotics and technology. And so, I would emphasize that for investors going forward.

Oscar Pulido: Nicholas, what about you?

Nicholas Fawcett: Yeah, I agree with Peter. He really puts his finger on it saying there are opportunities in some of the countries we've been talking about, that face the biggest, countrywide headwinds. I think the key thing is that it's not a simple case of ignoring all the countries that have shrinking populations.

It's much more nuanced than that. There's a huge amount of dispersion across sectors that Peter alluded to. the really interesting thing from the investment point of view is these phenomena that we've been talking about are pretty predictable in the sense that we know how working age populations are going to evolve in the next kind of 30, 40, 50 years because of the nature of what we're trying to forecast here.

And yet, if you look back in history and look at the academic literature, there've been a lot of times where these kind of predictable demographic trends have been really slow to be priced in by markets. And so there should be ample opportunities, if that's true. And that continues in the future for investment opportunities because the things that aren't currently priced that we know with reasonable certainty are going to happen are where some of the greatest opportunities lie. It also helps us gauge where the risks are, but the bottom line, as you said is you really need to be selective.

Oscar Pulido: I was reading something this week and that I had read before, but it was a reminder, it was this concept of peak 65. That in the US every day, there's 12,000 people a day hitting the age of 65. And when I first saw that, I thought, that number can't be right because 12,000 is a lot to happen on a daily basis.

But it brings forward the magnitude of what both of you were talking about. Thank you for shedding some light on this Megaforce. I'm sure we'll have you back at some point to update us on where we are. Peter and Nicholas, thank you for joining us on The Bid.

Peter Fisher: Thank you.

Nicholas Fawcett: Thank you.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you've enjoyed this episode, check out the recent episode with Belinda Boa 'Is Japan at an inflection point?' And subscribe to The Bid wherever you get your podcasts.

<<THEME MUSIC>>

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In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0324U/M-3460372

Oscar Pulido: Welcome to The Bid. Where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

Bond yields are higher today than they were 20 years ago. With inflation indicators falling around the globe, the time of elevated cash rates may be drawn to a close. So what are investors doing? They're choosing bonds in record numbers with 2023 global bond ETF inflows of $333 billion.

My guest today says investors could be moving even more quickly back into fixed income. Why? The signs of market change may be coming into focus. Global central banks appear at or near the end of a tightening cycle designed to quell the most significant surge in inflation in decades, a cycle that made cash so attractive.

Today I'm pleased to welcome Steve Laipply, Global co-head of iShares’ fixed income ETFs for BlackRock. Steve will help us understand what has been driving investors towards, or in some cases back to the fixed income market and what investors should be looking for as central banks appear set to loosen their grip on interest rates.

Steve, thank you so much for joining us on The Bid.

Steve Laipply: Thanks for having me, Oscar.

Oscar Pulido: So, Steve, we're here to talk about fixed income or bonds. We often use both terms to refer to that asset class, and perhaps we can just start with a really basic question, which is, how do investors tend to use this asset class in a portfolio?

Steve Laipply: Yeah, Oscar, let's start with what a bond is supposed to do. So, a bond is basically a company borrowing from someone. So that can be you and it can be an insurance company, it can be a pension fund or what have you. But generally, the way it looks is the company issues this piece of debt. It has a stated rate that it'll pay and it has a maturity date. When that maturity date happens, you're supposed to get your money back. And so bonds, generally, trade in the market so investors can buy them outright from the issuer when they're issued, or they can just go into the market and buy them after they start trading.

Equities are more intuitive, we hope they go up, they pay us a little bit of a dividend along the way, that's great. Bonds, if all goes well, you're going to get this payment that they told you were going to get, and then you're going to get your money back, but you're not going to get anything beyond that. And so a good outcome is you getting that payment and you getting your money back.

There are different ways that people evaluate that risk. People may have heard of the credit rating system where AAA is really good and BB is not so good and there's everything in between. Investors will look at that and look at what yield the bond is going to pay them and make a decision on whether they think they're taking the appropriate risk for what they're getting paid. Getting to your question on the portfolio, bonds do two things.

The first thing that bonds do when you use the term fixed income, Oscar, income, so in a portfolio, if you think about equities, equity dividend yields are fairly low. They're around one-ish to two-ish percent. Bond yields actually, as we know before the Fed hiking cycle, were probably not too far from that but now we're in a very interesting world where bond yields are back to where they were about 20 years ago.

So you can now get a decent amount of income, in the treasury market in the 10 year note, you can get around a four and a quarter, at the very short end you can get 5.5%. And so, we're in a different world. In the high yield market, you can get much more than that. So now the income part is back.

The second thing bonds can do in a portfolio is provide diversification. That tends to be more applicable to higher quality bonds like treasuries. If you look way, way back across time, treasuries as an example, tend to move in the opposite direction as stocks. And what investors would do with an equity, heavy portfolios, is hold some amount of high-quality bonds against those so if the equities go down, they get some protection from the high-quality bonds. It's a combination of this income and diversification that investors are looking for in their portfolios.

Oscar Pulido: Right, so they provide diversification to the stock market, and you mentioned treasuries in particular, which are sort of the risk off asset class that investors will tend to gravitate towards. And then you also mentioned income, it seems like the income that fixed income generates these days is like a capital I income compared to recent years. And you talked about the fact that the yield on bonds is back to 20 year highs. So how did we get back to these 20-year highs?

Steve Laipply: Yeah, so if we, take a little bit of a journey down memory lane, let's say before 2008, we had yields that didn't look terribly different than they are now. 2008 happened, all central banks all over the world reacted, including the Fed, they cut rates to zero. We had a full decade plus of rates that were very near zero.

That's where we were. We were scraping bottom for quite a while, and that was on purpose. The Fed was really trying to keep the economy going post-crisis. And there were all these programs, quantitative easing, et cetera, et cetera, that were going on that kept yields really low. Well, coming out of the pandemic, all of a sudden inflation for the first time in many, many, many decades, and I think, a lot of, quite a lot of people probably had never experienced inflation, and all of a sudden, everyone's, googling that word and what it means and what it looked like in the past and how bad it could get, and, sure enough, it comes roaring back.

And of course, the central banks react again, going in the opposite direction, they start hiking rates really, really aggressively. And in the US, they went from zero to 5.5% in a couple years. That, some people would say shocked the system, other people who were rooting for higher yields would say they renormalized the bond markets back to where they used to be. But nonetheless, here we are.

Oscar Pulido: So, your perspective on whether interest rates or yields on bonds are high really depends on how far you go back. Compared to a few years ago, they're, they're really high. But as, as you said, if you go back 20 years ago, pre the financial crisis of 2008, they are really just kind of back to where they were in that maybe more normalized period. So, as the Fed has raised rates and done so to combat inflation, a topic that we've spent a lot of time on with some of our colleagues at the BlackRock Investment Institute. So, what has this meant for investors? Does this mean they're more constructive on putting money into bonds or do you see them sitting in cash a bit more?

Steve Laipply: It was interesting, at the beginning of the cycle which really took hold in 2022, we were all sort of bracing for significant outflows, whether that was individual bonds or mutual funds or ETFs or what have you.

It turned out to be a little more mixed than that. Yes, you saw outflows in mutual funds, but astonishingly you saw quite a lot of inflows into bond ETFs as an example. And then of course, you saw, saw a lot of inflows into, very short-dated instruments like treasury bills.

That reflects a couple things. Yes, there was a little bit of sticker shock, people looked at their statements, for example, maybe in a mutual fund they'd held for a long time and, and perhaps decided to allocate out of that and into cash. But there was also this dynamic where investors got excited about yields that they literally haven't seen, like we said, in, 20 years, give or take.

I think that explained some of this allocation that we've seen the last two years into bond funds because investors are now looking at that and saying, you know, I'm not going to be able to call the top in yields, but how about this, I haven't seen these yields in a very, very long time, and maybe it's time to start getting back in.

Oscar Pulido: Can you say a little bit more about the allocation to cash instruments?

Steve Laipply: So, by design, when you, increase interest rates this much, you know, when we go from zero to five and a half, by design, you're going to invert the yield curve. that is designed to tighten financial conditions. And that's just a fancy way of saying you want people to be defensive. You want the premium for companies taking risk to go higher for investors taking risk to go higher.

Investors responded exactly the way that was intended, which is they moved into those very, very short-dated instruments or just outright cash. Why did they do that? Well, because it turns out you're getting paid more sitting there, than you are in say, 10-year notes, right? And so that was the point. But now they have to start thinking a little bit about, are things changing, are they done? Aren't they done? When's the first cut going to come? Will it come this year?

One way or another, we're probably coming to the end of this particular Fed cycle. Investors really need to start thinking about what role is cash playing in their portfolio? And it does play a role, you should always have some cash on hand, of course, because you may need that instant liquidity to, for an emergency or, or something unexpected that happens. But having all of your money sitting in cash is probably not ideal.

And we know, the reasons for that, which is that yield that you're seeing in cash today, can very well be gone tomorrow. It can change very, very quickly. This is the conversation that's very much happening right now everywhere, which is, when do I do this? When do I start moving out of cash? I do think it is appropriate now to start having that conversation and start thinking about it because markets have a funny way of moving before they send a very strong, all-clear signal.

So they're not going to tell you when it's over and when it's time to move, you're going to have to figure that out and as it turns out, those longer yields move much more quickly than the Fed. And so they'll move before the Fed even cuts. And that's something everybody needs to be aware of.

Oscar Pulido: So there's a bit of anticipatory behavior that investors have to think about. And you touched on this concept of the yield in a cash instrument might be a certain figure right now, it can change quickly, and I think that means that there's reinvestment risk for an investor - what they were getting in their cash instrument can change. It could go up, it could go down, but it certainly doesn't necessarily have to stay stable for an extended period of time.

What does it mean for investors though, as they're allocating to the bond market and some of the areas that you mentioned when the backdrop is also one of higher inflation. So how should investors be thinking about, on the one hand, their yield is higher, but inflation is also higher. So how do you grapple those two things together?

Steve Laipply: And that's, the trick, isn't it? So you have to look at what you're getting paid, after inflation. And so this is the whole discussion. And so when people are looking at, short-term yields versus long-term yields and where inflation currently is and where they think it's going to go, a simple thing to do is just take the current inflation rates, subtract that from the yield that you're looking at, and decide if that's going to work for you. A situation you don't want to be in, and we were in the situation for some period of time, before covid was what's called negative real yields. And real just means that arithmetic we just did, where you take the yield, you're looking at and subtract inflation, and if it's a negative number that's tough, right? But, we were kind of that way in many, many countries across the globe for a long time. And we're not, now we're at positive real yields. That's, something that people haven't seen for a while, and I think that's why they're taking comfort in this idea that even subtracting inflation, you're getting a positive return.

Oscar Pulido: The term 'negative real yield' translates into a stealth way to reduce your purchasing powers is what it sounds like, it also sounds like we're now in a better environment where even though inflation is higher, yields are compensating you for that and some, so investors are back to at least growing their purchasing power, even if it is a very small amount.

You touched on central banks. Will they cut, will they not? This is like a bit of an Olympic sport. I think now watching central banks and what they're going to do with policy, maybe just go back to why that is important. Why do people spend so much time thinking about the next policy decision, from the Fed and other central banks for that matter.

Steve Laipply: It's interesting when we look at how responsive the bond markets have been to these pronouncements, whether they're official statements or whether it's just a particular fed speaker, in the news cycle, markets have reacted very, very strongly the last couple years. I think it's because we just were in a period for quite a long, stretch there where, everybody was waiting to see what the outcome of this would be, are they going to land the plane?

Are they going to be able to, you know, bring this thing in for the much talked about soft landing, or are we going to suddenly find ourselves, moving far too quickly into a slowdown and will they have to react to that? So the sport has been all about, did they do the right thing? Did it work? And I think that's why Oscar, you're seeing so much attention paid because people want to know what the score of the game is, but they actually want to see what the final score is going to be. Not sure that they're going to get that satisfaction because again, I don't think the market is, is very good at just giving you these all-clear signals or, oh, the clock ran out and the final score is X. The economy is dynamic, so you might not actually get that, signal you're looking for, but that's why everybody's trying to figure out did they pull it off or not, and what will the next phase be?

Oscar Pulido: Steve, you've been working in the fixed income market, the bond market for years. And presumably you feel like you've seen this movie before where investors are waiting for clues from central banks, and as you said, trying to predict what the final score is going to be. And I think, what you're saying is that investors, should be thinking a little bit further ahead and not be overly focused on decision to decision if I'm not mistaken.

And so Steve, what's the bottom line for investors? I mean, you touched on a few of these things and, you referred earlier to moving out to, three or four years of maturities, meaning moving out of cash and moving a little further out the yield curve. But are there areas of the bond market that you're focused in on and maybe some key takeaways for investors?

Steve Laipply: This is going to sound obvious, but I think investors have to have certain views in order to make these decisions.

So let's take case one. Case one would be if an investor does believe that, you know, like we talked about before, that they pulled it off, that we're going to get this soft landing, we're not going to go into recession. They'll be able to start cutting rates very gradually, inflation will behave and continue to grind down to 2%, et cetera. You could do a lot of things then, you can have the confidence to invest in something like high yield. If you believe that the economy is, on firm footing and is going to stay that way, and high yield's offering very attractive yields. What's interesting, Oscar, last year everybody was scared of high yield because of all the talk about a recession, but it returned 13% last year. So, you know, even though it was yielding, I want to say 8, 9%, it returned something like 13%. So, you know, that was one of those contrarian things where people stayed away from it, but it generated a very good return. So if you do think the economy is going to, sort of glide into the soft landing, then you could take more risk in something like high yield or emerging markets or what have you.

If you're more defensive than that, then you want to stick to high quality. You want to be in high quality investment grade. And we talked about treasuries. You want to move a little bit further out the curve to get that diversification, get a little more duration in your portfolio to help balance out that equity risk.

If you think, I'm not quite sure, we might or might not, enter into a slowdown and I want to be a little more balanced here. Let's go with one more, which is, if you are very worried that, maybe all of this right now feels great, but we will wake up, in six months or a year and realize we're, we're in a recession. Well, you probably want to be even more overweight to that very high-quality exposure further out the curve, let's just say longer maturity or longer duration treasuries as, as an offset or diversification for the equity part of your portfolio. If you think a recession could be a real risk, and also that is the benefit of locking in yields where they are today because in that scenario, they probably will fall.

Oscar Pulido: Right. So you painted three very different scenarios, but the commonality was, uh, there's something to do. There are opportunities in the bond markets. And so we will stay tuned to see what the final score of this game is, although it feels like following markets the game just always, continues.

Steve Laipply: There’s always over time.

Oscar Pulido: There's always overtime! Steve, we appreciate your insights and thank you for joining us on The Bid.

Steve Laipply: Thanks for having me, Oscar.

 <<THEME MUSIC>>

Oscar Pulido: Thanks for listening to this episode of The Bid. You enjoyed this episode. Check out my conversation with Becky Milchem, 'Are you leaving cash on the table?' where we explore three things investors should consider when it comes to cash in uncertain markets. And subscribe to The Bid wherever you get your podcasts.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0424U/M-3473453

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

In the ever-evolving tapestry of geopolitics and economics, the Asia-Pacific region stands at a pivotal juncture. Structural shifts are underway, redefining global dynamics, and the emergence of competing economic and geopolitical blocs takes center stage, reshaping alliances and influencing international relations.

Not only has the region been grappling with high inflation post the global COVID pandemic, it's also an historic election year, with over 70 elections globally that could have seismic implications for economies. And as we anticipate the outcomes, we're compelled to examine the economic implications, opportunities, and potential pitfalls that arise at the intersection of politics and finance.

In this special episode, we took The Bid down under to record this episode live. Wei Li, Global Chief Investment Strategist for BlackRock joined me at the event in Sydney. Wei and I discussed the intricacies of high inflation, emerging competing geopolitical bloc, how a momentous global election year will impact Asia-Pacific region and what opportunities investors can expect from the region.

Wei, thank you so much for joining us on The Bid.

Wei Li: Thanks for having me.

Oscar Pulido: And Wei welcome to Sydney, Australia. We are down under recording another episode of the podcast.

Wei Li: So exciting to be here!

Oscar Pulido: And we're also in live in front of a live audience. and I'd like to bring them into the discussion. G’day, Sydney!

AUDIENCE: G’day!

Wei Li: I feel like I'm on the Friends set. This is so cool.

Oscar Pulido: I did a little research before this, just out of curiosity. I know you flew in from London. I came in from New York. It turns out both of those cities are 10,500 miles from here, so thanks for meeting me halfway. Let's get into the discussion around markets. You're obviously the global Chief Investment Strategist for BlackRock and the BlackRock Investment Institute. Your colleague Alex Brazier and many others have talked about the year ahead with an optimistic tone. But given that we're in the Asia Pacific region, what are some of the major stories in this region that you are following?

Wei Li: Absolutely, so this more upbeat sentiment extends to our view of the APAC region as well. And as I think about the main stories that, are playing out our kind of look at it geographically from the perspective of what's happening in Japan, India, and also what's happening in China.

So very quickly Japan, depending on which index you're looking at, it's just broken out from the all-time high last set in 1989. So, it's really taken a long time to get where we are and we think that there is more for the rally to go, because the first leg was driven by macro development, the economy exiting long time deflationary mindset. From here on the micro development on a corporate level, are likely going to drive the next leg higher, and we're excited about that.

In terms of India, this morning we talked about mega forces. the likes of AI, digitalization, geopolitical fragmentation, they are all forces benefiting India, at the moment. Yes, valuation is not particularly cheap, but, these structural forces have long runway and we think that this country is really standing out at the moment in terms of what's happening to China, is a bit of a more nuanced story, In the run-up exiting from the pandemic, consumers have been somewhat disappointing in terms of their willingness to spend, which is why equity markets didn't really deliver the sort of recovery that many were hoping for. Maybe now there is a window, given very cheap valuation, to respond to stimulus, measures, but the long-term structural challenges still exist for the country. So, it's more of a nuanced story, but definitely one that not only impacts APAC, but also emerging markets broadly.

Oscar Pulido: So, you touched on Japan, India, China, mega forces. So, I'd like to get into all of those things maybe in a little bit more depth, but why don't we start with India. We recently had Catherine Kress as a guest on the podcast, talking about the geopolitical environment. She described India as a multi aligned country, one that has not chosen sides amongst the economic blocks that are being established around the world. We know it's also a country that is growing demographically, financially, going through a lot of, evolution. So, talk to us a little bit more about India's investment opportunity.

Wei Li: So, if we think about the theme geopolitical fragmentation, India definitely has demonstrated its ability to interact with multiple, and potentially, differently aligned economic blocks, right? So, thinking about its interaction with the US, with China and their respective spheres of influence and that is an advantage in this increasingly polarized world.

In terms of other geopolitical forces, you think about the strength of consumer lending. You think about younger population in India and in the rise of the middle class. You also think about the incredible penetration of digitalization, UPI- unified payment interfaces- it's really incredible in terms of the progress that they have made. So again, this is not a market that is cheap because the progress is clear for all to see, but we definitely think that the representation of Indian market, in broader emerging market benchmark, has more room to grow. You look at a population, it's just overtaken China as the most populous country in the world. And that's just the start. So, we definitely think that it's one to watch out for.

Oscar Pulido: You and I both live in parts of the world where the demographic discussion is about an aging population, but you described India as a younger population and having a divergence maybe from much of the developed world. You also mentioned China. We cannot have a discussion around the Asia Pacific region without discussing China- it's the largest economy. So, talk a little bit more about your macro viewpoint, and the investment viewpoint that you have on China.

Wei Li: So far over the tactical horizon, consumers have not been very confident to spend given policy ambiguity. And also, some of the tailwinds for Chinese economy during the pandemic, when it was the factory of the world, they were fading away exports dropping off as the rest of the world switched back on. And obviously the real estate overhand has just been such a sentiment dampener.

So, over the near term it hasn't been great last year, but we're seeing signs of policy support coming through, targeted to start, but now a bit more coordinated. Is this the bazooka that is needed for the country to turn around? I think it's too early to say that. I think for us to really get index level wide kind of confidence, we need deeper cuts, we need greater fiscal spend, and we also need more meaningful resolution in the property sector, which is really hard to come by. So, it's hard to see Chinese equity market right now, as more of a long-term investment.

There can be a trade given how cheap valuation is, but is it the attractive long-term investment in a whole portfolio context? I would put a question mark around that and over the longer term, there are structural challenges around Chinese long-term productivity and growth because of aging population. By the end of this decade, Chinese economy growing was a 300, which is not that much more attractive than the US for example.

So, for reasons like this, we are thinking about China as a as a tactical opportunity right now, but even then, we're neutral, not overweight. We're starting to see some flows coming back into this market but in more speculative fashion and also, international investors need to feel more comfortable about the market before we can really see a meaningful sustained turnaround.

Oscar Pulido: And you mentioned policy response, fiscal and monetary, that's been a common theme it seems like in recent years for economies around the world. The importance of policy in terms of the trajectory of markets. we're here in Australia, as I mentioned, a country that has sometimes or often been dubbed the 'lucky' country. And I think, if I'm not mistaken, a country that hasn't experienced a recession in something like 30 years. I'm not sure how that's possible, but it's also a country that is grappling with higher inflation like much of the world. So, what's your outlook on Australia?

Wei Li: Well, the trade-offs facing policy makers worldwide, exist in Australia as well. So, in this new regime of structural supply constraints, policy makers are finding themselves having to sometimes balance inflation fighting versus, labor market versus growth and that balance, that delicate, balancing act and trade off exist in in Australia as well.

We are in an environment of lower trend growth. We're in an environment of structurally higher inflation. We're in an environment of structurally higher rates, that applies to Australia as well. You talked about it, avoiding recession for such an enviably long period of time.

But the trend growth in Australia is lower compared to pre pandemic in our assessment. So, inflation has also come down, it has come down a long way, goods deflation contributing to a large part of that. But the service component of inflation, what drives that, we're talking about wage, we're talking about rents, they have shown signs of persistency too. So yes, we are expecting rate cuts in the same way that we're expecting rate cuts from the fed, but perhaps later in the year and also not as many as what we have seen in the past. So, a general trend of new regime, new environment for central banks. That applies here too. But you're right, it's a lucky country!

Oscar Pulido: Right, so while it might be a great distance from countries like the US and the UK, it seems to have a lot of similarities post pandemic. Uh, that you talked about in terms of, inflation growth and what it means for interest rates.

Wei Li: And because the world is becoming increasingly intertwined. Yes, we're talking about maybe globalization, not making further progress, but even stalling at the current pace of, exporters percentage of GDP globally, we're talking about, it steadily increasing to now more than 50%. That's quite a high degree of intertwined connectivity and that's why we have similar patterns in the US, in Europe, in UK, and in Australia for that matter.

Oscar Pulido: Can we go back to the mega forces, something that the BlackRock Investment Institute has really coined those five, so I imagine you must wake up in the middle of the night, thinking about these five mega forces. Things like the future of finance, geopolitical fragmentation, demographic divergence, artificial intelligence, and transition to a low carbon economy. Mm. I've memorized them myself because we've covered them a lot on the podcast. So how do these five mega forces, touch the Asia Pacific region? Are they all relevant or are some more relevant than others?

Wei Li: They're actually all relevant. And I would also say that some of the mega forces that are typically associated with not so positive investment consequences are acting as a tailwind in the case of APAC.

So, let's start with geopolitical fragmentation, because that's typically something that just sounds so negative, not like we're talking about geopolitical risks and how much more geopolitical risk premia that needs to be baked into market pricing.

So more broadly, when we talk about geopolitics, it sounds negative, but if you look at the likes of India, the likes of Vietnam that have benefited from reshoring and shifting of supply chain, Asia has stood to benefit from that. So that's on the geopolitical front.

In terms of AI, obviously China has a role in that, but the strategic confrontation between us and. China has made it harder to harvest that theme in the context of the Chinese investment universe. So instead, I look at Taiwan, I look at South Korea as beneficiaries of this trend, and these equity markets are starting to respond to that as well. So that's two of the mega forces.

And then if you think about the aging population, we already talked about India overtaking China as the most populous country in the world. And then low-carbon transition. India actually stands to benefit from potential acceleration of decarbonization after the election. So, it's something that we're paying close attention to.

So, this year is a big election year, obviously everybody's talking about the US election, but India is going through election too and we're expecting a bit of a continuity in policy. And once we have this big event moving into the rear mirror, we actually are expecting re-acceleration of the pace of India as growing as a bigger hub of energy, renewable energy production and decarbonization pace. So that's likely going to gain more traction with greater capital expenditure too.

Future of finance has a role in India too, if you think about digitalization, but also the greater, consumer spending and the role of private credits and also the evolving role of banks in lending and it has just been growing at incredible pace.

So, when you bring all of that together, I mentioned India probably a dozen times doesn't come as a surprise that it's one of our overweight countries. It's not cheap, but it's expensive for a reason, and we continue to think that it deserves a good-sized allocation in portfolios.

Oscar Pulido: You touched on a lot of countries, you did mention India a little bit more, but, I guess it's not surprising that the five mega forces in some way, shape or form touch the Asia Pacific region because the Asia Pacific region is quite broad, not just geographically, but it is, very heterogeneous in terms of, economies and stock markets and actually Japan, which would be good to get your thoughts here because Japan is both a large economy and a large stock market, but has been very out of favor for a long time. And when we spoke to Belinda Boa recently, one of our senior investors, in Singapore, she made a very bullish case for Japan. I think one of your recent pieces talked about Japanese equity prices are high, but they could go higher. So, talk a little bit more about what's changed in Japan that makes you more bullish?

Wei Li: Yeah. So, I talked about how the axis from deflationary mindset has really been the first catalyst in terms of Japanese equities staging the comeback and ultimately getting to where, we are, right now. and precisely because of that, precisely because it took such a long time for the economy to come through and for markets to come through. We do think that the Bank of Japan is going to be very careful in its, exit from the very low and lose monetary policy environment.

So, everybody's looking at Bank of Japan starting to hike rates and maybe meaningfully, move it higher. We think that they're going to err on the side of caution just so that they are not responsible for killing the exit from deflationary mindset too early, which is why we think that they're going to hike rates later than market expects, and they're also going to hike less than markets expect.

So, that in itself already is a bit of a boost to further kind of momentum. And then in terms of how we want to play this next lag, I think there are some interesting themes that we can position for. Like the broad market obviously have benefited but as we think about the beneficiaries of the corporate governance reform- the Tokyo Stock Exchange reform- companies that are positioned for that is one way of slicing and dicing, the market another way, as kind of economy stabilizes and inflation meaningfully comes through a nominal earnings are strong, a nominal growth is going to start to build having exposures to domestic players, that are benefiting from domestic recovery, that's another way of kind of thinking about, slicing and dicing the Japanese market.

And then as we think about re-shoring, friend-shoring beneficiaries of reshoring as a theme is another way to think about the Japanese market. I think there is room to be active along those lines that I just talked about in the same way that actually that there is huge room to be active in the Chinese market.

But the broad market in Japan, we also like right now we like the whole top-down benchmark. We think that there is more what is misunderstood, given that Japanese equities have come a long way, is that maybe, oh, it's expensive given how much it has rallied, if you look at earnings revision momentum. Japan actually is currently outpacing that in Europe, in the UK, and also in the US. In terms of earn revision, Japanese equities are really well positioned and at the same time, given the still prevalently low-rate environment from an equity risk premium perspective, which is actually our preferred way of looking at valuation, because that considers the rate environment, not just the multiples itself, because rates are still low. Japanese equities are still offering attractive equity risk premium. So yes, it has done well, but it's not as expensive as you would've thought. Looking at price appreciation, which is why we still like it.

Oscar Pulido: And so, when you put all this together, what does this mean for investors who are interested in the Asia Pacific region? What are some things you would tell those individuals?

Wei Li: Yeah, so as I reflect on our conversation here, I think I mentioned India many times. So that's definitely a country that I think deserves to be considered even standalone in the context of portfolio construction. So, India, we like. We talked about mega forces, more broadly. So yes, country is one way that we slice and dice the universe. But as we construct portfolios that are, positioned for mega forces, I think going at it from a sector perspective, maybe even on a stock selectivity perspective, is a more precise way of playing these mega forces. So, we're working with our, colleagues within, RQA to construct, RQA is our internal risk analytics, team to construct portfolios from a bottom-up perspective, selecting stocks that are well positioned to benefit from these mega forces is another way that we are thinking about playing Asia as well.

And then we so far only talked about stocks- equity market. Actually, we also like, bonds, but that goes beyond Asia emerging market, for example, we're talking about an environment where policy rates are coming down, growth is, reasonably robust. So that benefits emerging markets more broadly but given, the higher volatility in stocks from a risk adjusted return perspective, we actually like EMD better than EM equities from a top-down perspective. So that's one additional consideration I want to throw into the mix as we construct portfolios.

Oscar Pulido: Well, and at the very beginning you said country's one way to do it, but it does pay to be more granular, more precise. And that actually goes along with the outlook that your team have published at the beginning of the year of this being an environment where precision and granularity, is important.

I know you're very used to doing live television and I'm used to watching you on live television. I know you always do a great job on that. You did a great job on the live podcast as well. Thank you, wave for joining us on the Bid.

Wei Li: Thanks for having me.

AUDIENCE: [Applause]

Oscar Pulido: Thanks for listening to this episode of The Bid, if you’ve enjoyed this episode check out our recent episode with Liz Koehler, where we talk about how the younger generation is looking to the future and considering their own retirement outlook approaches.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0324U/M-3441502

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

Younger investors are looking to the future with greater anxiety than future generations. They are looking at a future with aging populations and reduced labor forces and a new age of technology and connectivity that is impacting their values and expectations. On the other hand, pre-retirees now are having to consider that fact that their generation will live longer and what do they want to prioritize in their retirement years.

So what do investors at different stages and ages need to consider when planning for their future, and how do those approaches differ? 

In this special episode, we took The Bid down under to record this episode live. Liz Koehler, Head of Advisor Engagement for BlackRock’s US Wealth Advisory business joined me at the event in Melbourne. Liz and I discussed how the younger generation are thinking about their future and what pre-retirees should be thinking about as they head toward retirement age, and opportunities all investors could take advantage of as they prepare for their futures.

Oscar Pulido: Liz, thank you so much for joining us on The Bid.

Liz Koehler: Thanks for having me.

Oscar Pulido: So Liz, this morning I was walking to work through the city and walking towards the river and I looked up and I saw hot air balloons flying overhead.

Normally I'm walking through New York City on the way to the Hudson River, but I was actually walking through the streets of Melbourne, Australia walking towards the Yarra River, and that's why I saw the hot air balloons. So here we are, The Bid is down under.

Liz Koehler: Very exciting.

Oscar Pulido: Thank you for joining us here. I know it's, a great distance. And the other thing about this podcast is that we actually have a lot of individuals looking at us right now. We're in front of a live audience, so to prove that I'm going to say… G'Day, Melbourne!

Audience: G'day!

Oscar Pulido: There they are! Liz, regardless of where we are in the world right now, there are topics that sort of transcend borders and demographics and aging populations is one of those topics. So, in the past, on the podcast we've talked about the aging population, we talked about the pandemic and how that forced a lot of people to retire early. So, maybe just give us a state of play today. Where are we when you think about the demographic landscape?

Liz Koehler: Thanks Oscar, so demographic divergence is absolutely one of the five key mega forces, that BlackRock continues to track. And some of the themes that we're seeing, is people over the age of 65 tend to be the age group that is growing the fastest globally. And that has implications, certainly, including for fewer people in the workforce, causing us to do more with less but the reality remains, there are still some really interesting technological and medical advancements that could create some great opportunities for us.

Maybe just focusing for a moment on the investor landscape, so, similarly, baby boomers hold the lion's share of the wealth as well today, not surprising, but their wealth is growing significantly slower than generations that are coming after them. So, for example, millennials, their wealth has grown exponentially quickly, given where they are from an earning cycles perspective and also the great wealth transfer. But the reality remains that these generations, in particularly millennials and Gen Z, are quite different in terms of who they are and what they want.

Oscar Pulido: So, you mentioned Gen Z and the millennials, these younger generations. How did they perceive their ability to save and build wealth? Maybe talk a little bit about, how that compares to the baby boomers, for example.

Liz Koehler: So, these two generations have just experienced the world differently, than their parents did. They have different fears, different values, different insights and perspectives. Just for example, millennials were really born into, the more prosperous nineties, right? They had fairly encouraging baby boomer parents. They tend to be more optimistic, a bit more collaborative. They saw the rise of innovation, they saw the rise of smartphones and social media, for example. And then you have Gen Z who was born more into, call it the lost decade of the two thousands, tend to be a bit more independent, really born into ubiquitous connectivity twenty four seven news. COVID was a pretty defining event for them, and they're also often called the socially conscious generation.

So, millennials on one hand, saw the rise of innovation and Gen Z was immersed in it. Maybe just a few more quick things about the generations, they tend to stay with employers for less and less time, and so while they have options available to them, oftentimes they're navigating retirement savings in a more independent way, and they want to invest in brands and services that have a real purpose and align to their values.

Oscar Pulido: You mentioned that both of those generations grew up in, in periods of technological change, different periods, but still technology became a bigger part of their day-to-day. So, with the expansion of AI and technology, does that help this generation in terms of making investment decisions, or does it actually do the opposite where it's information overload?

Liz Koehler: Yeah. By the way, did you know I'm a geriatric millennial? Did you know that was actually a thing?

Oscar Pulido: Is that on the cusp of millennial? Is that what that means?

Liz Koehler: I'm either Zennial or a geriatric millennial.

Oscar Pulido: I might be with you on that one.

Liz Koehler: Geriatric… I don't like that. To your point, there is definitely a lot of information out there, and some of it is useful and well-informed and a lot of it is not, and oftentimes it's out there on social media platforms. And so, what I would ask when we think about financial professionals in the industry, who have expertise, who have experience, who can proactively share information that's really useful for these generations and will help them achieve more financial wellbeing, please do it. I think as an industry, we all can challenge ourselves to do better around more plain English, less jargon being clearer to really help people understand and invest for the future.

Oscar Pulido: Yeah, for sure the financial services industry can introduce a lot of terminology and jargon. I think all generations could probably benefit from a simplification of those terms. Let's go back to the retirees and pre-retirees, which I think is where the baby boomers tend to sit more. What are some of the challenges that they're facing?

Liz Koehler: Yeah, oftentimes I think this idea of retirement is a bit of a manufactured concept, right? And what I mean by that is historically people didn't necessarily abruptly retire, right? A lot of times people couldn't afford it, so they continued to press on, and it was more of this kind of gentle transition from life stage to life stage. Don't get me wrong, I think retirement can be a wonderful thing, but oftentimes it brings a lot of fear these days. People wondering about their independence and finances and sense of purpose. And so there's a lot of uncertainty and fear that can come with it if people don't think about and plan for the future. and also thinking about sources of retirement income and healthcare planning and getting family involved. There's a lot to think about. And so I think those are some of the challenges that exist, but I do think there are things we can do to help ourselves.

Oscar Pulido: I've heard you say the term 'rewirement', sounds like if a two or three-year-old was trying to say the word retirement and what it would sound like, but you actually mean it as a distinct term, I think, right?

Liz Koehler: Absolutely. I think it, it aligns to what we just said, which is we can think differently if we plan and we create more intention around what we're doing, and that's why we tweaked the word to be 'rewirement.'

Oscar Pulido: And so I think I know the answer to this question. You're sort of alluding to it, but retirement seems to look very different today than it did 2030, or or even 40 years ago. So, walk us through maybe some of those differences for somebody who's heading into that stage.

Liz Koehler: Well look, one, I think that we have an opportunity to be a little bit more intentional around what we want retirement, rewirement to look like. And so I think that there are questions that we can ask ourselves ahead of time and each other around.

What do you envision that retirement to be? Who is someone that you think has retired well and why? What are some of the strengths and accomplishments that you want to take forward with you? Where do you want to live? Who matters to you and why? Who do you matter to? I think there are questions that we can ask ourselves ahead of time in preparation, for designing that retirement that we want.

Certainly, starting early is really important. I think, Albert Einstein called it the eighth Wonder of the World, the power of Compounding, right? And working with professionals to seek advice. But we worked with a great company called Designing for Better to think about frameworks and questions we can ask ourselves to help in retirement.

Oscar Pulido: Those questions that you started to go through, are those supposed to be intuitive to people or how do folks know? What are those right questions to ask themselves as they're thinking about retirement?

Liz Koehler: I think that oftentimes, we're all moving fast, right? We're trying to accumulate assets for retirement. We're thinking about families and work and all of the things that go into our busy lives. And so I don't think it's difficult. I think a lot of times these are common sense questions. They're just not common practice. And so, I think if we can push ourselves to pause, reflect, think about, and ask each other, and also do this as partners and families, it can go a long way.

Oscar Pulido: It's, women's History Month, so it would, I'd be remiss if I then didn't. Think about it, looking through the lens of, women, seeking to retire. Are there unique challenges that, you think women face as they head to this stage of their life as well?

Liz Koehler: Yeah. opportunities and challenges, right. So, the truth is we're moving to a situation, a world in which women are poised to hold the majority of the wealth. That is a pattern that we've seen, women, 80 to 90% of women will at some point in their lives be solely responsible for their finances and their homes. Oftentimes they're breadwinners or co breadwinners in their houses, and so there's a lot of interesting patterns that exist. But also, there's still some statistics that are a little bit, unfortunate, right?

I think, the number is now 61% of women would rather talk about their own death than money, right? So, it's not something that they lean into all the time. I think they're looking for financial security, absolutely. and I think while more concerned with things like short-term debt, they can see the power and the importance of staying invested. And so, the good news is we can work on this through education, through transparency, through conversation. And women, when they have the information that they need, are actually quite good investors. They're disciplined, they stick with the plan, and they invest for the future. And so, I think it's more about having the conversation and opening it up and sharing insights.

Oscar Pulido: I mentioned we're in Australia, which is, a nice, change of pattern to walk through the streets in the summer, and it's only March. But let's talk about Australian investors actually learned earlier today that Australia has the third highest life expectancy in the world. So, longevity, risk, or living longer is a nice problem to have, and Australia's right near the top of that list. So can you talk to us about some of the trends? In Australia, how do they compare to other trends that you see in other parts of the world?

Liz Koehler: So, a lot of the same demographic patterns and trends we talked about hold true in Australia as well. I will say one thing I've learned more about is they have a well-established and well-funded retirement saving system, superannuation, which is great, and I think other markets could probably have learned from some of the patterns in terms of retirement savings. I think one could argue across the board for all investors that. We learn sometimes to save well for retirement, we also need to learn to spend well in retirement for sure. But when you look at local regulatory changes, they're setting more Australians up for access to more advice in retirement, which I think is really encouraging.

And also, the development of more and more products and solutions to help retirees. And then I think other patterns we talked about, other trends around starting early, seeking advice, thinking about wellbeing in retirement hold true, absolutely. But I will say that we could all strive to live in a nice climate with beautiful weather like this one.

Oscar Pulido: And hot air balloons in the sky, on your morning commute, which I'm just not used to seeing in New York. And you mentioned superannuation, which, maybe not everybody's familiar with that term, but think of it as compulsory savings and to your point, in Australia and some other select economies around the world that have these types of plans. People end up with savings in retirement, but they still need some guidance on how to spend, in retirement.

So, what does this mean for investors, Liz? Yyou talked about the millennials and the Gen Zs liking to express their preferences and invest in brands that they like, what does this mean when you think about this mega force of demographics? Tell us what the end investor should be thinking about.

Liz Koehler: I think at the end of the day, a few things. One, understand your goals, understand how you feel about risks. Oftentimes, if we can separate our emotion from our decisions, I know that's hard, especially when we're bombarded in the media. I think that's really important. I would say we also have this action bias as humans. I like to equate it to, penalty kick in soccer. I should probably say football. But basically the idea is oftentimes the best place to kick the ball, in a penalty kick is straight down the middle. And the reason for that is oftentimes the goalie will jump left or jump right before the ball is even kicked because they have this action bias, they feel like they need to do something. to not risk losing, that point. And I say that because as investors we can have this tendency too, and it's really important not to jump to action, but to stay invested, stay diversified for the future. One other key statistic I think is interesting for all investors to think about is oftentimes the 24 of the 25 best days in the market over the last 20 years have occurred within one month of the worst day.

And I share that because I think oftentimes, it's easy to get spooked and overreact to one given point, but if we do that, we run the risk of overreacting and losing out on some real opportunities. So, my point here is have a plan. Think through and try to control impulses ahead of time and have a plan for your long-term success and try not to let emotions get in the way of your investing for the future.

Oscar Pulido: Liz, maybe one more question. You and I have known each other for a long time and a fun fact is you called me five years ago and asked me whether I'd be interested in hosting a podcast for BlackRock. You knew there was an open role, and so thank you for that phone call, I'm enjoying this! But what is it that got you personally passionate about this topic of retirement and demographics that you're spending so much time on today?

Liz Koehler: I think, ensuring that people, all people have a chance to feel seen, feel heard, really reflect on what they want out of their lives, how they want to invest to reach their dreams, has just always been a passion for me. That's why I got into this business. And so I think taking the time to understand where people are coming from, their life experiences, how to address their concerns, and to achieve more success for them in their lives is just something that, I know a lot of the people in this room strive for each and every day, and it's just a journey worth taking.

Oscar Pulido: Liz, I know you just recently celebrated a birthday, so I have two pieces of good news for you. One is you're one year closer to retirement, and the second is that I think you're going to be in good shape 'cause you know a lot about this topic. So thank you. Thank you for joining us today on The Bid.

Liz Koehler: Thanks Oscar.

Oscar Pulido: Everybody give Liz a of applause!

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0324U/M-3431058

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

In the ever-evolving landscape of finance, women investors are overcoming historical barriers to embrace the world of investing and secure their financial future. A significant shift is underway as women increasingly recognize the importance of financial independence and long-term wealth creation. They also recognize the unique challenges they face in the workforce and are bringing issues like wage and resume gaps to the table. Today on this International Women's Day episode, we shine a light on the ways in which female investors are redefining the investing landscape.

Today I'm pleased to welcome back two phenomenal women in the world of finance, Anne Ackerley, head of BlackRock's Retirement Group, and Gargi Pal Chaudhuri, head of iShares Investment Strategy and Markets Coverage at BlackRock, Anne and Gargi will help us understand some of the unique challenges women face investing for the future, and how women's improving prospects can benefit the wider economy.

Anne and Gargi, thank you so much for joining us on The Bid.

Anne Ackerley: Thanks for having us.

Gargi Pal Chaudhuri: Great to be here.

Oscar Pulido: I always look forward when both of you are on The Bid - I'm not used to having both of you on at the same time. So, this is a special treat, and it really is a special occasion because we're celebrating International Women's Day.

And so, we want to talk about the state of women in investing. And Gargi, maybe I could start with you. Every year you write a progress report for your own weekly newsletter, about the state of women in investing in the workplace. Can you give us your report card? What is the state of women in investing that you're seeing?

Gargi Pal Chaudhuri: I'll start off by saying I have very happy International Women's Day to everyone listening. And to your point, as I think about the progress of women in investments and in the workplace, there are a couple of things that I look at every year and this year we have a ton to be really excited about when we look at women and the progress they have made on a few different fronts.

So, the first one is, participation in the labor market. Now, we all know that the US economy right now, especially when we look at the jobs market, is doing very well. And a big part of that is because women have come back to the labor force in droves. Right now, for prime age, which is 25 to 54-year-old women, the participation rate is at the highest level it's ever been. So that's something that we are really excited about. And why does it matter for the economy? The more people that come into the labor force, the more productive, an economy can be, and the more job growth and the more growth for the economy we can have.

The other thing that I look at is of course, unemployment rate. And again, here, the unemployment rate for the overall US economy is fairly low. But what's also exciting is looking at women's unemployment rates specifically, which is, currently, for prime age women sitting at 3.1% for women overall sitting at 3.4%, very close to multi-decade low.

Comes to wages, the good news is wages are rising for everyone in the entire US economy. Up by about 4.1% last year when we look at women's median wage gains, one thing that's very exciting to me as a woman, and it should be to anyone listening, is that every single quarter of 2023 women had higher wages than the previous quarter.

That is something that we want to celebrate absolutely. However, what we also have to recognize is that there is a wage difference, between women and men. And currently, as of the data that we got from the Bureau of Labor Services- the BLS- we are seeing about an 82 or 83 cents on the dollar in terms of where, median wages are for women versus men. So, we have to take that into consideration, the good news along with the bad.

And then I think another big focus that I have, the concept of a wealth gap. Thinking about where that comes from in terms of women not investing enough, in terms of women staying in cash and missing out on this incredible rally over the last decade, last two decades that the US stock market has been able to have. Also, in terms of women having higher student debts, living a little bit longer, and therefore having higher healthcare costs. All of that lead to the wealth gap.

Oscar Pulido: So, it sounds like there's definitely good news recently, you mentioned more participation, wage growth, low unemployment, but still a lot of progress to make. And it seems like when you're on the podcast, Gargi, we have to ask you about inflation, what your outlook is for inflation, but also how is it impacting women in investing?

Gargi Pal Chaudhuri: As of the last print of inflation, we are seeing a lot of progress on inflation. So, back in 2022, we'll remember, and I know there were many Bid podcasts about this, where inflation was very high, and of course the central bank was combating that with higher rates. And from a high of 9.1% on headline inflation, on CPI, inflation is now at 3.1%, which is absolutely magnificent, and something we should all celebrate.

Having said that, obviously this conversation here is much more about how inflation specifically impacts women. And I think one of the things here to think about is what is commonly known as the pink tax. Do women pay somewhat higher prices on equal quality and equal amount of goods and services than men?

And you know what's very interesting when I was researching this. I found this paper in 2015 that was written about in New York City, how Pink Tax Impacts Girls in Women from Cradle to Cane. So, from when they're born, all the way till when they're older and using canes. And what that report found was the difference in the similar goods if you're a man versus a woman, how things were priced differently. And of course, that was about a decade ago. So, my team went and looked at something similar for now to see if some of those discrepancies and prices still existed.

Two examples that we quickly looked at one, was for razors. for the same product, and I don't want to name the company, but women paid more for fewer blades. The same product for women was $25 and for men was $22 with, men having five blades versus women having four. And yet there was a cost difference.

Similarly with deodorant, same company, but women are getting for the same cost, a smaller, deodorant versus men so it the cost is the same, but you're getting more.

But footwear inflation, for example, 10 of the last 12 months. Women's footwear, shoes, have experienced higher inflation versus men's. Even with clothes. Like sometimes I go shopping with my husband and he'll buy a pair of shorts and I'll look at a pair of shorts and his shorts is slightly bigger, and it'll still be that his shorts will be, cheaper than mine. So again, these sound like small numbers, but it all adds up.

Oscar Pulido: I'd never heard of the pink tax, and it sounds like you've not only relied on government data, but your team got their hands dirty and did.

Gargi Pal Chaudhuri: Some due diligence!

Oscar Pulido: Anne maybe coming to you now, and the last time, we spoke was about retirement and the five forces shaping retirement. Things like people are living longer, there's a move from defined benefit plans to defined contribution. but talk about with respect to women, what are some of the barriers that. Exist for women saving for retirement, and what are the implications of those barriers?

Anne Ackerley: Sure. Well, first, let me say, happy International Women's Day as well, and how excited I am to be on The Bid podcast with my colleague and friend Gargi.

And one, I do think we should all celebrate the success that women are having in the labor force, as Gargi pointed out, that's really exciting news. My news might be slightly less, inspiring. When we look at retirement what women have when they get to retirement. Their balances are often 30 to 40% less than men's. And that's in the United States, in Japan, that number is like 50%. Now, there are countries where that number is smaller, but according to Mercer, there's no country where it's actually zero. And there are a number of reasons that factor into why this happens. I sometimes call it the triple whammy.

First, we have the wage differences between men and women, which Gargi pointed out, if you're making 82 cents on the dollar, and even if you're saving the same percentage as a man, that's less absolute dollars and that's going to compound over your lifetime.

The second thing is, even though women's labor participation has increased, which is great, women often have gaps in their employment. They are often the primary caretaker, whether it's for children or adult parents. And having those gaps means often women aren't saving consistently through the course of their lifetime. We know women live longer on average of five years, and so that money actually has to last longer. All of this adds up to women when they get to retirement and maybe not being as in good a shape as men.

Oscar Pulido: What about, the other side of that coin? Are there areas of success that you see for women? There's an assumption, for example, that women are more risk averse and perhaps that means that they're saving more. Is that a correct assumption to be making?

Anne Ackerley: So, I think the data on whether women are more risk averse is mixed. I think what is often said is that women, do keep their money maybe more in money markets or cash. When they actually do invest, they're not as risk averse as men. But what I would say, and if I put my retirement lens on this, there are things definitely to celebrate. Women participate in 401ks at the same rate as men. Women actually contribute a greater percentage of their salary than men do. What we find is, and I think this is a good thing for retirement investing, is women tend to look at their investments less frequently, which may sound, oh, that might be a bad thing, but when you're in a retirement plan, if you're defaulted into the target date, you're getting the right asset allocation, not checking it, being able to live through the market volatility is probably a really good thing.

So, the fact that women tend to do it less frequently than men do trade less frequently than men do, I think, accrues to their benefit.

Oscar Pulido: And just listening to the two of you, you've diagnosed some of the problems that women face, whether it's maybe a different inflation rate or an employment gap. So, what are some of the solutions, I imagine they don't take place overnight, but if you think about the longer term, what are things that women investors can be doing to correct some of these issues that you've mentioned?

Gargi Pal Chaudhuri: So first of all, it is a recognition, an acknowledgement that no matter where you are on your investment journey, if you haven't started at all, or if you have been investing very well for the last 30 years, that there is still progress to be made. It's never too late to get invested in the market, that's true for everyone!

But, just looking at a couple of the numbers and recognizing that there's a lot of data that has shown that, if you stay invested in the market, to Anne's point earlier, if you don't churn your portfolio around too much, that you can have a really good outcome if you stay invested in the market.

But if you just stayed in cash, we actually ran the numbers, if you, over the last 10 years, if you stayed in the s and p 500, earning about 230% over the last 10 years, if you were just in cash for that same period of time and over 10 years, you'd earn about 13%. There is a big cost in terms of not putting your money in the markets.

The numbers that I just, said to you were over a 10-year period, if you looked at over a 20-year period, it would be about 535% versus 34%. So again, anytime that you're staying away from the markets, you're missing out.

So, number one is a recognition that you need to do this, but don't worry, it's never too late. The second one. And I feel very strongly about this because even as an investor myself, there were periods in my life and when I was, new to the business, I didn't invest as much as I should have. And I think just recognizing that you don't need to know everything about everything to get invested or to start investing.

And I think there's a lot of research that has shown that women tend to apply for jobs when they have hit 10 of the 10 requirements, whereas men would do it only when they hit eight of the 10 requirements. And I wonder if that also translates to the markets where you feel comfortable to invest. So even if you do, that's wonderful, but even if you don't, if you just invest in a diversified manner- And do so consistently, it pays off.

The other thing I would say is, and this is really important, and Wells Fargo did a survey on this, is women are often more reluctant to share their financial information. On average, 52% of women were comfortable talking about their financial health compared to 62% of men. I remember when I was starting out my career at BlackRock, I came to Anne once, and I don't know if you remember this, but I came to Anne to ask for advice on how to talk about money because I didn't know how to do that.

And Anne, you taught me how to talk about getting a raise, getting a promotion, it was an uncomfortable moment for me. But I had Anne, and I'm very thankful that I did, but recognizing that if you are reluctant to talk about your financial health, you're not alone. but you have to be able to do that.

So, another thing that we can do is really making sure that you are able to have those conversations. And finally, I'll say. get the financial help you need. Think about if you need a financial professional that can help you, that understands your goals. And think about other ways in which you can, become more financially savvy. So, if there's a podcast that you want to listen to, such as this one, or if there is financial outlets, financial news, that you want to start incorporating into your daily life and bite-size pieces. So read one article a day and spend five minutes on it. That's it. And just start there.

Oscar Pulido: Anne, do you remember that discussion with Gargi?

Anne Ackerley: I actually do. Yes. And I'm glad it paid off.

Oscar Pulido: Anne, what else would you add to Gargi’s comments about, maybe just behaviors. I think Gargi touched on a number of points that seemed like good common sense, and maybe just hearing it from you, Gargi, is one of the most powerful things that you've followed some of this advice. But, Anne, what about you? You've had a long career in finance as well. what advice would you give?

Anne Ackerley: I think Gargi gave amazing advice, and I think those are all things that, women and actually men can do to invest. I might pull out just a broader thing to say that not everything that we talked about today can be solved by women themselves. 

And so, when I think about solutions, And I might just focus on two things that we think a lot about here at BlackRock.

One is access to 401k plans. 57 million Americans don't have access to a workplace plan. That's almost half the private sector workers, and it falls disproportionately on women and people of color. But we know that when you have access to a plan at work, you're 15 to 20 times more likely to save. So, I think one of the things the industry needs to do is to help get people more 401ks where they work. So one is, let's try to get everybody a 401k plan at work.

The second thing that we talked about is women live longer, and probably the number one financial fear for women is the fear of outliving their savings. and so, we as an Industry really need to work on how do we help everybody, take their savings and convert that into a stream of income that they won't run out of for however long they live.

Oscar Pulido: I mentioned at the beginning the pleasure is to have both of you in the studio. at the same time. There was a lot of, folks in finance, men and women that, look up to you and admire the careers that both of you have had. So, who are the people who inspire you, whether it's female business leaders, within finance or elsewhere? who are some of the folks that you've looked up to throughout your career?

Anne Ackerley: I'll go first. So, one, Gargi! Absolutely, I'm just inspired when I'm with her and inspired as she gets out there and talks to people in, in real words about how to invest. Other people that I think about, I always talk about my mom, maybe not a business leader, but somebody who widowed young, worked really hard, but told me I could do whatever I wanted to do, and so she inspires me. And then there are people like Ruth Bader Ginsburg, who have worked their whole lives fora society where men and women are equal. I think about people like Serena Williams who's the absolute best at what she does. So, I can take inspiration from a lot of different places, but those are just some.

Oscar Pulido: Gargi, you had some good company there.

Gargi Pal Chaudhuri: Thank you, Anne. And I was going to say that when I first got here, you were a managing director and you let me put time on your calendar and gave me sage advice that I use to this day. And I will never forget how meaningful that conversation was. So, I send a lot of people your way and I really deeply respect what you have done for women and retirement for the US. I also think about, this paper that Janet Yellen wrote that talks about the GDP of the country of us can increase by 5% if women were to participate in the economy and the labor market in the same way that men do.

Which goes to show how when you have leaders like Janet Yellen, treasury Secretary, but of course, chair of the Fed before that, how much research can be influenced. And she's someone that I have looked up to my whole career. And, Indra Nui, as a woman of color, when you're young and you are an immigrant in this country, your parents want you to be Indra Nui. So, I was sent to America and told that you have to be her one day. So, I have let my mom down. And lastly, my mother. Anne to your point, I think many of us, we are a reflection of who our parents are, and my mom is a doctor, and she was a doctor in India in the sixties. Having a mother do that in the sixties, seventies, eighties, nineties, and now in India has been such a source of inspiration for me. All of that to say that there are so many women to draw inspiration from.

Oscar Pulido: Well, I'm happy to talk to your mom if you think you've let her down, and I'll let her know that every once in a while, when I look up on the TV and see you talking about markets, on live television, I think it's-

Gargi Pal Chaudhuri: -yes, but I'm not a CEO of a big company

Anne Ackerley: Not yet! Watch out Larry!

Oscar Pulido: Thank you both for joining us. Gargi, you talked about it's never too late to start investing and just some of the practical advice you gave is about starting sooner than later. So hopefully, on International Women's Day, we have, women and men, frankly, following some of this advice and enjoying more financial security. Thank you, Anne and Gargi, for joining us on the podcast.

Anne Ackerley: Thanks for having, us.

Gargi Pal Chaudhuri: Thank you for having us.

Oscar Pulido: Thank you for listening to this episode of The Bid. If you've enjoyed this episode, check out the episode on Five Forces Shaping Retirement, featuring Anne Ackerley, and subscribe to The Bid wherever you get your podcasts.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

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Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

A culture of growth within an organization is vital to foster innovation, resilience, and adaptability, which will ensure that a company can thrive in an ever-evolving business landscape, or so argues today's guest, Dr. Mary Murphy, social psychologist and author of a forthcoming book entitled Cultures of Growth.

Mary has spent over a decade pioneering research on motivation, performance and interracial relations at Stanford and Indiana University. In her inaugural book, Mary Unveils how to recognize an organization's mindset and strategically embed a growth mindset within its culture.

She also shows how to discern the triggers. Move you and those you work with along the mindset continuum so you can create environments that shift you towards growth more often. Mary, thank you so much for joining us on The Bid.

Dr. Mary Murphy: Thank you so much for having me, Oscar. I'm very happy to be here.

Oscar Pulido: So, Mary, congratulations on publishing your new book. It's called Cultures of Growth. I'd love to start with what inspired you to write this book and what is it about this concept that you want leaders and investors to know about?

Dr. Mary Murphy: It's a great question. So, for years we have thought of Carol Dweck's fixed and growth mindset as something just in our minds, if you have a fixed mindset, you're thinking about intelligence, talent, and ability as something that's fixed- you either have it or you don't. At Stanford, we would talk about are you a techie or are you a fuzzy?

That's the fixed mindset and the growth mindset is this idea that intelligence, talent, and ability, it's something that is a potential that we can actually develop with hard work, good strategies and support from others. And what we have discovered over the last 10 years is that the way in which mindset has actually been applied and studied over time, there's been some misconceptions about it.

The biggest misconception and why I wanted to write this book is to really correct some of these ideas that, first of all, there's only two mindsets and you have one or the other. The truth is, we have both within us. And the second is that it's located only in our mind. And for the last 10 years, my team and I have been doing research. Carol was my PhD advisor and we've all been doing research on how mindset actually exists as a cultural feature of teams, companies, schools, leaders, and how that mindset culture affects everything from motivation, engagement, to bottom line performance.

And so, what I want leaders and investors to really know is that anytime you have two or more people together in your one-on-ones, in your team meetings, in your organization, you have a mindset culture happening there between you. The question is, do you know what that mindset culture is, and do you know how it's affecting you and everyone else around you?

Oscar Pulido: So, Mary, you said fixed mindset, you talked about a growth mindset, and then you also talked about this continuum that it seems like you can move between the two. In fact, you said that both live within an individual, so just maybe go a little bit more into those concepts, which for some people might just be new terminology.

Dr. Mary Murphy: So, this growth mindset idea is a really powerful one. It influences motivation, engagement, performance, willingness to take risks. And the fixed mindset if we think we either have it or we don't, I'm just good at math and that's always been the case, or I'm terrible at math and I don't want to deal with that, right?

If have that fixed mindset belief about ourselves, oftentimes there's nothing we can do about it, it's relatively fixed. What we see is that these mindsets we're oftentimes in our growth mindset and sometimes we're in our fixed mindset. And so, what we know is that both mindsets exist within us, and they exist on this continuum. And what moves us between our fixed and growth mindset is predictable and common situations, what I call mindset triggers.

And it's really important for us to understand, those mindset triggers because that helps us understand when we're slipping more towards our fixed mindset, and when we are actually engaging in more of a fixed mindset culture, in our teams and in our interactions with others and then what we can do to move ourselves back towards growth.

Oscar Pulido: And what are some of the cues or the markers that indicate that somebody's moving more towards that growth mindset? Because in listening to how you've described the two, I think I'd want to be in the growth mindset a bit more. The fixed mindset sounds very limiting and not as ambitious, but what are some of those cues that tell you somebody's moving more consistently into that growth mindset?

Dr. Mary Murphy: Well, we have two different levels of cues or situations that we look for when we're looking to see whether we're moving more towards our fixed or our growth mindset.

At the individual level, we can look at our mindset triggers, and these are those four common, predictable situations that move us towards our fixed or growth mindset, and those are evaluative situations, when we anticipate being evaluated by others, we're putting together a big report or a presentation, we're pitching a new client, High effort situations. I have to put in a lot of effort to understand that appropriately. Critical feedback is another fixed mindset trigger where the critical feedback that I might have been anticipating now is actually here, and how do I address and think about that critical feedback? Do I think about it as telling me whether I'm right or wrong, good or bad. Or is it telling me what I can learn, how I can improve, what I can do to develop?

And the last mindset trigger is the success of others. When I see other people being praised, to what extent is it moving me towards my fixed mindset? Oh wow, I'll never be as good as her. Or is it moving me towards my growth mindset, which is finding inspiration in her success and trying to figure out the strategies she used, so that I can get as good as she is in the way that's authentic for myself.

I'll also say that in fixed mindset cultures, what I'm calling these cultures of genius, the focus is primarily on star performers, this belief that there's just going to be some geniuses, some people crowned in these environments that are thought of as inherently more capable. And so, we see a lot of markers in these environments that these cultures of genius are reifying and really praising and giving all kinds of power and status to these individuals, these geniuses in the environment. And so, we can see, where do the good ideas come from? Do they come from everywhere or do they just come from a few different, individuals crowned as the genius in the context.

And conversely, the main belief in this culture of growth is that given the right supports, everyone can develop and contribute. And so, we look, and we can see that their structures, policies, practices, supports embedded in these organizations that actually support people's growth and development. And the reality is that just like in an individual, we have both mindsets within us. We do see that most companies don't just have a culture of genius or a culture of growth. It's oftentimes a mixture, and so understanding where we can move towards growth both at the individual level and at the cultural level, that's where we're going to get the most success.

Oscar Pulido: And have you come across examples, of organizations that live along this continuum and maybe what are some of the characteristics that, you see?

Dr. Mary Murphy: Well, it's important to understand that when we're talking about culture, there is an argument among scholars and among practitioners around what culture is, is it what we say we value, or is what we actually do on the ground, right? And the best of course is when these things match, when we have very little or no, what I call 'value implementation gaps'.

And so, we've used AI algorithms where we've been able to scrape the whole Fortune 500, look at their mission statements, their websites, how do they actually describe themselves to the public in their own materials?

And then we've been able to look at other data like in Glassdoor, where we're looking at how, people who work at these companies, how they're experiencing those companies. And what we see is that when these companies have more of a growth mindset culture in their own materials, what they're saying,

The people within it are experiencing that culture more positively. But we have to look deeper, we have to look actually at the behaviors that are on the ground to see if they're a match to what the company believes and what they value.

And so, what we have seen putting this into practice is that cultures of growth are really places where people are collaborating internally. There's strong, norms around collaboration, strong norms around innovation and creativity. Mistakes are something that are understood, mined for their learning and then shared widely, so those mistakes aren't repeated in the context. There's a lot of risk taking, there's resilience, there's agility, and we also see much higher levels of integrity and ethical behavior in cultures of growth because the whole organization and team is about learning and development.

 Whereas in these fixed minded cultures of genius, what we see is not much collaboration. Why would I collaborate if I'm not going to get the credit, I'm really focused on trying to be the star, be seen as the star, and maintain that status.

We don't see much innovation and creativity, instead we see people playing it safe, recycling what's been working in the past. We also see a lot of unethical behavior like information hoarding or cheating, right? In order to be seen as the star, I know that information is power, and I might not share it broadly with everyone else because I know that that gets me ahead in a culture of genius.

Oscar Pulido: And it's interesting 'cause you go to school, you get a degree, you're doing all this learning, to land a job at an organization, and the culture of growth mindset feels like the learning continues that you might feel working at one of these organizations that you're still in school, and you're, iterating on work, there's trial and error, there's informed risk. And so, a workplace either has that culture or it doesn't, and if it doesn't, what's your experience in terms of how to change that culture? What does that journey look like for a company that wants to move more in that direction?

Dr. Mary Murphy: I want to be really clear that what I'm not saying is that we're just victims of our environment, right? The truth is that we're all culture creators, so that means we're all shaping our surroundings. And while you're right that it's going to take some time to shift an entire culture and that it's going to be a group effort that's needed for that, we're each going to play a role. But it's also true that those in leadership positions or with wider spheres of influence, they will have an outsized role in trying to shift the mindset culture of a team and of a company, broadly speaking. And so, the key of how to start doing this in small ways is to start to look at everything through the lens of learning.

How can I grow? How can I develop in each task, and in each interaction that I have? We also talk about storytelling, trying to identify the places where I know I've occupied my fixed mindset, and how has that held me back in some ways? How does switching to my growth mindset actually move me forward? What strategies did I use? How did that actually forward my ability to make progress towards my goals? So, when you start with that storytelling. You're really communicating and creating a norm that these are the ways that we want to approach our work. These are the ways we want to approach our organization as a whole towards that growth mindset.

Another thing I tell companies to do is to start thinking about your hotspots and your bright spots with regard to mindset culture. The hotspots are the places where we see really strong cultures of genius- they might exist on certain teams or in certain divisions. And where do we see the bright spots of these dynamic cultures of growth? And by understanding those bright spots, we can then understand how to spread the practices that make those bright spots, within the organization actually spread over time. So that's a strategy we can use within organizations.

The last thing I'll say is to conduct a Q'S audit. Look at your everyday practices and see where the fixed and growth mindset is actually being communicated, maybe even subtly. one example I like to give is how we give praise. So, Oscar, when you praise an employee, what do you usually say when they've done a great job?

Oscar Pulido: Great job and keep it up!

Dr. Mary Murphy: That's right. Exactly. That's how I give feedback a lot of the times, but it also doesn't actually communicate what someone did well or what they should repeat, what you actually want to see the next time they do that, we can also help them understand what they did well and then challenge them to the next level and that's going to move everyone towards their growth mindset.

Oscar Pulido: So, I would then say, great job, keep it up and what I really liked that you did is the following and that is still positive feedback, but a little bit more specific and sends that individual maybe on a better path.

And you mentioned, a lot of the benefits to companies and employees that adopt a growth mindset. What about the investors in these companies? What's the value for them of organizations moving in this direction?

Dr. Mary Murphy: Well, in a study my team and I conducted, we did work with hundreds of startups and early-stage organizations. And what we found was that those with stronger cultures of growth and that had founders who had more of a chronic growth mindset, they were more likely to meet and exceed their fundraising goals.

And they were more successful at establishing and reaching their products and services goals. We also found that in more established companies, those with stronger cultures of growth are more innovative, they're more resilient, and they're more financially successful than those with strong cultures of genius.

So, when we're talking about an investor perspective, I think it's really important for us to be thinking about what kind of mindset culture is this company really embodying. How are the policies, practices, procedures, how are the interactions really structured in such a way that's really going to help people actually perform better, create more innovation, and actually have more financial success than, these fixed minded cultures of genius?

Oscar Pulido: Mary, as you're talking about that, I'm just thinking back to something you said earlier about using AI to scrape the language that companies use to describe themselves and how that helps you decipher between more of the fixed mindset or the culture of genius versus culture of growth. Can you share a little bit more about what are some of the key words or phrases that you tend to find in one example over the other?

Dr. Mary Murphy: We find some really interesting cues that you can tell even an individual reading these mission statements we have found can tell whether a company is more along the mindset culture continuum towards the fixed minded cultures of genius or the growth minded cultures of growth. So, what we find in differences, I'll give you some examples from some of these mission statements.

In these cultures of genius, we see language like we offer the highest performance opportunities, we're going to emphasize employees, talents and success, we're going to focus on results and only results, rather than process, we're going to beat an atmosphere of best, the best instincts, the best ideas, the best people, really communicating. You either have it or you don't, and this is going to be the place where geniuses are going to thrive.

The culture of growth sounds a little different, culture of growth still cares about the highest performance, the highest outcomes, and in fact, we find they have better outcomes, but they're also talking about the growth and development of their people. So, on their mission statements and on their websites, they say things like, we offer the highest growth opportunities, we're emphasizing employee’s motivation and hard work, we are focused on results and process. We're an atmosphere that fosters a love of learning, creativity, passion, and resourcefulness. And we're going to be a place where you can come and do your best work because we're going to support you to do that here. It has a different sense to it, right? Rather than a harsh proven perform, you're only as good as your last performance kind of context. It's much more about development, growth, and actually finding the supports in this environment. They're going to help you take the work and the organization to the next level.

Oscar Pulido: And Mary with AI entering the workplace more and more. In fact, we recently spoke with Rob Goldstein and Lance Bronstein, who are two senior executives here at BlackRock, about how AI is influencing financial services. So as AI enters the workforce, what does it mean for the evolution of company cultures and those that want to move towards more of a growth mindset?

Dr. Mary Murphy: I think no matter. What technological era we find ourselves in culture is always going to be paramount to both individual and organizational success. What I think is going to happen is that with AI, companies are going to become more and more smart about what to put in those mission statements and what to put on the website, What I anticipate happening is that people will become actually a bit more skeptical about whether a company really is what it says it is. What it actually is to work inside the organization, when your mission statement or your website is AI written and driven, algorithm created, it's going to be much more important how the experience is of working in the company on the ground.

I think it'll be more important than ever that companies address and minimize these value implementation gaps. Because while what the mission statement and the website and what our public leadership statements might help get people through the door, initially, whether they stay in the company, whether they trust it, whether they're committed to it over time, is really going to be influenced by those norms on the ground. Is it collaborative? Innovative? Can I do my best work here? Am I supported? Am I seen as someone who can be promoted? Am I being motivated by what matters most in this organization? That's going to actually predict success, both at the individual level and the organizational level at the long term, and growth mindset culture is a huge part of that.

Oscar Pulido: Employees are going to, look for truth in labeling, it sounds like. They're going to want to make sure that gap that you talked about between what the language says and. What the culture feels like is small or non-existent.

As you were talking Mary, I was thinking, about, very famous, organizational psychologist, Adam Grant, who I know has given you a nice, testimonial for your new book and he said something recently about how much better he feels about succeeding at something that initially he was not very good at versus something that maybe came easily. And as I listened to that and when he said that I'm thinking about, again, fixed mindset and growth mindset.

Dr. Mary Murphy: Absolutely Adam's work and his new book, Hidden Potential is a fantastic read it really does talk about this idea, what I talk about in my book around effective effort, is this idea that a true growth mindset is really paying attention to where our skills and abilities are now and applying effort to move us in the direction of increasing or developing those skills and ability.

The false growth mindset is this idea that you're just going to try hard, right? We hear a lot of this with managers or teachers who say, I'm sorry, this employee or this student, they just have a fixed mindset, there's nothing I can do about it. They just need to try harder. What we're seeing in both, what Adam's sharing and what we talk about with regard to mindset, is that a true growth mindset isn't just about banging your head over and over trying again and again in the same way

If you do that over and over, your head's going to explode, right? The wall doesn't move, and so what we really need to be focused on is effective effort. Is the effort that we are actually applying? Is that effort actually moving us towards the goal that we're moving to? And so, what Adam said, the things that don't come easy at first, I really enjoy the things most when I've had to try hard and when that effort has actually moved me towards some kind of learning, some kind of growth, some kind of development, it's moved me closer to the goal that's effective effort in action, and that's a true growth mindset.

Oscar Pulido: And it goes back to organizations continuing the schooling that. perhaps you of enter that organization with, in the first place.

So, Mary, congratulations again on, on publishing your book and best of luck as you go out and get the word out to more and more people. We appreciate you joining us here on The Bid.

Dr. Mary Murphy: Thank you, Oscar. This has been fabulous. Thanks for having me.

Oscar Pulido: Thanks for listening to this episode of The Bid. Next up, I welcome back Bid favorites and accurately and Gargi Pal Chaudhuri to celebrate International Women's Day. And take a look at how women are increasingly recognizing the importance of financial independence and long-term wealth creation. Subscribe to The Bid and don't miss the episode.

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Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host Oscar Pulido.

From our episode last year on emergency savings, we discovered that 37% of all Americans can't afford an unexpected expense of $400. And for black families, that number is 72%. So how can these statistics be overcome to allow communities to save for the future and build wealth?

To help me answer that question, I'm pleased to welcome Troy Millings and Rashad Bilal, founders of Earn Your Leisure, or EYL. Founded in 2018, EYL has grown into a multimedia business platform, an online educational platform focused on business, finance and entrepreneurship, and also a successful podcast.

So, thank you guys for joining us on The, Bid.

Troy Millings: Thank you for having us.

Rashad Bilal: Thank you.

Oscar Pulido: So, Troy and Rashad, tell us a bit more about the Earn your Leisure story. How did this become a personal passion for you? And maybe tell us a little bit about your stories, your personal stories of how you met and what caused EYL to come to life.

Rashad Bilal: We met in middle school. We grew up together in the same town, a small town in Westchester County. And we just became friends and played basketball together.

So as we started to choose our professional careers, he was a teacher in the Bronx and I was a financial advisor when I came out of college. So we combined to have financial literacy by working in the classroom and teaching financial literacy to kids. That spread to social media and a variety of other things that was happening at the time with the beginning of Instagram – me, as a financial advisor using Instagram to grow my practice outside of the traditional realm of cold calling and going to networking events and doing seminars. I saw that the new age of social media would be a good way to grow the practice and to get attention on my financial services business. And that was the birth of EYL, five years ago.

Troy Millings: Yeah, it came at the perfect intersection of our careers. Like you said, I was teaching, he had just started his financial advising career. And originally it was just to scale his brand when he was trying to figure out how to become a celebrity financial advisor, it was like, how do we do it? We need a hashtag because that's big on social media.

And I said, look, earn your leisure is going to be the hashtag. It has to be the hashtag. It encompasses everything that people have a misconception about, right? They think that there's no hard work that goes into this. They think that everything is given. They think we're Silver Spoon kids 'cause we're from Westchester. They never see the hard work that was put into the things we had to accomplish. And Earn Your Leisure was the perfect title for it.

Oscar Pulido: It does seem if you're going to start a platform around financial literacy, no better combination to have than a teacher and somebody who worked in the financial sector. Tell us more about Earn Your Leisure, we described that as a platform. Really there's a lot of initiatives that go on, maybe tell us a bit about some of those initiatives.

Rashad Bilal: Yeah, we have a podcast network, so we have six shows under the umbrella. That's a major part of what we do as well as far as daily content that's produced on the social media side.

Then we do events, we have a very big event called InvestFest, which is a financial literacy festival of sorts. We combine the best fields and elements of festival and a business conference and kind of put it together. So that's in Atlanta every year and, last year we had 20,000 people there. We've had people like Steve Harvey and Tyler Perry, Rich Paul, Kathy Woods, Mike Novogratz, Dan, Kathy.

But we also do other events. We were just on a world tour for our show Market Mondays, which is a stock market show. So we went to Ghana, Toronto, London, LA and Chicago. We've done shows in South by Southwest, art Basel, New York Fashion Week. The event aspect of it is very big for us.

And then we're also working on curriculum for school districts. So that will be ready very soon. And the idea is to have a new age curriculum, as far as what has been taught traditionally in school. The same thing over the last century and very few things have changed. And a lot of school districts still don't have financial literacy as something that's mandatory, or even optional. When we were in school, financial literacy wasn't taught, and our school still doesn't have financial literacy to this day. So we want to teach financial literacy to young people because we feel like if you can educate a kid, then they have a much better chance at success as an adult. So those are just a few things that we have under the umbrella that we're currently working on.

Troy Millings: The backstory is that this really started with an iPhone and an idea in my dining room. And we were just creating a mission on trying to liberate people, from financial trauma, trying to educate them on financial prowess really. And it spawned into this. And so every time we look what is needed in our community, how can we help, how can we help? So it has been an amazing journey.

Rashad Bilal: I've also forgot, we do have a subscription-based model as well called EYL University, so that's more of a hands-on learning and we have around 8,000 members in that. Everybody's welcome. Anybody can receive the education, but some people need more of a hands-on learning experience. So, we have a private school model with EYL university.

Troy Millings: The original show was just me and him doing case studies and giving background information on different financial topics and different business topics and culture as well. And then early on we had an episode where a restaurateur broke down his entire business model and we were sitting back like, 'oh, this is the new format.'

And when people heard the episode they wanted more information. And so now there's an opportunity to have a private education piece where now you could actually talk to the person who was on the episode. The stock market was the same thing when during the pandemic we saw the market crash and people were trying to figure out how can I make money? Especially since I'm sitting at home with the pandemic, we couldn't go anywhere. We had been preparing the entire time, to educate but the pandemic expedited everything because now everybody was locked in, 'how do I have more multiple streams of income?' And we had all these episodes, where professionals had, who had been given the details of how they created their businesses, and so the timing was perfect.

Oscar Pulido: It's interesting. I think about like school back in the day was thick textbooks with a lot of information. And if that was the way you were teaching folks these days, I think they'd turn away pretty quick. But nowadays, do you have a lot of different ways to convey that information, social media, subscription events and that maybe brings people closer to a topic that can feel intimidating? So, on this podcast, on The Bid, we've talked with BlackRock colleagues, about things like employee sponsored retirement plans or sometimes what we call 401ks. We've talked about emergency savings and we've talked about these things as a way for people to chart a path to more financial security. What does the earn your Leisure curriculum teach people about building and growing wealth?

Rashad Bilal: I think it teaches a variety of different things. I guess it really just depends on where you're at. So you can pick it up as you go or what's important to you, so credit, what does credit mean? how to build credit, how to utilize credit effectively, how to utilize business credit, how to build business credit. These are all things that's extremely important for individuals, employees, and entrepreneurs.

Of course, real estate is a major part of what we have taught from the beginning of the foundation of Earn Your Leisure. So many aspects of real estate. The biggest purchase in your life will be a home. And there's really no education on buying a home at any stage in life, from high school, to college, if you don't know the process of buying a home, then you're really just relying on the bank to guide you through it. And especially if your parents were not homeowners. who's to know if you're getting taken advantage of? Who's to know if you're getting the best rate? Who's to know what a, difference between, a home that you're actually building from the ground up as opposed to a home that you're renovating?

Stock market investing, of course, educating people on what is an ETF, what is an index fund? What's the difference between an index fund and the ETF? Is it a good idea to invest in tech stocks, like individual stocks as opposed to collective saving for your retirement, getting the tax deduction for your 401k. What's the difference between a 401k and an IRA? What's the difference between an IRA and a pension plan? These are things once again that there's really no education for.

Most people, the average American, their wealth is either in their 401k plan or their home, and those are two things that most people are very uneducated on. So, teaching people about the fundamental aspects of the stock market, not just day trading, not just, stock options, that's probably 10% of the information that we're providing, 90% of the information is. More on the fundamental long-term investing, and how to have the emotional intelligence for the stock market. That's another thing, right? Like people panic. If you buy a stock and it goes down and you want to sell it, then the stock goes back up, then you start chasing it.

Of course, we're in a new age, so you have to talk about Web3, crypto, we have to talk about, artificial intelligence. but that's some of the core pillars that, we've built the platform.

Troy Millings: Yeah, it goes for all ages. And so when you're talking about buying a home, that’s great, but a lot of people are just trying to buy a car, and understanding the difference between leasing and buying and advantage of it. What are the tax advantages of buying a leasing? What's the advantages of having it inside of your business name? And so when we talked about the 6,000 pound rule, This became a viral moment and we started hearing people discussing it around us and it was like, wow, this is really good information, but it existed for so long.

That's kinda why I was telling you prior to sitting down was that decoding process. These are all these things that can generate wealth from a sustainable standpoint for your family, but nobody had decoded it or at least explained it in a way that it felt transferable to a community.

Oscar Pulido: Demystifying just the financial landscape, which we can relate to actually in terms of a lot of the discussions that we have on this podcast. And you also mentioned that the origins of Earn Your Leisure was for more high school students, but that gap existed also at their level of their parents. So it was across generations and that gets me to, the question, or one of the findings that the Wall Street Journal reported on recently, which was that black investors are now the biggest new group of retail investors and goes on to say 68% of black Americans under 40 are now investing. So why is this trend emerging now?

Troy Millings: I think it's incredible, first and foremost. And if you look at the start of when they began taking the statistic was around 2019. And it just so happens that, we started our mission in 2019 and so I like to think that we had a little part to play in that. But it's encouraging because people are looking at themselves and saying, again, it goes back to that age old adage that is 'one income is too close to none'. And it's tough to save your way to wealth. And so investing is very important. And so to hear that statistic, to understand that people are looking at creating brokerages accounts and looking at their long-term, financial gains, it's an incredible stat. We've seen and we've heard all statistics, especially when we're talking about, wealth gaps in our, country. This is one of the ways to combat it. We can talk about real estate, we can talk about investing, but these are just steps. It's extremely humbling and gratifying to know that it's at that number. But let's see what happens when it's 90%, when it's a 100%. Because like I said, it's tough, it's almost impossible to save your way to wealth. You have to invest, you have to create businesses and other ways to create generational income.

Rashad Bilal: I would say that the reason for that is social media, the New York Times had a term, what they call it 'Finfluencers', like financial influencers.

There's been institutions around forever, there's been banks around forever, and that hasn't moved the needle. So having people that speak in a language that you understand and are relatable is something that is beneficial. So I definitely think that, that would probably be the majority reason for that uptick in young black people investing.

Oscar Pulido: Let's go back to that cohort of black investors now, getting more involved in the market. what are they investing in, and do you see any trends, among this cohort or among the Gen z the millennial type, that you come across?

Rashad Bilal: Yeah. So you see a lot of people invested in tech stocks, everybody's invested in right now. all the chip stocks. That's what's leading the market with Black investors, young investors, because they can relate to the company. They understand it. They know that artificial intelligence is now and is going to lead the future. We'll see how it plays out in the future, but definitely that's something that has gotten people excited over the last 12 months for sure.

Troy Millings: I'd be interested to look at the correlation between those accounts that they said that's 68% and the correlation between the amount of money that's been poured into ETFs 'cause they've hit record numbers over the past five years. And so again, I mean it's just, it's beautiful to hear. We're talking about what are they invested in rather than them not being invested. So yeah, tech, a lot of people are looking at opportunities around them, more so than they ever have. The mindset has changed, but the vision and the landscape has changed as well. Now we're walking around, each thing that we probably have our eyes on has a company that is running it. So I think it's a beautiful time. But that correlation would probably be interesting, the amount of money poured into ETFs with the amount of new brokerage accounts that are open, especially for our community.

Oscar Pulido: When we talked about the various initiatives that EYL has going on, Rashad, I think you mentioned Invest Fest. So let's just go back to that. I must confess, I did a little bit of research before this and I found a video of I think it was this past year's Invest Fest, and I think there was a drone flying through the convention center. And I remember thinking. There's not just a couple hundred people there. That looks like a couple thousand, and you said it was 20,000. And it did occur to me, you might need a blimp to fly overhead if you want to capture the whole audience. Tell us more about Invest Fest and tell us more about this term that I heard you say once ‘edutainment’ and how that captures I think what you're trying to do at Invest fest?

Rashad Bilal: When we were putting together InvestFest, we wanted to break the mold and be different. So even with the wording 'festival' was a word that I had never heard used in conjunction with finance or business. Now it has been used several other times, but at that point in time, I had never heard it. So it was like, okay, if we can combine a festival element, and festivals have become very big over the last couple of years, especially music festivals. It was like, okay, how do we have the excitement of a music festival, but educational, like a business conference?

That shot that you saw, that room holds 15,000 people. So we wanted to create that rockstar element, right? You come on stage and there's smoke and there's fire, and Mike Novogratz walks out so it's just like a different aspect to highlight entrepreneurs, but we also, as far as the edutainment, so just being an education and learning from teachers that in order to get kids' attention, you have to have some level of education attached to it, but it has to be entertaining at the same time, adults are the same way. If you just make things plain and boring, a lot of times people will check out.

So putting all of those things together and just merging pop culture with business, which was the original thesis of earning leisure, was the blend pop culture with business. and that's happened in a real-life format as far as Invest Fest is concerned. So, you have a vendor marketplace, you have the food experience, you have musical performances, you have live podcasts, you have a keynote address, you have panel discussions, and it's all happening simultaneously.

So that was something, like I said, I think that we broke the mold with InvestFest and it's just grown every single year. One year, the first year we had around 5,000 people. The next year we had 14,000. Last year we had 20,000. So it's just a lot of good energy for sure.

Troy Millings: Yeah, and it goes back to that core principle that I talked about. It was that kid who walks in the classroom, sees a note on his desk and realizes that he's going to learn today about financial education through a lyric from his favorite artist. It's like now the relatability is there.

I could imagine, edutainment in the classroom, all right, here's the Beyonce lyric. It's 'put some respect on my check.' Pay me an equity, now this is a financial lesson. What's equity? Is that, how do you get equity inside of a company? And so that's always been the core principle and it's been elevated to a point where now, like you said, InvestFest becomes a place, it's the center place for culture and business, right? People are looking to network, they're looking to raise funds, they're looking to potentially invest in people and in themselves. so we're very proud of it. and this year, be no different. This year is going to be the biggest one yet.

Oscar Pulido: I can think of a few classes I've taken over the years where I could have used some of this entertainment aspect to liven it up. But you guys have thought about the experience for the person attending as much as the curriculum and the information, itself and making sure that both are important to keep the engagement level high.

It's clear that, both of you had, have had a massive impact on investors over the last few years. And, maybe talk to us a little bit about what's been the key to success and the popularity of earn your leisure and where do you see this going from here?

Rashad Bilal: I think the key to success has definitely been the relatability has been the democratization of financial literacy and business. That's probably the number one thing.

Troy Millings: And like you said, we're super excited about the curriculum, we're going to start here in New York. but this is not just an issue that is, synonymous with just New York. This is something that we see could be an elective in high schools, but throughout the entire country.

and we also see it as not something that is synonymous with America. Like you said, we travel a lot and we do it very intentionally. Whether we're in Davos, Switzerland, or we're in Ghana, or we're in London, the message is the same. People are looking for someone to democratize the me the theory of what finance should be and how it can be relatable to them. And so global domination is something that we see. This matches we, we want to spread through throughout the world. Because, we took it from watching sports. I always give the analogy, the rumble in the jungle was bigger than a boxing match. The thriller in Manila was bigger than a boxing match. It wasn't to say 'I'm the US champion.' It was to say 'I'm the champion of the world.' And so we're taking that same approach when it comes to finance. We want to be the champions of this message, but not in a way where it's encompassing saying we're going to send our message no, we want to take what's being done in all these other countries and see how we can incorporate, how we can build bridges and how we can work together to champion for everyone. Because like I said, it's a mission, that's worthwhile, and is definitely needed.

Oscar Pulido: Yeah. Troy and Rashad on your path to global domination or taking your message around the world, we appreciate you stopping in here and joining us on The Bid podcast.

Troy Millings: We appreciate you having us. Thank you.

Rashad Bilal: Thank you for having us Thank.

Oscar Pulido: Thank you for listening to this episode of The Bid. If you've enjoyed this episode, check out the episode on emergency savings from September last year featuring Claire Chamberlain. Where we dig into factors that are exacerbating this problem and solutions to overcome them. Subscribe to The Bid, wherever you get your podcasts.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0224U/M-3393434

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido. The BlackRock Investment Institute has outlined five mega forces that are shaping the macroeconomic landscape and the transition to a low carbon economy is one of those. 

This brown to green transition is underway and represents a journey from fossil fuel reliance to renewable energy sources. It is a stepped process that is not only a response to environmental challenges, but also a structural shift in the evolving investment landscape. This transition requires a significant amount of capital to propel us forward into a greener world. Governments, companies, and investors are all channeling resources into supporting low carbon transition targets that will reshape industries and create new opportunities to help me unwrap the various layers of the low carbon transition. I'm pleased to welcome Olivia Markham, a portfolio manager from BlackRock's Fundamental Equity Team. 

Olivia and I will explore the changes she's observing in the global economy, how companies are evolving their approach to low carbon emissions, and why investors should take note of this mega force. 

Olivia, thank you so much for joining us on The Bid. 

Olivia Markham: Thanks for having me here. 

Oscar Pulido: So, Olivia, one of the topics that we have covered a lot in the podcast over the last few months is this topic of the mega forces, which are these structural investment themes that the BlackRock Investment Institute says will characterize market movements for many years ahead. One of those mega forces is the transition to a low carbon economy. And there's this other term that we hear which is the brown to green transition. But maybe we can take a step back and talk to us a little bit more about what does it mean when we talk about the brown to green transition. 

Olivia Markham: So, this terminology, in its basic form, it really involves moving from today's economy, which is based on fossil fuels, it's got high carbon emissions associated with it, and we're trying to move towards a green economy, which has lower emissions associated with it. 

Quite simple, in its basic construct, when we think about what's really driving the change, we are moving away from just thinking about the cost of an activity, and we're now starting to think more and more about the impact that that activity is having. 

There's also another important point we should recognize here, and I think that word transition is really important because this isn't change that happens overnight. It takes time. It can be a stepped process but it's going to involve a lot of capital, there's a lot of opportunities and it's a really important conversation that the investment community should be having. 

Oscar Pulido: You said this transition takes time and you also said it takes capital. Maybe on the capital part, how much are we talking about? What kind of investment is needed to transition to this greener world and what areas will see the greatest demand? 

Olivia Markham: In my view, the low carbon transition going to be one of the greatest re-mobilizations of capital that we've seen in the global economy for some time. There's a lot of forecasters out there trying to estimate the cost of doing this. The numbers are incredibly big - they're in the tens of trillions of dollars. What’s been encouraging is that we have seen over the last couple of years that governments are stepping up. They're providing support, stimulus incentives to start driving this change. But it's not just the funding that's driving it, it's actually economics. Today it is cheaper to build, renewable based power than to build fossil-based power. So, it's just good economic sense to be doing this. 

The other thing that we're also seeing is the private sector stepping up. We're seeing huge amounts of capital invested by the private sector into areas such as wind and solar, so that's also helping to drive and accelerate this change. But what I find quite interesting is that when people think about the investment that we need for the low carbon transition, they think about the investments that are going to go into wind and solar infrastructure. They probably think we're going to swap internal combustion engine cars into electric vehicles. They probably think we need charging infrastructure. Maybe they even think we need to upgrade the grid. And I guess that's the obvious stuff. But I think what many people fail to really appreciate is what do we actually need to build this low carbon infrastructure.

And so, from the work that we've done, we can clearly see we're going to need a lot more metals and materials. When you think about a wind turbine, you probably should think about the steel, the cement, the rare earth that we need. Similar for solar, it's the aluminum, the silver, the polysilicon battery materials for the EVs, copper cabling for the grid. The list goes on. So, when I think about this green economy that we're moving to, we're going to have this energy system based on sustainably produced metals and materials. It's very different from where we are today, and that's just going to create a much more materials intensive, global economy going forward. 

Oscar Pulido: It is interesting, you do tend to think of that finished product of a greener economy, the wind turbine or the battery in the electric vehicle. But you're saying, hold on a second, there are materials that we need to just create those things. You started to allude to some of them but what are some of these materials that we need to source in order to transition to more of a green economy?

Olivia Markham: I find this, personally, incredibly interesting. We've done a lot of work on this area. We've written white papers on it because the opportunity is really, really big. and maybe let me take you through some examples here. A core component of the energy transition is really electrifying the power sector, and what we think about is effectively having to build out a lot of wind and solar infrastructure to be able to support that.

However, we have a challenge in doing this, and that's principally that the sun only shines during the day and the wind typically blows at night. So, you end up actually having to build a lot more capacity to deal with that lower level of utilization. The numbers start to really inflate. If you think about an example of wind, the amount of steel that's used to build a gas plant and compare that to the amount of steel that's used to build an onshore wind turbine is three times larger. If we think about an offshore wind turbine, it's five times larger, and then we're going to need copper to have the cabling to connect renewables back to the grid, we're probably going to have to expand the grid because we're going to have to deal with the intermittency of renewables. 

So, when we think about those commodities that are benefiting, they range. Some of the more traditional commodities, like steel, they do see structural growth from this transition, but what's going to see the really exciting demand is green steel - steel that is produced with lower carbon. There's some really interesting technologies that can produce carbon free steel that essentially involves using high grade iron ore with hydrogen to take out coal from the production process. 

Oscar Pulido: So steel, copper. But the examples you were giving, you were very clear, we need more of those, commodities when we produce infrastructure for a greener economy. And so, it sounds kind of counterintuitive in that we're moving to a greener economy, but we're having to use more of these commodities, which produce emissions when they're created. But again, it sounds like companies are thinking about how to produce these commodities, produce more steel, produce more copper in more eco-friendly ways. And you mentioned green steel, but what are other ways that companies are evolving their processes to be able to produce these commodities in a, in a more eco-friendly manner?

Olivia Markham: I think one of the conundrums that we have with the transition is we clearly need more metals, more materials to enable the transition, but the production of those products are themselves carbon intensive. And let's be honest, we're not really going to achieve a lot if we take out carbon in the production of energy or in the usage of energy, but just swap those emissions to the production and materials. We're not a achieving a lot in doing that. 

So, I think what we really need to see happen here is we need to see the investment into the green infrastructure. But we need to see it happen with materials that are produced with lower carbon. And that really requires the value chain, the material sector, to do their bit. If we can produce these materials in a lower carbon way, we are going to accelerate the transition overall and that's going to have a really big, real-world impact given that the materials sector accounts for around about 17% of global greenhouse emissions today. That real world impact is very significant. But we do have solutions here and we're seeing change happening.

So, in the steel sector, we are seeing the development of low carbon green steel using hydrogen instead of coking coal in the production process. Similarly in cement, there's some really interesting technologies to reduce the clinker content in cement which in turn reduces the amount of carbon content.

Another area that I see companies using, and I think is going to be a growing solution in the future, is this notion of the circular economy and closing the loop. When we look at a number of processing options nowadays, you're seeing companies who are generating energy and generating emissions through that process, try and capture and reuse heat, capturing, reuse water. They're investing more in recycling, they're investing more in carbon capture, they're using waste to make new products. They're making products that will hopefully last for longer. As we do all of these things, we're also going to reduce the emissions overall.

Oscar Pulido: I also get the impression as you talk about what these companies are doing to reduce their emissions, that we're still at an earlier stage of the process. That there, there's innovation, there's innovations that we've seen but there's still a lot more innovation to come. That's my impression as you're talking about this that there's a lot more innovation yet to come. 

Olivia Markham: That's very fair. I mean, if we think about companies and the targets that they are setting to reduce their own emissions, we're going to see some very meaningful emissions reductions by the end of this decade. And the companies are not doing this alone, they really rely on their own supply chain to come up with some of the technologies, the equipment, the battery operated trucks to help them decarbonize, and that's creating a whole new profit pool for that supply chain and in creating more investment opportunities that they can feed into as the material sector is spending more and more money on decarbonization. 

Oscar Pulido: Olivia, last year we spoke to your colleague, Charlie Lilford, who like you, is based in London and we talked about electric vehicles he touched on the fact that about 25% of carbon emissions in the world comes from the transportation sector. So, going back to the use of materials, is it fair to say that electric vehicles require more metals and minerals than what we would see in, regular combustion engine? 

Olivia Markham: Well, the simple answer is yes, but let me give you the spectrum of what we need here. I alluded to it before, but an electric vehicle typically requires about four times the amount of copper. So, then we need to think about how we are going to charge that electric vehicle. So, we're going to have to build in charging infrastructure to do that. An electric vehicle has a much bigger battery, so we're going to need all the battery materials, the lithium, cobalt, nickel, graphite that goes into the batteries today. So once again, much more materials intensive.

So that's just to produce the EV, but then really, we need to power that EV with green energy. So, we're going to also have to use materials to build out, the green infrastructure, the wind, the solar that we need. we've got intermittency issues with some of that renewable capacity. Probably have to have some more battery storage as well. We're going to have to upgrade the grid. We have to connect the renewables via copper back to the grid. So, as you can hear me talking about it, these numbers start to scale and the materials intensity of an EV becomes really quite substantially larger than that, of an internal combustion engine.

Now we have some solutions in time to start to deal with what will become. supply challenges for some of those commodities and that's really around recycling. As we start to build up the amount of EVs on the road, the amount of batteries that are out there we are going to have options and requirements to actually start recycling these batteries more, which will then create a, a new source of feedstock for the future batteries that we need. 

Oscar Pulido: And that was leading to my next question as you're talking about recycling because I did start to think do we have, or does the earth have enough of the materials that you talked about? You took us on a bit of a tour around the periodic table, as you were mentioning, nickel and cobalt and copper, but is there a risk that there's not enough supply of these materials? 

Olivia Markham: In theory, we have enough commodities but what we don't have enough of is high grade, low cost and readily permitted projects that can come in and feed this supply that we are going to need. When I look across the board, for quite a long time now, we have become too complacent that commodity supply will always be there. This is a cyclical industry, at times we have too much supply, at other times we don't have enough. But given the long period we've had now of underinvestment into new supply, I do think that we are approaching a point where supply is going to be challenged to meet demand, and if supply cannot respond quickly and that will inevitably see higher commodity prices associated with that.

Now, when I think about some of the commodities that we need, we just haven't had the exploration success over the last decade as what we've had in prior decades. When we look at new projects, they're deeper, often at higher altitude, and all of this translates into a higher cost, to actually go out and build these projects. The industry is becoming a bit more disciplined in how it's allocating capital. and if these projects are not economic at current commodity prices, then that supply will not be built. So, we need to see a move up in commodity prices to try and justify and incentivize that supply to come into the market. 

Oscar Pulido: So, this is an evolving space not only commodities, but all the different, areas of the market that must touch the brown to green transition from producers of the commodities to the companies using them, the electric vehicle companies. You're an active stock picker, you spend your day looking at companies that presumably are benefiting from the brown to green transition, and perhaps those that are not, and thinking about how to own those appropriately. So, what are you looking for in these companies as you think about this trend? 

Olivia Markham: What I always look for is companies that have got high quality resources. They've got growth optionality, ideally, they're being run by a management team with a proven track record of value creation, and ideally an attractive valuation.

What we are also looking for is companies that have really credible plans around reducing their own emissions intensity from their business. Now, why I think this is so important is, yes, I think it's important for the world, if we can produce the materials with, with less emissions, we're going to have a faster transition. But I think for a number of companies, particularly those companies that are very carbon intensive, they've had their valuation depressed. because of their carbon risk, the carbon that is associated with their business. And if they can reduce that carbon risk, reduce their carbon intensity, I do think that that's going to improve the multiple that they trade on, the margins they receive and their valuation. 

Oscar Pulido: And presumably as part of your research, you get a chance to visit some of these companies as part of your research process. So, what has impressed or maybe surprised you the most when you visit? 

Olivia Markham: So, a really important part of our job is getting out and seeing the assets, getting our hard hats on, our boots on the ground, and actually going and seeing what change is occurring. I've been everywhere from R&D centers looking at new battery technologies, I've been to some very carbon intensive cement plants across Europe and seeing the change that's happening there. 

I've recently come back from a trip to Chile, to see some of the capital costs and some of the challenges that they're having in terms of bringing on new copper assets. So, it's, a great part of the job. It's really important thing for us to do and what I'm most impressed by is that change is happening. 

I think back to some of my early site visits back 25 years ago, and I look at the big yellow trucks. Now big yellow trucks in the past were all driven by people, you typically have about, four person to a truck because people have shifts and there's downtime at maintenance, et cetera. And then, we moved away from having people in trucks and we had instead those people sitting away from the mine in a remote operating center driving the trucks. And then we've taken another step, we no longer have people driving the trucks. They're actually driven by technology. And I look forward to, in the next few years, no longer seeing trucks driving around with diesel fuel coming out the back, I'm actually going to see these trucks being driven by batteries. And I think that just shows the continuous change and improvement that we see across this sector. 

Oscar Pulido: Change is coming, and new profit pools are being created. So, it must make for a lot of fun for somebody who gets to sort of look through companies and decide who are going to be the leaders in this brown to green transition. Olivia, thank you for painting that picture of the change that is coming in the world economy. And we look forward to having you on The Bid again. Thanks for joining us on the podcast. 

Olivia Markham: Thank you. 

Oscar Pulido: Thanks for listening to this episode of The Bid. Be sure to subscribe to The Bid and don't miss the episode.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0224U/M-3371220

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

The advent of AI has radically altered the landscape of work, reshaping the fabric of industries and prompting a monumental shift in how tasks are executed, and decisions are made within the financial services industry. AI has induced both awe and apprehension. The financial world stands on the precipice of an AI driven transformation where the balance between machine intelligence and human ingenuity heralds a new era of possibilities, challenges, and responsibilities.

Joining me today is Rob Goldstein, BlackRock's, Chief operating Officer, and Lance Bronstein, head of Aladdin engineering, BlackRock's Portfolio Management software. Rob and Lance will help us consider the issues facing business operators. From how to harness this technology to amplify human capabilities, redefine roles, upskill the workforce and recalibrating approaches to risk management and client interactions.

Lance and Rob, thank you for joining us on the podcast,

Rob Goldstein: Awesome. Great to be here.

Lance Braunstein: Thank you.

Oscar Pulido: Lance, this is your first time, I think you're what we refer to as a longtime listener, first time caller. And Rob, it turns out a little fun fact is that you were actually the first guest on the first ever Bid podcast that we recorded, the topic was around FinTech, the sort of intersection between finance and technology, so it's very appropriate to have you back.

Rob Goldstein: I actually assumed I was coming to get my royalty checks. Is that not what's happening here?

Oscar Pulido: We know you've been busy, so we took a little bit of time in welcoming you back. That was about five years ago, you didn't spend a lot of time talking about AI on that episode at the time, but a lot's changed. It's 2024 and AI is top of the list of topics that we've been addressing on the podcast, and this is a really great opportunity to hear from two business leaders at BlackRock about how it's impacting the business.

So, Rob, maybe I can start with you. I'd love to hear your perspective on Gen AI, and just how it's evolved over the past year because it seems like things are evolving quickly.

Rob Goldstein: Taking a bunch of steps back, AI as a concept is not a new concept. In fact, sometime in the 1950s MIT started its AI lab. So as a broad concept, AI's been around for a long time.

So, it's January 2024, but if you really think about it, from the period of time, more or less of Davos last year, so in January 2023 till now was actually, in my opinion, one of the most extraordinary times in the history of technology.

And there were major, major, major step functions in terms of technology, but more importantly, it's less that there's sort of new math. It's this confluence of data, compute power methods that have existed for a long time all coming together in a way that effectively has enabled or really started the transformative journey to enable English to be how people interact with computers.

People have grown accustomed to interacting with computers in certain ways, they've grown accustomed to interacting with them, with a mouse, with a keyboard, through your phone, with your thumbs. But for the first time, there's enough data, there's enough compute power, there's enough technology to fit models that enable you to talk to a computer, and to have it talk back to you. That capability, that step function is actually, in my opinion, one of the most transformative technology step functions we will see in our lifetime, this is going to really change how people think of technology.

Oscar Pulido: I'm glad you mentioned that AI is not A new concept. It's popular now, but that it's something that's been around for decades, and we actually talked about that on a few episodes, last year with some of our investment leadership. People like Jeff Shen and Brad Betts, who talked about, Dr. Steven Boyd and, the AI labs that we've set up. I'm also fascinated that you've been in the industry and with BlackRock for 30 years, very close to technology, and that you're saying in the past year is some of the most transformational change that you're seeing. So, how does that impact the financial services industry. You're the COO for BlackRock so you're the pacesetter for change. so, what are financial services company doing to try and stay up with that change?

Rob Goldstein: It's actually a super fascinating question because when you go to meetings and start talking about this stuff, people want to start talking about humanity, robots, when are the robots taking over humanity. So often I'm the one saying that's super important, but we need to focus on this through the lens of being in our jobs in a company.

The way I like to think about it, this whole concept of language and English being the way people interact, is a very different way technology is used and it's a way that really impacts work patterns. It's a way that really impacts how companies view productivity, efficiency, those broad concepts.

I'll give you a couple of examples. Lance and I were, leading a group of people as we presented this to the board. We wrote a presentation, and in the presentation, we spoke about a variety of the aspirations that we had for BlackRock, but the key theme is that all of the technology tools we build, people should be able to just type in what they want the tool to do, and the tool should be able to do that. That's number one.

Number two is we produce a lot of client reports. performance evaluations, credit write-ups, prospectuses, whatever it is. That first draft why can't that be done by a computer? Normally the work pattern would be someone would then take that away and four days later you'd get a draft of the letter. Why can't, right after that meeting, we get a draft of a letter that's from a computer and then we all comment on it.

So, what we did for the board presentation is we wrote a PowerPoint presentation explaining what we were going to do, the strategy, the risks, all of those components, everything you would imagine. Then, we actually fed it to ChatGPT within what we call a walled garden, basically our own version of effectively running the ChatGPT models, but within our own infrastructure, so we're not leaking any information. So, we took that presentation, put it through the model, and we said write a 1000-word executive summary, because in addition to submitting a PowerPoint presentation, we also would submit a, an executive summary more in like Microsoft words, something that's more, literal than a deck.

I got the memo coming out of it, and I gave it to two people who are among the most critical people in terms of looking at memos. One was Larry Fink, and one was Martin Small, our CFO. Martin came into my office and Martin said, I don't know why you didn't mention this, it's missing this, the tone's a little, you should be more confident in what we've done. And I was like, 'Oh, Martin, it was written by a computer.' He was like, 'Oh, really?' He had no idea. And then with Larry, it was the same thing. 'Hey, the tone of this is off.' And I said, Larry, it was written by a computer. We could set that tone.

I could have said, 'Here's a PowerPoint presentation, here's 10 memos. Give me a memo in a thousand words that summarizes this PowerPoint presentation in the tone of these other memos.'

And I think if you look at it through the lens of A COO, the productivity that unlocks is beyond imagination. If you look at it through the lens of a normal person in terms of helping you in daily life through being able to talk to a computer and have the computer talk back to you, it really is a remarkable, transformative opportunity.

Oscar Pulido: And that word productivity, the two of you are senior leaders and any time saved is very helpful, but it helps people across an organization. The example you just gave time saved and being able to invest it elsewhere. And Lance, you sit at the forefront of the technology platform that BlackRock runs and what has what Rob has discussed around the evolution of gen AI mean for an organization that has a tech platform that employs engineers, what do those engineers do now when the gen AI tools can do the kind of stuff that Rob described?

Lance Braunstein: Before I get to that, let me riff on the idea that this is really expansive. So, when we say that this will impact productivity across job families, we mean that quite literally. We talked about executive presentation, getting to a first draft of a PowerPoint, a Word document. But imagine getting to a first draft of an application. Having a software engineer, not start with a blank slate, but say, do the thing that is like this other thing that we've done before, or an analyst summarizing broker, documents or a salesperson summarizing all of the interaction notes. The idea here is that this democratization of data and models really is expansive across the enterprise. It's every job family, HR professionals, legal professionals, compliance professionals will work differently. How does this impact the technology world? in a couple of ways. So, if you have a technology platform, it will change the way that you think about the user interface and the user experience.

First, the standard will become a chat interface, exactly what Rob was describing, which is an English language, natural language interface to the computer rather than code or rather than complex application navigation.

Second, the way that you think about your information architecture, this is the way that information and data interrelates changes. So instead of having to navigate four different applications to determine my risk to book a trade, now I can simply ask a chat interface like 'Tell me what my risk is and on the strength of that risk rebalance my portfolio in the following ways.' That changes the navigation paradigm in a pretty profound way.

And then finally, I think this notion of democratization of data and models is really powerful. The idea that more people will participate in a broader set of data-driven decisions than they have historically. And I'm not talking about data scientists, and I'm not talking about PhDs. I'm talking about every single person involved in the investment life cycle now will have more data at their fingertips than they ever have before. That is hugely powerful.

So, if you are at the helm of a technology platform, thinking about the interface, thinking about the democratization of data, thinking about your information architecture, changes.

Oscar Pulido: I have two kids, I'm listening to you both talk and you're describing this world where, things seem a little bit easier. Like I can get to a more advanced part of the work or the project sooner. And when I think about my kids, part of how they learn is trial and error. They learn from mistakes that they make, and we learn from our mistakes. So, is the environment that you're both painting one where it's different in terms of how you develop talent because they don't get to learn as much from their mistakes? And maybe I'm not thinking about it, right, but what does that mean for talent development in an organization?

Lance Braunstein: First, I think it's what Rob said a minute ago, this notion of getting to a first draft sooner. Part of the power of these large language models is prompting the model often in a very precise way. So, like when Rob talked about tone, you could create the initial draft and then go back and say, I'd like it to be in the tone of this other document, or I'd like you to refine this into a set of bullet points, et cetera, et cetera.

So, in terms of development and learning, the idea that you could get to that first draft of your term paper of your science project faster by harnessing more data and more models, I think is a powerful learning tool. That is not cheating and getting to the Wikipedia of result sooner, it is actually harnessing more information.

Then the interactivity that you have with that first draft or with the model, I think is another learning opportunity. So, the ability to prompt in an increasingly precise way to me, drives a greater analytic mindset. Rob and I talk about this notion that we all are going to become developers, when you think about the human computer interface becoming a prompt in English, that means all of us are writing code. We may not think of it as code, those prompts may not look like code, they may look like an English language sentence, but they're code. And they will generate code in some cases. So, the precision with which you have to prompt the computer increases over time. So that learning to be more precise, more analytic, more data-driven, is a talent opportunity. It's a learning and development opportunity.

Rob Goldstein: Lemme just add, we try very hard to be tech optimists and it's amazing how many things through the years you could point to as given this new technology, this means humanity's going to become much more stupid and humanity is doomed. But I'll give a couple of examples through my own personal lens.

So, my dad was a financial advisor my dad growing up would work almost every night, but at nine o'clock, he would stop working because it was not polite to call people at home, after nine o’clock, and once email came about, if you get an email at nine o'clock and you don't answer it by like 10 o'clock, you're considered rude.

So, everything just adapted, and if anything, expectations change. It created a huge productivity boom in theory. As opposed to having to FedEx documents, you can now email documents, that's a productivity boom. But it didn't seem like the amount of work went down, just expectations changed. And I think what happens with technology is as it empowers this new productivity and these productivity step functions, it brings with it changing expectations.

People can look at these technologies through different lenses. I look at it through the lens, I think there's going to be a giant productivity boom. I think there's going to be a giant expectations boom. And I think that how people get smart will change. I don't exactly know how, but I know that humans are very adaptable. Technology's a tool that actually makes them even more adaptable. And I think that combination, I have confidence that people are going to get smarter, not less smart.

Oscar Pulido: You've given examples of the productivity boom, right? You mentioned the board presentation and the memo and, but now you just talked about the boom in expectations, and you touched on your dad being a financial advisor. That's a very client-oriented profession as most of financial services is. So, talk a bit more about how does this change what clients. Expect now that generative AI is more interwoven in business.

Rob Goldstein: Absolutely. And, if you zoom out for a second at the state of the industry, on the wealth side, most clients have websites or apps that they could access. They could see things in real time, but the truth is you get reporting once a month. And on the institutional side, it's equally the same, if not even more so once a month.

 Oscar, if I said to you in the year 2030, do you get reporting, once a month? I think you'd be, 'hmm, I don't think so.' Ultimately, you could imagine, every day, every hour, every trade, whatever, if you want a summary of your portfolio and how it's changed, you have access to one. I think it's going to be very hard to fulfill that expectation with people. I think it's going to be very easy to fulfill that expectation with technology.

And that is why that English component, the ability to talk to the computer in English and have the computer talk to you in English, that is why that is a whole new unlock with regard to technologies that will be profoundly impactful in terms of the Day-to-Day lives of people, in ways that are unimaginable.

Oscar Pulido: You both mentioned this point a couple times, so worth reiterating that the language that you use to interface with computers has been coding languages for many years. But what you're saying is that now it's English is that language to interface with the computer and the coding goes on in the background, but by, having that shift, more people can interact with the machines that are increasing productivity in businesses or the economy.

Lance Braunstein: Yeah, that's correct. the question often comes up because we've lowered the barrier to the human computer interface, do professions like software engineering, software development, system engineering, data analytics go away? I believe the answer is A hard no. Not only do they not go away, but the burden that we put on our servers, on our computers, as we expand the aperture of the user base- in this case, the prompt engineers, who is every human who will interface with a large language model- actually grows the burden on resilience, scale performance security increases.

So, the need for really talented engineers who could construct the backends. of all of these systems that now have quite an elegant low barrier to entry as a co-pilot or a chat, I think that need grows over time. Now I am like Rob, a tech optimist and pragmatist, I am thinking the hard next 12 to 24 months, there are jobs to be done, they will be enabled by these generative AI technologies and these models, but they are jobs that we could predict.

Rob Goldstein: If we were having this conversation pre covid, the technology that we would be talking about was autonomous driving. And it was like, why would your kids get a driver's license? Don't buy a new car. Everything is going to be autonomous driving.

Then if you think about what happened, you basically had a once in a hundred years, scenario, where two people couldn't get into the car with each other unless they were in the same family pod. So, if ever there was a time for autonomous driving to take over, it would've been then. Instead, what happened was driving trucks wound up being so in demand that in certain countries, they had to call up their National Guard to actually drive trucks because it became a matter of national security and national infrastructure.

And I think as you listen to the subtext of what Lance and I are saying here the subtext is, this isn't about the computer alone, it's about the person being much more empowered, much more productive by the computer, but the person in a very similar scenario to autonomous driving, still being part of that process, still being the critical control, still looking at what the computer is doing. I think where people get confused is they look at a world with no people, we look at a world with people who are enabled to be better by the power of the technology.

Oscar Pulido: You've both touched on the fact that you're both tech optimists and I think, it's always good to end and pragmatists. but always good to end on an optimistic note. I think as we talk about any topic. So, I'd love to just get your thoughts on, the next year or two, what lies ahead, like what haven't you discussed that gives you even more optimism about ai, in a business setting?

Rob Goldstein: I have a vision that I believe will come true. Which is right now there's this concept of the prompt engineer, no one knew what that was a year ago, now it's going to be the job of the future. I have a different perspective on it, I'm very fortunate, I have two children. One of them is graduating this year of college, and one of them is a sophomore in college. And I think for my daughter Sadie, who's a sophomore in college by the time she graduates, I believe two things. One, the concept of a prompt engineer won't really exist. And two, whatever it was supposed to do, she will naturally know how to do from being in college for the next two years. This goes back to your question about training, sometimes you're training yourself and you don't even know it. I think a lot of what we're talking about here is just going to be natural. It's going to be in the water, and we won't even know it.

Lance Braunstein: And I would just extend that Getting everybody into generative ai, teaching them the concepts, teaching them the prompting. Is going to enhance our ability to just run a better investment process to be a better technology company. The thing that excites me in this next year, and I am really thinking about from now, is getting people more into ai. Getting people like hands-on into co-pilots and chat assistance and enabling them to get to that first draft that we described earlier, faster with higher quality. That's thing one. I think thing two is there will be a number of jobs that we want to automate, that we want to create greater automation.

And again, not in the, not to, to the exclusion of the human supervisor, but getting those rote tasks to a greater place of automation, I think is immediate and exciting for me. So more of us becoming sort of gen AI enabled and empowered. And more of us doing the highest value work rather than the rote tasks that is near and present and super exciting for me.

Oscar Pulido: And it sounds like more people becoming students of technology,

it sounds like the evolution in AI is going to push everybody in that direction. And guys, I want to thank you for, joining us, on the podcast as almost the professors of technology that we will look to, I'm sure down the road. Again, Rob, Lance, thanks for joining us.

Rob Goldstein: Great. Thank you.

Lance Braunstein: Thanks.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you've enjoyed this episode, check out our two-parter on AI featuring Brad Betts and Jeff Shen, where we look at the history of investing in ai, and potential future applications in finance. Subscribe to The Bid wherever you get your podcasts. Subscribe to The Bid wherever you get your podcasts.

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Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

In the ever-evolving landscape of geopolitics, the world finds itself at a pivotal juncture marked by structural shifts that redefine global dynamics. The emergence of competing economic and geopolitical blocs stands out as a prominent feature reshaping alliances and influencing international relations.

As we've learned on previous episodes, the BlackRock Investment Institute has outlined five mega forces that are shaping the macroeconomic landscape. And geopolitical fragmentation is one of them.

To help me explore this topic, I'm pleased to welcome Catherine Kress, head of Geopolitical Research and Strategy at BlackRock. Together we'll explore the macro and investment dimensions of this megaforce, the complex interplay of geopolitics and global markets and provide insights for investors navigating this new era. 

Catherine, thank you so much for joining us on The Bid.

Catherine Kress: Thanks for having me. 

Oscar Pulido: So Catherine, we've been talking to Alex Brazier from the BlackRock Investment Institute, and one of the things that he's been mentioning, and that actually has been a common theme throughout a number of our episodes, have been the mega forces of which there are five, artificial intelligence, aging demographics, the transition to a low carbon economy, the future of finance, and last but not least, geopolitical fragmentation. Talk to us a little bit about the geopolitical landscape and what's changing. 

Catherine Kress: So, I think it's important to take a step back and if you think really to the last half decade or so, it's clear that we've had these cascading events that are really building on each other and now hang over the global economy. 

We had the US trade wars back in 2018, 2019, which extended into the Covid pandemic, Russia's invasion of Ukraine, and now the outbreak of war in the Middle East. These events are really starting to build on each other and drive structural change in the global economy. Our BlackRock view is that geopolitics from an investment perspective has become a persistent and structural market risk. 

We saw last year S&P 500 executives use the word geopolitics 12,000 times, which was up three times relative to two years ago. If you look at our proprietary BlackRock geopolitical risk indicators, we see them hit their highest level in the last year. Throughout history, the impact of geopolitics on markets economies has been fairly short-lived. It's been modest, markets have tended to fade geopolitical shocks when they happen. We actually did a study several years ago within the investment institute 62 historical risk events, and that's what we found that these events had a fairly short-lived, indirect market impact. We see today's events as different. We believe that they're driving structural long-term change, and the world order that's emerging really stands in sharp contrast to this post-Cold War period, which was characterized by US hegemony, constructive and productive relations between major nations, lower trade barriers, ever increasing globalization. We see today's environment as different, it's driven by the emergence of competing economic and geopolitical blocs, competition between those blocs and increasingly less international cooperation. 

Oscar Pulido: You mentioned the events that you look back on over, I imagine, many decades. And the fact that the impact on markets was modest and short-lived, but you've also said we're in a structurally different world with respect to geopolitics. So is it fair to say that going forward market impact will be less short-lived and more impactful?

Catherine Kress: This is a discussion that we're having right now: has the environment changed that much that markets should be treating geopolitical events differently? Our view is, yes. The world today is a lot more connected than it used to be four or five decades ago. So, a risk or a crisis in one part of the world can really emanate and have ripple effects to other areas and other issues. 

Oscar Pulido: You mentioned the Russia, Ukraine war, people saw their food prices going up and some of that is because of the production of grains in that part of the world that was impacted. You also mentioned competing economic blocs, competing geopolitical blocs that are being formed. So, talk a little bit more about that evolution. 

Catherine Kress: So really, over the last several years we've seen the rise in emergence of these competing economic geopolitical blocs. This is one of the key fixtures of this fragmented landscape. On the one hand you have the US which is as unified as it's ever been with its allies in Europe and Asia. 

You see that with the expansion and solidification of NATO in response to Russia's invasion of Ukraine. We've seen the rise of multilateral fora like AUKUS and the Quad, but meanwhile we have China and Russia who are cooperating more closely than they have, and they're partnering with countries like Iran and in some cases North Korea. These powers are working together more closely than they have in decades, and that's something that we've really seen evolve and deepen over the last several years.

I mentioned Russia and China growing particularly close. There's been some interesting data points recently that show that. So for example, China-Russia dollar denominated trade last year hit $240 billion, which was 26% increase from a year earlier. Today, China trades more with Russia than it does with Germany. If you look at China's exports of transportation equipment specifically to Russia, that's up 800% over since Russia's invasion of Ukraine. And we now see that Chinese cars make up 55% of the Russian market. But I mentioned this informal alignment, deepening as well between Russia, China and North Korea and Iran, and there's some interesting data points here as well. For example, Iran has become a principal supplier of drone technology to Russia. We've seen North Korea provide more munitions to Russia in its invasion of Ukraine than Europe has provided to Ukraine. And Russia's providing its partners with supplies too, for example, cheap energy, natural gas. Increasingly, there's concerns about Russia exporting military technology and equipment to Iran and North Korea. So we're seeing these blocs harden and they're increasingly competitive with each other, 

Oscar Pulido: And at the same time that these blocs are forming, I think there's another term that you've used, which are these multi-aligned countries, that are also developing. I'm thinking of these countries as I think they're friends with everybody, or at least maybe they're not taking a particular side when it comes to some of these economic blocs. But maybe help clarify, when we say a multi aligned country, what does that mean and what are some examples of some of those countries? 

Catherine Kress: So, these are the countries that haven't taken sides in the contest between the US and China, or necessarily adopted the western position on Russia. They're very different from the non-aligned movement of the Cold War. So, we've chosen the phrase multi-aligned because we see these countries as fundamentally different. 

The non-aligned movement of the Cold War was much more about statements and posturing and protests. Today, the multi-aligned countries are major economies in the world that have a lot of power and influence.

The Economist calls them the 'Transactional 25' or the T25. Together, the T25 make up more than half the world population and about a fifth of global GDP, which is more than the EU. The multi-aligned countries are pragmatic. They have a fluid transactional approach to the world. In a way, they're uncertain about the future distribution of power, and so they're hedging their bets and aligning with both blocs in line with their national interests.

An especially important grouping of multi-aligned nations are the countries in the Middle East. So, years of high oil prices have made the countries, the Gulf Oil producers specifically, really primary sources of liquidity in the markets. we think that they're at an inflection point. They'll be the last one standing in fossil fuels. They have enormous opportunity if they can continue to maintain fiscal discipline, if they can manage regional tensions. 

But another multi-aligned player to watch is India. India's already the world's most populous nation, its working population is expected to hit a billion within a decade. It's projected itself as a leader of the global south. 

So, we have demographics alongside macroeconomic stability, as well as a focus on physical and digital infrastructure that I think make India really well poised, to compel global growth going forward. 

Oscar Pulido: One of the things that emerged post-Covid, was this recognition on the part of companies to, bring production closer to home. Prioritizing, resiliency more than cost, I think is a lot of what we've talked about with some of our guests on the podcast. And some people talk about this as de-globalization that after many decades of globalization, now we're going in reverse. Maybe Alex Brazier has talked about it as the rewiring of globalization. So, what is the right term and do you agree with this and what are the sort of the impacts if this trend in fact is happening? 

Catherine Kress: I very much agree with the framing as the rewiring of globalization. I don't think it's correct to say that the world is deglobalizing, that we've hit the end of globalization. There are measures of globalization that have receded. For example, trade is a percentage of GDP since the financial crisis. But there are other areas where we're seeing rapid globalization like digital trade and services. 

I do think it's fair to say that the system of globalization has been politicized and that we're seeing issues, as you said, like national security resilience, increasingly making their way into economic policy, business decision making, and we're seeing countries and companies leverage targeted policies like export controls, tariffs, investment restrictions, trade agreements with like-minded countries to achieve economic and policy objectives. 

So, our view is that globalization is rewiring, and this is a dynamic that we were hypothesizing for some time that national security and resilience would drive this rewiring and increasingly play almost a bigger role than traditional economic and market factors like pure cost efficiency, comparative advantage, in supply chain decisions. 

And increasingly, there's a critical mass of studies coming out that supports that hypothesis. Policy and geopolitics are driving this rewiring of globalization, and at a high level, it shows that trade isn't necessarily declining, but it is shifting, and we're seeing this in a couple of specific areas. 

So first, we're seeing that trade between geopolitical blocs is slowing. So, since Russia's invasion of Ukraine, the World Trade Organization has reported that trade between geopolitical blocs has grown four to 6% slower than trade within the geopolitical blocs. And today, China's trading more with developing countries than it is with the us, Europe, and Japan combined. 

So, we're seeing that kind of shift among the blocs. Second, we are seeing some reduced dependence on cross border suppliers. So, there is an element of that reshoring that's taking place. Third, and this is what I think is the most interesting and presents an investment opportunity, which is that as we see trade between the blocs decline, we're seeing the rising up of countries, which Bloomberg has referred to as the connector countries. 

These are the countries that are injecting themselves into global supply chains and becoming intermediaries. so, as US direct sourcing from China declines. For example, countries like Vietnam, Mexico, Indonesia, Morocco, Poland are inserting themselves into global supply chains, and China's trading more with them and they're trading more with the us. 

So, the US isn't necessarily reducing trade exposure to China entirely, but it's being more intermediated. These countries, according to one Bloomberg analysis, reported $4 trillion in economic output in 2022. They've all seen trade grow above trend for the last five years. So, they reflect a really interesting and important opportunity going forward. 

Oscar Pulido: So, let's go back to the fact that you said some of these geopolitical changes, or all the geopolitical changes you're mentioning are more structural in nature. That this isn't just a one- or two-year type of trend, but that, the world is fundamentally shifting. So, what does that mean for. Future geopolitical shocks, like how should an investor or just individuals be thinking about them as opposed to what they've seen in the past?

Catherine Kress: So, we had this conversation with a number of our investors recently, and I thought something that was interesting that emerged from that conversation is that fragmentation on its own doesn't necessarily need to massively disrupt core investment theses, it's a structural trend as I said. So, there are elements of it that we can track, that we can build into our investment hypotheses. We may get to a more stable world order over the longer term, but the path to getting there in our view is going to be very rocky. And so, what's critical for us to watch as investors is whether this kind of transition to a more fragmented world order is a managed and orderly one, relatively speaking, or a chaotic and disorderly one. 

By all counts, we are in a more volatile world order right now. The UN reported last year, the largest number of violent conflicts underway since World War II, and we're facing the largest election year in history with 76 countries or so going to the polls next year. So we are trying to identify what are the types of risks that could change that fragmentation path and disrupt core investment theses. There's a range of them, we feature our kind of top 10 risks on BlackRock's geopolitical risk dashboard, which you can see on the web, but I'll mention three specifically. So, the first is the competition between the US and China. We see US China competition really as the new normal for US-China relations. 

It's focused on the defense area, but it's focused very sharply in the technology area. Where the US is really pursuing a policy of protecting, defending, extending its lead in the most advanced technologies that it sees as having military applications like AI, quantum computing, semiconductors. China is responding by investing in its own indigenous technologies, which we believe will lead to parallel competing tech stacks for the most important technologies. 

This is one area that we're watching. A conflict over Taiwan or a conflict in the South China Sea would be massively disruptive to markets. So, these kind of competitive dynamics are areas we're monitoring. Another area is the ongoing conflict in Ukraine. At this stage, we don't see a diplomatic solution as likely in the near term. 

We believe a long-term standoff between the west and Russia is likely. So, we're just ever monitoring the potential risk of escalation there. Then third, we have the ongoing war in the Middle East and here, we are very closely monitoring the risk of escalation as well. We've seen recent attacks on shipping in the Red Sea as an example of how conflicts can, disrupt shipping lead to higher production costs, contribute to potential inflationary outcomes. 

So, these are types of geopolitical risks we're monitoring as affecting the path of fragmentation going forward. 

Oscar Pulido: And it's worth mentioning the geopolitical risk indicator that you talk about. There might be, I think you mentioned 10 different geopolitical risks that you're monitoring, but you don't necessarily view the risk of them all the same. You, the risks can vary based on what you're observing in the market. 

Catherine Kress: Absolutely. So, one thing that we try to do as we assess the risks is provide both kind of a subjective assessment as to how we see the risks evolving, but then also a quantitative assessment as to how markets are. Paying attention to them if they are or aren't. 

So, these geopolitical risk indicators that we have are a quantitatively driven measure of market attention or investor concern about a particular geopolitical risk, and it's a sort of proxy for market pricing. Our belief is that if markets are paying attention to a risk. It's more likely they're pricing that, in so we try to identify the disconnects between our subjective assessment based on subject matter experts, and this quantitative assessment based on natural language processing of brokerage reports, financial news, media, and the like. 

Oscar Pulido: And the inverse of that is where you think the market is not paying enough attention to a geopolitical event. It could actually pose a higher risk because markets are ignoring it and maybe they shouldn't be.

Catherine Kress: Exactly. 

Oscar Pulido: Can we just talk then finally about the bottom line for investors? If I'm listening to this and thinking about the structural changes in geopolitics and what that means in the years ahead, what does that mean for my portfolio? You mentioned that investment teams shouldn't necessarily, in your opinion, be changing their core investment thesis, but what does an end investor need to think about? 

Catherine Kress: So, the geopolitical moderation of the post-Cold War period that we talked about was generally supportive of lower inflation and higher growth. 

We see this period of geopolitical fragmentation as inflationary and potentially likely to dampen growth going forward. We worry that as supply chains get longer and more complex, that is going to be expensive. It could weaken productivity in developed markets. And then meanwhile, we have structural economic challenges in China, which could present a drag on global growth going forward. 

So, from a macro perspective, we see geopolitical fragmentation as inflationary and likely to impact growth in a negative way. From an investment perspective, we're looking at relative opportunities where things are priced or not priced. And we can look at this geographically. So, for example, the connector countries that I mentioned, are already benefiting from a diversion of trade and investment flows. 

So, we think that there could be relative opportunities, in those countries. From a sectoral perspective, a parallel dynamic that's underway is, as countries are – as these blocs are hardening as countries are turning inward, we're seeing a surge of industrial policy in strategic sectors and areas of focus like clean energy, like advanced technology. 

And so, we can look at some of those areas for opportunity as well. So, the bottom line for investors is that while fragmentation may be inflationary and impact growth over the long term, we see relative investment opportunities both geographically and at the sector level. 

Oscar Pulido: And it rhymes with what the BlackRock Investment Institute and Alex have been talking about being nimble, being agile, and perhaps being more granular in this new macro regime that we talk about. 

Catherine Kress: Exactly, and fragmentation will create dispersion. And so that does allow investment skill to shine in this environment. 

Oscar Pulido: Catherine, listeners who have been following the podcast closely will know that you have both hosted and now, served as a guest of the podcast. So I hope you enjoyed sitting in the other chair today. Thank you for joining us on the Bid. 

Catherine Kress: Thanks for having me.

Oscar Pulido: Thanks for listening to this episode of The Bid. Next up, we'll revisit the world of electric vehicles to discover how the infrastructure has entered its growth stage with rapid increases in adoption and usage, as well as improving technology and falling costs. 

Subscribe to The Bid and don't miss the episode.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0224U/M-3349563

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

Long regarded as an undervalued and overlooked market, Japan has been undergoing a profound transformation. The renewed interest in this market stems from a variety of factors, including revamped investor sentiment, evolving macroeconomic conditions, and compelling corporate reforms. And as global dynamics continue to recalibrate, will Japan live up to its potential and redefine its role on the global investment stage?

To help me answer that question, I'm pleased to welcome Belinda Boa. Head of active investments for Asia Pacific at BlackRock, Belinda will help me examine the prospects challenges and potential opportunities that may define Japan's future in the global investment sphere.

Belinda, thank you so much for joining us on The Bid.

Belinda Boa: Hi Oscar. Thanks for having me.

Oscar Pulido: We're here to talk about Japan, and I'm wondering if before we zoom in on the present and the reason that people are talking about Japan so much today, I wonder if we could zoom out and think about some of the standout moments that Japan has had over the past few decades and how have people thought about Japan just as a market to invest in?

Belinda Boa: Yeah. Japan was the poster child of the 20th century. Post-World War II, it grew a massive agricultural hub in the sixties. It was known for its engineering and its innovation in the seventies, and by the eighties it was actually the second largest economy in the world. And the reason why I say that is not only that the economy was thriving, but so was the stock market.

December 1989 was the peak of the Japanese stock market, and at the time, Japan was 45% of the world's market capitalization, it's now six. Not only did it have an incredible run, it became an asset inflated bubble economy.

Post December 89, just one year on from that, about 2 trillion was roughly knocked off the market capitalization of the exchange. That was roughly half its value. And from there it entered two decades of very low economic growth, deflation and stagnation.

And the reason why it's so important is that, when you have an environment of stagnation and deflation, for as long as Japan did, it creates a strong incentive for both corporates and for households not to invest and not to spend.

And so Japanese investors historically have been some of the most risk averse in the world. Households today, still, most of their assets are in cash and in deposits. And up until recently, even corporates had very high cash balances. Lack of investment also meant that there was a lack of growth in the market. Roll on to the end of the nineties and beginning of 2000, the Japanese government, put forward some aggressive policies, some of which worked, but only for a short space of time. It was only in 2013 when Abenomics, which was really the economic term for the late Japanese leaders, revival of the Japanese economy had sort of three errors and the focus was monetary policy, flexible fiscal and then a structural reform story.

And the idea there was to reinvigorate growth to bring back inflation into the economy. So up until recently, we haven't seen any of that, but that's why I think we're so excited about this transformational story that's playing out in Japan because we are now seeing in the economy some of these efforts by policy makers and by corporates, which are really turning around what has been a very disinteresting environment for Japanese investors.

Oscar Pulido: Belinda, you mentioned a couple of really interesting things across that timeline that spans a few decades. I wrote down two numbers- 45 and six. You mentioned Japan was nearly half of the world's market cap back at its peak in the late eighties, and today it's less than 10% at single digits, so that suggests that Japan has lagged a number of global stock markets over the last 30 plus years. But you're painting a picture that things are getting better, maybe talk a little bit more about this renewed investor optimism that really started in 2023.

Belinda Boa: Well, Japan has been both unloved and under owned in global portfolios. And Oscar, you're right, there was a good reason for that. When you're in a deflationary environment with a lack of consumer confidence, a lack of spending, both at the corporate level and at the household level, it doesn't generate the sort of returns that you've wanted, and that's been the environment that actually characterized Japan. But there are some really big shifts that are happening, and I want to just focus on three of them.

Firstly, the macroeconomic environment. I mentioned that Japan has been in this deflationary spiral for a long time and for the first time, since mid 2022, we are starting to see inflation come back. This is going to have a profound impact on the behaviors of households and corporates. Because as opposed to always being in a cost cutting exercise and worried about costs and not spending, actually, we are now seeing companies able to increase their prices. The impact of that is that we're seeing margin expansion. So, this is profitable for companies and also, they're able to spend not just on their own CapEx, but on wages.

So, we're seeing wage inflation, you look at CapEx, you look at wage inflation. The numbers at the end of 2023 are at multi decade highs. So, the macro environment is significantly different to where we've been and the impact that it's having on corporates, on households, I think still has a long way to play out, but it's very important because it's so different.

Secondly, Japan is a diversifier. When you look at the rest of the world, we've been in an inflationary environment where inflation has remained stickier for longer, rates are higher for longer, and Japan's policy is very different to the rest of the world. But that may change going forward. what's also important to note is when you look at the stock market, it is very diversified. The US stock market is very concentrated in a number of tech names. Even A ex J when you look at Korea or Taiwan, has a very big concentration in semiconductors, and Japan is far more diversified. So, when you think about a global portfolio allocating to Japan, they really benefit from the resilience of low correlation driven by the macroeconomic policies, the economic environment, as well as the diversification of the index.

And then lastly, not only are we seeing investors globally interested in Japan, but also there's been a very big shift from the government in terms of launching, a tax savings scheme for households. This is to encourage households to allocate from their significant cash holdings into securities. And while I think this is going to take a long time to play out, and we do understand that this is not only an allocation to purely Japanese equities, it is a very big shift from the environment we've been in where, like I said, households have held very large cash balances.

Oscar Pulido: So as of this month, we believe that the NISA scheme, which is going to be launched, is going to actually provide a separate tailwind to the Japanese equity market from domestic investors. You just reminded me I was going through my bookshelf this weekend and I came across a book that I read post the Financial Crisis in 2008, and it was titled This Time is Different and the authors were making the case that financial crises actually have repeated themselves over time. So actually 'this time is different' are four very dangerous words to utter when it comes to financial markets because we tend to see a lot of these false starts and I think Japan has been characterized like that, before where you saw some of these ingredients that you mentioned maybe in place and then nothing manifested from it. But you've talked about inflation, you've talked about the role that it plays as a diversifier, policy changes, and so maybe this time, in fact really is different in terms of Japan's revival. Can we talk about the geopolitical landscape and how does that affect the renewed interest in Japan?

Belinda Boa: This is a theme that we speak about a lot, particularly in this part of the world. We have been over the last decade in an era which can be described by geopolitical moderation, a globalization, and those terms, we're not speaking about anymore. We're in a world of global fragmentation. We are calling it the world in three, where we have the countries aligned with the West, countries aligned with China and the East, and then there is a large block of neutral political countries. These countries we think are going to benefit massively from the shifting trade patterns and shifting in supply chains.

So, when I look at trade numbers, trade's not declining. Trade is just shifting, and it's been driven by politicization, by a need for security. That's true for governments, it's true for companies as well. And we look at Japan, which has been very politically stable for many years. It has very close ties and allies in the West. And so as global companies are looking at rewiring their supply chains, we are seeing, companies looking at Japan as a market that could benefit from this. We know there are very large companies which are signing contracts to build manufacturing plants and large R&D centers in Japan. There are also domestic companies that are doing the same. And while this is going to take a long time to play out, we believe because of its political stability that Japan is one of those countries along with some of the other multi-aligned countries that are set to benefit from this rewiring of supply chains globally.

Oscar Pulido: And you made the case that Japan is a more diversified stock market maybe than some of its developed market peers. I think you talked about the US and the peers in Asia as well, having more of a tech concentration. So, talk a little bit more about Japanese companies and. Businesses, what is it that makes them unique for investors to consider?

Belinda Boa: There's so many unique stories that are really playing out now, some of those opportunities actually are driven off the headwinds which Japan has faced over the last couple of decades. Japan has had a declining workforce since the middle of the nineties, and that's because of its aging population. It actually leads the world in a graying population- they call it a silvering population. And as a result, it has actually been focused on developing, medical technologies and factory automation to deal with the fact that they're going to need to address labor shortages. As a result, there's some global companies, which are leaders right now in this space, not only to provide those type of services and factories as needed in Japan, but also globally.

An example of that would actually be railway operators. They're using AI to monitor remotely and to improve the efficiency of the railways. This is an area which is growing, not just domestically in Japan, but also there is a need for this globally because Japan is now not just unique in an aging population with a tight labor market and labor shortages.

Medical services and products is another area where we are seeing Japan has been focused. Also because of its aging population, but there is now a regulation which is coming through. So as of April, doctor's hours are going to be regulated in Japan. The need to have medical services and products which will be able to alleviate the hard-working hours of doctors, is now a regulatory requirement. So, we are seeing investing in this infrastructure. And we think that there's going to be a global need for this, so again, we are seeing the need of some of these unique investments that Japan has made over the last couple of decades now playing out in both innovation and leadership for aging populations.

Oscar Pulido: So, Belinda, when you went back through the timeline of Japan over the last few decades, you touched on some economic reforms that started about 10 years ago. they were called Abenomics, and this was when Prime Minister Shinzo Abe, introduced economic reforms, and I think they didn't quite deliver the impact that they were intended to. You've touched on some more targeted, regulatory reforms in your comments around healthcare, savings schemes that individual investors have, but usually at a country level, there are some more significant reforms that need to take place for a country to really experience this revival. So, can you talk a little bit more about those?

Belinda Boa: Yeah, corporate transformation, so this is a unique story to Japan. It's one of the biggest themes that we have had in our portfolios over the last year and a half. Japan used to have a significant number of conglomerates. Or complex organizations with a number of listed subsidiaries. they were both difficult to analyze, but also a lot of these were not profitable or had very low growth prospects. When Abenomics introduced, the third era was very specifically directed at this corporate reform. We have seen a number of companies restructuring, and spinoffs of non-core business. And that's actually generated, improved multiples for the companies, higher profits, and clearly the equity prices have reacted as well. This is just the start of this transformation. There are many more companies that are going through that right now. So, we do believe that there is still a huge amount of embedded value that can be unlocked from these corporate transformations going forward.

But look, it's not only the government policies like Abenomics, which have helped with this corporate transformation story. We've also seen the Tokyo Stock Exchange, which has called for better capital efficiency of companies. And by that they are focused on making sure that companies, stop hoarding their cash and spend their time looking at how to spend it and how to improve shareholder returns. So, it's focused at the end of the market where book value companies are low. that was a reform that was actually introduced in 2023. As of a couple of days ago, the Tokyo Stock Exchange has taken it one step further and they have decided they're going to name and shame companies that fail to report on how they're going to release value for shareholders and how they're going to improve their book values. That has actually been one of the most significant themes that we've been invested in over the last number of years, and it's playing out. And while I think there has been progress, we're seeing change in multiples, we're seeing business models improve.

There's still a long way to go, Oscar, when I look today at the Top Ex, which is the broad index in Japan, roughly half of the companies still trade below their book value. And what that means is they trade below the value of their assets. So, there's still a lot of upsides here, in terms of corporate transformation, it's one of the bigger opportunities and themes we've been invested in.

Oscar Pulido: And it sounds like what you're describing takes some time to play out. It doesn't happen in a week or a month or maybe even a year but makes this an interesting market then to follow for the next couple of years as things like what the Tokyo Stock Exchange is doing come to fruition. And you mentioned where you're sitting, we should mention that you're recording this, in Singapore at a rather, late hour of the evening to accommodate us. But you're the head of active investments in the Asia Pacific region for BlackRock. So how do you think about the role of an active investor when you're looking at the Japanese market?

Belinda Boa: It's a good question, I feel biased answering it, but let's be clear. We believe that Japan is going to have a larger role in global portfolios because of all the things that I've mentioned going forward. And whether that is a role in terms of just broad index exposure or whether it's an active exposure, so relative to a benchmark, or even a private exposure. I just believe that because of this transformational story that is playing out, we are going to see more interest and more investment in Japan as a whole.

However, because of this massive transformation that we are talking about, and because Japan is ripe for stock picking, Tokyo Stock Exchange had 3,900 companies listed on the exchange at the end of December. It is deep, it is liquid. As I've mentioned because of this transformational story, not all companies are ripe for the changing business model environment and are going to benefit from some of these things. So, I'd argue that this is one of the few markets where you really do want to be active, so that you can be on the right side of that trade if you want to enhance your returns in Japanese equities.

Oscar Pulido: Right, it's a large market with a lot to choose from and perhaps some inefficiencies that are going to start to correct themselves in the years ahead. So, an active investor has a good playground from which to choose from. Belinda, you're probably familiar with the five mega forces that the BlackRock Investment Institute has put out, and we've talked about them on the podcast.

You've actually mentioned a few of them in your comments. You talked about artificial intelligence, aging populations, and geopolitical fragmentation. Other mega forces include the future of finance, and the low carbon transition, as you think about. Japan, what are some of the most compelling mega forces that you think impact that country?

Belinda Boa: Yeah, the one I probably haven't spoken about is this transition to low carbon. It is front and center for Japan, and interestingly, it has been probably long before sustainability, the term became popular globally. And the reason for that is Japan has had to focus on the scarcity of natural resources, and its social values given the changes that I've mentioned from demographic perspective. It is a country that has faced unbelievable earthquakes and tragic tsunamis over the years, and there is a deeply felt duty to both protect and preserve the environment in Japan. That combined with the country's expertise in engineering and innovation has meant that it's actually developed energy efficient industries years before the rest of the world was starting to look at that. It was the first place that developed the hybrid electric vehicle. It also has this deep sense of renewables, and in fact, plastic bottle recycling, it has been running at over 80% in Japan for over the last decade. That is significantly lower in other countries, so just examples of how focused the country has been in terms of the theme around sustainability.

But more important than anything else is the fact that we are seeing both public and private companies aligning with the government's commitment of 150 trillion yen to building a sustainable future in Japan. And that means we're going to see more leadership and more innovation from companies around the theme of sustainability coming out of Japan. And they will thrive in that environment.

Oscar Pulido: So, it sounds like almost all of the mega forces are somehow interweaving in the Japanese investment opportunity based on what you're saying. Belinda, I know that you're actually from South Africa. you spent part of your career there, you've worked in London, you've worked in Hong Kong, now you're in Singapore, you have this great global perspective. I'm just curious, when you go and visit Japan, is there anything that, jumps out at you in terms of the economy, the industries, the companies that you're looking at that you'd want to share some perspective.

Belinda Boa: I've traveled to Japan for years, Oscar actually one of my first trips to Japan, I wouldn't have even considered going to Hong Kong or Singapore as Japan was really the hub. It was the hub of Asia, that's, where business was done for Asia. I remember one of my first couple of trips to Japan, I needed someone to walk me through the station because there was no way that I could navigate the station, it had no English language. I'm sure you know that from your trips as well. But one of my more recent trips to Japan, I stood in a queue at immigration for an hour and a half. And that is not speaking about any inefficiencies in immigration in Japan, it really was speaking to the number of tourists that were coming into Japan. It has become an absolute global destination for tourism. Certainly, in Asia if you speak to anybody, their number one choice of destination is Japan. and Japan, when you look at the numbers, is seeing a real boom post covid in terms of tourism. That's true because it's a fantastic cultural hub, it's a shopping hub, it's got beaches, it's got magnificent skiing and not to mention all of the incredible food.

I mention that because for a lot of our investors globally who have not seen and felt on the ground the transformational story that I'm talking about, it is an incredible destination to go to. And lastly, it is now 35% cheaper than it was a year ago because of the yen depreciation, I think tourism's going to continue to boom. It's an open politically stable economy in our part of the world, which is, looking for the story of transformation and as it plays out, I think getting a feel for it on the ground is going to be super important.

Oscar Pulido: You're right! I have had that experience of walking through the train station and feeling a bit lost, fortunately I was guided by somebody. But it gave me the sense that there's a lot about Japan that I don't know, and you've helped fill in some of those blanks today. Belinda, thank you so much for your views on Japan, and thank you for joining us on The Bid.

Belinda Boa: Thanks Oscar!

Oscar Pulido: Thanks for listening to this episode of The Bid. On our next episode, I welcome Catherine Cress, head of geopolitical research and strategy at BlackRock to discuss what the economy can expect this year from the world of geopolitics.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0124U/M-3333800

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

Digital assets have become a fascinating and sometimes perplexing phenomenon in the financial landscape. Cryptocurrencies offer decentralized and borderless transactions challenging the long-established norms of the financial system. And the underlying blockchain technology not only ensures security, but also opens doors to innovative applications beyond currency- impacting industries from finance to supply chain.

Robbie Mitchnick: The ability for the first time to have an asset that is truly global, that anyone with a mobile phone and internet connection can tap into. This asset, and the new access to financial opportunities that it creates in a permissionless way is really a significant breakthrough.

Oscar Pulido: But cryptocurrencies receive their share of skepticism due to their volatile nature. So, what does the future hold for this asset class?

Samara Cohen: This era of access and integration is what's here for Bitcoin now. So it's going to be critical to see how the integration of Bitcoin in capital markets catalyzes new strategies for investors and differentiated outcomes.

Oscar Pulido: Today I'm joined by Robbie Mitchnick, head of Digital Assets at BlackRock and Samara Cohen, Chief Investment Officer of the ETF and Index Investments business at BlackRock. Robbie and Samara will lend their knowledge and experience to help us navigate the story of digital assets, from their inception to their current state and beyond. We'll explore the unique features that set digital assets apart and the potential they hold for investors seeking new opportunities in the ever-evolving financial market.

<<THEME MUSIC ENDS>>

Oscar Pulido: Robbie and Samara, welcome to The Bid.

Robbie Mitchnick: Thanks for having me. Good to be back.

Samara Cohen: Thanks for having us, Oscar.

Oscar Pulido: I'm very excited to have you both because, I don't know if it's just me, but when we talk about this space, there's a lot of terminology that we use. We talk about digital assets, there's blockchain, there's crypto, there's Bitcoin, and I've needed to listen to a few of these conversations to make sense of how this all comes together. Robbie, maybe I could start with you, help us make sense of some of these concepts.

Robbie Mitchnick: Sure. Digital assets as the starting point is the umbrella term for this space. And everything in digital assets is enabled by blockchain as the underlying technology.

So, when we think about digital assets, I think that best way to think of its significance is with an analogy to the internet. That is that digital assets through blockchain makes possible for the movement of value, what the internet did for the movement of data multiple decades ago, a global, decentralized, accessible, real-time network.

Then within digital assets, you've got really three buckets that we think of. One is crypto, the most famous -generates a lot of the headlines, you have 10,000 plus different crypto assets today of which Bitcoin is the original and remains today by far the largest with a striking share of market cap north of 50%.

Second bucket, stable coins where you take the properties of digital assets of crypto in terms of ability to send them anywhere in the world in near real time, at near zero cost in a digitally native, transparent way, and strip out some of the intrinsic volatility that exists today for crypto assets to make them more useful as a payment asset.

The third bucket, tokenized assets, the idea is you're taking real world assets or financial assets, and you're issuing the ownership record of those on a blockchain in digitally native format.

Oscar Pulido: I love the analogy about digital assets, providing the ability of the movement of value, I think is what you said. The way the internet facilitated the movement of information. And thank you for that description. I think that helps categorize these various concepts. But if I'm an investor, what does this all actually mean? what part of what you mentioned actually matters to me as somebody looking at the markets.

Robbie Mitchnick: Yeah. I think sometimes it's tempting to look at this and say, the applications of blockchain technology, maybe Bitcoin or crypto was first, but there's going to be so many vast applications of blockchain that those'll be irrelevant in the long arc of history. And I don't think that's quite correct, Bitcoin's been around for 15 years, the blockchain hype and institutional interest has been here for, let's say six, seven years. When we look at, what are the things that we couldn't solve before as a human society and economy or that we did, but we did them in a really inefficient way. Now through blockchain, we either solved that or we predominantly use blockchain to do it in a much more efficient way. The record so far is pretty thin, and the exceptions are really Bitcoin, Ethereum to some extent in a more early-stage way, and stable coins.

So, Bitcoin, why is it significant? I think it's a really complex question that's not well understood. The way to think about it is in three components, three problems that it solves, which are centuries old problems.

And the first is payments and particularly cross-border payments or moving money across political jurisdictions. That has always been difficult. Domestic payments today actually pretty easy, pretty efficient. A lot of countries have real time digital payment networks. But cross border is another story altogether.

And if we go back a millennia to what was a very pioneering system in the Middle East, the Hawala system. And that was how, money moved across longer distances in that time. And how it worked was you went to a broker, and you deposited something of value, they created a receipt that was then transmitted to another broker, let's say in the next village, who was connected to your broker. And they would pay out to some recipient something of value, and then the two brokers would periodically settle.

It's an innovative system for the ninth century AD. But in fact, our cross-border payment system today looks a lot like that. If you're sending a wire or a money transmission, you're going to your bank or your money transmitter and you're depositing with them, and then they've got a relationship with their bank, and their bank has a relationship with the end recipient's bank, and at the end of it, someone at the other end gets their money, but in the process you incur significant fees and time delays and frictions, and so that has not modernized really in centuries.

When we think about the introduction of Bitcoin and digital assets, this idea of being able to move a digitally native asset globally across borders in near real time at near zero cost, that's an amazing breakthrough.

The second piece is when we think about the predominant form that money lives in today, Now, for most of our history, money was either a commodity itself or coinage that had a linkage to commodity, whether directly or through convertibility. Today the predominant form of money is as government issued fiat currency. And that has all kinds of benefits in terms of efficiency to settle transactions at scale and digital format. But what it doesn't have is security against arbitrary supply increases. And so, what we've seen throughout much of modern history is when fiscal challenges arise in a given country, there's this temptation to increase the supply to base currency and ultimately create inflation. Bitcoin with its rigidly fixed supply cap of 21 million units, 19.5 million of which are already in existence, has a totally different paradigm.

And then finally, the ability for the first time to have an asset that is truly global, that anyone with a mobile phone and internet connection can tap into. There's people who have mobile phones but don't have bank accounts. So, this asset, and the new access to financial opportunities that it creates in a permissionless way is really a significant breakthrough.

Oscar Pulido: So, you're saying that crypto, and you use Bitcoin as the prominent example, is modernizing the financial system. It's making it easier for cross-border payments and is making people think about the currency that they have in their pocket, that fiat currency, those bills, are not fixed in supply, they can't increase in supply. And in fact, we saw central bank responses over the course of many years do that in response to crises. Whereas cryptocurrencies are more fixed in supply, and therefore have a purchasing power that perhaps is more valuable. Let's talk more about cryptocurrency, which perhaps had a lot of critics, that this was a fad, and, to some extent that appeared to be the case at the end of 2022. But here we are again today with crypto and Bitcoin, really prominently in the headline. So, what's changed?

Robbie Mitchnick: Actually, you allude to the major correction that happened in 2022, that was just one cycle in crypto's history. But there've been four. And if you put a price chart of them side by side, they look almost indistinguishable.

So, Bitcoin's created in 2009, and then you have 2010, 2011, this spectacular parabolic rally when it goes from nothing to something. Then crash.

2013 another parabolic rally. This time it enters the mainstream consciousness of a wider number of people. Ultimately that, cycle collapsed when Mount Gox, which was the leading crypto exchange at the time, imploded. Then you have this bear market for a while.

2017 arrives and crypto goes parabolic again, hits all-time highs, order magnitude above where it had ever been before. And now it started to enter not just mainstream investors, but big institutions are thinking about this, Again, that, rally collapses.

Finally, the fourth cycle, which we saw starting in Covid, it was some flight to scarcity value of Bitcoin initially, but then it extended to other crypto assets, that too collapsed in 2022 with some excesses and other bad behavior.

So, it's been this, rollercoaster journey, but when you look back at the long-term trajectory, each of these cycles, tend to be a multiple or even an order of magnitude or higher than the prior cycle.

Oscar Pulido: So, these ups and downs are nothing new. And in fact, your timeline went back to the early 2010s, but we should expect volatility in this asset class. that gets me to think about investments and Samara, when we think about these digital assets and particularly cryptocurrencies, how should investors think about this relative to more traditional investments, things like stocks and bonds. Are there certain advantages they possess or are there certain challenges, or maybe it's a combination of both?

Samara Cohen: Oscar, what I love about the framing that Robbie just gave us is that he not only just did a 14-year history of cryptocurrencies and Bitcoin specifically, but he actually went back a thousand years in talking about the history of money, which I love as a self-professed markets history nerd.

And Robbie has laid out really well the vision for digital assets, they can be traded across borders in a transparent manner without intermediaries and that's the crux of what is the specific change in this new paradigm. And of course, these are markets that don't close, these are 24/7 markets. so that's the vision. Now let's speak to the actual practice of investing in Bitcoin.

When you look to invest in and own Bitcoin directly, as an investor, you're engaging with an entirely new ecosystem. You have to take a more direct role in vendor selection, in onboarding, you need to understand custody and also the differences in tax management. This is a big education curve, and it introduces, complexity as well as potentially trading and operational costs.

So that's the state of play for investors who are, alongside their, asset classes and markets they have traditionally been invested, in looking to overlay bitcoin strategies. Now the attributes of digital assets that we've talked about are actually particularly appealing to millennial and Gen Z investors who, over the past several years, are becoming much more predominant in the investing world. And that's an important part of what's happening in market structure around the world and what's happening in crypto.

Both of these generations are digital natives, they grew up with the internet, they're comfortable transacting their lives in an increasingly borderless space. And they are more likely to own crypto than mutual funds, equities, or ETFs. And as Robbie spoke about, this trend of engaging in Bitcoin has been spreading to institutional investors as well with a number of them, adding Bitcoin as an asset class alongside others in their portfolios. So, the moment right now, and I love Robbie's layout of the four eras of Bitcoin because I think this era is really around integration and access with the availability of access technologies like ETFs.

Oscar Pulido: It sounds like it won't just be the millennials and Gen Z investors that are thinking about crypto, but that it could broaden out to a broader swath of investors. So are there certain developments in the regulatory landscape that have created more legitimacy or acceptance for digital assets that you've seen or that you foresee happening?

Samara Cohen: Yeah, this is important to talk about because evolution in the regulatory atmosphere has not only enabled the rise of digital assets, but where it goes from here is going to be critical to the path forward.

I do want to make the point though, Oscar, to what you said about institutional investors alongside the Gen Z millennial investors. Putting crypto to the side, a huge topic in markets around the world is how market structure is adapting to self-directed retail investors. And that is true, across asset classes with platforms and a huge part of market structure regulation generally. Looking at equity markets, through the lens of how they are accessed directly by investors, is really guiding policymakers around the world in traditional finance as well.

Now policymakers are starting to make moves to develop frameworks around Bitcoin, and the reason they're doing it is because they see the increase in interest in investors and also the evolution in infrastructure across the industry.

We see countries broadly focused on how to bring crypto markets into compliance by creating frameworks, which is what they do, and what they're supposed to do for all parts of the financial system and all parts of emerging technologies.

The European Union will actually be the first major jurisdiction with a comprehensive crypto framework. The Markets and Crypto Assets licensing regime, and that takes effect at year end 2024. In the US there have been efforts in Congress on a bipartisan basis to create measures aimed at regulating and providing greater market structure to the digital asset industry, those measures have progress that needs to be made. I will say in my own engagement in the industry and with US policy makers, I think the drive to ensure the US is competitive in this space, is going to accelerate and make sure we progress.

Oscar Pulido: Samara, it sounds like what you're saying is that regulators are working to put frameworks in place that give investors some comfort that there are guardrails in place, so that if they want to incorporate Bitcoin and digital assets into their portfolio, they can do so in a more confident manner. And Robbie, I think Samara alluded to this, you mentioned blockchain technology, it has wider application, that it's the foundation for, digital currencies, but it has other ways in which it can be applied. So maybe talk about, where are we there?

Robbie Mitchnick: It's fun that we get to do this together because you were one of the original believers in this Samara. I remember, sitting in your office on a Friday afternoon in October of 2018. And you were so dialed in to what this was, and you were newer to the technology at the time, but thinking about what this could mean for ETF markets, and I remember walking out of that thinking, this is going to be a thing here,

Samara Cohen: And I'm just sad you didn't bring up your thousand-year history of money, Robbie, because I think we would've gotten here faster!

Robbie Mitchnick: Or, you might've said, that guy's crazy and I would've been, looking for another job. But, when we think about going beyond crypto and I mentioned in the sort of three-part framework at the top for digital assets of crypto, stable coins and tokenized assets. And tokenized assets is how I would answer that question where, there's a lot of interest and, hype around, the potential to take this technology and apply it to existing assets, whether they be financial or physical assets- we could be talking about stocks, bonds, commodities like gold, real estate, art, you name it. And take the properties of blockchain and what it enables in terms of transparency and efficient settlement and, borderlessness and being digitally native and programmable, all these things and modernize how our financial system works and modernize access to, maybe asset classes that weren't easy or efficient for many investors to get access to. And so, I think this is a transformation that is going to take time. This is not a three-year transformation. This is 10, maybe 15, maybe 20 years, but if it happens, it'll be the biggest transformation in our securities market since we moved from paper-based share trading in the 1970s to electronic records.

Oscar Pulido: And the reason it takes that long, the 10, 15, 20 years, is just that financial markets are complex and there's a way in which things are done that takes a long time to unwind. Robbie, I think I've also heard you talk about the issue of property rights and how tokenized assets strengthen this issue of property rights over digital assets. So maybe talk a little bit about that.

Robbie Mitchnick: Yeah, one of the breakthroughs of Bitcoin that then, applies, in other digital assets is, historically it's been very difficult to create a form of property, a form of value that cannot be seized by force.

Again, go back centuries or millennia, property, whether that was at risk of seizure by an invading army, or by a hostile or authoritarian government. Now for the first time, you have this idea that your wealth can fit on effectively a USB key as stored in your pocket, or even be memorized in your head. We're talking about private key that gives you access to your Bitcoin. that's an amazing breakthrough,

Oscar Pulido: So, Samara, what advancements do you see taking place in the digital asset space that investors should be mindful of? What do you think that's going to mean in terms of the investment decisions that investors need to make going forward?

Samara Cohen: I have to say, the private key, comment is a great example of when we talk about the practical applications and what's new for investors here, like having to memorize seed phrase is very stressful for investors. And so, figuring out how you want to engage and whether that's how you want to own your crypto, that's a perfect example of what it means to actually have to adopt to a new ecosystem.

For all of the reasons that we've talked about, self-directed investors, we know we see it, this is a huge topic for policy makers, they are interested in gaining access to digital assets broadly, to Bitcoin specifically in a way that's convenient and efficient and secure. Importantly, crypto is also becoming a topic for the whole wealth industry and for financial advisors.

And then we're starting to think about crypto in a whole portfolio context, this brings me back to this idea of the era of access and integration. What are the ways to integrate crypto into a broader portfolio? And then the significance of the application of existing and familiar technologies like ETF technology to spot Bitcoin? The use of ETF technology, which is now becoming predominant, in multiple jurisdictions allow investors more access to Bitcoin in a whole portfolio way. So, they can see the integration of risk, they can manage their portfolios holistically. And that's a very significant aspect of what this kind of next phase will be.

And I will also add with respect to whether it takes, years, decades, millennia for market structure to change. We know a few things, like really what moves market structure forward are two things, it's what technology enables and this inexorable march towards more access and more transparency, which investors always want. Competing with that are, entrenched interests often, which can, slow things down. And then as you talked about before, the ability of policy and regulatory frameworks to adapt in a way that supports the new ecosystem.

This era of access and integration is what's here for Bitcoin now. So, it's going to be critical to see how the integration of Bitcoin in capital markets catalyzes new strategies for investors and differentiated outcomes.

Oscar Pulido: It sounds like both of you have a front row seat to the modernization of, financial markets. So, thank you for sharing that with me today, I feel like I've got a little more information on this topic, but I know there's probably more to learn, so we'll look forward to welcoming you both back at some point on The Bid. Robbie and Samara, thank you for joining us on the podcast.

Robbie Mitchnick: Thanks for having us.

Samara Cohen: Thanks for having us. Oscar.

Oscar Pulido: Thanks for listening. to this episode of The Bid. Next week, be sure to tune in and check out my conversation with Jeff Spiegel, where he'll provide a holistic overview of major investment themes to help investors navigate the year ahead.

<<THEME MUSIC>>

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MKTGSH0124U/M-3290789

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

Benjamin Franklin once said, an investment in knowledge always pays the best interest. So, as we begin a new year, what knowledge will help investors prepare for potential volatility on the one hand, and potential for opportunities on the other?

Jeff Spiegel: One thing that we have to keep in mind, and this really started last year, um, is all decisions around investing, everything we're seeing everyone doing is now colored by the rate situation. With yields where they are, um, frankly, you have to be a little more thoughtful about taking risk, right, if you can capture, you know, four or five, 6% on short-term debt uh, that raises the bar. And so, we think that investors, when they're thinking about the equity side of their allocation um, need to be thoughtful about where can they really drive returns.

Joining me today is a Bid regular Jeff Spiegel. US head of Thematics Sector and International ETFs at BlackRock to help investors navigate the year ahead. Jeff will provide a holistic overview of three major investment themes, including the emergence of the AI trade opportunities in medical innovation, and the impact of geopolitical shifts on globalization.

Jeff, welcome back to The Bid.

Jeff Spiegel: Great to be back with you, Oscar.

Oscar Pulido: And Jeff, Happy New Year. it is 2024. I hope you had some time off, before we started the new year?

Jeff Spiegel: Happy New year to you, Oscar. I've actually been out in Denver for a couple of weeks, visiting my sister who's a veterinarian, which means I was also staying with four chinchillas and a four-pound dog.

Oscar Pulido: So, Jeff, with the new year comes the opportunity to invest in new themes. So, I'm curious, how are you thinking about the year ahead as far as the broad themes that investors should be considering?

Jeff Spiegel: One thing that we have to keep in mind, and this really started last year, is all decisions around investing, everything we're seeing everyone doing is now colored by the rate situation. With yields where they are, frankly, you have to be a little more thoughtful about taking risk, right, if you can capture, four or five, 6% on short-term debt that raises the bar. And so, we think that investors, when they're thinking about the equity side of their allocation need to be thoughtful about where can they really drive returns. Where is that potential opportunity to get the outperformance that justifies being out of cash and being out of bonds?

And so, when we think about that, there's really three areas. The first is artificial intelligence. I know we've been talking about this for a long time. I did a Bid episode with you last year where we discussed it but it, it's a constantly growing and transforming phenomenon. We're really thinking about it as the very early iterations, the concepts, the ChatGPT to real products and enterprise usage and commercialization.

The second is about medical innovation, unlike artificial intelligence a lot of the most exciting areas of medical breakthroughs last year in 2023 really struggled, from a performance perspective that rerated valuations, and even though we have amazing breakthroughs right in front of us, against cancer, against neurodegenerative conditions, those valuations make really attractive entry points.

And the last is this idea of rewiring globalization. This new megaforce that we've brought to market last year in 2023, the idea of a fragmenting world is something that investors have to think about more and more in their international allocations.

Oscar Pulido: Let's go through some of these themes. You mentioned three of them, but let's start with AI and I was going back through the archives and in fact it was last February that you and I spoke, and we talked about ChatGPT, in fact people might remember that we had ChatGPT join us on the podcast as a special guest. It was a big theme for 2023 as it turns out, and you're saying it's going to be a continued theme in 2024. What are the developments that you expect to see this year? What industries, what sectors are going to benefit from this AI theme?

Jeff Spiegel: We make a lot of predictions, both of us in our work. I think we were both really excited about AI back in February. I think we probably under clubbed it, in terms of how exciting it was going to be, and that excitement really continues. but again, it's shifting, towards a new phase. last year most people's experience with artificial intelligence was having an amazing conversation with ChatGPT or with Bard and that felt a little bit more like a novelty but was teasing people's idea of what might be possible.

I think going into this year, what you're going to see is, much more commercial applications. That means that if you work in a law office, you're probably going to be using technology that allows you to iterate on contracts incredibly quickly with just text-based inputs, and this idea of text-based inputs is so important because one of the other areas that I think will be transformed is coding. Pretty much anything that you might write in code, you can actually just tell your artificial intelligence what you want it to do, and it'll output that code. So, across industries, you're going to be able to use text language to accomplish incredibly complicated tasks that usually would require some level of coding automation. And again, that could be contract based, that could be marketing and advertising language, so on and so forth. And again, companies are investing not just because AI is cool, though, I think we can all agree it's pretty cool, but largely around cost reductions. When you think about the efficiencies that are created, a coder sort of spending his time or her time, debugging something rather than writing the code from scratch- that's faster, that's powerful. Actually, about 60% of companies who plan to adopt AI are planning to do so for the reasons of cost savings.^[i]

 This is a real imperative in how businesses are being run in generating more revenue and generating more profitability. These productization, these actual use cases in the way that we work, I think that's going to be really powerful.

We've also talked in the last year a lot of the downstream implications and beneficiaries, the picks and shovels, if you will. There were semiconductor companies that were some of the biggest performers around the AI craze. a lot of that specifically semiconductor companies that were responsible for GPUs or graphic processing units. Now, these are really critical when it comes to training AIs, when it comes to crunching massive amounts of information. But we actually think that semiconductor opportunity is really just starting because as we move forward from training artificial intelligence towards what we call inference. You actually need different semiconductors, you need CPUs. That broadens out the opportunity set to a range of other firms. And the way you can think about this is the training process is about learning how to do a math problem. The inference process is actually taking what you've learned applying it to solving a math problem. As we shift to that phase of artificial intelligence, the semiconductor opportunity only broadens out from here.

And then investors remain really underexposed to a lot of these themes. If you look at the NYSE fact set, robotics and artificial intelligence index, it’s a very small holding in most people's portfolios when you consider pure play companies. From pure play companies under a hundred billion dollars, the average investor is only owning about 1.5% of their portfolio in artificial intelligence, there's a lot of room to grow that allocation, especially as artificial intelligence continues to grow in importance in our lives and in the economy.^[ii]

Oscar Pulido: It is interesting to think back to the conversation we originally had around AI and chat GPT. You used the word novelty and just thinking about how that discussion around AI evolved in 2023, where we had seemingly this kind of cool toy to play with.

And then, what. Manifested over the course of the year was all of these real-world applications that it was going to start to apply to. And you started talking about some of those and some of what's to come. You also mentioned medical innovation. So, what are some of the factors that make. This sector, attractive in terms of valuations, in terms of potential breakthroughs? I'm remembering as well the discussion you and I had around neuroscience and maybe that's one of the areas that you're, wanting to discuss.

Jeff Spiegel: It absolutely is. We're quickly entering a world in which there will be more grandparents than grandchildren. Effectively that's more people over 65 than under the age of 18^[iii] and, we can actually predict what some of the consequence of that is medically.

We know that in older populations, cancer is significantly more prevalent. We know that in older populations some of those neurodegenerative conditions we talked about last time, Parkinson's, Alzheimer's, various other forms of dementia are a lot more prevalent. That's a challenge for society, for sure, but it's also an opportunity because we can see it coming, because this is a very predictable force, these aging populations. And so, there's a bunch of breakthroughs in both areas as well as biotechnology broadly. It's not actually just that people are getting older, that age cohort, that baby boomer population is aging up, it's also that people are living longer because medicine is better.

And I would actually predict we're going to accelerate that pretty quickly because a lot of the drugs that we've seen that are combating diabetes and obesity, that's one of the major problems that limits lifespans, particularly in the United States. These drugs are actually going to drive about a hundred billion dollars of additional revenue in the prescription drug market up from about 1.5 trillion today, so almost an 8% increase in the total prescription market just based on these drugs that are going to reduce obesity and therefore extend lives even further.^[iv]

But when we think about specifically, how we're going to operate faster, how we're going to operate better, we actually can go back to that artificial intelligence conversation that we were just having. One of the differences from 2023 to this year is when you're playing with chat GPT, when you're using Bard, these are generative AIs that were trained on the internet, they were trained on public information. What you're going to increasingly see is more specialized artificial intelligence that's trained on specific information. And in medicine, that's going to be one of the most powerful places, naturally medical data is restricted. That's exactly what we want, so it's not available to a GPT or a Bard. But when you use it within a walled garden of a biotechnology company, for example, you can actually get at that.

And so, for example, scientists actually last year, used AI to map a fruit flies’ brain, 150,000 neurons.^[v] And this is actually the first animal that we have ever mapped the brain for. How did we do that? We used artificial intelligence to accelerate the process. Now, the human brain is a little bit more complicated, it's more like 86 billion neurons than 150,000 neurons.^[vi] But at the speed of which artificial intelligence is improving, we're probably going to be able to map the human brain as well in the near future. Artificial intelligence is driving breakthroughs in one of those areas that we know is going to be such a prevalent problem, which is these neurodegenerative conditions. Because if we can better understand the brain, we can come up with a lot more treatments in those areas.

And then when we think about cancer and drug discovery more broadly, bringing a new drug to market, if you factor in failures, which there's a high fail rate, the average drug actually costs about $2.5 billion in development costs.^[vii] It takes about 12 to 15 years on average from development to regulatory approval.^[viii] There's only about a one third probability that a drug researched actually is successful, in treating the condition it's intended for.^[ix] And then almost a 10% probability that it gets approved by the FDA or whichever governing body.^[x]

So, it's incredibly challenging bringing new drugs to market but again, AI can prevent a really nice solution here, which is by 2025, we actually think that over 30% of new drugs are expected to be discovered using generative AI,^[xi] which is really good at iterative processes, which is what drug development is often all about, and we think that this can save biotech companies 25 to 50% of their development time,^[xii] When you think about that, you're basically saying drugs go from a likelihood of 35%, of being successful over 10 to 12 years, to basically taking that risk only over five to six years. that makes a huge difference in the profitability of biotech companies as well as in the opportunities we're all going to have to have these drugs brought to market sooner for us and for our loved ones.

But when you think about AI a little bit more holistically in healthcare, you could actually think about the patient experience. virtual nursing assistants, AI robot assisted surgeries, health monitoring through wearables, personalized healthcare plans.

You can almost imagine, 'Hey, artificial intelligence, read all of the patient notes on this person, take a look at the patient tests, and then spit out for me a treatment plan' That's where we're headed. And then more diagnostics and more treatments. So, it's not just drug discovery, it's this whole universe of health care that's going to get supercharged at a time that's really important because we know we have that aging population, we know we're going to have those greater health needs.

Oscar Pulido: Just listening to you talk, you've intersected the AI investment theme with a medical, healthcare-oriented investment theme, which is a good reminder that these two things are not interdependent.

They can, intersect. and you brought up some good examples. you also talked about an aging population, as I understand it. I just recently heard this, that 2024 is what they're calling Peak 65, which is the year in which the most baby boomers are turning 65 years old. Just to give us a sense of the aging population.

So, what is the impact for somebody who's a long-term investor and thinking about investing in the market, what is the impact of this larger and older population?

Jeff Spiegel: So, I think there's, two impacts that I would point out. So, one is what we were just discussing. It's very predictable that we're going to see more healthcare spending. It's very predictable that we're going to see more breakthroughs as we invest more to fight those diseases, and we use artificial intelligence to supercharge that process.

The other areas that, this demographic dividend that was effectively paid to the United States and some other countries following World War II because of that baby boom is ending in much of the Western world. It's long over, in a place like Japan. but when you think about large parts of emerging markets, particularly emerging markets outside China, the demographic dividend is only just paying out now. labor productivity, size of labor force, age of labor force. Increasingly, opportunities are a lot more attractive outside of the United States and outside of Western countries because of the disparity in where folks are on this demographic dividend, on this aging curve,

Oscar Pulido: As you talk about the differences in, geographies that, changing demographics are having, it brings up the last theme in the outlook, which is, the rewiring of globalization, which is something that we've seen accelerate post the Pandemic. Again, you've been on here talking about this theme in the past, so tell us a little bit about the countries that you think are poised to benefit from the changing supply chains around the world.

Jeff Spiegel: There's a range of countries, that are going to benefit. And, two really important concepts are, French, shoring and Nearshoring. So Nearshoring, actually to back up for a second, just to provide context, for 30, 40 years. Companies really only prioritize cost in the development of their supply chains.

Now they're focusing on resilience for a range of reasons. One, the supply chain disruptions of the Covid Pandemic two, an increasingly fraught geopolitical world. a lot has been shown based on what's happened in Ukraine, based on what's happened in Israel, and as a result. That more fraught geopolitical environment means that supply chains around the world are even more at risk.

So as folks think about reorienting these, they want to limit the geopolitical risk and they want to limit the sort of, geographic distance sort of risk. So Nearshoring is bringing production back towards closer to home. and French shoring is doing more business with countries which you have more free trade agreements or just more positive government relations.

And so, thinking about those two areas, Mexico and India are the two that come to mind. Mexico kind of hits, on all fronts here, right? So really strong free trade agreement with the United States. if you ask executives what are the reasons you want to do more business in Mexico, they'll tell you it's because there's a qualified labor force, they'll tell you because the salaries are attractive, but they'll also tell you in huge numbers because of the proximity to the United States. and then you think about a place like India, and India obviously is a good bit away geographically from the United States, but today it's the world's fifth largest economy.^[xiii]

We think by the end of the decade it'll be the world's third largest economy.^[xiv] and again, a lot of that growth is driven by what we were talking about, the working age population, growing incredibly rapidly, the amount of educated young workers, growing incredibly radically, along with being a democratic countries that is good relations with a lot of other democratic countries like the United States, and so we've actually seen about $2 billion flow into India ETFs just over the course of last year.^[xv]

But when you zoom out a little bit, Mexico and India are really good examples, but the list goes on, right? You've got Vietnam, Thailand, Indonesia, Brazil, all of whom are benefiting from the near or French shoring components or both.

And when you also think about the fact that China makes up about 30% of the emerging markets benchmark,^[xvi] we're seeing investors increasingly focus on emerging markets X China We've actually seen about $4 billion flow into, emerging market X China ETFs just over the course of the last 12 months or so.^[xvii] you know that growth is incredibly rapid. In fact, emerging markets x China is now making up a really large percentage of total flows into emerging market ETFs, this new way of investing, focusing on this wide range of beneficiaries of nearshoring, of friend shoring, and thinking a little bit more about a diversification of supply chains beyond just China.

Oscar Pulido: So, Jeff, maybe just to wrap up, it's been a bumpy few years. We've had Covid, we've emerged from the pandemic, we have a new macro regime that the BlackRock Investment Institute has talked about with higher interest rates. You tend to come on here and give us an optimistic view of the world and think a little bit more long term, so starting off 2024 on the right foot, what are some of the things that investors should be considering to maximize the opportunities that are out there?

Jeff Spiegel: Everything has to be covered by this new yield environment that we're living in. And when you think about in that context, investors really have the luxury. of being pickier, if you can lock in fairly safely or very safely, strong yields, it gives you an opportunity in the portfolio to take a bit more risk, but also to be really thoughtful about that risk. That's why we think artificial intelligence, given the sort of expanding out of the opportunity, it's why we see medical breakthroughs given the attractive valuations combined with the supercharging impact of AI combined with some of the really near-term breakthroughs that are right in front of us.

And again, this geopolitical fragmentation, as places where we think investors can take some of that additional risk and be really targeted in equities, and not just as has worked really well for the last decade or so, own the whole market, but own specific markets where they think they can truly drive growth.

And honestly, when I think about these three areas, in a lot of ways, I think the biggest risk is missing the opportunities potentially being left behind. That's this whole idea of mega forces of really thinking forward, of really thinking about the opportunities that are huge, that we know are coming and that we want to make sure we participate in.

Oscar Pulido: Jeff, as always, very insightful. Again, happy New Year. I'm not sure if staying with your sister makes you more likely or less likely to want to have pets, but we do hope you'll rejoin us on the podcast over the course. Of 2024. Thank you so much for joining us on the bid today.

Jeff Spiegel: Still love pets, huge animal lover. I don't think I will ever have a chinchilla, much less for Chinchillas, but it was great getting to visit with her over the holiday season and as always, it's great getting to visit with you today, Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid. Subscribe to The Bid wherever you get your podcasts.

^[i] Slalom, 'AI’s most powerful prompt,' 10/10/23.
^[ii] BlackRock, Morningstar, BlackRock Portfolio Solutions as of June 30, 2022. Starting Portfolio Allocation is representative of advisors’ broad asset allocations for equities, based on analysis of 21,276 portfolios over the 12-month trailing period.
^[iii] Inter Press Service News Agency, 'The Historic Reversal of Populations,' 08/08/2016.
^[iv] BlackRock, 'Diagnosis: Big opportunity in healthcare stocks,' 07/27/2023.
^[v] Fortune, 'Scientists just used A.I. to map a fruit fly’s brain. Here’s why it’s a ‘turning point in neuroscience’,' 07/08/2023.
^[vi] Drug Discovery and Development, 'The Brain Knowledge Platform aims to illumine the brain’s cellular universe,' 06/10/2023.
^[vii] Morgan Stanley, 'Why Artificial Intelligence Could Speed Drug Discovery,' 09/09/2023.
^[viii] BCG and Wellcome, Unlocking the potential of AI in Drug Discovery,' June 2023.
^[ix] Ibid.
^[x] BCG and Wellcome, Unlocking the potential of AI in Drug Discovery,' June 2023.
^[xi] Gartner, 'Beyond ChatGPT: The Future of Generative AI for Enterprises,' 01/26/2023. BCG and Wellcome, Unlocking the potential of AI in Drug Discovery,' June 2023.
^[xii] Ibid.
^[xiii] World Economic Forum, 'This chart shows the growth of India’s economy,' 09/26/2022.
^[xiv] The Economic Times, 'India set to be world’s third-largest economy by 2030: S&P Global,' 10/25/2023.
^[xv] Global Business Intelligence, Bloomberg, as of 10/31/23.
^[xvi] Morningstar, as of 10/31/2023.
^[xvii] Global Business Intelligence, Bloomberg, as of 10/31/23.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH1223U/M-3285375

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido. In 2023, global equity markets experienced a notable surge driven by resilient economic growth and increased investor confidence. Setting an optimistic tone for the forthcoming year.

In particular, US equity returns pleasantly surprised investors, but with higher rates and inflation coupled with rising geopolitical tension still top of mind, can the solid performance continue and how might these topics impact markets in 2024?

Tony DeSpirito: If there's anything I've learned over my 30 or so years of investing, it's to expect the unexpected. I'd have to say We're still in the late innings of the economic cycle. Employment's rather full, there's not a lot of slack in the economy, and the Fed's job is a tough one.

Oscar Pulido: Today I welcome back a Bid regular BlackRock's global CIO of fundamental equities, Tony DeSpirito. Tony will break down the headlines and his stock Pickers guide to 2024. Tony, thank you so much for joining us on The Bid.

Tony DeSpirito: Thank you, Oscar. It's great to be here again.

Oscar Pulido: Tony, as we look ahead to 2024 and your expectations for the stock market, maybe we can first start with, how the equity markets defied expectations in 2023.

Tony DeSpirito: That's a great way of, putting it defying expectations. And if there's anything I've learned over my 30 or so years of investing, it's to expect the unexpected. Let's scroll back to the beginning of 2023, inflation was running at about 6.5%, the Fed was in the middle of its biggest hiking cycle, in the last 40 years, and you could describe investors as at best, cautious, and maybe even fearful.

You fast forward to where we are today, things worked out remarkably well. First in terms of inflation, it's running at less than half of what it was running at last year, so the Fed tightenings having a real impact there. But where we haven't seen a big impact is on the economy itself. If you look at the economy and the jobs market, that's remained really solid. In fact, we're probably going to end this year at about 2.5% GDP growth. The latest unemployment report was 3.7%, very healthy.

And then you look at markets and even if you look at the equally weighted S&P500 index, the market has climbed that proverbial wall of worry, if you will. Now it wasn't without some wobbles along the way, we had a banking crisis back in March. It's hard to remember now.

So it wasn't, without its wobbles, but certainly when you look at the year on the whole, you'd say the returns look quite normal. The economy looks quite healthy and inflation's about where, almost where we want it to

Oscar Pulido: And it's interesting you mentioned interest rates mention inflation, the economy, I might even add geopolitics. Those are topics that we touched on in 2023, but it seems like these are also some of the main topics going into 2024. So, tell us again where you fall on these various topics and what does it mean for equity investing?

Tony DeSpirito: I represent Fundamental Equities and we're not macro forecasters. We're bottoms up stock pickers. we're looking for good businesses at good prices that we want to own for the next three to five years, that's our investment horizon. That said, it's important to recognize where we are in the cycle.

I'd have to say we're still in the late innings of the economic cycle. That doesn't mean I'm forecasting a recession or preparing for recession. It just means we're in the later innings. the later innings are when employment's rather full, there's not a lot of slack in the economy, and the Fed's job is a tough one, to be quite honest, If the Fed tightens too much or for too long, we risk a recession, and if the Fed tightens too little or rolls back, some of those increases too quickly, we risk inflation coming back. And so, we're at that point in the cycle where you got to pull out your late cycle playbook as an investor. And to me what that means is you want to go up the scale in quality. Quality, I think about good businesses. I think about really strong balance sheets. And I think about buying at fair or good valuations, good prices. As you do that, the implication for investors is that you'll be okay no matter what the macro environment turns out. And I think that was the lesson from 2023, to be quite honest.

Oscar Pulido: The environment you describe, seems to imply that investors should be selective. You mentioned quality as a characteristic, but perhaps in the later, stages of economic cycle, selectivity is important, and this actually rhymes with what Alex Brazier has talked about from the BlackRock Investment Institute, which is this need to be agile in terms of your investment approach. So where should investors start in 2024 when they think about the stock market, particularly because a lot of them were very focused on cash at the beginning of 2023, should their mindset change as they go into the new year?

Tony DeSpirito: Well, this issue of selectivity, I think it's going to be a multi-year issue. I don't think it's going to be an issue for just 2024. I think we need to look back in history a little bit. We've talked a lot about this is a new era of investing. And I think what we really mean is that we're going back to old eras. I think about that period, post the global financial crisis all the way through till the end of 2021, when the Fed first realized it was behind the curve on inflation and rates. I call that the 'post global financial crisis' period.

It was incredibly unique by any historical standards. It was a period that was characterized by excess supply, too many empty houses, too many unemployed people, too many goods coming from all over the world in terms of low-cost geographies, and it meant not enough demand to soak up all that supply. The Fed's job was to fight deflation to constantly come to the rescue, to markets with low interest rates, quantitative easing, et cetera. The result of all that was extremely high equity returns, particularly in the US equity returns were about double historical averages for that entire period on average. Wow, that's a long time!

And not only were equity returns super high, but volatility was really low versus history. So, it was a proverbial free lunch, way better returns at slightly better volatility. I. That meant you really need to make one decision, buy the S&P500 in the low-cost way and forget it. We're in a very different environment now, I think BII has done a very good job of describing this. We're in an environment where it's no longer excess supply, now it's not enough supply. Some of that's demographics, the baby boom's retiring and that's having an impact. Some of it is, we're going through a massive transition with decarbonization. Eventually that's going to help on the cost side, but there’s going to be a number of years where we're just spending a lot of money, and that's inflationary.

Then finally, think about globalization. We've reached peak globalization. Now we're in a period of deglobalization. We're in a period of rethinking supply chains. That too means higher costs, more inflation. And so, the fed's battle is going to be dramatically different going forward. It's going to be about fighting inflation instead of deflation. inflation will come and go, but that'll be the fight that'll be ongoing. What that means is more stock volatility. So, I think this is a really good environment for people who do what I do, stock pickers, fundamental equities, because of two things.

One is if you think about returns are going to be more normalized. That means alpha is going to be a more important part of portfolios. So, they're going to seek excess returns, they're going to seek active managers, and at the same time, when you think about volatility, volatility's really good for what I do. If you're a skilled stock picker, volatility is your friend. Now and I use the words carefully, skilled stock picker, because we all know, alpha's a zero-sum game, but if you're skilled in a volatile environment, you'll do better than average. And so, when I look at that, I think that's what's important for investors is to stay invested in the market. 2023 taught you that if nothing else and be active.

Oscar Pulido: Most people don't associate volatility being your friend, but as you point that out, because you're saying in your line of business when you have volatility, you have opportunity to identify some of those companies that could perhaps, do better than the normalized returns that you think we're going to experience going forward. I think in the past when you and I have spoken, you've talked about particular sectors that interest you. I know healthcare has been one of those sectors. Is that still an area of interest for you as you look ahead into the new year?

Tony DeSpirito: It totally is. What do I like about healthcare? first of all, demand long-term demand is solid. And that goes back to demographics. We're aging as a society, and as you get older, you consume exponential amounts of healthcare. So, the demand is there, the growth is there It's a sector with a lot of innovation, a lot of high-quality companies. And then it's also a very resilient sector. Think about a recession. You don't stop going to the doctors just because we're in a recession. You don't stop getting sick just because we're in a recession. So, it's a very resilient sector, and yet, despite the fact that has all these great characteristics, the valuations are quite attractive. Lower multiples than the average stock, in the S&P500.

The last point is about stock picking, there's a lot of variation. There are some winners and there's some losers in the healthcare sector. And so, I think it's not only a good sector to own overall, but it's also a really good sector for stock pickers.

Oscar Pulido: Tony, hopefully you've been listening to the podcast, not only when you're on as a guest-

Tony DeSpirito: I do, I listen all the time as I'm walking my dog!

Oscar Pulido: Fantastic, well, I'm sure you've heard a podcast or two around the topic of artificial intelligence. We've talked a lot about AI on The Bid this year, which, is obviously then an investment in the tech sector for those wanting to invest in that theme. How do you see that as an opportunity set in 2024?

Tony DeSpirito: The tech sector is another area where there's a lot of dispersion, a lot of opportunity for stock pickers. And I think artificial intelligence is going to be the topic for the next 20 years. It's one of the biggest things going on, just like the internet and the smartphone was over the last 20 years. But I don't think this is going to be an area where it's about, set it and forget it.

One of the ways we think about it is in terms of a tech stack, if you will, at the bottom level, there's the hardware, there are the chips, the servers, the cloud providers going up a layer, the large language models. Above that data and above that new business models that have yet to be developed. Right now, the winners have been basically in that hardware layer, the chips, maybe some of the server, producers, maybe, the cloud providers. And I think going forward, what's going to win is finding areas of technology that the impact of AI is just underappreciated. and that's what the opportunity set is going forward.

Let me give you a couple examples of what I mean by that. One Is in the memory area. So, if you think about the memory business, it's a growth business. We consume more and more memory over time, but it's a cyclical business. There are up cycles, there are down cycles while the general trend is up. Right now, we're actually in the middle of a down cycle. Probably around the trough. So, I think cyclically it's good time to invest in memory. But AI is a total memory hog. In fact, you actually have to use specialized memory in many cases, high bandwidth memory. So, I think about it as, okay, there's a potential for a normal upcycle, that's good, but with Ai, there's a potential for a super cycle on the way up that's even better. So, I think this is an underappreciated area of artificial intelligence -memory.

Another area where our investors are scouring is looking at companies that have unique data sets. If you think about training large language models on publicly available data, that's going to become commoditized. Everyone has access to that. What's really interesting is when you have proprietary data and AI makes that proprietary data even more valuable than it already is. And so, we're looking for companies with proprietary data sets that can be made more valuable by AI that'll then allow those companies to price up for their data. So those are some examples of hidden opportunities, if you will. Eventually we'll start getting new business models, et cetera. But that's still to come.

Oscar Pulido: So, what you're saying is AI is an investible theme, but the way in which you can best access those returns, or the more interesting investment opportunities might be different companies in the years ahead than what have been the winners so far. And that'll be a rotating process based on how business models are evolving.

Tony DeSpirito: Exactly. And that's how the internet played out.

Oscar Pulido: You talked about, deglobalization. We went through this period where, supply chains broadened that across the world, and now we're seeing that reversing, there's another term that often comes up, which I think is, reshoring, that seems to be related. Maybe you can talk a little bit about those themes, just what's going on geopolitically and how do you think about investing in these themes.

Tony DeSpirito: So, let's look back historically. Supply chains were built for maximum cost efficiency. not for resiliency. And that worked pretty well until we got to Covid. What we saw was all of a sudden that was a problem, we went too far. And that combined with some of the things that are going on geopolitically have really created an incentive for companies to rethink their supply chains. Some of it I would call reshoring, some of it I would call friend shoring, moving to economies like Mexico or India, which we're closer with. Some of it's actually bringing it back here to the US. Certainly, government has played a role in this too, we've had three major acts. We've had the inflation Reduction Act, the Chips Act, and even the Infrastructure Act. I think all of these are encouraging companies to bring more production back, to the US and so that's a really playable theme. But again, there's going to be winners and losers.

Take electric vehicles. for instance, the Inflation Reduction Act subsidizes the purchase of EV vehicles, but there's a requirement in order to get that $7,500 subsidy, a large part of the vehicle has to be made in the United States or in NAFTA, particularly the critical battery components. Some cars qualify, some don't. And so, if you look through the car manufacturers, some have a long list of vehicles that qualify, and some don't. The ones that don't, they're going to be the relative losers. For example. Another comment on geopolitics is certainly over the last two years we've seen the world; it's potentially becoming a less safe place rather than a more safe place. And so, I do think defense is also an interesting theme that would include here under geopolitics. Defense companies are very reasonably valued, less than the market, yet when you think about the growth opportunities in defense, they're probably going up, not down.

Oscar Pulido: It's interesting to hear you talk about these very high-level themes, but then distill it down to very particular sectors and industries and then ultimately companies that you're identifying that benefit from these themes.

If I could ask you to maybe take your passport out and take us outside the US for You have a global view on the world from your seat as a chief investment officer, where do you see the investment opportunities on the international stage outside the US?

Tony DeSpirito: So, I think the markets globally are quite interesting. Japan is definitely an interesting market. One of the things I do is I run an assembly of our US portfolio managers every other week. For two weeks in a row the topic, which the individual members portfolio managers set, was around Japan.

If you look at Japan valuations, they're pretty attractive. But what's really interesting about Japan is profitability. Japanese companies have been less profitable than their developed market peers around the world. Part of that's because of the deflationary spiral they've been in, and that looks like it's getting resolved, part of it is company will. and what we're seeing is both governments and stock exchanges there putting a lot of pressure on companies to become more efficient. and so, we're starting to see companies get away from the conglomerate structure, we're starting to see them deploy cash that's just been sitting on their balance sheets, not earning a lot. And so, we're starting to see that ROE, the return on equity going up for these companies and then becoming more profitable. That's where the real opportunity is. And then as I look across the globe, two big themes I’ll talk about.

One is in energy, what I see is a really big valuation dislocation. The US integrated oil companies are much more highly valued than the European and UK integrated oil companies, despite the fact that when you look at the underlying businesses, they're actually quite similar. And over the last couple of years, the Europeans have become much better capital allocators than they were historically. So, I think that's a really exploitable valuation opportunity. That gap has started to close actually in 2023, but I think it has a long ways to go.

Another gap is a quality gap, so when I look at, US pharmaceutical companies versus European, the, they're similarly valued, but the Europeans have way higher quality, particularly when it comes to patent expirations. the US large pharmaceutical companies have a number of upcoming patent expirations. That's a lot less so true for Europeans. And then the R&D pipeline is way more robust in Europe. actually, we talked about healthcare earlier, it has not been a great sector in 2023, but we avoided the value traps of US large cap pharmaceuticals deploying the cash. In some of the obesity drugs, deploying the cash in some medical devices and some European pharmaceuticals. So again, very much about stock selection.

Oscar Pulido: Tony, we spend a lot of time thinking about the year ahead,

Tony DeSpirito:

Oscar Pulido: and of course, when it's a new year, it's always a time for reflection. you've had a long career, of investing and you have a lot of history that you've brought into the discussion What are some things right now that you would tell investors reflecting back on many market cycles in the past, as we go into 2024 are there any lessons that you've learned that you think are important to keep in mind right now?

Tony DeSpirito: Let me pass along what I think is some Wisdom about, growing your wealth. Improving your retirement over time. And first of all, it's about savings, you should save like a pessimist. There's a Chinese expression 'The best time to plant a tree is 20 years ago. The next best time is today.' So, I encourage everyone to save as much as you can for your future.

Also don't try to time the market. We have an expression around here. It's about time in the market, not about timing the market. And I think that's really true. And if nothing else, 2023 is a great example of that. I think a lot of people would've thought, oh, this would be a great year to sit things out. Turned out to be a horrible time to sit things out and not being in the market. And then finally, I think the best advice is yes, participate in the market, but do so in a prudent way, don't do it in a speculative way. The more prudent, the more resilient your portfolio is, the more likely you are to stick with it and that's the key. Get rich slowly, not fast.

Oscar Pulido: As usual, these are great insights. I hope you'll listen to them the next time you're walking your dog, and listen to some of your own advice, Tony. But thank you again for joining us on The Bid.

Tony DeSpirito: Thank you, Oscar. It was my pleasure.

Oscar Pulido: Thanks for listening. to this episode of The Bid. Next week, be sure to tune in and check out my conversation with Jeff Spiegel, where he'll provide a holistic overview of major investment themes to help investors navigate the year ahead.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0124U/M-3284722

Stevie Manns: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host and producer, Stevie Manns.

From the rise of AI, banking collapses, inflation and geopolitical changes, 2023 has kept us busy with no shortage of market-moving events. Now, as we wrap up the year in our final episode for 2023, we’ll look at how the year’s biggest stories have impacted economies, and how these events impact what’s to come in the new year? But… with a twist.

Today, we’ll be taking a lookback on 2023 year with a special Holiday Quiz edition of The Bid. If you’ve been listening to episodes of the podcast this year, you should be able to play along and see how you do compared to our budding quiz contestants.

My guests today are eager quiz goers and familiar voices to Bid listeners. We have Oscar Pulido, your regular Bid host with the most and ETF expert and Bid, regular Gargi Pal Chaudhuri. Oscar and Gargi will play for bragging rights, and the esteemed title of The Bid Quiz winner in our inaugural holiday quiz, and maybe a special prize at the end...

So, Oscar and Gargi, welcome to the special holiday quiz edition of The Bid.

Gargi Chaudhuri: Thank you for having me, Stevie!

Oscar Pulido: Thank you Stevie. I'm excited.

Stevie Manns: So Oscar, how do you feel in the speaker chair today?

Oscar Pulido: This is actually the same chair, but I'm playing a different role. I'll let you know in a couple minutes.

Stevie Manns: Let’s kick off. For the benefit of our listeners, Oscar’s buzzer sounds like this… [BUZZER 1] and Gargi’s sounds like this… [BUZZER 2]

So let's start with interest rates. When did interest rates reach their peak in the US and what is the current interest rate?

Gargi Chaudhuri: [BUZZER 2] July of 2023 and 5.375%.

Stevie Manns: You are correct!

Oscar Pulido: Gargi lives on the Federal Reserve's website though, in fairness!

Gargi Chaudhuri: I do and I’m proud of that fact.

Stevie Manns: Let's dive into this bit more. So we're a couple of weeks post Black Friday, we're now into the full holiday season. So how is consumer sentiment right now?

Gargi Chaudhuri: So consumers are still strong but slowing and you bring up Black Friday, I think it was an interesting phenomenon that we saw is that there was still spending certainly more online than brick and mortar stores, but what we saw pick up was a lot of that buy now and pay later type behavior. So what that hints at is a consumer that's still feeling good about going out and spending.

It has been a move away from traditional goods, like things that you can touch and feel towards more of services for going for movies and entertainment and things like that. But there is a little bit of slowing down. We are already seeing that in various data points that are coming out, and the slowing down just means that as we look into 2024, maybe don't expect the same sort of outcome from consumers as we saw in 2023, which was so robust.

Stevie Manns: You have definitely described my spending habits there and how I'm planning for Christmas… Let's turn to the job market, how many US jobs were created since January, 2022?

Oscar Pulido: [BUZZER 1] I'm going to say 7 million?

Gargi Chaudhuri: [BUZZER 2] 8 million?

Stevie Manns: Oscar you have it, It was 7.4 million.

Oscar Pulido: Nice, rounding to the nearest million!

Stevie Manns: So what are some of the factors that have led to this strong job performance over the last two years?

Oscar Pulido: I think Gargi has more of the details, but my, understanding is that a lot of the strength in the job market is simply the economy coming back from the pandemic. There were a lot of jobs lost during 2020, and so a lot of the strength we're seeing is just people coming back to work and, the economy getting back to a more normalized form.

Gargi Chaudhuri: I love that answer. I think a couple of things in addition to that is, people coming back to participate in the job market is really important. Particularly think back to the pandemic where many people, I'm sure many of our relatives left the job market earlier than they would have taken retirement. And we needed people to come back to the job market to fulfill some of the gaps left. And what we saw in 2023, which we obviously are very happy about, is that participation of people in the job market started moving up again.

Particularly for women between the ages of 25 to 54, that participation rate has gone up. Participation from immigrants foreign born, that is at the highest, that's another exciting thing. And then I'll also say that there were some areas of the economy, if you look at, healthcare, so nurses for example, very much in demand. If you look at education teachers, for example, very much in demand. So when we look at all of these 7.4 million, jobs that have been created, where they've come from, these particular sectors of the market, there is still demand there, which is great. And I think this shows that keeping wages higher, which has been the phenomenon over the last couple of years has enticed people to come back to the labor market, which of course we like,

Oscar Pulido: I'm starting to wonder if I deserve the point for answer, but…

Gargi Chaudhuri: You do!

Stevie Manns: So from jobs to retirement, some of you may remember an episode with Anne Ackerley this year. What percentage of workplace savers in the US feel on track to retire with the lifestyle they want?

[BUZZER 1] [BUZZER 2] Oh, that was a tie!

Oscar Pulido: Ladies first.

Gargi Chaudhuri: Less than 50?

Oscar Pulido: I'm going to say 50…

Stevie Manns: Then Oscar, you are correct. It was 56%.

Oscar Pulido: Again rounding!

Stevie Manns: Yeah… But you were both so close. Can either of you tell me what is driving this drop?

Oscar Pulido: Yeah, a couple of things that I remember from the conversation with Anne is we've had market volatility. We had Covid, we've had the financial crisis, we've had plenty of scares in the markets over the last many years. I think that's part of it. inflation, which, Gargi is close to the inflation data month to month. I think people feel like that's eroding their savings. And then perhaps

one of the thing that I remember Anne talking about is, the lack of retirement income. People feeling uncertain about how are they going to generate income in retirement.

Stevie Manns: Excellent answer. I'm glad to see that you were paying attention during these recordings!

Oscar Pulido: Once in a while I do!

Stevie Manns: Okay, so one of the biggest winners this year was ETFs. How much did investors put into the ETF market this year?

Gargi Chaudhuri: [BUZZER 2] $800 billion?

Stevie Manns: Well done, Gargi. So why did investors turn to ETFs in such a big way this year?

Gargi Chaudhuri: First of all the different use cases of ETFs. When investors think about building portfolio blocks, ETFs can be used as a portfolio builder. So that's one of the main use cases, and of course this year with markets having a great performance with equity markets up globally with bond markets somewhat positive, I think investors seeking income as well as growth and returns. That was one driver.

Another one, is the advent and the growth of active ETFs. So many investors coming into the market to express views actively using active ETFs. That's been a huge growth area for the market, and we saw that across the industry. I'd also say that investors trying to find more granular ways of expressing views. So if you wanted to have allocations to Indian equity markets, if you wanted to have allocations to Japanese equity markets, if you wanted to have allocations to a particular part of the fixed income markets, such as high yield, for example. Again, granular ways of expressing your views on the market were also seen in ETF flows. And then lastly, I think, many institutional investors using ETFs as a financial instrument of choice for them to, get liquidity, especially in volatile times.

Oscar Pulido: I was waiting for you to say the word access, which I think was another sort of theme when we talked to building you and various others from our ETF business, but just that ability to access so many different parts of the market quite easily.

Gargi Chaudhuri: Yeah. Fantastic. Yes, of course.

Stevie Manns: Okay, name one commodity that investors often turn to in times of high volatility?

Gargi Chaudhuri: [BUZZER 2] Yay. So I did do a podcast on this, so a little shameless self-promotion, but gold is one thing that we did talk about earlier this year, That was not, you were wearing gold.

Oscar Pulido: You were wearing gold!

Gargi Chaudhuri: I was wearing gold! It was my wedding gold. And we had talked about the role that gold plays during times of geopolitical, uncertainty. And obviously at that time we couldn't have possibly known some of the events that would've unfolded later this year, but we have seen

investors turn to gold. We have seen gold outperform many other asset classes this year. So that's certainly an episode people should watch.

Oscar Pulido: I found it interesting, if I could jump in, that gold has done so well. I grew up understanding that when interest rates are high. Gold really shouldn't do well ' cause it doesn't pay you any interest. Yeah, and so it should look less compelling, but you talked about the reasons why it still has managed to outperform.

Gargi Chaudhuri: We did. We talked about how when real rates are high, because gold actually does not have a real rate associated with it. But one of the other things that I think we talked about was how it's not an inflation hedge necessarily but a good geopolitical or uncertainty hedge. So I think Oscar, to your point, yes, interest rates are high and investors are certainly, we talked about ETF inflows in 800 billion earlier this year, and a lot of that is in fixed income.

We've certainly had investors flock towards fixed income for that higher interest rate and to optimize for that. But there is another role that gold provides in a portfolio, which is of course that of that uncertainty hedge.

Stevie Manns: That was one of my favorite episodes actually. I really enjoyed that.

Gargi Chaudhuri: I enjoyed wearing my wedding gold to it!

Oscar Pulido: My buzzer looks a little gold here. I need to get this thing going a little bit. It's lying dormant!

Stevie Manns: Let's see what happens with the next question, Oscar... From commodities to low carbon emissions transportation accounts for approximately what percentage of global CO2 emissions today,

Oscar Pulido: [BUZZER 1] I seem to remember this from the episode with Charlie Lilford. I was in London, I think he said like 25%. 20 to 25%. I'm going to say

Stevie Manns: You are correct, from that EV episode with Charlie Lilford. What are some of the barriers that are preventing EVs from becoming more mainstream?

Oscar Pulido: Yeah, I thought he was going to say price, but actually over the course of the episode, he made the point that price is coming down and, there are more producers of electric vehicles and they're getting better at scaling and there's government subsidies now, so price is less of the inhibitor.

And the answer was actually the other thing that I thought, which was charging infrastructure or lack of sufficient charging infrastructure and people still having range anxiety, not sure about how far they can drive on a battery, and I, in the episode I told him how I'm a recent buyer of an electric vehicle and I've experienced some of that as well. So that lack of charging infrastructure seemed to be the main impediment.

Gargi Chaudhuri: Range anxiety. I love that terminology. I'm going to use it.

Oscar Pulido: And I've experienced that. It's like when your phone's about to run out of battery, you'll be okay most of the time, but if your car runs out of battery and you're somewhere more you don't want to be, then you can see how that's a higher level of anxiety.

Stevie Manns: One recurring theme for 2023 has been AI. Chat. GPT just celebrated its one year at birthday in November, and when we had Jeff Chen on The Bid, he mentioned some early breakthroughs for ai, one of which was when Deep Blue, the IBM supercomputer beat chess world champion Gary Kasparov in a chess match. What year did that match occur

Gargi Chaudhuri: [BUZZER 2] 1996.

Stevie Manns: Ummm….

Gargi Chaudhuri: Seven!

Stevie Manns: Seven, is correct

Gargi Chaudhuri: Yes!

Oscar Pulido: Let's round to the nearest something. This is a theme here!

Stevie Manns: For a bonus point, how many days did it take for chat GPT to reach 1 million users?

Oscar Pulido: Less than a hundred?

Gargi Chaudhuri: I think it was 53?

Stevie Manns: It was actually five!

Oscar Pulido: Oh wow. Which is less than a hundred!

Stevie Manns: What do you see for the future of AI investing? is there anything that you're keeping an eye on?

Oscar Pulido: Well, we've heard this from a couple speakers, which is that AI is an investible theme, will remain prevalent, but it's where within the tech sector, the winners will be, that is maybe going to evolve. It's been a lot of the chip manufacturers and the semiconductor companies this year, but perhaps going forward, it's companies that are more involved in data, just the sheer quantities of data that are created and processed. And that just means different winners in years ahead versus maybe what's been the winners this year.

Gargi Chaudhuri: Yeah, one of the things that I learned when I was listening to Jeff was just this idea of how there are winners and losers. This is where active management plays a great role and obviously Jeff and their team are fantastic at this and all the work they've done. And I also think that. Maybe next year or even sooner than that when you have other people talking about AI on The Bid, I think there'll be a lot more talk about the advances in healthcare. There'll be a lot more talk about

the advances that AI has brought to education. Now we're talking specifically about just the tech sector and I can't wait to see how we're talking about it in the healthcare sector.

Oscar Pulido: We also learned about the game Go by the way, which I had never heard about, which is probably my fault, but something about the number of moves in that game is greater than the number of atoms. Was it on the planet or?

Gargi Chaudhuri: Yeah, that's what he said, because there's so many outcomes in that game!

Oscar Pulido: He subsequently said that the world champion and go then, retired from the game after losing to the AI machine.

Stevie Manns: Okay, so let's zoom out and look at global trends for a moment. Which country's economy grew by about 5% in 2023 and is expected to be the fastest in coming years.

Gargi Chaudhuri: [BUZZER 2] I think it's mine. And if you can't tell from the accent, that's India.

Stevie Manns: Correct. Gargi, what are some of the key attributes, from India that is helping this, country thrive?

Gargi Chaudhuri: The easy one that we would've spoken about and we'll continue to speak about is demographics. Looking at a country with a young population, a population that is between the ages of 25 to 35, the highest population in that age group obviously leads to a more productive economy. So that's number one.

But I think more importantly, and I think coming to the forefront now more and more is. It's a digitized economy. It's one where most of the population have access. They've gone from not having a phone to having cell phones to do all of their shopping, investing, et cetera. So there is that digitized economy, and I think there's a lot of potential there.

And then another feature that I'm really excited about is outside of the advances that India can have in the AI space, the adoption of AI in India. I was surprised that India and many other EM countries have actually have a higher rate. Of AI adoption, so that I think can, reap benefits in the decades to come.

And then lastly, from an infrastructure perspective, the a government has done a lot and is trying to do a lot to improve roads and railways and the efficiency that brings about in the economy. So if you combine all of that, it's not a single pronged approach. It's not just about the demographic dividends that we often talk about, but it's also about digitization, it's also about technology, it's also about infrastructure. And I think all of that adds to a picture where, yeah, Indian equities can look rich, certainly by our valuation metrics they do, but investors are taking note of this as being another long-term theme in your portfolio that's going to reap benefits for years to come.

Stevie Manns: Absolutely. And Oscar, you had a great conversation with, Jeff Spiegel on emerging markets recently. Was there anything that you took away from that from a different emerging market that is growing?

Oscar Pulido: First of all, I feel like playing against IBM’s Watson, giving all this great information. But, yeah, actually Jeff mentioned India in his conversation. He talked about. Mexico as well as another country that benefits from nearshoring and just this sort of environment post the pandemic where companies are moving their supply chains closer to home before the pandemic. We talked about globalization and the need to lower cost or the desire for companies to lower their cost. And so seeking out supply chains that in some cases were far and wide, but near shoring, meaning you're bringing those supply chains closer to home and Mexico as a friendly neighbor to the south of the US, stands to benefit from this trend. So that was another country he talked about.

Stevie Manns: Great information and responses from you both. we have one final question. Staying global, what is one country, not the US that will benefit from nearshoring? I feel like we might have just answered that question….

Oscar Pulido: Can I buzz in?

Stevie Manns: You may…

Oscar Pulido: [BUZZER 1] Mexico?

Stevie Manns: Correct!

Oscar Pulido: We have a little bit of a sixth sense going on.

Stevie Manns: We do. We've been working together for so long now. In fact, you know what? I'll give you a follow-up saying as you answered so expertly... What considerations should investors take into account as, global rewiring continues to trend?

Oscar Pulido: I think if I remember Jeff's comment, he used this term not only near-shoring, but friend-shoring, I think was the other term he talked about, which is not only the proximity of a country, but just the diplomatic relationship that countries have could be very beneficial as you think about where to source your supply chain and Mexico being a beneficiary of that.

Gargi Chaudhuri: Just to maybe add to that, I think there are a few others. Obviously, Mexico great one. but I think if we look at the global south more broadly, I think thinking about the opportunities in Indonesia, in Vietnam, some of the other countries that might replace, some of the other broader, partners that the US has had as a big trading partner. So thinking about where else we can friend shore to and from. And I think, investors will over the next few years, turn to these countries as sources of return. Vietnam is a good one that comes to mind again, very favorable demographics, Indonesia is another one. and I can't wait to see how those, economies evolve and their markets evolve over the next few years.

Oscar Pulido: Alt-Asia, is what he said?

Gargi Chaudhuri: We like global south, I think.

Oscar Pulido: Yeah, I like that better.

Stevie Manns: Okay, we are just going to tally up the, scores... It is my great honor to announce our official runner up for the first inaugural Bid holiday quiz, Oscar Pulido with five points.

Oscar Pulido: Thank you!

Stevie Manns: Our winner, our esteemed winner with bragging rights and this wonderful, limited edition The Bid mug is Gargi Pal Chaudhuri with six points!

Gargi Chaudhuri: Wonderful.

Stevie Manns: Well done!

Gargi Chaudhuri: Thank you. This means a lot to me. I have a long speech prepared, but we don't have time for it, but listen to it for when I'm invited back to the next bit. Congrats

Oscar Pulido: Gargi. Congrats.

Gargi Chaudhuri: Thank you Oscar. Thanks for letting me win.

Stevie Manns: Thank you both so much for your insights. Oscar, thank you so much for hosting a wonderful year of The Bid, and we can't of course forget our listeners. Thank you for joining us and we will see you all in the new year.

Gargi Chaudhuri: Thank you for having us. This was so fun.

Oscar Pulido: Let’s do it again next year.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the “Advice Law”), nor does it carry insurance thereunder.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH1223U/M-3279674

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

2023 has seen high volatility across global markets driven by high interest rates, bank failures and a surge in bond yields. The financial landscape witnessed a year colored by nuances and unexpected turns. Despite initial optimism, the year unveiled challenges that reverberated across global markets. Central banks grappled with persistent inflationary pressures amidst structural constraints, while investors sought new opportunities amid heightened market volatility. So, after a tumultuous 2023, what can investors expect in 2024?

Alex Brazier: This is a macro environment that's more complex and interesting, perhaps, than anything we've had in the last 20 years. There are now rewards for getting the calls right and for being precise, selective, and agile in portfolios. And that's a big contrast to the last twenty years. So, it's time to grab the wheel!

Oscar Pulido: I’m pleased to welcome back Alex Brazier, Deputy Head of The BlackRock Investment Institute to help us look ahead to a new year. The BlackRock Investment Institute has just released its 2024 Outlook and Alex will give us an overview, help us understand the structural shift to a new macro regime and explain how investors can consider the 5 mega forces that the BlackRock Investment Institute sees as being the key drivers of the new regime.

Alex, welcome.

Alex Brazier: Hello again, Oscar. Thanks for having me back.

Oscar Pulido: So, Alex, as we near the end of 2023, a year that has felt like quite a rollercoaster ride, how are you feeling as you look ahead to a new year?

Alex Brazier: Well, in short, excited! And this is, notable. It's rare for an economist like me to be excited, that's why I make a point of it. Why excited? Well, this is a macro environment that's more complex and interesting, perhaps, than anything we've had in the last 20 years. So, in some respects, it's making me feel young again but more importantly, it's an environment where there are now rewards for getting the calls right and for being precise, selective, and agile in portfolios. And that's a big contrast to the last twenty years where broad, static, asset class exposures worked about as well as anything else. So, the way I think of it now is the economic and investment road is actually a very bumpy and windy one. And that means there are big rewards for good, agile drivers to outperform others, rather than driving along the straight highway we've been on for the last 20 years. So, in the words of The Outlook, it's time to grab the wheel.

Oscar Pulido: I think you are a pretty upbeat guy in general, but I can sense that extra level of optimism in your voice. And as you said, you ae an economist so tell us more about the global economy as we finish 2023 and perhaps that will help us understand the excitement you feel going into next year.

Alex Brazier: Well, the macro environment isn't straightforward, which is actually what makes this an interesting time. Now, the good news is, as we end the year, we see inflation coming down on both sides of the Atlantic, in the US and in Europe. And that's happening as the mismatches that arose as a result of the pandemic, we were all spending a lot on goods and not on services, for example, they're all unwinding.

And in Europe, the energy shock is unwinding too. So, inflation's coming down. That means central bank policy rates have probably peaked as a result. that's all good, but then take a step back and look at the broader context, because actually the context is everything here. And there are three aspects of this macro picture that are really quite interesting.

The first is that we seem to be on a weaker trend growth path. Before the pandemic, the US economy typically was growing at around about 2.5% a year. Since the pandemic, on average, it's been growing at about 1.7% percent a year. Now, employment growth has been pretty strong recently, but that's because it's been catching up with the restart of activity.

And overall, over the last three years, that's been quite muted as well. We've got weak output growth, weak employment growth, and yet we haven't really got unemployment or slack in the economy. And that's because the workforce is growing less quickly now as the population ages. That's telling us that the economy can't actually grow faster than this new muted rate without resurgent inflation. So, the first kind of really interesting aspect of the macro regime, the really important piece of context, is that trend growth is somewhat lower than it was pre pandemic. The second really important piece of context is it's going to take higher interest rates than we were used to in the past for central banks to keep growth muted. And that's because they're pushing against fiscal policy, which has become looser and is stimulating the economy, and they're leaning against that, and they've got to lean down to keep growth muted. Interest rates probably coming down at some point next year, but not to where they used to be. So, weaker growth, higher interest rates.

And then the third important piece of context is that in this environment of geopolitical tensions and the energy transition, we do expect future bouts of inflation. So, this bout of inflation going away,

but we're likely to get future bouts too- we don't know when or precisely what will cause them. But this is the opposite of the past 20 years when geopolitical integration of supply chains, all repeatedly pulled inflation down. And now we're turning that on its head. And central banks are going to be squashing inflation down over time, with higher rates, rather than trying to push it up over time with lower rates.

So weaker growth, structurally higher rates, and more volatility, and that's what makes this road really windy and bumpy. And it's a road where investors who can be precise, selective, and drive in an agile way can actually outperform.

Oscar Pulido: So, from what you’re saying it sounds like inflation and interest rates are trending down but probably not to the levels we were accustomed to for the last 20 years. You also talked about the need to grab the wheel in this new macro environment. Sticking with this driving analogy, how can investors think about avoiding the bumps or maybe the ‘potholes’ in 2024?

Alex Brazier: Well, this is the first theme of the Outlook that we're publishing now, and that's about managing macro risk. This isn't a road for the autopilot or for taking unintended macro risks, you have to be very deliberate about macro risks in this environment and navigate them skillfully. I would just highlight two in particular that we're paying attention to.

The first in fixed income markets is really the US fiscal position. Because in this regime of muted growth, higher interest rates, and bigger government deficits, put that together, it means that public debt, relative to the size of the economy, is going to be growing. It's on an unsustainable path, and that actually raises the prospect of higher inflation in the future.

That makes us more precise in our fixed income exposures, tilting towards short and medium-term bonds, the belly of the curve, rather than very long-term bonds. So that's one issue that needs careful navigating.

The second one that needs careful navigating is that it's not clear that all broad asset classes have really adjusted to this regime of persistently higher policy rates than we were used to in the past. In other words, expected returns adjusted for risk are not equivalently higher on all assets as they are on cash. So, we're careful with broad static asset class exposures, but that is where the opportunity lies to get selective and beat the benchmarks.

Oscar Pulido: Ok so those sound like a few of the trickier aspects that investors need to consider as they manage their portfolios. But on the flip side, what is making you excited? Where are the opportunities that investors can look to take advantage of?

Alex Brazier: I think the flip side of this difficulty with broad static asset class exposures is that now there's an opportunity that we haven't had for 20 years to really outperform those broad static exposures by being selective and agile in approach. You look back at the past 20 years, investment that was agile and selective wasn't really rewarded because broad static exposures did about as well as anything else. But now, because we've got this weaker growth, higher rate, more volatile regime, we don't expect the sustained bull markets of the past. Sure, there'll be periods when everything goes up, but it won't be sustained like it was in the last 20 years. And so, the complexity of the macro picture means there's much more dispersion of expectations on a pricing of assets.

And that means there are real rewards now for being very selective and precise and in this outlook that we're publishing we highlight potential gains in portfolios from tilting allocations across asset classes depending on how they're valued right now. For example, I've already mentioned that we tilt towards shorter and medium-term duration bonds rather than longer duration. We're tilting towards hard currency emerging market bonds and mortgage-backed securities in the U. S. rather than developed market credit. That's because we see spreads as more attractive on those. And we're tilting towards equities in Japan versus Europe on account of the differing fundamentals not really being reflected yet in market prices.

So, opportunities from being very selective and granular across asset classes but also opportunities to get really precise and granular within asset classes too. And we highlight in the Outlook, for example, the idea of being underweight the broad U. S. equity index and using that space in portfolios to focus on U. S. equities that are set to take advantage of AI to lower costs, boost revenues, in the future. And I know you've talked a lot on this podcast about AI. So, it's absolutely not the case that complex, difficult macro environment means we think we should sit and wait. It is what it is. And we're embracing the fact that the road ahead is windy and bumpy and interesting, and using precise, agile exposures to outperform.

Oscar Pulido: Yes, as you mentioned we’ve had some interesting conversations here on The Bid about AI, and I expect we will continue to do so in 2024. In fact when we’ve discussed AI, we’ve described it as one of five megaforces reshaping the investment landscape so tell us about the role of the other megaforces in portfolios and how those might impact markets in 2024?

Alex Brazier: Sure, and I think these are things we see as big structural shifts in economies, and we see them actually as drivers of return differences within asset classes. They're a way in which to get selective about your exposures within asset classes. Now in addition to AI, there are four others that we're monitoring particularly closely.

The first of those is the reshaping of the financial landscape, especially in the United States. Banks are under pressure from increasing regulation and greater competition now for deposits. And so, bank credit is likely to become more expensive, less available. That's going to be a differentiator across banks who can adjust to this reality, but it's also going to create opportunities, for example, in private credit where we see ongoing demand from borrowers who are looking to replace tighter bank credit.

The second megaforce we're looking at is demographic change. I mentioned this earlier in the context of weaker trend growth in the United States. It's also true of other advanced economies and, importantly, China. But it's also a potential driver of sectoral prospects in economies, for example, around healthcare.

And it's also a driver of different growth prospects across economies, because not all economies now have ageing populations. There are some economies still with very quickly growing populations, and it's important to take that into account.

The third megaforce we're looking at is geopolitical fragmentation. And that's interesting because it's spurring industrial policy and a rewiring of supply chains. And that's something we use to get precise within portfolios to try and find securities that will outperform.

And then finally, we're looking, of course, at the transition to reduce carbon emissions, which, as we know, is driving a big shift in the energy mix, but it's also now creating demands for solutions to resilience a changing climate and weather events. You talked a lot about this, I think, a couple of weeks ago with Helen on the last podcast. So, four or five in total, with AI, big mega forces that we see really reshaping economies and not in all cases yet fully reflected in market prices and therefore creating interesting investment opportunities for precise exposures within asset classes.

Oscar Pulido: So, Alex, a winding and bumpy road ahead, but exciting terrain for those agile drivers you described earlier. Maybe just one final question, which is if you had to briefly sum up your outlook for 2024, what will you be telling investors?

Alex Brazier: Well, it's an environment where money can be put to work, but it can't be done by putting on the autopilot on a straight highway. It's a bumpy, windy road, as you say, so grab the wheel, drive skillfully, drive precisely, and drive in an agile way, and have a great holiday season.

Oscar Pulido: Grab your driving gloves for sure and thinking back to all your comments, it sounds like in 2024, we better be ready to shift gears! Alex, thank you so much for joining us on The Bid, it’s a pleasure as always. Wishing you a great holiday season as well.

Alex Brazier: Thanks so much.

Oscar Pulido: Thanks for listening to this episode of The Bid, if you’ve enjoyed this episode check out our recent episode that Alex mentioned featuring Helen Lees-Jones entitled “Low-Carbon Transition Investing 101” and find out how investors are taking advantage of the energy transition in their portfolios.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH1223U/M-3265872

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

The transition to a low-carbon economy has emerged as a key player in the 5 megaforces that the BlackRock Investment Institute have been outlining for us in recent episodes. But what exactly does it mean to 'invest in the transition to a low-carbon economy', how are investors seizing this opportunity, and why is this transition seen as a 'mega-force' for investors?

My guest today is Helen Lees-Jones, EMEA Head of the Sustainable & Transition Solutions group at BlackRock. Helen, will reveal the top questions investors are asking about transition investing and will highlight the particular areas in this field that are exciting investors. We'll also delve into the timing, the regional variations, and driving factors behind the transition. Helen, welcome to The Bid.

Helen Lees-Jones: Thanks so much for having me.

Oscar Pulido: So Helen, in recent episodes of The Bid, we've been discussing the five mega forces that Alex Brazier has introduced us to, and these are forces that are affecting investing both now and in the future, and creating opportunities and risks that investors can't ignore. The transition to a low carbon economy is one of those forces. So can you tell us why this is one of those mega forces?

Helen Lees-Jones: So, as you've heard, this is one of those mega forces, it's not the only one and as we think about advising investors and talking to them about what's happening in markets. We see that alongside the future of finance, the advent of digital technologies like AI, the transition to a low carbon economy is rewiring economies, sectors and businesses. And we see as a result of this transition the average investment in the energy sector increasing to $4 trillion per year over the next 30 years, that's up from only $2 trillion over the years past.

And so, as part of this rewiring of economies, that is creating both risks and opportunities for investors. And what we're seeing is that it's also channeling investment into both high carbon sectors and low carbon sectors. So, it's really a transition that is affecting the whole of finance and we are trying to put as much information into the hands of investors as possible.

When you think about this transition, there are really three key drivers behind it. You've got policy forces like the Inflation Reduction Act in the U.S. or the EU Green Deal, you've got the advent of new technologies like carbon capture, and you've got real changes in the way consumers and investors like to think about their investments. We also know that the transition to a low carbon economy, is playing out at different speeds in different regions, particularly when you look at developed markets versus emerging markets, as one example.

We see that the electrification of light vehicles is largely on track for 2050, whereas other sectors that perhaps have harder to abate emissions in the emerging markets need a significant amount of investment and or policy in order to drive that transition ahead.

Oscar Pulido: Okay, so just to reiterate, you're saying $4 trillion per year of investment in the energy sector over the next 30 years. That's a huge increase from what we're seeing now, and maybe we can take a moment to think about what does it mean to invest in the transition to a low carbon economy. In other words, what are some of the ways that investors are thinking about this opportunity?

Helen Lees-Jones: Great question! The definition of transition investing is something that continues to evolve, we're operating in a quite new space when you think about it. So, we at BlackRock have tried to put our own framework around it just to help investors think through the risks and opportunities associated with it. And we define transition investing in four ways, but the first area is around preparing for the transition. And that's where companies are investing in assets that make them better positioned for the transition, such as those improving and or leading on mitigating GHD emissions within their industry, either through their business operations, or their business models.

So, you're probably sitting there thinking, what on earth does that mean? Let's bring it to life a bit. As an investor, you're going to be thinking about companies that are outperforming their peer group, and we'd see in this category someone who is placing particular emphasis on reducing emissions intensity in their own operations and or deploying more CapEx than their competitors in that space into lower carbon solutions. So that's the first definition, those companies that are preparing for the transition.

The second is those that are aligned to investing in portfolios or assets on a decarbonization pathway that's aligned to an industry accepted low carbon scenario. So, you are an investor, you're looking at your portfolio, here, it might be an index or a portfolio that's aligned to a Paris aligned benchmark.

Thirdly, those companies that are really benefiting from the transition They're investing in assets such as those that are providing key inputs necessary for decarbonization that will benefit from the macroeconomic trends offered by the transition. Here you might think about the mining sector and a company that produces lithium. That's a key input into electric vehicles and the batteries within electric vehicles. So, a company that is leaning into lithium production, we would see as benefiting from the transition to a low carbon economy.

And then finally, those companies that are contributing to the transition. So here this might be companies who are investing in solutions or interim low carbon alternatives that are needed to mitigate emissions in the real world. So here examples might be wind farms, or grid scale batteries. So those are really the four ways in which we are defining transition investing here at BlackRock.

But when we think about investors and what's driving their preferences in transition investing, you see a range of interest from investors worldwide. Some want to look at it through a whole portfolio lens, you tend to find the big institutions who have made whole portfolio commitments seeing this as really something they want to see throughout their whole portfolio. Others who are very much focused on the thematic opportunities associated with the investment, like investing in specific sectors, minerals, materials, would want to play it thematically. But the prevailing interest that we are seeing is in the private market space because we see that the transition is driven by new technologies and new businesses that don't exist today. The real innovation that's going into this space requires an awful lot of private capital.

Oscar Pulido: That framing was very helpful that description of the various ways in which somebody can go about investing in the transition to a low carbon economy. I wonder if you could maybe give us a few real-life examples that might help someone who's learning about this investment space for the first time. You mentioned batteries. What are some of the opportunities that exist in the battery and carbon capture space?

Helen Lees-Jones: Of course, two exciting areas in which to invest. When we think about carbon capture, we have a brand-new joint venture with a US oil major on this very topic because as you will know from what I've talked about so far, traditional oil and gas producers are really key to meeting the world's growing energy. Even with the rapid build out of clean energy infrastructure, we still see that there's a space for emissions removals capabilities to come online. So, carbon capture is really there to use new technology to remove large amounts of carbon dioxide from the atmosphere and put it back into the ground.

On the battery side of things, they're essential to the transition to a low carbon economy, whether it's from powering electric vehicles or ensuring grid reliability. And we have also in our infrastructure business invested in a super battery in Australia, it's there to ensure that it stabilizes energy grids as they shift to renewable sources. When you think about it the wind only blows for a certain amount during the day, the sun only shines for a certain amount during the day, so being able to harvest that renewable energy supply, store it and then transmit it when it's needed, those grid scale batteries are critical to ensuring that we can make the most from those renewable energy sources. So those are just two examples, carbon capture, grid scale batteries.

Perhaps the third space, whilst we're talking about batteries is next generation materials that are needed. Batteries are now prevalent everywhere, whether it's in your electric car, or in other parts of your Day-to-Day life and those batteries need to become higher performing more efficient, more sustainable. So, looking at new materials and minerals that are required in order to make those batteries better, is also another interesting area for investment opportunities.

Oscar Pulido: And so, Helen going back to the numbers you referenced earlier about the investment in this space doubling, what impact will that have on opportunities for investments going forward?

Helen Lees-Jones: So obviously with that significant scale of CapEx going into new energy sources, there's an array of opportunities across the world. This transition isn't happening just in one sector or one country, this is something happening globally. I talked about, a super battery in Australia or a carbon capture facility in the U.S., there are other areas in which we are investing in transition assets. Pipelines as one example, we're looking at ways in which we can invest in building thousands of miles of critical infrastructure to help transition from oil to natural gas and clean hydrogen. So, it is about taking some of that infrastructure that exists and finding ways in which it can both continue to deliver the oil and gas that is being produced today but also be converted in the future into a way of transmitting newer energy sources like clean hydrogen.

Electric vehicles, we've made a pretty significant investment into a continental European EV charging company, which installs and manages high speed electric charging stations. Their goal is really to be the biggest charging facility provider across Europe, and they're already operating one and a half thousand chargers across the continent today. As we see wider adoption of electric vehicles coming online, those drivers are going to want the convenience of being able to charge wherever they wish. you can charge your vehicle at a petrol station wherever you like today, but the infrastructure still needs to be built out in order to charge your electric vehicle. And the goal there is to ensure that around every 150 to 200 kilometers on European highways, you can access the convenience of EV charging as you drive.

Perhaps if we look at the more renewable end of the investment opportunity set, you can think about solar power. We can see big opportunities in solar power, we have significant investments across our portfolio today, we've invested, in a renewable energy developer in the Philippines as another example of where we see global opportunity. So yes, this is happening in, developed markets, but increasingly we're seeing much more opportunity coming across in the developing markets.

And those transition assets are not only helping transition from browner sources today to greener sources tomorrow, but they're also providing resilience and security, which importantly we see as key characteristics of the transition. Yes, of course we want it to be green and lower emissions, but also it needs to be consistent, and it needs to be stable. Things like solar power and battery storage are a key component of that transition, so for investors, there's a wide array of infrastructure, assets and technologies in which to invest globally.

Oscar Pulido: So Helen, you may have recently listened to an episode we did with Portfolio Manager Charlie Wilford around electric vehicles, and he commented on some of the charging infrastructure challenges that you mentioned as well. You also mentioned policy as a driver of the transition, and you touched on the Inflation reduction Act in the us. And the EU’s Green Deal package. What impact does policy have on investment opportunities and what challenges might it present?

Helen Lees-Jones: Great question because the policy landscape is a really critical input into how you think about making investments, particularly as long-term investors. What we've seen with new policy come online, whether it's the US Inflation Reduction Act, whether it's the EU's Green Deal package, there's been a significant investment of policy and subsidy into both the US and European marketplaces, we're seeing other parts of the world also come online, Japan most recently. The policy support is huge in this space, that catalyzes investment, which is what we want to see, but it also does create risks when you think about how that policy is going to be deployed.

Things that you might want to consider are things like policy changing. So, policies are enacted normally aligned to political cycles, what happens if a different, political party comes in or the government is managed differently, will those policies endure or will they look different or be removed entirely. And so that's a risk to consider when you think about just the feasibility and long-term nature of policy.

The second thing is that huge wave of investment that it generates can also create bottlenecks, whether that's in your supply chains, getting hold of critical raw materials and minerals, that wave of demand can also generate bottlenecks in your supply chains. And then you've got the issue of permitting risk. The policy support is there, the money is there to put to work, but are you allowed to actually go ahead and build that new project? And often you require permits in order to put those infrastructure projects in place.

And that in itself comes with risk, not all projects actually end up getting the permits they expected to get, and we've seen some of that play out recently. So, policy is a great mechanism. It comes with huge opportunity, but it does come with some risks as well. And importantly investors in this space want to work with a partner who can understand and help navigate all that complexity that I just talked about.

Oscar Pulido: And do we have any data how many institutional investors are already thinking about this for the future or are they already investing in the transition?

Helen Lees-Jones: So that's a timely question, Oscar, because we recently surveyed 200 institutional investors globally over the summer, and a whopping 56% of them indicated that they plan to allocate more to the low carbon transition over the next few years. Some are looking at it through a whole portfolio lens, they want to really think through how do they hit net zero targets if they've made them, others think about it from an asset class perspective, so where can they generate the highest and best, investment return in their portfolio and or manage the risk that it generates.

Oscar Pulido: So 56%, that's a significant portion of the investors you surveyed, and I'm curious, as this is a relatively new space, how has that number changed in recent years? Is that a big shift in investor preferences into investing in the low carbon transition?

Helen Lees-Jones: We have seen a change in investor preferences particularly since three years ago. We've seen the world change around us, we've seen a shift in the geopolitical context, we've seen, unfortunate crises with energy supply, with geopolitics. That has changed to some extent the way investors think about their objectives as fiduciaries to their assets. thinking out over both a, 1, 3, 5, 10, 30-year horizon, you've got to adjust to, what's going on around you. And of course, the transition. Isn't necessarily linear. So perhaps three years ago, investors who were interested in the space would've been very much focused on things that you'd perceive to be green today.

They'd be very invested in your renewable energy sources like solar and wind, and having quite restrictive exclusions in their portfolios, they might have chosen particular sectors that they felt were not aligned to sustainable investing and excluded them from the portfolio. And as I said, today, we've seen the conversation shift quite considerably, and investors are much more interested in assets that are greening, so they're transitioning, and hence why we're so focused on the transition in all its frames.

Because when you think about what this means in a portfolio, an exclusionary approach doesn't get you to where you want to be necessarily. You understand that the biggest drivers of this transition are also perhaps the industries, sectors, companies who aren't necessarily the greenest today, they've got big plans to transition and they're putting a significant amount of time, energy, and resources into thinking through how do they get to where they'd like to be over a long horizon.

But those things can't be done overnight, and we're seeing a much bigger preference towards transition assets. And I think importantly, the dialogue is really shifting as well between investors and corporates, and we're seeing much more of a partnership approach between incumbents and disruptors.

Rather than just seeing the new technologies recast the playing field, we're seeing much more interaction between traditional sectors today in traditional companies within those sectors, partnering with the challenger technology providers, challenger companies in the same sector. And we see that coming to life in investors’ portfolios. So, whilst they'll invest in perhaps the traditional sectors today, they'll also be investing in newer technologies through their private markets allocations to almost go alongside what they have in their public markets portfolios. This is something that we see as an important part of the transition investing opportunity set that it really is a whole ecosystem opportunity and that, investing across a wide range of assets, sectors, capabilities is just a great opportunity for investors.

Oscar Pulido: So basically what you're saying is that the good news for investors is that there are a whole multitude of ways to think about investing in this transition to a low carbon economy. Helen, thank you so much for this 101 on transition investing. It really does sound like there are a lot of exciting opportunities in the space right now. And thank you so much for joining us on The Bid.

Helen Lees-Jones: Thanks so much for having me.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you enjoyed this episode, check out our recent episode 'The Race is On For EVs' where portfolio manager, Charlie Lilford, unpacks the contribution of transport and electric vehicles in the transition to a low carbon economy.

Subscribe to The Bid wherever you get your podcasts.

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MKTGSH1123U/M-3243169

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

In a world filled with financial uncertainties and rapidly changing economic landscapes, one thing remains clear. Emerging markets are becoming increasingly pivotal in shaping the global investment landscape.

This topic has been a point of great interest for us since our enlightening conversation with Emily Fletcher in London during the summer. You might remember Emily is a portfolio manager in BlackRock's fundamental equities business. Emily and I discussed the BlackRock investment institute's bullish outlook predicting that emerging market equities would significantly outperform their developed market counterparts over the next decade. But the question remains, how will this outlook play out in the near and long term?

Today I'm joined by Jeff Spiegel, US head of BlackRock, megatrend International and Sector ETFs. Jeff is going to help us explore the multitude of factors contributing to this anticipated outperformance. We'll delve into specific global trends that are paving the way for emerging markets, including the intriguing concepts of supply chain rewiring, and demographic population shifts.

Jeff, thank you so much for joining us on The bid.

Jeff Spiegel: Pleasure to be back with you.

Oscar Pulido: So, Jeff, as you know, over the summer, I spoke with Emily Fletcher. Emily's a portfolio manager in our fundamental equities business and she invests in emerging markets and was quite constructive on, the asset class. The BlackRock Investment Institute, has an outlook that of the next 10 years, emerging market equities will outperform, developed market equity, so they're quite constructive as well.¹ So how do you see, this playing out in emerging markets? What's your outlook on the asset class?

Jeff Spiegel: Oscar, as you and I have discussed in the past, one of the privileges of getting to work here at BlackRock is we work with some of the greatest investors in the world. In Emily's case, a fundamental equity investor, at the cutting edge, but it's not just our fundamental equity business or even our investment institute that's excited about the opportunity in emerging markets. It's our alternatives business, it's our systematic business, it's our index business.

Really, there's tremendous excitement all across the firm around these opportunities. There's a historical truth about emerging markets, which today has become a misconception, which is that a lot of emerging market countries are actually the smaller countries in the world. Actually, that's changed significantly.

Countries like China, India, Brazil are today some of the world's most important economies. The reason we consider them emerging markets has more to do with local equity market structure, as an example, and going forward, we actually think in the next 10 to 20 years, four out of the five largest economies in the world, markets we would consider to be emerging today. So, these are big, important economies and these emerging market countries are being driven forward by one of the things we like to talk about a lot here, which are big structural changes or mega forces we have identified five of them: digitalization and artificial intelligence, demographic divergence the transition to a low carbon economy, geopolitics and economic competition, and the future of finance.

All of these are going to play a role in propelling forward emerging markets. In particular I think we'll have the chance to talk about them today, demographics, that transition, and geopolitics because so many of these countries have favorable demographics, so many of them have access to the key resources for the climate transition and there'll be beneficiaries of increasingly, competitive geopolitics by essentially playing all sides and staying in the middle.

Oscar Pulido: You mentioned the five mega forces and one of the ones you touched on was demographic divergence. I think we read a lot about in the US in the UK, in Japan, these developed markets, how populations are getting older. So how are demographic shifts then impacting the emerging market economies? Is it the same story or is it something different?

Jeff Spiegel: It's actually quite different, so The Economist has this term I like, called 'AltAsia', like alternative Asian economies, that are really coming up in importance.² And a lot of these countries have incredibly favorable demographics, especially relative to, developed market countries or even China.

And just to put some numbers around that, AltAsia, think about Vietnam, Thailand, India, has a collective working age population, about 1.4 billion people.³ It's home to about 155 million people between age 25 and 54 who have a tertiary education.⁴ What's interesting is these are some of the only countries in the world where those stats are actually improving, year on year. They're not at the sort of peak, they're actually still in the early innings of that demographic growth and of that education trend.

Now, when you compare that to China, Western Europe and Japan, all three are actually shrinking in terms of working age population, and even the US is actually only staying about flat. There's a term we like to use here that demographics are destiny, because this is one of the big changes in the world that you can actually predict with a pretty good amount of certainty- how many people are in a country today? What does the birth rate look like and how are people going to age over time?

And looking at those things. A lot of emerging markets, particularly in this sort of Alt Asia cohort, present incredibly attractive opportunities that are going to be hugely important for economic growth in those nations.

Oscar Pulido: And so, on top of the demographic shifts that you just mentioned, we also hear a lot about geopolitical fragmentation we're seeing it in the world. We're seeing more economic competition. So how does this play into your long-term outlook for emerging markets?

Jeff Spiegel: So, we talked about demographics and the importance of that mega force geopolitical fragmentation, another really critical mega force that's affecting the emerging markets cohort and in a variety of different ways. So, off the bat, trade is actually growing faster between geopolitically aligned countries that have better diplomatic relationships with one another.

We are also distinct from the Cold War period, have this idea of multi-aligned states, really large economies, that are negotiating with all sides geopolitically, and they're benefiting, they're getting infrastructure support, they're getting trade deals, from some of the largest economies in the world.

To get a little more specific, you have the Gulf States. these are countries that have massive capital account surpluses and people are courting their investments. You have, Latin America, which has a lot of the most critical minerals, that are going to be really important in the transition to a low carbon economy.

So, lithium supply is really geographically concentrated. About 98% of it comes from South America, Asia, and Australia.⁵ And the bulk of that, specifically from South America. and then copper. You think about countries like Chile and Peru, they alone account for about 40% of output.⁶ And then beyond this idea of multi-line states beyond this transition, metals, you also have this sort of geopolitical battle in technology where South Korea and Taiwan are great examples of beneficiaries.

So, East Asia, particularly Taiwan, really excels in wafer fabrication and assembly, for semiconductors. Whereas actually the US and Europe and Japan tend to specialize in more of the design of chips. So, you only have a couple of countries that can actually do the fabrication and assembly, they're going to be beneficiaries as the world increasingly fights over things like semiconductors. So, this geopolitical fragmentation idea is going to benefit a range of emerging markets, but also in a range of different ways.

Oscar Pulido: So, you took us on a little bit of a tour around the world in some of your comments and you highlighted the point that these countries are cooperating. They're creating economic blocks. They're increasing their negotiating power and that's making them more powerful players on the economic stage. But we've talked about emerging markets at a high level. Maybe we can zoom in a little bit, you've touched on a few countries, but are there specific ones that in particular you think are poised to outperform?

Jeff Spiegel: If I was going to lean into one country that is potentially most poised to benefit, I would think about this as India, for a variety of reasons. They are beneficiaries of geopolitical fragmentation as well as demographics. And I'll break this down into a couple of areas. The Indian economy is now the world's fifth largest, recently overtaking the United Kingdom.⁷ Again, reinforcing this idea is that emerging markets are not the smaller countries. they're actually some of the largest economies in the world. And by the end of the decade, economists actually think that India will be the world's third largest economy, behind only the US and China.⁸

In fact, the Indian economy grew at a rate of about 7%.⁹ In 2023 and that's expected to remain strong going into 2024. in fact, India's likely over the period to be the fastest growing economy. The G 20 and the upsides are massive going forward, so manufacturing opportunities come to mind. So as supply chains rewire and the world looks to find a gateway to growing South Asian markets, India's really well positioned to benefit.

The Indian government has certainly taken note of this and it's looking to increase attractiveness, as a home for manufacturing. They've introduced production linked incentives. To encourage overseas manufacturers. that initiative alone drew about $6.5 billion in investments during 2022.¹⁰ But India's heft, it's demographic, it's demographics, it's multi aligned status.

all of these things make us think that if there's one sort of standout with maybe the biggest opportunity in emerging markets, it may very well be India.

Oscar Pulido: And it's interesting to hear how they've climbed the ranks in terms of the size of their economy and where you projected that going forward, very much among the leaders in the league table if you were looking at it on a global scale. Jeff, one of the things that, I think back over the last few years, when we think about the pandemic and we think about how the economy was getting rewired, a lot of companies realizing that they were sourcing their supplies from very far away, and we've started to hear this term of nearshoring and companies bringing their supply chains, closer to home. How does that impact. Emerging market economies, is that a positive for the space?

Jeff Spiegel: I think it's a mixed bag for the space. And this is where you have to think about, what are the more specific opportunities in emerging markets and not think about emerging markets as just a single or monolithic cohort.

Trade openness or globalization we often call it has been a one-way escalator ride since the end of World War ii. there were really two forces that drove that. So, the first was the Bretton Woods system after the Second World War championed by the United States. And the second was really around the initial rise of China, its entry into the World Trade Organization, for example, in 2000, but there's a few forces that have changed, a lot of this just in the last few years. And we've actually seen trade openness start to go into reverse for the first time in a long time.

What are those three forces? The first was the Covid19 pandemic, to your point about supply chains, it's not just that they were far away, it's that companies were really prioritizing the lowest cost production of goods. And what they learned is it can't just be about cost. You actually also have to think about resiliency, even if that might make your goods a little bit more expensive. So Covid19 changed this focus away from purely cost towards resiliency. That's the first area, rewiring supply chains. The second is really the war in Ukraine.

And here it was less industrialized goods that were affected, but a lot of commodities, be it energy, be it food, were massively disrupted by this, geopolitical event that's also leading to a rethinking of supply chains. And then lastly, and we've already talked about it a bit, is geopolitics. as geopolitics become more fraught, it means that not just reshoring is important, not even just nearshoring, which you referenced, but also something that we think of as friend shoring. now Mexico I think is actually a really good example to think about what that means.

So, Mexico is a candidate both for nearshoring and front shoring. Nearshoring is moving production, closer, to the ultimate destination of goods. Friend shoring is moving production towards areas that have really friendly relations between governments, really open trade. So, when you look at Mexico, and you poll executives, of companies around the world and you ask, why is Mexico a potential beneficiary of all this? The answer is threefold.

Qualified labor force, proximity to the US and friendly relations. But Mexico actually isn't the only story in this regard, if you think about a country like Poland in Eastern Europe and its proximity to Western Europe and its friendly relations and its qualified labor force, you actually have a very similar story.

Think about Vietnam, again, skilled labor force, strong government relations with the west, proximity to a lot of markets like India and like Japan. Mexico's not the only part of this story, even though it gets referenced the most, probably because we're sitting here in the US and it's obviously the most directly close by.

But when you start to rattle off the full list of countries who are going to benefit from this rewiring, be they in Southeast Asia, Eastern Europe, Latin America, you actually start to think about most of the actual countries in the emerging market benchmark being huge beneficiaries of these shifts.

Oscar Pulido: Right, so the shift is companies went from just seeking the lowest cost to seeking, you said, resiliency in where they source those supplies and that could be from still a low-cost location, maybe not as low, but also with countries where they have stronger diplomatic relations.

Jeff, you also touched on China. And China constitutes a large proportion of emerging markets.¹¹ China's not only large, but it also has its own opportunities, challenges and nuances. How are investors thinking about China distinctly from other emerging market countries?

Jeff Spiegel: Yeah, so this gets back to this critical point of emerging markets are not a monolith. They have different opportunities associated with them. Now, as far as China's specific role, in emerging markets or in an emerging markets benchmark, the analogy to make here is actually the United States, versus developed markets more broadly. So, people don't tend to invest in developed market equities inclusive of the us.

Instead, they tend to have a dedicated allocation to developed markets, ex-us. Alongside a dedication, a dedicated allocation to US equities. why is that? It's really a size issue. when you put all the developed market countries together, the US makes up such a huge portion that it's just critical to think about it independently.

Otherwise, it's driving your whole developed market allocation. It's a similar situation now with emerging markets in China. So more and more we're seeing investors take a modular approach that actually splits China and these other EM holdings. in fact, ETFs that are tracking, emerging market X China benchmarks might be great tools for investors who are thinking about this opportunity.

this has been a really popular trade. in fact, year to date, we've seen almost $3 billion, flow into such ETFs.¹² Now, what's important to remember is. There's no right or wrong answer, for how to access emerging markets in a portfolio. But we recognize, and we have to recognize that China is a large component of the EM universe, with its own unique characteristics, and it makes more sense today than ever before to have an EM view and a China view that are distinct from each other.

Oscar Pulido: So, Jeff, we've heard from Emily, Fletcher, we've heard from you today on your view on emerging markets and the exciting trends that are driving these countries. So, looking ahead, there's plenty of economic uncertainty and the geopolitical risks, have only escalated more recently. So, what should investors be considering when it comes to emerging markets?

Jeff Spiegel: So, the question is, how do you want to access emerging markets? Do you want to own a broad emerging markets benchmark? The traditional emerging markets benchmark holds about a dozen plus countries, and we continue to see this as the way that most investors seek EM exposure.

Or as we discussed, do you want to think distinctly about emerging markets and China emerging markets? Ex China as an index is actually outperforming that traditional EM benchmark,¹³ and critically flows into it or growing incredibly rapidly. This is a new phenomenon really just in the last few years, so it's a sea change on the part of investors to do this break.

In the emerging markets benchmark and some are actually getting even more granular still. so India and South Korea have both had tremendous performance this year.¹⁴ They've also had flows into chinaETFs that specifically track those countries.¹⁵ So we're moving from a world in which investors are thinking about emerging markets as a monolith into one where they're either breaking it into two camps or even just targeting to target these individual countries they're getting more deliberate, they're getting more targeted, and that's important because as we discussed, these are some of the most, large and important economies in the world.

So, at the end of the day, emerging markets on the whole are really set to benefit from a lot of these mega forces, demographics and geopolitical changes in particular, but whether in Asia, south America, Eastern Europe, and even within these geographic boundaries, emerging market countries will capitalize on these opportunities differently Some will succeed in policy, others won't. Some will benefit from geographic proximity to the US or Western Europe, others will profit from significant deposits of the metals that are critical to the energy transition. So, the opportunities in emerging markets are many, and they're exciting, but investors need to be deliberate in how and literally where they want to capitalize.

Oscar Pulido: It sounds like a space that is evolving a lot and the way in which investors are approaching emerging markets is also evolving, is what you're saying. So, we'll hope to have you back and hear more about how emerging markets are evolving and how this story is playing out. But Jeff, once again, thank you so much for joining us on the Bid.

Jeff Spiegel: My pleasure. Great to be back with you.

Oscar Pulido: Thank you for listening to this episode of The Bid. If you enjoyed this episode, check out the episode titled A Stock Pickers Guide to Emerging Markets with Emily Fletcher. Subscribe to The Bid wherever you get your podcasts.

Source
¹ BlackRock Investment Institute, 'Capital Market Assumptions,' 08/2023. Data as of 06/30/2023.
² The Economist, 'Global firms are eyeing Asian alternatives to Chinese manufacturing,' 02/20/2023.
³ Ibid
⁴ Ibid
⁵ McKinsey & Company. Lithium Mining: How New Production Technologies Could Fuel the Global EV Revolution, 4/12/22.
⁶ International Energy Agency. 'The role of critical minerals in clean energy transitions', May 2021.
⁷ World Economic Forum, 'This chart shows the growth of India's economy,' 09/26/2022.
⁸ The Economist, 'India likely to become third biggest economy behind US and China by FY28,' 10/16/2022.
⁹ The Economist, 'India's economy likely to grow 7% in FY23: First advance estimates,' 01/07/2023.
¹⁰ Reuters, 'India to review production incentive scheme this month-end,' 06/13/2023.
¹¹ Morningstar, MSCI. China constitutes 30% of the MSCI Emerging Markets Index as of 9/30/2023.
¹² BlackRock, as of 9/30/2023.
¹³ Morningstar. The iShares MSCI Emerging Markets ex-China ETF has a YTD total return of 6% as of 09/30/2023. The iShares Core MSCI Emerging Markets ETF has a YTD total return of 3% as of 09/30/2023.
¹⁴ Morningstar. The iShares MSCI India ETF has a YTD total return of 7% as of 09/30/2023. The iShares MSCI South Korea ETF has a YTD total return of 4% as of 09/30/2023.
¹⁵ BlackRock, as of 9/30/2023.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH1123U/M-3192519

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

Electric vehicles, or EVs, have been hailed as the future of transportation. They promise cleaner air, reduced dependence on fossil fuels, and a seismic shift in how we commute.

Charlie Lilford: When I work in the office, I take my bicycle which is obviously lowering my carbon footprint significantly when I travel. Yes, we can buy electric cars and we can utilize that in an EV, but when we think about our mobility and our transportation around our daily lives, it becomes much more significant.

Oscar Pulido: But as we navigate this high-speed journey towards an electric future, there are certainly some speed bumps ahead, whether it's concerns about range anxiety, the availability of charging infrastructure, or simply the price tag of EVs.

Charlie Lilford: These cars are much cheaper, in some cases even cheaper than a lot of combustion vehicle cars today. And so the next question is then, what is the challenge today?

Oscar Pulido: Here to dive into the fast lane of EVs is Charlie Lilford, Portfolio Manager for BlackRock's Fundamental Equities business. Charlie talks with hundreds of companies across the electric vehicle and renewable energy supply chains every year. Today, he joins us to talk about the rate of adoption of electric vehicles across the world. and where he sees the most exciting investment opportunities.

<<THEME MUSIC>>

Oscar Pulido: Charlie, welcome to The Bid.

Charlie Lilford: Thanks, Oscar. It's a real pleasure to be here today.

Oscar Pulido: Maybe we can start by talking about what is driving this shift towards electric vehicles? We hear a lot about the transition to a low carbon economy, so I think these two things are related.

Charlie Lilford: Yeah, they definitely are related. I think what's really exciting right now is the fact that electric vehicles are truly accelerating. This is becoming a mass market opportunity, we're seeing more and more of these EVs proliferating in our cities, in our economies, and we've really taken a totally new step change in terms of the future of electrification and electric vehicles.

As these cars become much cheaper, much more affordable to the consumer, we will see more and more of these cars being owned and purchased in all segments of the population. Historically, people thought of electric vehicles as something that's quite exclusive, whereas now it's really democratized.

We often see Government regulations and subsidies has having been very supportive to get that initial take up of electric vehicles and that's certainly been the case in a number of markets such as in Europe and China for instance where EV penetration rates are now in excess of 20 percent in new car sales.

But that was really just the first step and now what we're seeing is this more broad and holistic adoption of EVs which I think is very exciting for the net zero transition and what it means for just our ability to reduce our impact on emissions in our cities. But also, this advancement in technology and mass market opportunity for electric vehicles

Oscar Pulido: And you talk about the net zero transition and the reduction of, carbon output, the lower reliance on fossil fuels, this is something we hear a lot about. What is the contribution that this transition to EVs is making to that transition? Because certainly there's a lot of other things that are contributing to that transition, but what's the EV contribution to that?

Charlie Lilford: There's certainly a lot of other things that contribute to this and that there has also been an evolution what it means to be able to emissions more generally. And so, it is clear that this is something which is holistic and will need to be done in variety of industries and sectors.

But transportation accounts for approximately 25 percent of global CO2 emissions today. And then road transportation, passenger vehicles and freight, that's about two thirds of that amount. It's a huge component of emissions, and yet it's hugely addressable in the sense that we can actually create change over the coming decades very effectively just from moving from mechanical to electrical transportation.

Passenger vehicles typically see that car owners own their cars for 12 years or in some cases more than that that's clearly an area where we will see electrification expanding and evolving and increasing penetration rates of electric vehicles over time.

But commercial vehicles are typically used for six to eight years on average the turnover rate of those vehicles is much higher compound that with the fact that many of these companies have net zero targets. They're trying to also reduce their costs and clearly electric vehicles do reduce your operating costs. It suggests that we will potentially see much higher acceleration and adoption of electrified vehicles in these segments than what we've seen to date. And that all comes down to the fact that it's becoming much more affordable, it's being driven by cost incentives and operating costs, and these adoption rates could accelerate.

Oscar Pulido: So, it's not the only way in which the world can transition to lower carbon, but it is a major contributor is what you're saying.

Charlie Lilford: Exactly, Oscar. But as I said before, the fact that we are seeing these vehicles becoming cheaper every year, they're democratizing into our economy so that opportunity is no longer something that we are forced to do. It's something that we will naturally choose, it's cheaper for us, it's a better solution and actually it has a much, more sustainable outcome.

Oscar Pulido: So, let's talk about the consumer, and I have to admit I'm actually one of those consumers in recent years of having purchased an electric vehicle, but what are the barriers to more mainstream adoption of electric vehicles? is it still price? You mentioned government subsidies before played a role early on, but is price the biggest barrier or are there other factors at play? Are people concerned about the range of the vehicle, maybe you can talk a little bit more about that.

Charlie Lilford: Historically it had been about price, this is changing, and this is actually changing very quickly. Now that we're seeing Not just one or two car manufacturers in the world producing electric vehicles, we're seeing many more. For instance, this year alone, there are over a hundred new designs that are being launched in Europe, close to 50 in the United States, China is even more, about 150 new designs.

So, the opportunity for us as consumers to purchase electric vehicles is expanding. And so, we are spoilt with choice, and we will be even more spoilt with choice in three, five, 10 years’ time, because these manufacturers are producing electric vehicles at scale at affordable prices. That affordability question and the price point is becoming relatively mute in the future. These cars are much cheaper in some cases even cheaper than a lot of combustion vehicle cars today. And so, the next question is, then, what is the challenge today?

There's still challenge around charging, and I think people's anxiety around range. Can I get to my destination without having to stop and charge? To some degree that's people getting used to using electric cars and being familiar with how they would utilize them day to day.

It's clearly also a factor of building more charging infrastructure. And we're seeing a lot of that being built out. So longer distance charging. A lot of work being done with automotive manufacturers to work together to find solutions so that they solve the problem for the consumer.

And then also the fact that ironically, we've over built the batteries in the cars. The average US driver drives 40 miles in a given day. And if you think about the efficiency of battery in a pack, we are effectively looking at a car that is overbuilt by a factor of four or five times in terms of battery capacity. So, there are ways that we can evolve the cars to be best suited to the use cases of the end consumer.

Oscar Pulido: And it's interesting you mentioned all the new models, new companies coming out with electric vehicles, and I've had this experience of walking on the street and seeing a car and not recognizing the manufacturer of the model and more often than not, it does appear to be an electric vehicle. So that resonated with me as you said that.

Before there were electric vehicles, we had something called hybrid vehicles, and they still exist, but there was this sort of steppingstone where people used hybrid cars before they went fully electric, and now people making that jump to just go more fully electric. So, what is that role of the hybrid vehicle these days then?

Charlie Lilford: Well, I think the hybrid still has a place. Particularly for those making that are using the car more frequently, want to have the opportunity to use electric, but also that range anxiety means that they want to fill their car with gas when they need it.

That being said, the progress and the advancements that are being made in EVs, pure EVs, battery electric EVs, is so significant. Really the core of the matter is hybrid is just a transition story as we move to a full electric marketplace. With the advancements in technology around electric vehicles there is the opportunity to see more and more of these EVs coming to the market. If you think about some of those step changes in technologies, the chance to have higher voltage electric batteries being able to charge faster. I mean, that’s the key right? As a consumer, you don't want to waste too much time charging your car If you're out and about you want to be able to charge it quickly.

That's one of the key changes that we see underway, and a lot of these car companies and a lot of the manufacturers are focusing on that. How do they produce batteries that have much higher energy density that can enable us to charge our cars faster?

 Then car manufacturers asking the next question, where do we find greater efficiency? Where do we improve the technology? And then it comes down to the aerodynamics. It comes down to the rolling resistance. So how much resistance is applied from using your tires or the inertia? All of these incremental improvements mean that we can find ways to be far more efficient with the electricity that we're using in our cars and enable further adoption of electric vehicles.

Oscar Pulido: Everything you've mentioned certainly highlights that there's progress for the consumer, there's more choice, and there's progress being made in terms of transitioning to lower carbon emission. For you, as somebody who comes to work and is investing in stocks and companies, it sounds like the automobile ecosystem has changed dramatically over the last couple of years. So, what does that mean in terms of investment opportunities?

Charlie Lilford: This is such a great question, Oscar, because You're getting a collision of effectively the legacy environment with this new onset of what it means to be in an environment with electrification and electric vehicles.

And so, when you take a step back and you think about the automotive sector or the transportation sector, we've seen these companies historically engineering change. The fact is that this is the first time in over a hundred years that we've actually seen a totally new power train technology. We're moving from a mechanical to an electrical world. And what that means for me and our team as investors is that you see new companies coming into the space, new technologies emerging. There's a lot of change and that as an active stock picker really represents a huge opportunity for us.

We see companies that are legacy, or companies that are incumbent, that are able to change, that will evolve, that will survive, that will succeed. That being said, some other companies that are legacies will not be able to do that. And I think that's where it gets truly exciting, this change that's underway, the emergence of new players, the emergence of new technologies, creates true opportunities for us at BlackRock as active stock pickers.

Oscar Pulido: And so, what's that one innovation that you see coming to electric vehicles that could, be a game changer in terms of performance and price and how far away is that innovation from being in mass production?

Charlie Lilford: We get this question quite often. We’re certainly looking for these game changing technologies. So, if it's advancements in battery technology, to get very technical, some of the anode technologies that we're seeing, where these companies are progressing on that front. Even just the advancements in the chemistries for the batteries, and furthermore, when you think about longer term, a lot of people talk about, solid state batteries. There is evidence that this could be very exciting and a game changer in its own right.

When I say solid state battery, what that means is there is a different technology that we can see being able to be used in cars, which is, much safer, but also has much greater performance. if we were to get into this achieving solid state status, it does unlock a lot of the issues around charging times.

But I often reflect on what is the key game changer. And the key game changer for me here is efficiency. The ability for the manufacturers, for the supply chain, for the providers of technology to find much, much more efficient solutions to the problem.

 When you think about it, how does a car company scale? How does a car company manufacture millions of vehicles very cost effectively so that it is cheaper for you and I, when we want to buy our next car. How do manufacturers of batteries, get into a position where they can produce batteries at an affordable level so that those batteries are much cheaper when going into the electric vehicles?

And so, there are a lot of really interesting game changing technologies out there, but it comes down to efficiency and the entire ecosystem to become more and more efficient, to improve day in, day out, year on year, to bring a product, which is going to be far more cost effective, far more affordable for everybody, not just a premium product.

Oscar Pulido: That's interesting because we live in a world where we want something, and we want it right away. We expect it on our doorstep. And what you're saying is there's great technology already in these vehicles. So certainly, there could be improvements. There always is, but it's just these companies getting to a point where if a lot of people actually want these vehicles right away that they can do it in an efficient and scalable manner.

Charlie Lilford: Yeah, exactly. Like you said, it's really about providing something to the consumer they want, that solves some of their problems. People want to have a car that's easy to use, cheap to run, comfortable, safe, reliable. All of these factors come into play in this sector, and I think electric vehicles do solve a lot of those issues.

Oscar Pulido: You mentioned before that one of the anxieties that potential buyers have is the range of the vehicle and where am I going to charge it? Is that the biggest obstacle right now for electric vehicles or is there something else that is precluding this industry from growing faster?

Charlie Lilford: That is the case. We've seen that costs are coming down. In fact, costs will come down even more dramatically when we think about buying our next car. Really the key factor right now is, can I charge my vehicle? And I think this is, also very interesting when you think about it, and I often use this quite flippantly, but it’s incredibly true. Electrification is all around us. If you think about electrification and the access to electricity, in many cases it's more accessible to us as urban dwellers than combustion engine or combustion fuels are.

So, if you think about where do we source our electricity to charge our cars, it's in our apartment buildings, our homes, in our offices, on our streets, and so the fact that electrification is permeating all around us is one of the key constraints which we believe is there but in fact isn't, and so it's really about changing some of the behaviors.

And very similarly to when you think about when you go home and charge your mobile phone, you charge it overnight. And then I wake up in the morning and I go to work with my phone fully charged.

When you think about electric vehicles, The best solution is to charge it slowly overnight, take eight hours, let your car charge. it's a behavioral factor that will evolve and emerge over time as people become more accustomed to using these new technologies and become accustomed to how they can optimize those technologies.

Oscar Pulido: So, imagine you wake up 10 years from now and it's the year 2033 is the adoption of electric vehicles now mainstream? Have we gotten to that point where that's what you own?

Charlie Lilford: So, ask this another way, in 2033 when you're looking for your next car to buy will you be buying an internal combustion car? That's the key here. There are obviously some very optimistic scenarios around this many people think that internal combustion cars will disappear overnight. The reality is they won't. internal combustion cars will be with us for many years to come. And that's a factor of, we as drivers of these cars own these cars typically for 12 years. So that turnover rate is relatively slow, but nonetheless, what we're seeing is a dramatic increase in escalation in EV adoption.

And you just have to look at what's happened over the last few years. this year we should have EV penetration rates close to 20%, on a global basis, forget about certain markets where we see dramatic penetration rates, but if you reflect on that a few years prior, this was barely at 3 or 4%.

So, we've seen a 5X development in this just over the last four or five years. And when you think out to 2030, given the costs that we're seeing coming down, and given the nature of the design releases that we're seeing coming out of the manufacturers, there's nothing to suggest that we will not see significantly higher penetration rates in electric vehicles by 2030.

Oscar Pulido: So, Charlie, I have to ask, I mentioned at the beginning that, I became an electric vehicle driver myself in the last couple of years, but do you practice what you preach? Do you drive an electric vehicle?

Charlie Lilford: I do, but I think it's even broader than just that. what's really interesting is that it's becoming a question of electrification in our lives. Yes, we can buy electric cars and we can utilize that in an EV, but when we think about our mobility and our transportation around our daily lives, it becomes much more significant.

When I go to London to work in the office, I take my bicycle. I use mass transportation, which is obviously lowering my carbon footprint significantly when I travel. So, it becomes far more holistic, EVs are just one piece of that puzzle in terms of, how we can address our own impact and what it means in terms of our own impact on net zero, but also how we travel more efficiently in cities. And so how can we be much more sustainable in our daily lives?

Oscar Pulido: So, I feel really charged after this discussion. I was trying to think of a witty pun to match, many of the ones that you had as you were describing this space. But, Charlie, thanks for your insights on electric vehicles and what's to come ahead. And thank you for joining us on The Bid.

Charlie Lilford: Thanks, Oscar. we will see more and more electric vehicles in the future, and it's just going to be such an exciting next couple of years.

Oscar Pulido: Thank you for listening to this episode of The Bid. If you enjoyed this episode, check out our conversation with Cristiano Amon, CEO and President of Qualcomm, where we discuss the digital transformation and how that's already affecting the electric vehicle market. Subscribe to The Bid wherever you get your podcasts.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH1023U/M-318700

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

The face of finance has evolved considerably of late. From changing financial architecture and payment applications through to regulatory developments and the impact of AI, all of which have major implications for banking’s business models. So with all of this rapid change, what should investors be considering?

In our midyear outlook we discussed a new regime of greater macro and market volatility is being shaped by five major structural forces that we’re calling megaforces. Alex Brazier, Deputy Head of the BlackRock Investment Institute joins me to talk about the first of these big forces in detail, the future of finance. Alex will explain what this big shift will entail for banks, companies and investors as we grapple with a changing economy and structural changes. Alex, welcome back to The Bid

Alex Brazier: Hello again, Oscar. Thanks for having me back.

Oscar Pulido: Alex, you introduced us to the idea of megaforces in the mid-year outlook earlier this year, but perhaps you can remind us what a megaforce is, and what are we talking about when we say the future of finance?

Alex Brazier: These megaforces, they're big structural shifts in our economies. Things like demographic change. Competition between great global powers, the development of artificial intelligence, and the transition to a low carbon economy. All these things are changing the way we produce, the way we consume, and the way we work. And they are enormous, sort of powerful forces in our economies, and they're absolutely relevant to investment. They might be forces that are here with us for very many years to come, but they're actually shaping investment. returns right now.

And this week we're talking about reshaping the financial system, the future of finance. It's a big topic, I don't pretend that what we've got to say on it right now is in any way the last word. There's loads more to explore, and we'll be exploring it. But what we're really looking at here is how the way the financial system serves savers, borrowers, how stable the financial system is, and most importantly, as it evolves, what investment opportunities does that create? And what risks does that create? That's what we're exploring in the future of finance.

Oscar Pulido: Okay, so as you said, you're thinking about these as thematic shifts. So, moving on to today's topic, the future of finance, as we're looking ahead and considering what that might look like, maybe we can start by thinking about the fact that US banks have been experiencing deposit withdrawals. At an unprecedented pace. So, can you tell us what's been happening that's led to this change? And what is the ultimate impact?

Alex Brazier: Yeah, when we talk about deposit withdrawals at an unprecedented pace, it sounds like really bad news. we're normally used to people taking deposits quickly out of banks when they 2008.

But this is actually pretty good news, because part of what's happening is just due to what the Federal Reserve has been doing with, first of all, QE - purchasing assets. Every time it purchases an asset, it puts money in someone's deposit in a bank. And now it's doing QT, Quantitative Tightening, it's, selling the assets that it had and draining deposits out of the banking system.

It's inevitable given that monetary policy, but there's something deeper going on as well, which is the good news here. Really what's happening is that savers are searching around for the best return. We're now in a very different environment, We're not in a zero-interest rate environment. And savers are looking for other options. And most importantly, they found them as well. And they found them in things like money market funds.

And we've seen around two trillion dollars’ worth of deposits over the last few years flow out of the banking system into money market funds. And, as I say, that's not largely because people have any questions about the safety of the banking system. There was a bit of that back in March, this year. But largely it's because banks have been slow to raise deposit rates as the fed has raised rates, but money market fund rates have basically followed the Fed's rate. So, people are looking to earn a higher return on their deposit. They're putting money where it earns the higher return. So, what it's telling us is that there are now credible alternatives to bank deposits. Money market funds have been substantially reformed since the financial crisis in 2008.

They put their money mainly in short term treasury bills and even on deposit at the Fed. So having this alternative to bank deposits is great news for savers. They can find the best returns. They've got choice. That's a new development, and as a result, they're looking around. Now, it's good news for savers, but it's going to be a challenge for banks. And they're going to have to face up to this more competitive market for people's savings, effectively. But broadly, big outflow of deposits, not the usual bad news story. Actually, a good news story about choice for savers.

Oscar Pulido: Certainly, sounds like a really good story for consumers, and they have better options, and sounds like banks are going to lose out if they can’t compete. So how are they going to adapt to this change?

Alex Brazier: Well, they will, over time, have to. for the bank, as we talk about in our paper, it's not really an urgent problem for the banking system as a whole. It's still pretty flush with deposits, largely thanks to the Fed's monetary policy actions. But what this is revealing is that banks can't rely on continually paying rates on deposits that are much bigger.

So, they're going to have to compete more aggressively for deposits over time. Now, there will come a point over the next few years where that. they really have to do that. And for some banks, they really have to do that now. We're particularly seeing that with smaller banks who perhaps aren't so flush with deposits.

And they've been repricing their deposits. That's a sign of what's going to happen in the system more broadly. What does that mean for them? Well, for banks, it means two things. It means squeezing of their profits, their so-called net interest margin, the difference between their lending rates and the rates they pay on their deposits.

And it also means they're going to be trying to pass through some of that higher cost of deposits. into lending rates, into the rates that borrowers pay them. And that means that over time, bank credit is probably going to get a bit more expensive relative to other forms of finance. That sounds like bad news as well. But actually, it creates an opportunity for reshaping or reinforcing a trend in the financial system that's been going on for many years actually, which is diversification in the sources of finance, particularly for companies.

So over time, companies have come to rely less on banks. They've been reliant more on using public markets in particular. Now this change, bank credit becoming a bit more expensive is actually going to encourage companies to continue to look for other sources of finance from outside the banking system. And ultimately, it's going to mean a financial system where companies have more choice as well. They've got more options, they've got a more diversified system to finance growth and jobs, in the economy. and that to us is one of the more exciting things of this, this tectonic shift we see going on.

Oscar Pulido: And if we think about the public sector for a moment, what are regulators proposing and what's that going to mean for this, change in bank lending?

Alex Brazier: Yeah, regulation is clearly in motion here and bank regulators, particularly in the u. S., are likely to make changes. They've made some proposals, and those proposals, could change, over time. But the thrust is that they're probably going to expect banks to fund more of their lending with shareholders cap their own shareholders capital. Now, that's great for the stability of the system, because it means banks are funded more with something that can absorb losses. if they take losses on those loans. but it also means that for banks, funding themselves in the mix the regulators want is going to be more expensive. if these proposals go through, it's likely going to reinforce this trend to make bank credit relatively a bit more expensive than other forms of, credit. And there's one other aspect to the proposals as well, which is, in large part, u. S. regulators are responding to global agreements reached a few years back,

But they're also responding to what happened back in, in March, and the failures of some mid-sized banks, in the u. S. And what they're proposing to do is to extend some of the more stringent regulations. that apply to the biggest banks Down to some of those mid-sized banks as well.

So that's going to be a particular tightening for that segment of the banking system in the U.S. it's going to take away some of the advantages to being middle sized rather than big which as a result we think is going to encourage some consolidation in the industry but it's also going to add to

This sort of tightening of supply of bank credit, because these mid-sized banks have actually been pretty important in the supply of credit to the U.S. economy over the last few years. they've been playing an outsized role. So, for all these reasons, regulation we think is a kind of added factor, added to competition for deposits, that means bank credit is going to become relatively a bit more expensive.

Oscar Pulido: So overall banks are raising rates, regulators are making proposals for more regulations and stricter regulation I should say. So, what does this mean, perhaps, for the broader economy and maybe what opportunities do you think this is going to create?

Alex Brazier: Yeah, we've talked about how it's good news for savers. It's probably good for the stability of the financial system as well. But it does mean slightly more expensive bank credit.

So, what does that mean we're going to see? we're likely to see some innovation in the way finance works. We're probably going to see growth of non-bank forms of finance. and for many years, we've seen companies diversify finance away from banks towards public markets by issuing bonds. This is going to reinforce that trend. And it's also going to broaden it out a bit as well. Because many companies want smaller deal sizes than the public markets can serve them with. And so maybe we're going to see partnerships between banks and other parts of the financial system where the banks do the lending, but the loans are held outside the banks on other balance sheets. But we're also probably going to see the growth of things like private credit. by which we mean loans that are directly negotiated between a borrower and a non-bank lender like an asset manager. And they're held in funds financed directly by investors. Now, this market's still pretty small relative to public debt markets and bank lending. But we think we're likely to see it grow. And that's going to be good for diversifying the sources of finance that companies have to drive growth and drive, drive job creation.

But it also potentially creates a pretty big, investment opportunity over the long term, and we actually see some opportunities in private credit over the long term because as banks step back, we're Probably going to see more demand from borrowers for these alternative forms of credit. That's going to keep interest rates pretty high.

And that's what creates the potential opportunity, but we think we need to be pretty discerning here because private credit loans are not immune from credit losses in a higher interest rate environment. So, we focus on companies that are better placed to navigate that as borrowers. And it's really important to recall that much of the kind of interest rate premium, the extra return on private credit, reflects the so-called illiquidity of those loans. The fact that it's difficult to sell them quickly at a good price.

So, these are not investments suitable for all investors and investors who do hold them need to be able to manage their cash needs pretty effectively using other assets. But if they can do that, then actually there's a premium. To be harvested, and that's why we see the appeal in things like private credit, particularly in longer term, strategic, portfolios.

Oscar Pulido: So, Alex, it sounds like there's a lot to consider. and I'm just wondering, there's a lot of things happening in the world at the moment. Why are we considering the future of finance such an important megaforce?

Alex Brazier: Yeah, it's particularly important, I think, for the way our economies are going to function. In the same way that many of the other megaforces are as well. It's a big structural shift in the way a core part of our economy, the financial system, works. And we're not just interested in this because it's, close to home for us. We're interested in this because it reaches a lot of different parts of the economy. It's changing the way savers save. It's changing the way borrowers borrow. It's changing the way our financial system interacts with our economy. And in the process, potentially creating some investment risks, but also very importantly, investment opportunities. And that's our focus on this. So, it's a big force with big structural effects that's going to be at play for many years yet, but it's already having an effect on investment returns.

Oscar Pulido: Alex, as always, thank you so much for your time. we very much appreciate your insight leading the way in the first of these megaforces that we're considering. And I very much look forward to speaking with you about the upcoming outlook for 2024.

Alex Brazier: Great, thanks for having me, Oscar. See you soon.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH1023U/M-3181415

Oscar Pulido: Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I’m your host, Oscar Pulido.

How do you feel about your own retirement during uncertain market conditions? In periods of volatility, investors can often be short sighted when considering the outlook ahead. And your retirement is a journey that's not only personal, but also profoundly influenced by external factors.

These forces can make or break your retirement dreams and understanding them is crucial for anyone looking to secure their financial future. So, what should investors be thinking about today when planning for tomorrow? Here with me today is Anne Ackerley, head of BlackRock's retirement group. Anne will help us consider the current market conditions from a retirement lens and will walk us through the five major forces that are shaping the retirement outlook. Anne, welcome to The Bid.

Anne Ackerley: Thank you so much for having me.

Oscar Pulido: Anne you're a frequent guest on the podcast, so it's good to have you back. And when you've been on in the past, you've talked about the retirement challenges that women investors have, you've talked about the need for more resilience in retirement plans. And today you're here to give more of a State of the Union address about the retirement industry. I know you released a paper earlier this summer, so what are some of the things that are going on that you want people to know about?

Anne Ackerley: Well, I’m excited to be back here talking about my favorite subject, retirement, and I'm glad that you called it, the State of the Union. that's really what we had in mind when we wrote the paper, and it's about the five forces that are impacting retirement in the United States. It's probably no surprise to you that retirement today is kind of a mixed bag. There are a lot of things that are really quite challenging, but there are things that are working, and we wanted to really focus on that as well. The five trends that really stick out to us are the following:

So, one, Americans are living longer.

Two, there's been this move from defined benefit to defined contribution.

Three, there's Millions of Americans actually don't have access to a workplace retirement plan.

Four, there's a really great need and a great desire for, lifetime income.

And then finally, the racial and gender, disparities continue to exist in retirement. Before I go through all of these, or I hope we get to all of these today.

Oscar Pulido: We definitely will.

Anne Ackerley: I did want to double down on maybe the first two and just do that as scene setting for the rest of the conversation.

So, longevity, Americans are living longer and actually, in the 20th century, we added 30 years of life. We went from 49 years to 79 years in just that short amount of time. And when you think about historically, people have been around for thousands and thousands of years, and it's just been this massive change in longevity.

Now, one thing I do want to just point out, we talk about average longevity in the United States. It is not the same for everybody, and we do need to be aware of the differences. It differs by race, by ethnicity, by gender, by socioeconomic status. And actually, over the last couple of years, longevity has actually been on the decline in the U. S.

But generally, overall, Americans are living longer, and it should be a good thing. Now at the same time that Americans are living longer, our society is also aging. We are going to have more and more people over 65. In fact, within the next couple of years, there'll be 15 million Americans over 65, and that is unprecedented. It's also unprecedented math. All these people are going to have to find a way to pay for these longer more expensive retirements. And interestingly, the one thing that hasn't changed in that time frame has actually been the retirement age. So, while we're living longer, people are still retiring right about the same age, 62, 63, on average, that they were, 40, 50 years ago.

The last thing I'll say, is that the tools that people have to save have also changed during this time period. And there's been this kind of massive shift from defined benefit to defined contribution. I think for most people listening to the podcast, probably very few of them will have guaranteed pensions. Maybe some of the lucky ones, maybe some of the people who are working in the public sector. But for the most part, people will have, defined contribution of 401K plans, which really means the onus is on the individual now, not the company, for people to save and invest and then ultimately figure out how to spend their money in retirement.

Now, it sounds like, whoa, is that a good thing that we've moved from defined benefit to defined contribution? There are some good things about that in a lot of ways.

Oscar Pulido: So just taking a step back, you mentioned, living longer is a good thing, but it requires more planning and you're right about that retirement age point because I can think about my parents. Both have retired in that mid 60s, but yet, their life expectancy has gone up relative to history. So, let's just go back though to define benefit, define contribution. Defined benefit, a company is responsible for a pension that an employee gets after they retire. But there's been a shift towards defined contribution where that employee now is responsible for making their own investments, and they dictate what their retirement pot's going to look like at retirement. So why is that move to defined contribution so impactful to the industry?

Anne Ackerley: You know, 401k plans have helped millions of Americans be better prepared for retirement. and there are two things that have happened with the rise of 401k that have helped that. And we call them the autos, like automobile, but they, actually automatic enrollment.

And automatic escalation, so the autos, and also the rise of the target date fund. So those two things have actually helped more and more people be prepared. So, what is, auto enrollment?

You start at a company; you're automatically put into the 401k plan. money is taken out of your paycheck. And it gets invested into the plan. You don't have to do anything. And in this way, inertia works for you. You're just put into it. Auto escalation means you start out at an initial contribution, and generally every year that contribution might increase by half a percent or a percentage up to a maximum amount. often, it's timed with when people get raises and the concept of auto escalation is that people might not even notice that they're saving even more money. both those things have helped people be more prepared. the second thing, I would just say target date funds, I'm sure we'll talk a lot about them, but they have also been a major, I'd say revolutionary transformation that has happened over the last 30 years in retirement.

Oscar Pulido: The auto part is, it's interesting to me, it would seem like somebody should just do that on their own, but there's also a behavioral aspect of sometimes people need that nudge, you use the word inertia that once it's done for them, they're not tending to reverse that, right?

Anne Ackerley: Absolutely. Look, people are busy. People are out there living their lives, they're working, maybe they're having families, they're volunteering, they're just doing so many things. And the idea that you have to remember to sign up for something, and I will just use my 30-year-old son as an example, because he's in a school that they actually don't have auto enrollment.

And just yesterday I asked him. Did you enroll? And he's like, 'Oh, I need to go check.' You know, people are busy. And all these autos, the doing it for you, and these nudges have really helped. And just on auto enrollment, we know that when people are automatically enrolled, it's something like 98 percent of people or 95 percent of people stay enrolled in the plan. When you have to do it yourself. The number is something like 28%. People are busy, and they think they're going to get to it, and they don't get to it.

Oscar Pulido: So, it's in their best interest,

Anne Ackerley: A hundred percent.

Oscar Pulido: So, your son is 30 years old. It turns out that Target Date Funds, at least the ones at BlackRock, are also celebrating 30 years this year. You've talked about the importance of Target Date Funds within the retirement ecosystem, so maybe take us back, why was it important that Target Date Funds came of age 30 years ago? What's the state of them today? When you look ahead, are some of the evolutions coming to Target date Funds?

Anne Ackerley: This is the 30th anniversary of the Target Date Fund, and BlackRock did pioneer it, 30 years ago. Really, what a Target Date Fund does is take the complex job of trying to figure out how you should invest over your career, and it does it for you. Target date funds are basically a mixture of equity and bonds and that mixture changes over the course of your career. It's more in equities when you're young and then target date funds take risk off the table as you get closer to retirement.

And really the only decision that you need to make is, quote unquote, the target date. What is the year that you think you will retire? You pick that and then you're put into it, and it does all the investing for you, both, what we call the glide path, the mix of stocks and bonds, as well as the asset allocation within that.

Really revolutionary just transformed. What happened with 401k plans. Today, something like 36 million Americans use a target date fund, and they are the primary default vehicle, in over 90 percent of 401k plans. So, this is just a way that we've made it easier and simpler for people to be invested appropriately during the course of their life, and I'm just really proud that BlackRock pioneered this amazing vehicle.

Oscar Pulido: I'm thinking about how you said it and people are busy. within the retirement ecosystem, this concept of enrolling them automatically escalating their savings, and then within the target date fund, it sounds like making adjustments in the portfolio is also happening automatically. So, all of this creates, hopefully, a better long-term experience for the person in 30, 40 years or whenever it is that they're retiring.

Anne Ackerley: You know, if you put yourself in a 401k plan, let's say you put yourself in a certain non target date fund, you get busy in life, you forget about it, maybe you're not changing your asset allocation often enough, maybe you started in cash. And you're young, you shouldn't be in cash, as you get older, you probably shouldn't be in all equities. it does it for you, and you really don't need to think about it as you're busy living your life and doing the things you want to do.

Oscar Pulido: And then one day you retire, and you have this pool of money that ideally, you've been very diligent about and saving and so you've talked about then the need for that person to have retirement income or at least the concept of retirement income becomes important to that individual because now I have this pool of money. I'm no longer working. how do I consume and how do I maintain that day to day that I was accustomed to having? So, maybe talk a little bit about this concept of then retirement income and why it's so important.

Anne Ackerley: Absolutely. The number one financial fear in the United States is the fear of outliving your savings. And it's actually, it does make sense if you think about it. as you said, you retire, you no longer have income coming in, and you've got this pool of assets. And, in the United States now, because we're in 401k plans, it's really up to you to figure out how to spend that money and spend it so that you won't run out of it. And yet, you don't know how long you're going to live. You don't know what the markets are going to do, and you probably don't really know what your expenses are going to be, particularly if you're going to have some sort of larger medical expense or some unforeseen expense, and yet we say, everybody, hey, go figure this out.

Bill Sharp, the Nobel Laureate, has called this the nastiest, toughest problem in finance. Particularly as people are aging, more and more people are retiring, people are getting very focused on retirement income. The question of how do I spend my money so I can continue to live the life I want, but not run out.

And we've looked at surveys, 98 percent of employees want help with this, or over 90 percent of employees want help with this. 98 percent of employers I think they should be helping people with it. If you look back, people were very focused on that accumulation phase, the saving phase, now people are really starting to think about, how do I generate this income stream? at BlackRock, we've been very focused on this. we've taken the concept of the target date, and we've extended it. And we have come up with a strategy that embeds annuities into the target date strategy so that when a person gets to retirement, they would have the option of perhaps annuitizing and getting some form of guaranteed income.

And all embedded within a target date, which people know, and now we've put a guaranteed, piece into that as well. So, they're trying to bring back some of the defined benefit aspects. But still within the confines of a defined contribution plan. it's industry innovation, I think, at its best. There's just, the fact that people are living longer, the fact that they want help, employers wanted help, we've really pulled together to come up with something that we think can give people real help in figuring out how to spend in their retirement years.

Oscar Pulido: And so, everything you've talked about is around, if you have a retirement plan, if you work somewhere that offers you target date funds or a company has a 401k plan, right? The economy's changed a lot over the years and I think there's a lot of companies that don’t necessarily offer target date funds or a worker that doesn't have access to a good retirement plan. And I think your report actually maybe even touches on it and shares some data on this, but what does that person do? Like how do they get set up for success if they don't have access to all the wonderful, 'we'll do it for you' sort of features that you've talked about?

Anne Ackerley: So, this is a great question, and it is something I'm extremely passionate about. It goes without saying that all these good things that I've talked about, all the innovation, is only available if you, in fact, have access to a workplace plan where you work.

And today, 57 million Americans do not have access to a workplace plan. That's about 48 percent of private sector workers, so think about that, almost half of the people who work in the private sector don't have access to a workplace plan. Now a lot of that is small to medium sized businesses. Historically, small business has found it costly, hard to administer. they may not have HR departments who are able to do this. And so, the industry has really tried to work on how can we get more people plans, because we know that when you get, a plan at work, you're 15 to 20 times more likely to save.

You ask me, what do people do if they don't? They've got to go and probably set up some kind of IRA. And then they have to remember to take money out of their paycheck and invest. They've got to figure out their investments. And it's just shown that people will save 15 to 20 times more if they have access at their workplace plan.

And so, the industry's been focused on how do you increase access. And one of the things that has really changed over the last few years is technology. Technology is making it easier and simpler and cheaper for small businesses to offer plans. Today there are companies where in two clicks, an employer can sign up, and in two more clicks, an employee can sign up. And so, technology, I think, is going to help. there's some policy that's helping, in a policy called Secure 2. 0. There are tax credits available to businesses to try to encourage them to offer the plans. And then finally, some states have gotten involved. I think it's about 12 states have said if you work in this state, the company needs to provide a plan.

 So, we've got a whole bunch of different things working to try to increase the number of people, in the United States who have access, because there is no, federal requirement that a company provide these benefits.

Oscar Pulido: I'm almost thinking if a company has a gym in their building, you probably get more of the employees that exercise versus if a company doesn't. and therefore, the statistic around 15 to 20 times. more likely to save if there's a workplace plan. it makes sense. It's the people who don't have access to the workplace plan are also busy, and therefore, if it requires extra work for them to find how to do it, it's going to be more challenging.

Anne Ackerley: For sure.

Oscar Pulido:  That 57 million, those people who don't have access to that workplace plan, talk a little bit more about that. I think there's also some demographics, challenges in, in, in terms of what we see, access to retirement, the retirement outcomes that we see among different genders and demographics that I know you've done some work on that is, is interesting to touch on.

Anne Ackerley: The who doesn't have access are, people who tend to work in, certain sectors, the retail sector, maybe the hospitality sector.

I'd also say, gig workers don't. People who work for smaller businesses often don't. this might be surprising, there's 600,000 401k plans in the United States, but there's 6 million employers who have more than one employee.

So, there's a lot of plans, but then there's a lot of companies that don't offer it. And women and people of color disproportionately are affected by the lack of access. It's the sectors they work in. It might be part time workers, particularly for women. Often part time workers are not eligible to participate in plans. And the ultimate impact on retirement savings if we look at women, what we find is that women's balances at retirement are often 30 percent less than men's. This is in part due to access; they often don't have access. it's also due to the gender pay gap, the fact that women make 84 cents on the dollar. even if they're saving the same amount as men.

It's less amount of money, and that less amount of money compounds over time. Women are often, I think they provide almost, 80 percent of caregiving in the United States, whether that's childcare or elder care, and are often in and out of the workplace, which, again, impacts, their ability to save.

And for women of color, these numbers are even far, far greater. And again, I think the impact, is pretty devastating on people who don’t have access. and again, particularly women and people of color.

Oscar Pulido: So, this is a topic that I imagine we're going to be talking about for some time, but I get the sense that there's a lot of positive trends in the retirement space, particularly, I keep coming back to the person who's busy and how the ecosystem around them is developing to try and put in some good behaviors. There's still those 57 million Americans, though, that lack access that we need to help. we will probably have you on more than a few more times, Anne, to hear about how we're trying to close that gap. I want to thank you, though, for joining us today on the Bid.

Anne Ackerley: Thank you so much for having me.

if you've enjoyed today's episode, check out 'How to Solve the Emergency Savings Crisis', where I speak to Claire Chamberlain, BlackRock's Global Head of Social Impact, about what both the private and public sector is doing and what more still needs to be done to help resolve this crisis. Subscribe to The Bid wherever you get your podcasts.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH1023U/M-3146522

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

Artificial intelligence can be described as the simulation of human intelligence by machines. As we heard in the previous episode in this two-part look at AI, we heard how AI has been evolving for decades. Today we're going to take a look at the implications of AI for the investing landscape. Here with me today is Brad Betts, global equity researcher for BlackRock Systematic, an investment team that emphasizes the use of data-driven insights and cutting-edge technology in their approach.

Brad focuses his research efforts on using artificial intelligence, machine learning, and natural language processing to generate alpha. In other words, he uses AI to attempt to outperform the markets, and he's been researching these technologies for decades from his time as a scientist at NASA to the pivotal role he's played in bringing AI innovations to BlackRock. Brad will help us understand what AI means for investing and the opportunities that lie ahead.

Brad thank you so much for joining us on The Bid.

Brad Betts: Thanks for having me.

Oscar Pulido: So, Brad AI is seemingly everywhere right now. We're hearing about it on company earnings calls. We're hearing about it in news headlines, but you've been researching and using these technologies, really throughout your career. So, I'd love to hear more about the evolution of AI in terms of how you've seen it and how it pertains to the investment management industry.

Brad Betts: Yeah, my pleasure. I was an intern in the summer of 1989. I was working in a military research lab and one of the senior members of the lab had gone to a conference and came back and gave us all a briefing, and it was the first time that I had heard about artificial neural networks. And these neural networks are the key architecture behind things like ChatGPT. it was a particular demonstration. of a truck, a big rig, you know, an 18-wheeler being backed up.

Here I was seeing a computer learning how to do it. It wasn't being instructed explicitly by humans. It was learning how to do it, and this fascinated me. and it could do it even from a position that you called jackknifing a big rig, which is a really tricky position to get a truck out of. And it was riveting and so that was my first exposure.

Back in those days, we had nowhere near the computing power, nowhere near the volume of data, nowhere near the accelerated computing hardware that we have now, and nowhere near the sophistication of the algorithms. But it captivated me and it in no small part led to the great fortune I had in that next step of my career, which was to do my doctorate in something called the information systems lab at Stanford.

That lab was buzzing with ideas of information theory and signal processing, and cryptography and optimization and compression and medical imaging. It was just a wonderful time and there were giants of the 20th century, that were there. But there was another powerful force in this information Systems lab at Stanford, and it was a gentleman named Bernie Widrow - Bernard Widrow. And Bernie Widrow, had developed the first practical use of a neural network. If you made a phone call for many decades in the US you were using artificial neural networks, it was being used behind the scenes to do things like cancel echoes on the line.

Anybody that remembers older phone calls and you could sometimes get a really annoying echo. Well, that was technology that had been developed by Professor Widrow and others, something called Adeline. Professor Widrow, and others, built Adeline in 1960 before I was born, so that history of this goes well back into the 1950s. And it was the first practical use of a neural network. And again, these neural networks are what are underpinning so much of the progress and excitement.

I then had the good fortune to use what I had been trained and taught at places like NASA, at startups in Silicon Valley, and then close to 16 years ago now at BlackRock. The evolution has been for me, one of extraordinary excitement and privilege to see the changes in these technologies, to see the advent of more data, of more computation, of increased sophistication and algorithms, has led to this remarkable excitement that we're seeing now.

Oscar Pulido: Well, it's interesting because for many of us, common folk we think of AI as a recent development but I think you started your story with an internship back in 1989, this really has been an evolution over multiple decades, and you mentioned a couple terms, by the way, you mentioned neural networks, machine learning. I know we talk about like large language models, natural language processing, how do you think about those terms? What do they mean? How do they apply to the investment industry? Maybe we can go there.

Brad Betts: The field is definitely filled with jargon acronyms and terminology. Artificial intelligence, is a very broad and ambitious field of endeavor, which is obviously looking to try to mimic human levels of intelligence.

Machine learning is another term, and you can think of it perhaps as a sort of a subset of artificial intelligence. that tends to be more focused on performing a particular task. It's using computers to learn from historical data to take advantage of a historical data to make predictions about the future. That's a common use of machine learning. And its roots are in the signal processing and computer science and applied mathematics, the applied mathematics of optimization community.

You mentioned natural language processing, another term that people will use for that is also 'text analysis' but text analysis, natural language processing, NLP, is trying to have computers understand and take advantage to perform some task, human speech, human writing.

You mentioned large language models, ChatGPT is an example of a large language model. We call them large language models because they as rule of thumb, are trained with large amounts of text data, and also they have a very large number of parameters. you can just think of them as dials. you have one dial on your thermostat at home, imagine having billions of dials. So how you set those dials is critically important. The last one, you asked about, Neural networks, the, maybe the slightly more correct people usually just shorten it to neural network. we really say artificial neural network to distinguish it from the biological neural networks in our own human brains. These artificial neural networks we're meant to be very crude, of approximations of our human brains, of the neurons and synaptic connections and it turns out that these techniques pioneered by people like Bernie Widrow and many others have proven, over many decades now to be staggeringly successful.

Under all of those terms you've mentioned, natural language processing, machine learning, artificial intelligence, large language models. Under all of it is large amounts of data. Large amounts of computing power to take advantage of that data. And then also this accelerated computing. It's not just the standard computers people tend to have at home. There's specialized hardware that is well-suited to machine learning, natural language processing, artificial intelligence tasks in particular. It actually grew out of graphics processing, but it turns out it was well suited to the mathematics of this of this area.  So, I hope that gives a flavor and we've only touched some of it.

Oscar Pulido: Well, one of the added terms that comes to mind when you think of Ai, and you mentioned it, one of the most widely publicized headlines around AI when ChatGPT was released at the end of 2022, and I think you put it in the category of Large Language Models. So how does the large language model that ChatGPT uses compare to what you would use in investment analysis?

Brad Betts: We use large language models for investment at BlackRock, but we use them very differently. So, we take these large language models and we tune them to make forecasts for the returns that companies will generate in their stock. So, in effect, you can think of this model being tuned and becoming a real specialist. This a big piece of computer code powered by massive amounts of data and computation and becomes a specialist in making forecasts of, what will the return be to Apple over the next week, over the next quarter, over the next month.

And the process by which we do that is one called fine tuning. So, when people are interfacing with something like ChatGPT, they tend to be putting in text and they get out text. Whereas when we use them for investment, we tend to be putting in lots of text, and what comes out are numbers, forecasts of returns, and we use those forecasts of returns to conduct trading.

Oscar Pulido: Brad, one of the criticisms perhaps of ChatGPT is you put in text and. The text, you get back may or may not be accurate, it might have provided a lot of convenience, there's a bit of like, how do we know what it's telling me is true?

How do you then, assess that with the fine tuning that you described when you put in text and it gives you numbers, and do you know how believable that data is in order to make your forecast?

Brad Betts: You put your finger, of course, on a very difficult and challenging part of our job, which is exactly what you said. how do you trust, how do you tune the neural network properly, appropriately to do what it is that you want it to do?

So, this fine tuning process, think of it as, as, picking up an initial base model, that sort of understands a language, say English, it understands English very well. It can generate tokens, maybe not quite as well as ChatGPT but it can do it pretty well.

And then what we do is we feed in new text and we give this text a label. And this label is used by the neural net to understand if it's done something well or poorly.

Say you take the transcript of an earnings call, or say you take a broker report from some sell-side firm, this is the phase where you're training your neural net, then you're going to use the neural net for new data. But initially what you're doing during this fine tuning is using history to make the net much more specialized. And so you put in a piece of text and you give it this label. you can use the future returns that a company will receive over some horizon.

Then the neural net takes that information, feeds it forward through its architecture, and it produces a forecast of what the return it thinks will be achieved. We reward or penalize the neural network on how well it does. And then the neural network, the algorithm I'm describing it so I'm personifying it, of course it's just math and code, computer code, but what happens is the neural network then adjusts its weights.

I mentioned earlier that notion of like maybe having a billion dials, how do you set those? This part of the algorithm is now called back-propagating. The neural net says, 'okay, I took that piece of text. I think that the firm in the future, over the next say month or so, isn't going to do very well. Oh, but you're actually telling me it did do very well. Thanks for giving me that feedback via that label. I'm now going to go and adjust my weight slightly to try to close that gap.'

But you're doing this with huge amounts of information and you're doing it very rapidly. And it's not just one piece of text. It's taking in billions of these items and it becomes very skilled at matching what happened. And now what you can do once you have trained it in this fashion now you can use new pieces of information that it hasn't seen, so nobody knows because now you're talking about a real prediction, you're talking about the future, the neural net can take that piece of text and say, based on everything that I've learned, that I've been trained with, I think that this firm is going to do well. and again, it's not using any one piece of text.

By the way, Oscar, one of the things that allows us to do this fine tuning so powerfully is a brilliant algorithm called ADMM, the alternating direction method of multipliers. Under the covers, a lot of this comes down to doing optimization well, and this ADMM technique, was brilliant. And we have developed and tuned an ADMM implementation for so many years. that under the covers allows us to do this fine tuning because I described it as it's just matching returns. we actually get it to match exactly the investment problem or as close as we can make it to what we are really going to do.

So that is to say we want the neural network to learn to maximize returns while minimizing risk and minimizing transaction costs and minimizing borrow costs. And we're able to do this because of the brilliance of ADMM.

Oscar Pulido: Can I go back to something you mentioned, and that was fascinating how you painted that, image of the neural network learning being given feedback. Isn't the data that you are providing, historical data, and we're in a new investment regime, the great moderation is over, that period of low interest rates and low inflation and growth being more stable and predictable. Well, now we're in a new investment regime, of more volatility, so how do you think about the predictive nature of these models when maybe we're at an inflection point and some of the real-time data that you are feeding, it, it might not be trained for that. or does the data go back so far that it has plenty of history to have picked up on various economic cycles?

Brad Betts: Yeah, a huge change was the pandemic. As humans, we hadn't roughly seen a pandemic at this scale for, around a hundred years. Think back to March of 2020, how many of us really predicted how sharp the rebound would be in markets. And whether you are a computer, Or whether you're a human, A shift of that kind of magnitude is an incredible challenge.

The markets are a very dynamic system. And the nature of a dynamic system is It keeps changing. it will continue to be true. algorithms, humans have to be nimble, they have to be able to take advantage of what information they have available to do the best job that they can for prediction.

And we'll see, it is a fascinating time to, to be alive, to see, who is able to adapt more effectively to these changes that that will always be there in the markets.

Oscar Pulido: That race between man and machine, brings up something that we touched on in our previous episode, which are some of the ethical concerns, that arise from artificial intelligence, and what the impact is going to be on industries and society. And there seems to be two, schools of thought here. One is very fearful about the rise of these technologies and there's another side of the camp that's a little bit more I reverent. So, what's your view in terms of the business impact, the impact on society from artificial intelligence?

Brad Betts: It's my life's work. I don't go to bed worrying at night around a machine takeover. The opposite for me. I'm excited by the opportunities that these present the opportunities. You know, I,I feel that sometimes the conversation gets a bit focused on the risk and that's human. but sometimes it misses the extraordinary opportunity, the opportunity that will come, you look at algorithms like alpha fold. a neural network that learned the 3D folding structure of proteins, the opportunity that will afford for drug discovery is wonderful.

I fall in the camp of being more excited. I think that the impact businesses will see is around, automation. I think a lot of the ways initially and unsurprisingly businesses will see these impact will be, in productivity enhancing tools, for example, on things like email, in code generation, in the translation of old computer code into more modern languages to reduce operational risks, to put them into a more modern, framework.

How many of us really go to bed at night achieving inbox zero? Imagine if you had an agent that was sitting there that was summarizing the emails for you, was summarizing presentations, was drawing your attention over time to the ones that it's starting to learn, that you're more interested in that it feels are more worthy of your attention, that are able to summarize.

I think that is a way, and firms like Microsoft are working very hard and highly incentivized, of course to bring those kind of capabilities, to many enterprises. So I think these opportunities for automation are a path where we're going to see, a flurry of activity around the adoption of these technologies.

Oscar Pulido: I think the term inbox zero would resonate with a lot of people. I know it resonates with me. It seems like an impossibility unless I delete everything and then surely I'll have missed a lot of important things. But while you work in the investment industry, it sounds like a lot of the examples you gave were actually just about productivity, automation you mentioned healthcare as well. Are there other opportunities for artificial intelligence in in other industries or other, just, parts of our life that we're not thinking about, that you think about when it comes to artificial intelligence?

Brad Betts: You see them more and more in things like, chip design, the layout of chips on silicon, on car aircraft, spacecraft design, improvements in advancements in simulation, environments that, that come from these technologies.

There's a lot. And I don't want to give short shrift to investment, my goodness, there's so much opportunity that we have taken advantage of at BlackRock and will continue to take advantage of at BlackRock through these technologies. Our allegiance, Oscar, is to whatever is efficacious. Our mission at BlackRock is to do right by our clients. It's to do right and to bring them those investment results that they want and need.

 What it really excites me, the opportunity for these technologies in an investment context is that opportunity to continue to improve the outcome ultimately for our clients to execute the mission.

And also quickly, I mentioned that it feels very personal for me. my mom grew up one of seven kids. They were of modest means and she put herself through high school and she put herself through nursing school and. And she raised three boys. And she and my dad built a home for us and, saved their money and bought me and my brothers, our first computer, a Commodore 64 that took savings from them, that took effort. And I've been obsessed with computers and math since I was a little boy. And Oscar, if II can put, my life's study of math and computer science, if I can put that to use, to help our clients to, then for me that's a life well lived. That, that idea that maybe I can try to help a family that has never had a vacation. there's an extra basketball. It as a birthday gift or something, all the things that, that my mom never had. and for me that's, that's a life well lived.

Oscar Pulido: I love that story. I'm sure a lot of our listeners will say the same. Brad, I know you're based in San Francisco. I'm just thinking about your comments. I've been through the office but there's a quote somewhere that says something like 'the art of investing has become the science of investing.' I'm wondering whether you put that up there when you first joined?

Brad Betts: Well done, Oscar. Good for you for remembering. That comes from one of the most brilliant, researchers I've had the privilege to work with, Ron and Richard Grinold.

Oscar Pulido: Brad, thanks for all the insights and, most importantly, thanks for joining us on The Bid.

Brad Betts: Thanks for having me, Oscar. It was a real privilege.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you enjoyed this episode, check out part one where we took a look into AI's history and its inflection points for investing. Subscribe to The Bid wherever you get your podcasts.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0923U/M-3069965

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

Artificial intelligence, or AI, is more than just a buzzword. It's a transformative force that has revolutionized industries and reshaped the way we live, work, and interact with technology. But before the age of self-driving cars, virtual assistants and smart homes, there is a fascinating history of research, trials and tribulations that laid the foundation for the AI driven world we inhabit today.

In this episode, we'll delve deep into the origins of AI, tracing back to its theoretical beginnings and early aspirations. We'll uncover the pivotal moments that triggered significant shifts in investment sentiment, and we'll analyze the turning points in AI's history that propelled the technology from mere possibilities to tangible investment realities.

Here with me today is Jeff Shen Co-CIO, and Co-head of Systematic Active Equity at BlackRock, an investment team that emphasizes the use of data-driven insights and cutting-edge technology in their approach. Jeff and his team have been at the forefront of innovation in AI for decades from their role in helping to start BlackRock's AI labs several years ago to the strides that his team is making in leveraging the latest AI advancements in their investment process today.

Jeff, thank you so much for joining us on The Bid.

Jeff Shen: Thanks for having me.

Oscar Pulido: So, Jeff, I'd like to start by asking you to talk a little bit how you got started in this field of systematic investing and then what is your interpretation of some of the most recent developments in artificial intelligence?

Jeff Shen: Absolutely. So, I started in graduate school, got a PhD in finance and had been in the investment world for the last, 25- 30 years. I'll say that it's certainly been extraordinarily exciting to see some of the most recent developments. Some people like to call it the age of AI, the age of big data, the age of machine learning, and we're going to get into a little bit of what all of these things mean. I'll say, given what's going on in the world, this is certainly a bit of a golden age. We've also never seen so many developments in different algorithms to interpret this interesting data. And then eventually relative to the investors I think the most important thing is how do you make sense of all of this data and what you can do with this data and eventually lead to a better investment outcome?

Clearly, we're going to get into Generative AI, large language models, If I have to step back a little bit, we've been looking at numbers for the last 40, 50 years. And large language model or natural language processing in general certainly allows us to be really smart readers of any of the texts out there. Whether it's earning transcript, whether it's a broker calls, whether it's news articles. Now we can read smartly as an investor. And I think that's a revolutionary step that can impact how AI can be applied in the investment world.

Oscar Pulido: And that's interesting that you use the term, golden age for data, for technology and how it's maybe helping you do your job. But maybe if we could just, take a step back and tell us a little bit about maybe some of the technology milestones that led to the development of artificial intelligence. Just wind the clock back and help us understand where we've come from.

Jeff Shen: Now we can wind back the clock a lot if we want, because when you think about artificial intelligence it is really a field that encompasses many different subfields, if you go back to logic, go back to Aristotle, or if you go back to normal distribution, At the same time, the artificial intelligence field as we know it today probably can date Back a bit around 1940s and about 80 plus years of research and development. When we think about in 1969, Marvin Minsky and John McCarthy were given Turin award. A big part of it is actually about how do we think about representation? How do we think about reasoning in a machine intelligence way? And when we say machine intelligence, essentially you can really think about an intelligent agent would get a bunch of inputs and then the agent would go through a rational set of calculation- what we call algorithm. And the output will be a set of rational actions and behaviors that is actually desirable in a particular type of environment or context.

The development here is about better input, meaning better representation, better sensing technology, better algorithm, how do you process this information better? And also, how you measure the success is really to think about the output or the behavior coming from this kind of, intelligent agent, whether that can learn in a new environment, whether it can adapt to a new environment, so how good the output is. So, it is really about better sensing, better processing, or better algorithm, and then eventually leading to better output.

Oscar Pulido: I didn't realize you would take us back to Greek philosophers in winding the clock back, but you also made the point that a lot of the research and development has been taking place over the last 80 years. Certainly, a long period of time there've been advancements in this field. Have there been certain breakthroughs or milestones that triggered a shift in the investment trends in artificial intelligence where it started to get the attention of those who wanted to again, invest in this field and weren't just observing it from afar.

Jeff Shen: Yeah, I think the investors', attitude towards this field certainly have gone through I call it a potential three phases. Initially, there's always a sense of skepticism. How can an intelligent system be better than humans in behaving or delivering certain output?

So, there's a certainly a phase of skepticism, which is normal for any type of new technology. Then I think it can go through a bit of a period of hype. There's a lot of excitement, maybe sometimes too much excitement, and then that may eventually lead to a bit of a crash of excitement in any type of new technology.

And I think for AI, I'll say that back in 1950 s, there was a prediction that AI system would beat the world champion in chess in about 10 years. So, you're thinking late 1970s AI would be able to beat the world champion. That did not happen until 30 years later. we all know the story of Deep Blue and Gary Kasparov in 1997.

So initially there was certainly a bit of hype then in the 1980s there was certainly a bit of an AI winter and that caused a lack of enthusiasm in the sector. And then clearly, given some of the latest development, I think right now we're certainly seeing quite a bit of excitement, quite a bit of hype. So, I think, from an investment perspective I would like to think a thoughtful approach in any of these technologies, it's important, because there could be hype, there could be skepticism, there could be crash. It's always important to think about what is really going to impact, the future, what is really going to survive some of the hype, and I think the thoughtful approach is certainly an approach that BlackRock likes to take.

Oscar Pulido: And presumably this cycle that you highlighted, and I'd never heard the term AI winter, but I get the sense, of course those are periods where there was more pessimism towards this technology, but a lot of technology goes through that cycle, perhaps that you've described the hype, the pessimism so with respect to artificial intelligence, why is it that it has reemerged as a viable investment opportunity? I think it's safe to say we're out of an AI winter.

Jeff Shen: Yes, the 1980s is quite behind us. I want to take us back a little bit to think about some of the games that AI has actually delivered. I talked about the 1997 chess match. Deep Blue won over Gary Kasparov the World Champion back in that day. People also may remember that 2011, the IBM Watson system actually end up winning Jeopardy. and we thought Jeopardy's a very human type of endeavor and, for folks in Asia, the game Go has been around for a couple thousand years.

And the Google DeepMind developed this algorithm called AlphaGo. And that essentially, it is an AI system, that actually defeated Lee Sedol who was the world champion back in 2016.

If you don't know what the game Go is, it's a game with a board and you put black and white pebbles on top of it. And the whole objective of the game is to occupy as much territory on the board as possible. The difficulty of the game is that the number of possibilities of the moves is more than the atoms in the universe.

What Google DeepMind did was trying to use essentially what we call is machine learning. It is actually learning, along the way. So to a certain extent, the chess, what they did was a bit of a brute force. They imagined all the possibilities and they went for it. The game of goal, the issue is that you cannot get to the end by imagining all the possibilities.

The beautiful thing here is really that the machine came out with some of the moves that the human Lee Sedol in particular thought was pretty dumb moves, but it turned out to be brilliant moves10 minutes into the game. so, that was a surprise in a sense that it won without mimicking human. It won because it went with a machine way of thinking about what's most rational move under the circumstance and it was adaptive along the way. So, I think that was probably the most surprising part when we see artificial intelligence, that was probably the manifestation of the artificial intelligence because it had nothing to do with human intelligence.

Just to dwell on this, they developed another system called Alpha Zero, which did not even know the rules of the game and essentially self-simulated, so it was playing against itself try to learn the game. That was a major breakthrough because it did not rely on any of the prior human knowledge and it basically self-simulated, so played against itself such that it knows the objective eventually want to occupy as much territory as possible. Other than that, it did not know anything and, it ends up actually winning, against some of the world champions. so that's the part that's most exciting.

So, I would say that some of these big triumphs of AI systems that actually defeat, human or world champion in particular games certainly has been an extraordinary excitement, both in terms of thinking not only what AI can do, but also, the potential for AI system to surpass human capabilities.

That's certainly creates a lot of excitement, but also creates some level of anxiety. And I would say that leads both towards potential opportunities, but also there's quite a bit of a risk that people are considering.

Oscar Pulido: And so just bringing it back to the investment landscape, what are some of the types of companies in the AI space that are attracting the attention of investors?

Jeff Shen: I think, right now generative AI, especially, related to large language model is certainly all the excitement. Language is so central to our civilization, to our culture, and if you have a AI system that can have language, essentially at its own disposal and being able to not only mimic a human, but also, in a lot of tests, you can see that it's actually, whether it's a AP test for some of the high school graduates or some of the GMAT or GRE type of test, it certainly has demonstrated very strong capabilities. That part is actually generating a lot of excitement.

I think the second part is also if you're providing tools for the AI revolution whether it's chips or whether it's systems, whether it's cloud computing. So, the tools companies are also benefiting, from this overall AI trend.

That's probably the two big ones. Clearly, the outlook for this space is there will be certainly a few winners, but I think there's also could be quite a few losers because this is a very competitive space.

Oscar Pulido: And on the generative AI, side of it that you mentioned, as artificial intelligence becomes more mainstream and more people talking about it, one of the things that gets raised, and I think you touched on this, there's ethical concerns, there's questions around the biases that might exist in the data that AI is processing, there's data privacy concerns. So how do you see these generative AI companies dealing with those issues, or are they waiting for public policy to step in and regulate this in their own way?

Jeff Shen: Yeah, I'll come back. regulation second. I think just looking at the state of the world I’ll make a couple of observations.

One is that biased data will lead to biased output. Data integrity is very important and making sure that the data is covering all different aspects of the world so that we can get a more balanced output. So, I think the integrity of data is certainly critical for the success of the AI system.

The second part is some of these algorithms that's been run are extraordinarily powerful. Millions and billions of parameters that's actually being put into the system. The challenge there is really that the transparency aspect of it is actually very difficult to achieve just given how complex these systems can be. Probably some people may have heard about the neuro network that is underlying a lot of these generative AI systems. When you get into the billions of parameters, it's very difficult to figure out how the decisions is actually being made, that level of transparency can be of concern.

So come to the regulation. I think this is also the field that the industry, the technology is certainly ahead of where the government policies are. And this is actually where education for the policy makers, making sure that people really understand not only the power, but also the risk associated with the systems are very critical.

I think it's also a competitive game whether it's a competition within the industry, competition around the globe, it’s also forcing industry to need to go very fast. On one hand, this is a very powerful tool that can be transformational in a lot of industries, certainly in the investment industry. At the same time, the regulation is one or two steps behind, so I think that's the conundrum that we face.

Oscar Pulido: And so, Jeff, you took us back many years in terms of the history and some of the milestones that we've seen that have helped the development of artificial intelligence. You're using this in your day-to-day job as a systematic investor in present day. So, take us forward into the future. What are some of the developments that you see happening in AI and what are the investment opportunities for investors?

Jeff Shen: I would call out three things that I think for people to think about. I'll say that big data. Big model and big crowd on the big data front there's certainly a lot more data available and from an investment perspective, this is certainly about how do you take as much data as possible in your decision making. And it's a scale game, it's a bit of a race, on how much data you can absorb, how much data you can process. But I think the race is on, and I think that's also where the excitement can be because if you can measure things, you can make better decisions. And data is really the new oil for the AI system.

On the big model front, we talk about generative AI, we talk about large language model. These models are getting to be more and more powerful, also more and more flexible. I'll give you one specific example today we can measure many things; we can also combine them in a way that is actually optimal. So, it is not only about measure many different things in the economy in the world, but it's also combining them so that you can form a holistic decision through a big model by combining features together. So, I think from that perspective the big model not only allows you to combine different things in efficient fashion, but also allow you to tackle multiple objectives. You may care about, the investment outcome you may care about, draw down characteristics. You may care about the climate impact. So, this kind of big model really allows you to combine things in efficient way, but also allow for considering different objectives.

And the big crowd aspect of it. If you think about how generative AI is actually coming from. The human input is becoming more and more important in getting the AI system to be better. So, it is interesting that even though we call it artificial intelligence, human intelligence is actually quite important element of artificial intelligence. So, I think this idea of human in the loop is certainly something that I think is here to stay. We are making the system better and to allow the system to produce more rational response.

The new world it's not only about generating new ideas, we can see that from a generative AI perspective we can generate a lot more. But I think the human input here is also really allows us to think about how we judge these things. How do we discriminate the good output in relation to mediocre output? So, I think the human, aspect of it is actually also evolved from going from purely at a job of generating things to one that's also about discriminating different outcome. So, I'll see that big data, big model, and big crowd, are some of the exciting things as we look forward.

Oscar Pulido: Well, that's an easy way to remember your outlook and that last point, is a good example of just as technology evolves and it appears to be displacing humans in, what they do, humans adapt and humans contribute to that technology and work alongside, that technology. So, I'm going to go out on a limb, Jeff, and say, this is not the last time we're going to talk about artificial intelligence on the podcast. So, we look forward to having you back at some point in the future. And thanks so much for joining us today.

Jeff Shen: Thank you so much, Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you enjoyed this episode, be sure to check back next week for part two of our deep dive into AI, where I chat with Brad Betts, former NASA scientist and global equity researcher for BlackRock's systematic investment team, where we look to the future of this technology and explore the potential applications for AI in the investment world.

Subscribe to The Bid wherever you get your podcasts.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0923U/M-3103566

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

Neurological diseases and disorders are among the world's most prevalent health conditions. The need to address them is mounting amid an aging global population and as the world grapples with mental health challenges that were exacerbated by the pandemic. A combination of public and private investments, government grants and charitable donations are helping accelerate a wave of advancements and opportunities in the field of neuroscience.

Recent clinical trial success for the second significant disease modifying drug to treat Alzheimer's is a critical milestone and a positive sign for the future of neuroscience. So, what does this mean for the healthcare investment landscape?

Jeff Spiegel, US Head of BlackRock, Megatrend International and Sector ETFs, joins me to talk about these latest breakthroughs in neuroscience and why it demands a closer look when considering healthcare opportunities in your portfolio.

Jeff, welcome back to The Bid.

Jeff Spiegel: Thanks for having me back.

Oscar Pulido: So, Jeff, today we're talking about the brain, and I'm not a neuroscientist or a neurologist, but I do know that it is a very important organ and I also know that it's a bit of a mystery. I don't think there's been much progress in terms of treating neurological issues. So, what are some of the catalysts that are now bringing neuroscience to center stage?

Jeff Spiegel: So, I'm not a neuroscientist either, I just get to play one on The Bid. my wife though, actually is both a neurologist and a psychiatrist, so we had a little bit of a conversation about this last night, and she was very excited to hear today's discussion once it comes out.

The fundamental issue when I think about neuroscience is aging populations. And really, I think about this as an issue for lots of areas of medical innovation and medical breakthrough. Just to throw a couple of stats out there, I'll start maybe with my favorite, by the end of this decade, there'll be more grandparents than grandchildren in this country.¹ So that's more people over the age of 65 than under the age of 18. And about five years or so after that, the same phenomenon will be true all around the world.²

And there's some things we can predict as a result of that. We know that older populations are much more likely to suffer from a range of neurodegenerative conditions, in particular like Alzheimer's, which is a subset of dementia The good news about this is obviously people are living longer, the challenge is on us to make those years more fulfilling, more productive and healthier. Again, good news over the last 20 years we made more progress in genomics than anyone could have ever imagined. 20 years ago, we had a very limited understanding of the human genome, I would say today we seem to have a very limited understanding of the brain, and the next 20 years are going to be the story of us really getting that understanding and big leaps forward in mental health and in neuroscience. And just to set the stage, there's really three main areas that are relevant.

The first is neurodegenerative, things like dementia. The second is neuro traumatic, think traumatic brain injuries, there's a physical issue, or moment that's involved. And then traditional mental health, a lot of the conditions that affect so many people around the world, like depression, anxiety, and all of this fits into this bucket, of neurology, of neuroscience and I'm incredibly excited about the progress that we're seeing.

Oscar Pulido: Let's talk about that progress. We have seen some treatments for neurological diseases and disorders. In fact, there's been a few FDA approvals recently. So, can you go into a little bit more detail about what some of these advances are?

Jeff Spiegel: Sure. So, we have read about that and it's incredibly heartening, to see the amount of progress that we're making, especially because there's been virtually no progress over the course of the last 20 or 30 years. Consistently for a long time, we've been using cholinesterase inhibitors. These effectively are a performance booster for the brain, they're chemicals that allow the transmission of thoughts across neurons and we can use them to amp up the brain's capabilities in the short term, but we're not actually warding off the sort of degeneration that happens over time from some of these conditions.

But a lot of what you've read about, and it's so exciting in the field, is monoclonal antibodies. A lot of people first heard about these during the covid pandemic, and effectively what you're talking about is taking antibodies that exist within us, to fight various conditions, and inserting them from the outside. So, inserting very powerful antibodies that can come from you, that can come from another person who has particularly strong antibodies, and they're designed to fight particular issues in the body. One of the issues with Alzheimer's specifically is a form of dementia is we know that plaque, otherwise known as beta amyloid, builds up in the brain. Two drugs that have recently gotten approvals, Aducanumab and Leqembi, are monoclonal antibody treatments.

You can think of them as almost preventing and cleaning off this plaque that we see in Alzheimer's, they can slow the decline of the condition of Alzheimer's by about 35%.³ So, if you think about the expected survival rate of someone who's diagnosed with Alzheimer's, it's about eight years.

If you can get two or three more years that are really high quality with your family, where you're getting to engage and have that end of life, even if ultimately this condition is going to be a part of the rest of your life, if we can stretch out that period where you're still really engaged in the world, that's a game changer. Not just for the people who are afflicted, but really for their families. Because we know it's such a difficult disease, for loved ones.

So, if we think more broadly beyond just Alzheimer's, there are about 50 phase two drugs looking at neurodegenerative conditions.⁴ There's about a hundred phase three drugs.⁵ And think about across things like ALS, Parkinson's, Multiple Sclerosis and what's also heartening that we haven't made quite enough progress here yet, I think it bodes really well.

About 70% of cases of a lot of these conditions are linked to genetic factors.⁶ So, to go back to where I started the last 20 years of amazing breakthroughs in areas like genomics, that's also going to pay off as we can use some of that to better understand these neurogenerative conditions. And to give you a sense of the size of the market, it's about $40 billion in sales of these sorts of drugs today.⁷ That's a lot. It's expected to grow at a CAGR of 7.5% a year until 2031.⁸ So, this is a big market with a lot of hope ahead.

Oscar Pulido: You've mentioned Alzheimer's and you touched on this term neurodegenerative. So, these are afflictions of the brain that are more progressive and more chronic. But then you also said, something around neuro traumatic, conditions for the brain, which I think is more something caused by a trauma event, an impact. So, are there similar advances in treatments for those types of conditions?

Jeff Spiegel: Different advances, but no less exciting. This has gotten a lot of press recently in places like the NFL or children's sports, where we're hearing about so much more care and focus than there used to be around things like concussions.

I got a concussion when I was a kid playing sports, and I was basically just sent home and told to rest. That is not how we think of these conditions today, we think of them as very serious, we think of them as potentially having long-term devastating consequences. It doesn't just have to be a physical hit of the type you might get in sports- blood clots, strokes- these things can all cause brain injury. And interestingly, brain injuries are one of the leading deaths of young people. Diseases don't tend to afflict younger people in as great a portion, but traumatic injuries do because they're more active, sports obviously being a big part of that.

What can this cause? It can cause diminished cognitive capabilities, diminished motor capabilities, behavioral problems, sometimes things like paralysis, and a lot of secondary conditions that come on later or eventually like dementia, like depression.

And here one of the most important areas of breakthrough is actually less on the treatment and more in the diagnostics. Better, more advanced CT scanners and MRI machines so that immediately after a trauma we can have a much better sense of what's going on and be a lot more active in diagnosing some of these conditions.

Beyond that, when you think about the treatment, there's a lot of new tools, minimally invasive cranial surgeries, spinal tools that allow us to get in there with that better understanding from better diagnostics and actually have more of an impact on preventing bad outcomes.

And then a little further ahead, but we're starting to see it already, things like robotic neurosurgery, computers and monitoring, and I think we'll talk about AI a little bit later, but this is also playing a role here. And the last category that's exciting, is digital stimulation. So, if you're paralyzed, being able to control your limbs through digital stimulation even if you can't get back the traditional motion and regenerative cell therapies. So actually, getting to regenerate parts of the body that are impacted by these conditions. just to put some numbers around it, we think this is a $200 billion market by roughly 2029.⁹

Oscar Pulido: There was a third category which was mental health. I can't help but just think back through the pandemic this is a topic that, really seemed to rise in prominence in people discussing it and really trying to de-stigmatize it. You see a lot of companies that are making mental health treatment a comprehensive part of the benefits that they offer to their employees. So how is the healthcare industry trying to address it, and then how does it impact the investment landscape?

Jeff Spiegel: So, there's estimated to be about a billion people in the world who live with mental health challenges.¹⁰ And actually, one of the reasons I'm proud to work at BlackRock, is that is a big focus of our benefits, and the firm does take it really seriously.

I'm actually a mental health ambassador, here at the firm, which is a program that we have so that you have people to talk to. and a lot of that is about de-stigmatizing, to your point, I think a lot of companies are really starting to take this a lot more seriously, but stigma is a huge piece of it.

There was so much sudden onset of issues like depression and anxiety during the pandemic that it was more talked about. A lot of celebrities came out and really talked extensively, about their challenges in this space. One of the things that's different from the two areas we were talking about before that gives me a lot of hope, is more people seeking treatment period.

Treatment with a lot of existing drugs, existing antidepressants, existing anti-anxiety drugs. A lot of them were very effective, but people just hadn't been getting them because they weren't willing to come out and have this conversation. Look, this is true in developed markets, it's even more true in a lot of emerging markets, where the stigma is even larger. So, this market for these sorts of drugs and the ability of people to get help is really going to grow significantly.

One drug that I think is really interesting on a forward-looking basis is zuranolone.¹¹ so new generations of antidepressants tend to just be minor adjustments. And those minor adjustments are usually focused on side effects. This is really a new class of antidepressants, we're already in phase three trials, and the really interesting innovation is for anyone who's taken antidepressant drugs, you get told, okay, you've been diagnosed, here's a pill, in four to six weeks, it'll start to have an impact. That's a long time. This drug actually has shown to reduce symptoms of depression in a matter of days. That's a massive breakthrough especially if you think about the very strong link between depression and other behaviors, be it drug and alcohol use, be it suicide, being able to have a faster intervention, is really going to be a huge differentiator.

Oscar Pulido: So, you've highlighted across a number of these different dimensions of neurodegenerative disease, neuro traumatic, mental health. There's a lot of progress being made. I have to ask you about artificial intelligence, partly because you came on The Bid early in the year and were telling us about how you used ChatGPT over the holidays and now artificial intelligence is everything we talk about. How is AI advancing the neuroscience field, if at all?

Jeff Spiegel: AI is advancing so many fields, and I think a lot of investors have focused to begin with, on tools like ChatGPT these large language models, on the benefits to software companies that produce them, to semiconductor companies responsible for the hardware that goes into enabling them. But when you start to think about the downstream implications, there's a lot of industries that are impacted. And healthcare, I would argue, in an incredibly positive way.

It's not just that, artificial intelligence is helping us do better research on the brain, the way that artificial intelligence is developing is actually teaching us directly about the brain. So, what exactly do I mean by that, because it's a little bit hard to unpack.

Artificial neural networks, the way that they interpret visual stimuli, neuron by neuron, works very much the same way that humans do it. you've got something in front of you and I start to think about the shapes in my brain, then the colors, and I could piece it together until eventually I say, okay, that's a car. That's a dog or that's a banana. Interestingly though, these artificial neural networks aren't designed to mimic the brain, they follow that same sequential process, which is fascinating because we're actually learning about how there are some natural ways that neurons process that information is processed, they're actually being replicated by artificial intelligence without any input in that way. I would also note that, maybe that makes things a little less scary. AI kind of thinks like we do. Hopefully that's a good sign for us getting along well into the future. But even on how artificial intelligence works itself and how it's evolving and developing, we're learning more about how our own brains work.

Let me give you another example, smarter drug discovery and development. A lot of drug discovery is fundamentally trial and error. Machine learning is way faster at assessing that trial-and-error process that's going to allow people to move forward much faster with various drugs.

Also, one thing that's great about modern AI is it's great at spotting patterns. In particular, it's better than people at spotting patterns, so being able to look at a large set of sample data and have artificial intelligence analyze it for those patterns and what's actually happening to people who are being monitored for underlying conditions, also going to be a really significant push forward, We estimate that it's possible that the artificial intelligence application in medical innovation writ large, this isn't specific to neuroscience, could reduce time to drug discovery by roughly 90%. And I started with this idea of how little we know about the brain to begin with. Part of the reason we know so little about the brain is just because it's incredibly complicated. Again, the modeling and the mapping capabilities of artificial intelligence are going to help us improve that understanding.

Actually, mass General Hospital up in Boston has been using artificial intelligence in MRIs to spot Alzheimer's. So, to sort of look for those telltale signs in the brain like plaque and successfully identify it, which can be challenging, especially in early cases. The AI is 90% accurate at this, approaching the success rate of humans and it's only going to get better.

So, drug discovery, better monitoring, just a better fundamental understanding of how the brain works through modeling, is really going to be a major push forward in how fast we can bring drugs to market, how fast we can do the research.

Oscar Pulido: And the important thing is it's not only helping get the right drugs to market, or better drugs to market. You mentioned the trial-and-error element, being able to be done quicker, more efficiently, but it’s helping doctors understand this very complicated organ in a way that humans alone can't do.

Jeff Spiegel: Exactly.

Oscar Pulido: Jeff, you’ve mentioned there's a number of really positive advancements going on in this space, but when you look ahead, what's your near term and longer-term outlook on this space?

Jeff Spiegel: Bullish, would be to put it mildly. I'm thinking specifically about areas like biopharmaceuticals and medical devices. Aside from everything we've discussed, there's just a lot of great tailwinds that are happening. And again, to go back to this fundamental problem of how we're going to treat and care for aging populations in which we know what diseases are going to be more prevalent. Faster approval of drugs this is actually a positive legacy of the COVID 19 pandemic. The idea that for drugs in which there really is no better solution, getting earlier in the phase trial process that available to people, 65% of novel drugs are actually taking advantage of FDA programs to do exactly that.¹²

So, you're going to see things getting to market more quickly, you're going to see those faster approvals. And then, from a market's perspective, just thinking about performance, everyone has been focused on how do you capitalize on this artificial intelligence opportunity in your portfolios? And I talked about some of the traditional software and hardware that's really been the focus of that conversation. But again, these second order beneficiaries just aren't being recognized. If you look at themes like neuroscience, themes like genomics this year, biotechnology, the performance has massively lagged technology and even massively lagged the broader market. I think investors really should be focused on where are these major breakthroughs going to come from? What's AI going to enable? And I actually think that neuroscience is going to be one of the most exciting spaces for that.

Oscar Pulido: Jeff, as usual, you've come on and enlightened us on a topic that I thought I knew a little bit about, but you've made me realize I actually didn't know that much. You get an A plus from me. I think your toughest critic is going to be your wife who you said is a neurologist. So let us know how she grades you.

Jeff Spiegel: Hopefully gently, but she's a trained mental health professional, so I'm sure she can deliver whatever the news is appropriately.

Oscar Pulido: Great. And thank you again for joining us on The Bid.

Jeff Spiegel: Thanks. Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you enjoyed this episode, check out last year's episode on healthcare investing featuring MIT Professor Andrew Lo, discussing the funding of new drug development as he works to accelerate the pace of change in biomedicine.

And don't forget to subscribe to The Bid wherever you get your podcasts.

Sources

¹ United States Census Bureau, Older People Projected to Outnumber Children for First Time in U.S. History, March 13, 2018.
² United Nations, 2022 Revision of World Population Prospects, 2022. 
³ Eli Lilly, Lilly's Donanemab Significantly Slowed Cognitive and Functional Decline in Phase 3 Study of Early Alzheimer's Disease, May 3, 2023.
⁴ FactSet, Springer Adis Insight, 2022; BlackRock analysis.
⁵ Ibid.
⁶ Alzheimer’s Association, 2023 Alzheimer’s disease facts and figures, April 19, 2023.
⁷ Allied Market Research, 2023 Neurodegenerative Drugs Market, March 2023. 
⁸ Ibid.
⁹ Data Bridge Market Research, Global Traumatic Brain Injuries Treatment Market – Industry Trends and Forecast to 2029, February 2022.
¹⁰ Kuehn, Bridget M. WHO: Pandemic Sparked a Push for Global Mental Health Transformation. JAMA 328.1 (2022): 5-7.
¹¹ Biogen, FDA Approves ZURZUVAE™ (zuranolone), the First and Only Oral Treatment Approved for Women with Postpartum Depression, and Issues a Complete Response Letter for Major Depressive Disorder, August 4, 2023.
¹² U.S. Food and Drug Administration, New Drug Therapy Approvals 2022, January 2023.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0823U/M-3056188

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

Private debt, private credit, direct lending. Why are these asset classes capturing investors' imaginations around the world? Are they a viable option for individual investors or restricted only to the large institutional investors?

In this episode. I'm joined by Jimmy Keenan, chief Investment Officer and global head of private debt for BlackRock. We'll dive into the enigmatic world of private debt. Ask why it's having a resurgence in these particular market conditions and explore the risks and opportunities that are inherent from this alternative asset class. Jimmy, welcome to The Bid.

Jimmy Keenan: Thanks for having me, Oscar.

Oscar Pulido: So, Jimmy, we're here to talk about, private credit and I'd like to hear more about what is this asset class, but also private credit, private debt, sometimes I hear the term direct lending. Are these all different asset classes or are they the same thing?

Jimmy Keenan: Thanks Oscar. Yeah, I would say when you think about private debt in general, it’s as simple as it is. They are debt instruments that are done in the private market and most of the world is used to seeing the public equity markets or, public debt. Think about Investment grade market or the broadly syndicated loans or the high yield market, those are all securities or loans that trade publicly, and dynamically where you can get information on those borrowers.

The private market is really just referring to a similar type of loan or risk, but it is done in, I would call it more of a bilateral private negotiation between one or a few lenders, with a borrower.

So, the terms of that contract or that loan may not be available to the broad public, as well as the information of that borrower or company may not be as public. And so that is a private, negotiation with that, and that's essentially all that means. The evolution of the private debt space, is continuing to grow and I would say it incorporates a lot, but it’s as simple as that - it's a loan that is done that is not done through a bank, and the information associated to it is privately placed and not well known.

Oscar Pulido: So, the information is known by fewer parties. that's one difference. The similarity is that it's a loan, in this case less a bank involved and more a private lender. And so, it sounds like there's, a premium that is earned by that lender. And so, talk a little bit about like the risks and return differences with this asset class.

Jimmy Keenan: If you think about it, if you're a company, if you are a real estate developer, you're going to look and say, how do I finance my company? Or how do I finance this building? And there are different ways you can do that. You can go to a bank and the bank may. put together a financing package, and they may go to the public markets to syndicate that out. And that's typically what you see in the public markets.

The borrower may look at that and say there are positives associated to that but in many cases, they may look at it and say, what are my other options? And they may seek out a private debt provider as somebody like a BlackRock that might step in and say we'll offer you directly something that will give you a different package, meaning a different way to finance that real estate project or a different way to finance that company.

In that situation, that borrower or that corporate may opt in to having a direct relationship with BlackRock or any other private debt and provider, as opposed to going through a bank which might get syndicated out and there might be 50, a hundred plus people that are in that capital structure. And so there are a lot of different reasons why a borrower might choose one or the other it's just a marketplace that exists.

Oscar Pulido: I think it used to be, and correct me if I'm wrong, but particularly maybe before 2008, banks were the primary lender, right? But then the financial crisis hit, and I'm also thinking about even more recently, some of the recent bank failures that we've seen in the US and abroad that, that this development of the private debt ecosystem has been going on for a number of years, but that 2008 was an inflection point. Is that the right way to think about why this market has grown?

Jimmy Keenan: Absolutely. and that's a well-known fact and quantitatively you can look through that just with regards to the size of the banking systems. And even today, you mentioned it before with regards to some of the bank volatility, you've seen deposit flights of up to a trillion dollars coming out of the banking system. You're seeing risk management change, in which case it's reducing the size and scope of the banks that's changing regulatory environments, risk management and so, for a company or a real estate developer or an infrastructure project, finance, that doesn't mean that they don't need the capital.

It just might mean that their traditional lender or somebody at the bank, that relationship they might have, might not be there. So, what you said back in 2008, we saw a huge gap in financing post

the Lehman crisis, in which case credit dried up completely. And so, if you are a corporation, a middle market company, a real estate developer, like your ability to access capital, dried up.

That ultimately built in the fact that the ecosystem changed, I would call it private debt providers started to build infrastructure on how to face sponsors, corporates in a different way, directly. In the same way most of them set up shops that they can call it up. So instead of in the early two thousands, if you wanted to borrow money for an M&A deal or making an acquisition, you generally called the bank that you had that relationship with. Now you might look at a handful of options It doesn't mean that banks aren't significant and probably the biggest providers of capital and credit, but it means there are other options that you can look through and again, goes back to, the last comment, the reason somebody might, do a floating rate loan or a public high yield bond or private, direct loan may vary based off of the situations and circumstances, both for that company, but also where we are in the

Oscar Pulido: And maybe you can expand on that a little bit. You've alluded to where the financing might be utilized for, you mentioned like a toll road and real estate, but who are these borrowers? and what are the trade-offs they're evaluating between whether to use the public markets or whether to go through the private markets?

Jimmy Keenan: And it's not just price, right? often you can sit and say, why would somebody pay a higher price? At the end of the day in some cases, pricing looks fairly similar, right? And some of the premium that you get in the private market is reducing the fees that might be paid, if going through a bank process and ultimately syndicating it out, so that is generally an earned premium that private debt investors might get. But there are a lot of other reasons why, if you're a middle market company, in order to think about operating their business, dealing with a publicly syndicated loan or a high yield bond, means that you have to engage with a variety of different investors that are in your capital stack. And in some cases, if there are periods of volatility or you're going to be active with acquisitions that may be more complex in managing your business.

And those small companies typically have smaller teams, and so in some ways that might be easier and better for them from a long-term perspective to have a single or handful of lenders that might be in that capital structure.

Another example might be companies that are going through transition. they might be in a late-stage development project that have yet to kind of see more stable earnings. They might be transitioning different contracts or parts of their businesses, in which case they prefer to either have, show that concentration or that shift in the private markets as opposed to in the public domain.

So are strategic reasons beyond. I would call it pricing or structural reasons, in order to do that. And so, the bigger companies, you'll see more of that opportunity where sometimes they might issue a public deal and then, yeah, at other times they might move that and shift that to the private market. And you've seen more larger capitalized companies that might either go public and private and there'll be some pretty big headlines this year on that.

Oscar Pulido: Okay, so you've defined the asset class a bit and we've talked a little bit about, why it's come of age, particularly over the last sort of 15 years post 2008. You've talked about some of the different types of borrowers. But in your position, you're sort of the lender, right? You're the one

providing the capital and you're the investor. So where do you see the best opportunities? Is it across the entire asset class or there are subsets of the asset class that you find interesting?

Jimmy Keenan: I think all investors should look at it, at the end of the day, every investor's going to be a little bit different between how they think about their own risk reward and that includes liquidity.

But you think about the private debt markets as a whole, this is something that, for all the reasons that we just talked about, was not necessarily as broadly available of an asset class to invest as somebody might want to build their portfolio.

And now that for all those reasons, that supply that's been unlocked and based off of what's gone on this year, is only going to grow substantially over the next several years is going to provide an opportunity for people to build their portfolios in a different way. And you think about the risk reward or even the risk characteristics of some of these and how they fit in somebody's personal strategy, that they should be looking across all of this, because it is something that they can get a premium.

I think there are a couple things that are really interesting today because of the supply dynamic. Obviously, that banking system turmoil was met with some policy response in there and liquidity that was provided.

And so, there's not a fire sale per se that is going on, but you do have a shift in how those regulatory and risk management have. And so, over the next several years, you're going to see balance sheet downsizing, and we see a significant amount in the trillions of assets that are going to have to be reduced from the banking system.

And what that means is, as that balance sheet is reduced. There are really good deals that are coming at a very nice spread per unit of risk, meaning the yield that you can get relative to that underlying risk is going to look very attractive. And so, the stable income type products based off of that supply dynamic, I think are really interesting across the entire ecosystem.

Oscar Pulido: Right. So, some of the investment opportunities are because of regulatory shifts that impact the banks and therefore mean, some of what's coming off of their balance sheet is now available to investors like you. And then some of it is just the last 12, 18 months of interest rate increases have exposed some companies.

You touched on institutional investors and also individual investors now both have ways to access this private debt market, but there's probably a lot of investors who are approaching this for the first time. So, what are the things they need to know?

Jimmy Keenan: Private debt is a very wide-ranging term, when you're entering the space or even viewing the public and private markets where are you trying to anchor your risk? What types of risk you're looking for? And if you think about. private debt being a core part of your portfolio. Then you have to think about any private assets, which is what's your ability, to have illiquidity in your portfolio?

How much illiquidity are you willing to have in order to garner those either differentiated risks or that extra premium that you might get in the private market. And then you go to the private debt strategies of which one do I want which one fits in?

So, liquidity is a big portion of that again, balancing what you need and what you're trying to accomplish with what is the strategy? And then what's the vehicle.

That's probably the first thing somebody should be looking for of matching what they're trying to accomplish and what they're ultimately doing. I think the other things then fall down into those strategies of what are you trying to accomplish in that?

Then you start to realize, okay, alright. I'm going to look for the certain product, now I got to look for the manager. There's a lot of different products, there's a lot of different managers. But trying to find a product that you can kind of look through that it has a history, you want to look through that track record of that team, that product, to understand, has this historically acted in the manner that I'm thinking about investing or underwriting to and is the future of that consistent with how I want to invest?

Because at the end of the day, like if you're going to make that investment, you're in that product or in that manager you want that output to have a similar, return profile and potentially volatility profile that you're looking for in your portfolio. So those are like the two main things that I would recommend people try to dive into.

Oscar Pulido: Jimmy, you've been associated with the fixed income markets, your whole career and, particularly in credit and both public and private markets. you've, you're obviously very excited about the opportunity in private markets. So, take us five years ahead. What is, what does this space look like or beyond, maybe, if you can see that part? ahead?

Jimmy Keenan: I think it's something that has become far more of a common name associated to how people think about it, private equity 30, 40 years ago might not have been thought of the same way it is today.

So, I think, five years from now, people are just going to view this as part of their allocation in the institutional and the retail markets. I think from today's standpoint, like 2008. It's hard not to get excited, at the end of the day you have both a supply, a significant supply shift that is going on because of what's happened and what we just talked about in the banks, where trillions are going to come out, and a lot of those trillions are actually good deals, but the funding source of that from a banking system is changed, in which case they're now going to make their way to probably both the public and the private markets. That's a huge supply that it's going to ultimately come. That's going to grow demand, right? At the end of the day, it's going to create capital formation because you'll step into good deals and good financing and stuff like that.

So, from a business perspective, this is a huge opportunity that is going to be multi-years. and I think that because policy shifted, and we've seen this since the financial crisis where most central banks and governments around the world are acting quickly to try to continue to mitigate that risk of a significant credit crunch that dries up in economic activity.

So, I view this as something that is going to be significant for our clients and our investors, it's an opportunity to grow a strategy that they can ultimately get outsized returns relative to the risk profile. So, it's hard not to get excited about.

Oscar Pulido: Well, it's been a couple years since we had you on the podcast. We'll try to, not have it be that long of a gap this next time and that way we can. See whether your predictions are coming true So Jimmy, thank you for joining us on The Bid.

Jimmy Keenan: Thanks for having me, Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you enjoyed this episode, check out the episode, 'Are you leaving Cash on the table?' Featuring Beccy Milchem, where she provides the top three things to consider when thinking about cash and volatile markets. Subscribe to The Bid wherever you get your podcasts.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0823U/M-3067972

Claire Chamberlain: 39% of all Americans could not afford a $400 unexpected emergency expense and when you break it down further by gender and by racial demographics. The numbers are even more stark.

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host Oscar Pulido. In an era of economic challenges and uncertainties, having an emergency savings fund is a financial lifeline that can provide peace of mind. During turbulent times, yet statistics reveal a startling reality.

66% of the US population lives paycheck to paycheck. And lacks adequate savings to weather, unexpected storms. The problem is not limited to the US, and it seems to only be getting worse. Is there light at the end of the tunnel to find out the answer to that question and how both the private and public sectors are trying to resolve the lack of emergency savings?

I'm pleased to welcome Claire Chamberlain, global Head of Social Impact at BlackRock. Claire, thank you so much for joining us on The Bid.

Claire Chamberlain: I am delighted to be here, Oscar, it is a pleasure.

Oscar Pulido: Well, Claire, in your role as Global Head of Social Impact at BlackRock, you come across a wide range of social and economic issues. So, tell us why emergency savings is so important to you.

Claire Chamberlain: Well, when we think about our work, we start with the core purpose of BlackRock, which as you know, is to help people build financial wellbeing and security over a lifetime. And with that as the going in philosophy, we said to ourselves, how can we advance that purpose? And building financial wellbeing is aspirational for far too many people because if you're living day to day paycheck to paycheck, that is something that is very hard to come by.

And so, in thinking about how do we help people get closer to that aspiration, emergency savings is a topic and a focus that really has emerged over the last couple of years.

Oscar Pulido: How big of a problem is this or are there any numbers that would allow us to quantify when we think of what an emergency savings pot looks like?

Claire Chamberlain: So, in 2017, for the first time, the Federal Reserve published a report which outlined the financial precarity of American households. In that report there was a statistic that was really a wakeup call for many people. And the statistic was 39% of all Americans could not afford a $400 unexpected emergency expense.

And that was not just people living under the poverty line, but all Americans. And in fact, that number, when you break out people living on low and moderate incomes was 58%. It's a big number affecting a lot of working families and it was much larger than people anticipated.

Unfortunately, while there had certainly been improvements in the labor markets since 2017, there was a report released this past May where the number showed some improvement, now 37%, but again, this is of all Americans and when you break it down further by gender and by racial demographics.

The numbers are even more stark. for low- and middle-income families, who are Hispanic is over 70%. And for black families it's 72%.

Oscar Pulido: So, the numbers are surprising because the percentages are high, covers a pretty meaningful part of the population, but also the emergency expense that you outline $400. It doesn't feel like a lot has to go wrong for all of a sudden somebody to have a $400 bill. So now what is the impact on individuals, businesses and then the economy? because it's not just affecting the individual who has that unexpected expense, it must reverberate even broader?

Claire Chamberlain: Absolutely. You can think about it top down or bottom up and either way it's, currently a pretty grim situation. $400 is not a lot for a hiccup, an unexpected expense, whether it's a car breaking down, an unexpected medical bill, increasingly in our country, natural disasters and when you don't have that cash cushion readily accessible on the sidelines, you have to resort to really costly alternatives like payday loans, or even dipping into your 401K retirement account.

And we know that not only comes with penalties, but it means then you've diminished the body of investible assets, which hits you down the road as well as in the near term.

That's the individual level, in addition to families it also impacts employers. And we know that the productivity loss due to financial stress is as much as 15 hours per week per employee, which turns out to be an estimated $5 billion to employers in this country on a weekly basis.

So, the numbers are big and they're numbers, frankly, that employers have started to acknowledge and take action to try and remediate.

Oscar Pulido: And I know BlackRock has been doing some research on this topic, maybe you could share a little bit of what are the findings of that research?

Claire Chamberlain: So, the BlackRock Foundation, is focused on, financial security. During COVID there was a pretty unique opportunity to study the impact of that material economic disruption on individuals and families. So, working with one of our nonprofit partners, Commonwealth, we were able to do some research around how did having liquid savings, impact your ability to weather the disruption of the pandemic? One of the findings that emerged is that people that had less than $2,000 of liquid savings available to them were twice as likely to tap into their retirement account prematurely. So that described a pretty direct connection between liquidity and being able to build for the long term.

Oscar Pulido: And you've mentioned that twice now it's an important thing, which is people have the money to draw now, but they're now foregoing a more comfortable retirement so they're just trading off one problem for the next. Is this a US issue only then? Because as you're describing this, I'm wondering if there are other countries that are also experiencing something similar with a lack of emergency savings.

Claire Chamberlain: Well, I'd love to tell you this is isolated to the United States. It is not. And in fact, we have been working with partners in the UK, Nest Insight in particular, which is the research arm of the Nest Pension Scheme, which is Britain's Public Pension Program and the stats over in the UK in some ways are starker than the stats here, Nest Insight did research that showed one in four citizens in the UK could not come up with a hundred pounds fund for an unexpected expense. So, the UK and the US among the wealthiest countries in the world, there was further research done again coming out of Covid that has shown that countries that are lower- and middle-income countries, the implications of economic disruption of interruption in wages, for instance, people have far less to fall back on. And so, the problem we've described here in this country is by no means unique.

Oscar Pulido: That's interesting, you said a hundred pounds or a hundred sterling. That's a lot less than even $400, which you mentioned in the US. So, the bar's even lower to an individual in the UK for, that lack of emergency savings to really hit them.

You've painted this problem that is clearly prevalent in some pretty major economies. When you look ahead, what's that light at the end of the tunnel that you're seeing?

Claire Chamberlain: Well, there is light at the end of the tunnel, because there is an endless amount of innovation that as humans that we are capable of and it's happening, in trying to address, this financial precarity. One of the things that we found, with our research and with the people who were interested in partnering with us, is that the workplace was a very receptive arena for exploring how do we address this financial stress and vulnerability that workers feel. And employers and those that support them, like record keepers and payroll providers and other financial institutions, they have a lot to gain from trying to crack this I mentioned $5 billion a week in lost productivity, well that turns out to over 250 billion a year.

So, the incentive to try and not just chip away, but to pivot in a meaningful way is definitely there. And shortly after those early Fed numbers were published, BlackRock founded the BlackRock Emergency Savings Initiative to try to begin to address the problem and to encourage and spur innovation. And we really wanted that innovation to take place across channels, meaning we wanted to see it with large scale employers and with record keepers, fintechs and payroll providers because we didn't know enough to pick the horse but we thought our hypothesis was the more demonstrations and pilots we could get out into the marketplace with workers, the greater our chances of making a difference and taking friction out of that effort to build short-term savings.

Oscar Pulido: And this BlackRock initiative that you mentioned, the emergency, savings initiative was 2019, I think is when it started. It's four years later we've lived through a pandemic during that period. So how would you say it's going, and can you give some examples? You said a couple of things, record keepers, payroll providers. Are there some examples of some of these stakeholders that you've worked with and things that they're doing?

Claire Chamberlain: So, a couple of things. The initiative, at the end of last year marked its completion of phase one, and we published a learnings report in June of this year. I'll share a little bit more about that later. but in the report we do highlight case studies of partners that we worked with among them are Voya, who was the first record keeper to join the BlackRock Emergency Savings Initiative, and they were working on making available an after tax liquid savings account that people could, when they set up their retirement plan contributions, could also indicate that they wanted to build some short term savings where they could, access it whenever they wanted to without penalty.

UPS also came on board, and they did a whole internal marketing refresh on their emergency savings account and as a result of that using some insights that we have gathered from behavioral economists, they were able to increase usage by 40% of people who were offered that opportunity to build short-term savings.

Another key partner, ADP is a payroll provider, they provide payroll services for one in six Americans, and they created a savings sleeve on their pay card app and that resulted in $1.5 billion dollars of new savings, so pretty significant adjustment to an existing product that had meaningful uptake.

And then finally, another partner was AutoNation which employs over 20,000 people across the country. As an employer, they recognized they have a very diverse workforce they didn't want to just put one offering in front of their employees so they are in the process of testing three different offerings you could do a split deposit right from your paycheck. Or you could build this liquid savings on a payroll card, or you could do the savings sleeve that's adjacent to the retirement product.

They're going to let you decide as an employee and you could pick some or all of those offerings. We've really had the privilege to see this take hold directly with workers, but as provided by employers or, companies that support those employers.

Oscar Pulido: And all these examples you mentioned. It's not that people can't save, but sometimes you just have to make it easy for them. You have to provide some convenient method to do it. We all have good intentions, but sometimes we just need somebody to point us in the right direction. And that, that seemed to be like a commonality and all these examples that you just discussed.

Claire Chamberlain: Absolutely. Ideally, it's set it and forget it, or it's have it set for you and forget it and watch it build. But that's exactly right. One of the key learnings from the Emergency savings Initiative is that people even, who are living on low and moderate incomes they can save if you give them the right tools at the right time, like the point of payroll, they can save money and that even saving small dollar amounts can have really significant benefits for individuals and families. And that kind of goes back to that notion of, gosh, if you only had $400 more and you need a car repair so that you can keep going to work so you can keep earning money because you're an hourly worker, it's that either virtuous or counterproductive cycle. And building up that small dollar savings is super important to people.

Oscar Pulido: And that story you just gave is very real, the hourly worker whose car breaks down. And boy, you said if they just have that $400, it really changes their day-to-day pretty significantly.

Claire Chamberlain: And probably the child that they're dropping off at daycare as well.

Oscar Pulido: Voya, ADP, you mentioned some of these partners along the way with the Emergency Savings Initiative. Those are private sector companies, but let's talk about the public sector. In the US there's been some legislation, the Secure 2.0 Act, how does that influence this emergency savings topic that we've been talking about?

Claire Chamberlain: The legislation secured 2.0 that you mentioned was passed in December with bipartisan support which is terrific. The thrust, the primary thrust of Secure 2.0 is to encourage more and more employers to offer retirement plan programs to their employees and to encourage employees to take advantage of those programs. As relevant to the conversation that we're having here today, there are provisions in Secure 2.0 to make it easier for employers to offer an emergency savings options to their employees.

So, there are two non-mandated options that employers now have to help employees build emergency savings. The first is a $1,000 emergency withdrawal that they can make in a year from their 401K or equivalent retirement account, and they can make this without penalty. The second option is a $2,500 emergency savings account, which is linked to the retirement account and has automatic enrollment option, meaning the employer can set that up so it just automatically funds from payroll go into this $2,500 emergency savings account, which then sits alongside the retirement account.

The auto enrollment feature is the first time we've seen this in use with respect to this liquid savings, and we think it really has, a lot of incredible upsides because we know from auto enrollment participation that we've seen with retirement accounts it makes all the difference in terms of, really amplifying usage among participants.

Oscar Pulido: And it just goes back to encouraging good behavior, people want to do it, but you need to almost set it up and then we're off to the races,

Claire Chamberlain: And just let it build. And then, having this account that you can use as necessary without penalty. And that's really the secret here. We think there is a lot more innovation still to be done because Secure 2.0 is set up with this account being in plan, meaning it's linked to the retirement plan, but we know that there's an opportunity down the road to set up something similar for employees that are not saving in their retirement account but still have those needs to build emergency savings.

Oscar Pulido: So that'll be one of the many next steps that is coming from this. So, you've touched on the private sector, now the public sector in terms of how it's trying to address the issue. How should an investor be thinking about this issue when it relates to their portfolio and they're putting money to work in the market?

Claire Chamberlain: I think one of the things that's been so exciting about this work are the results but through, our partners we're able to reach 10 million Americans and build $2 billion in incremental new liquid savings which is a fairly unprecedented impact metrics from a philanthropic endeavor and so we're very proud of that.

But back to your question, I think what that shows is there's real appetite for building liquid savings and there is real ability to do that if employees are offered, back to right product at the right time. And as an investor, I would think about, are the companies I'm investing in, what kind of prioritization are they making of the financial health of their employees, and emergency savings is a part of that. So, if you're an employer like AutoNation really thinking in a very 360 way about your commitment to your workforce, that’s the way I would take this perspective and translate it to my portfolio.

Oscar Pulido: All else equal, a happier workforce is more productive, more productive business is more profitable, and you can then put yourself in the mind of that investor. And I want to be invested in companies like that.

Claire Chamberlain: And sustainable over time!

Oscar Pulido: Claire, what brought you into this field of social impact? Hearing you talk about this topic, it's obviously a passion of yours, but where did this passion start?

Claire Chamberlain: I have always, gravitated towards important work, and I've always gravitated towards organizations that I think have the standing in our world to really drive important work.

I first started my career in finance and over time, had opportunities to get involved in philanthropy and into venture philanthropy and from that came, here to BlackRock and have been involved in the setup of our strategic philanthropy commitments and program and how we support our employees and how we show up in our communities. So, I feel very fortunate for the opportunities I've had.

Oscar Pulido: well, we're, fortunate to have learned a lot about emergency savings, the issue that it is, and how we're trying to fix it. Thank you for joining us on The. Bid.

Claire Chamberlain: Thank you, Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you enjoyed this episode, check out our retirement miniseries featuring Anne Ackerley, discussing how to plan your roadmap to retirement. Subscribe to The Bid wherever you get your podcasts.

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Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

When big events happen in the markets, or even in history, analysts, economists and journalists set out to discover what led to those events, often working backwards, organizing a chain of events into a logical timeline. But on the flip side, accurate forecasting is a far harder skill to master, and our guest today suggests that the same deciding factors we see so easily in hindsight could in fact be easier to see in the present if only we looked through the right lens.

Peter Atwater is a behavioral economics pioneer and professor of confidence driven decision making at William and Mary and the University of Delaware. His latest book, the Confidence Map examines the hidden role of confidence in the choices we make and why events described as being unprecedented are often entirely predictable.

Peter, welcome to The Bid.

Peter Atwater: Thanks so much, Oscar. Glad to be here.

Oscar Pulido: So, Peter, congratulations on publishing your book, the Confidence Map. It's your second book, if I'm not mistaken. So, in this book you mentioned control and certainty as these two variables and you describe a visual graph of four different sectors, so can you walk us through what that graph is and what it's intended to show?

Peter Atwater: As I was trying to write this book on confidence, I discovered that to most people they know what confidence looks like when they see it, but they have a hard time explaining it, and it becomes this random word cloud.

And as I did more research, what I found was that the feelings of certainty and control that we have are really what drive our behavior. That confidence is how we see ourselves faring in the future, we need there to be a sense of predictability and certainty to what's ahead, and we need to have a feeling that we're prepared for it, that we have a sense of control. What I did was to develop a relatively simple framework, it's a two-by-two box chart, a quadrant that looks at the different, magnitudes of certainty and control that we experience. So, the four boxes, there's the comfort zone where we have both certainty and control and the stress center where we lack both of them. And those are what we think of when we think about confidence.

The other boxes are hybrid environments. you'd be familiar with what I call the passenger seat, where we have certainty, but no control. Anytime we're on an airplane or in a cab that's the environment that we're in. And then the fourth environment is what I call the launchpad. Where we have control, but the outcome's unclear to us and in the world of financial services, every decision that we make, whether it's to lend, to borrow, to invest, are all made in that environment where we have to imagine what's ahead as we're making the choice today to enter into a transaction.

Oscar Pulido: Well, I'm taking an airplane later this week so I, I will definitely be in that passenger seat part of the quadrant. But maybe as you describe those four quadrants, how do people make decisions when they're in each one of those quadrants? You described it well but take us through the decision-making process for individuals in those four boxes.

Peter Atwater: So, no matter what box we're in, we have to recognize that we're making decisions where we're imagining the future and that imagination becomes critical. It involves the stories we tell and then the outcomes that we imagine based on the choices that we're making.

When we're in the stress center though, where we have a sense of vulnerability, and we don't think of it this way, but vulnerability is the opposite of confidence. We crave familiarity, we need things to be certain. When we feel vulnerable, something's wrong.

And so, what happens in that lower left box where we are in the stress center, is that our decision making takes a very narrow focus. I focus on myself. I focus on right here, and I focus on right now. I don't care about the future, I don't care about others, and I don't care about the places that are distant from me. If there's turbulence on your airplane flight later this week, the only person you're going to care about is you in that moment.

And this has a big bearing then on the choices we make, we see this in the investment world where people out of nowhere suddenly decide they want to hoard cash. They're craving that certainty. We saw the same thing during the early days of Covid where people were hoarding water and wipes and the things that we needed to address the, the vulnerability that we were experiencing. And so that focus alters what we want and in turn what we do.

At the other end of the spectrum, we're a very different person. There we tend to be focused on, what I say is 'us, everywhere, forever'. Where we're generous, we're cooperative, we explore, we're interested in the future, and we're planning for the future. And you can see this in the investment world with the kinds of things that we invest in when confidence is really high, they’re oozing with abstraction. We saw this in 2021 with the whole focus on eVs, space and, NFTs and crypto.

And today I think we're seeing a similar phenomenon with AI where we're so interested in opportunity and that's the antithesis of what we think about in terms of possibility versus familiarity.

Oscar Pulido: That stress zone you described certainly sounds like not a great place to be in, at least not for an extended period of time. But I can't help but think that if you're in that upper right quadrant, that high confidence, high certainty, it sounds really compelling, but could you be overconfident? Isn't there something healthy about, maybe a little bit of uncertainty that keeps you somewhat cynical, keeps you asking questions, keeps you intensely curious. How do you think about that upper right quadrant not becoming also a hindrance to the decision maker?

Peter Atwater: So, when we're in that upper right-hand box, we forget that scrutiny and confidence are inversely related. The more confident we are, the less we pay attention because we don't think we have to. And so, our cognitive processes are inherently lazy, and that laziness is a disservice to us when we're really confident because we're not paying the kind of attention that we should be. The result is that we take too much risk in too great a size while at the same time paying the least amount of attention. And as you imagine, those three things together often are what precipitate a crisis that then follows.

Oscar Pulido: So how does somebody then, who finds themself in a certain quadrant, what changes do they need to make in their decision making to migrate from one box to the next or what have been your observations of how people adeptly move across these four quadrants?

Peter Atwater: The first thing is to recognize that confidence isn't a one and done experience. The self-help world would like you to believe that once you have confidence, you're going to always have it. And so, we're constantly moving around, and I think it's always helpful for us to pause before we're making a decision to step back and say, so where am I?

Am I feeling certain and in control, am I feeling vulnerable? Because that's then going to give me clues in terms of what things I should do better. For example, in the stress center, we're as likely to be under confident there as we are overconfident in the comfort zone, and so we need to be careful and to take more risk rather than less risk when we are feeling vulnerable.

And that's very counterintuitive, that really fights against our gut, particularly in the finance world. But panic tends to be an experience that should lead us to be more optimistic than we are. Panic tends to be a behavior that reflects that the worst is behind us, not ahead of us like we imagine it to be. So that's one of the things we need to do.

In the launchpad, we need to be careful about our imagination of the future because if I have control, but no uncertainty, I'm likely to make a choice based on what I imagine. And particularly in the finance world, we need to be open to both sides of the potential outcome that's ahead.

And if you are certain of an outcome, that's God's way of telling you, you're either being too pessimistic or too optimistic about what's ahead.

Oscar Pulido: When you think about like high performing individuals or some of the people that you've come across, do they rotate across all four of these quadrants and that's okay. or do like high performing individuals, people in leadership positions, whether that's in the public or private sector, do they typically operate in only one or two of these?

Peter Atwater: No, so what I find is people who are resilient recognize that all four of these boxes are going to happen. So, it's not about avoiding a box, it's more about recognizing that I'm going to be in the stress center, I'm going to be in the passenger seat, I'm going to be in the launchpad. That those are a natural part of a business cycle of a life experience.

And so, their focus isn't on avoiding those, but getting comfortable in those boxes. And to appreciate that they're not going to be there forever. I think one of the mistakes a lot of inexperienced leaders make is that they get themselves in the stress center and they become paralyzed, they feel like it's never going to end.

Somebody who's resilient recognizes as oh no, this is today. and what I'm going to do when I'm in that box, and this is where the high performers, I think really differentiate themselves is that they pause to say, what can I do, what must I do to regain certainty and control? Both of those are very actionable and interestingly, one of the best things people can do is to ask for help. Asking for help isn't weakness, it's actually taking control of the situation.

Oscar Pulido: Right, and that leader who finds themselves in the stress center and knows how to cope with it, it's almost going back to an earlier question, right? The leader who's in the comfort zone, perhaps the really good leader recognizes that now is a good time to ask questions of what could go wrong or what am I missing, and to not develop overconfidence, but to be almost like a healthy paranoia, I think is how I'm picturing somebody who knows how to properly, navigate being in that box.

Peter Atwater: Yeah, they're never complacent, they're always anticipating something that could go wrong and they're not of it. They're not being doomsday about it it's a much greater awareness of the fact that conditions change.

I think about at the other end of the spectrum, some of the most interesting conversations I've had have been with, emergency room doctors. The stress center is their day, and they spend their day going back and forth and back and forth, and their behavior in the stress center is so different from what particularly in corporate leadership. If you listen to emergency room teams, they're talking candidly about what's wrong. they're sharing information. They're not focused on what happened as much as what is, so there's never a concern about blame or shame.

It's like, look, this is where we are, and all of the energy is focused on resolving not only the problem, but the vulnerability arising from the problem. In the medical world, the difference between curing a patient and healing a patient is the restoration of confidence, the elimination of the vulnerability that patients feel. And I think sometimes leaders get themselves so focused on the problem, what's broken, what's crashed, what's burned, and they forget that what makes something a crisis isn't the problem, but the feelings that arise from the problem and that as much attention needs to be given to those feelings as to the situation itself - because the crisis won't be done until those feelings are restored.

Oscar Pulido: And an emergency room doctor, certainly emotions run high in a hospital or any sort of medical setting. Maybe bringing it back to markets because emotions can run high with markets as well, and you talked about Covid and some of the behaviors that we saw during the Covid era, or you talked about hoarding cash, especially in stressful periods for markets where investors, don't want to lose money. When you think, about some of the recent market shifts in history, how do you apply this frame, these four boxes, to how investors react?

Peter Atwater: So, if we look at what happened with the regional banks earlier this year, you could see that sense of panic people moving rapidly into the stress center. And I think one of the things Oscar, that's so unique about today is the speed and scale at which groups can mobilize and translate changes in sentiment into action. Between social media and online trading, what we're seeing is these microbursts of energy and I think that in investors today need to appreciate that the speed at which markets are moving up and down, arguably meme stocks represent the behavior at the other extreme, is that we're seeing this highly impulsive, highly emotional behavior at both ends of the spectrum. and to not fall victim to it. As I've said, panic is a sign that we're approaching the

lows in confidence. It's not a time to be afraid, but a time to be preparing for a turn that's likely to happen imminently, and the same things with manias. Don't become seduced by the siren song.

Oscar Pulido: And it makes sense and I think about Warren Buffet and be fearful when others are greedy and be greedy when others are fearful. It's kind of what, you're touching on, being sometimes a contrarian, you know, Hopefully the emergency room analogy that person is a well-trained, professional who knows how to control their emotions. But it seems like in markets people have trouble controlling those or have you witnessed something differently?

Peter Atwater: So, what I found is that individuals may have a hard time controlling their own emotions. It's very helpful for them to use the framework that I have to identify where is the crowd today, where are others? And it's remarkable to me how quickly we can spot where the crowd is on this quadrant. And just being able to objectively say the crowd is panicking allows you to take what would otherwise be a highly subjective and emotional phenomenon and look at it almost clinically. And that then allows you to make decisions in a much more really decisive and definitive way that allows you to have distance between, your own emotion and actions.

Oscar Pulido: And that then speaks to how investors can use those insights, knowing where the crowd is in those four quadrants is what allows you to make that, forward looking decision in your portfolio. That is what sets you apart from the crowd. And if you do that, that's usually where you generate better performance.

Peter Atwater: Yeah, and there are three dimensions that are easy to identify because at all locations. Our confidence, those feelings of certainty and control, our actions and our stories exist in equilibrium. So, I can look at where the crowd is in three different ways. What are the headlines that we're seeing in financial television and or, what are the actions that we're seeing people buy? As an economist, we talk a lot about elasticity. I think we overlook something called confidence elasticity, which is to say, how does confidence drive the choices we're making? And there's a high confidence elasticity for cash, for example, when confidence is low, that's when we demand it most.

And just knowing that the range of investments that we're going to buy is a function of our level of confidence allows me at all times to spot where the crowd is. Because what's hot in the minds of investors is revealing their level of confidence. Are they stampeding into cryptocurrencies or are they stampeding into cash? Those are things that I see at the two ends of the confidence spectrum.

Oscar Pulido: Peter, when I think about investors, I'm thinking about mom and pop and the individual investor, but have you worked with what I'll call professional investors, portfolio managers, people who do this for a living, who wake up every day and are thinking about what stocks or bonds to buy, and if you've worked with those folks, how do they think about this confidence map, the four quadrants, and what do you observe in these individuals?

Peter Atwater: So, most of my clients are institutional investors, and in the same way that they're looking at economic data, they're looking at, industry data. They're using sentiment as another overlay. And so, what they're interested in is that the indicators of sentiment that I identify as being representative of things that might be important to them in their portfolios.

So, for example, looking at the behavior in luxury today and the excesses that we're seeing there and how is that different maybe from what we saw a year or two years ago? Because, cultural trends,

from the music we listened to, to the TV shows that we watch have a bearing on our behavior and they reflect how we feel. The media is an enormous mirror of our mood.

Oscar Pulido: And Peter, just taking a step back, maybe I should have asked you this at the beginning, but why is this topic of confidence something that you have dedicated So, much time to? Just curious as to what is it that got you interested in either this particular topic or maybe even just behavioral economics, in the first place?

Peter Atwater: As somebody who spent the first part of his career in financial services, I had never really considered the role that emotions play in the choices that investors make. I sort of missed the forest for the trees. During the financial crisis, it became clear to me that we made a series of choices to borrow, to lend to buy homes that were in characteristics completely different in 2007 from 2009. And so, what I wanted to do was to understand why did we make those decisions? Were there characteristics that were universal? That while the means may change, what are we doing differently and consistently from crisis to crisis, from euphoria to euphoria. Twain says, history rhymes and I wanted to know why. And what I found was that the behaviors that we exhibit all act in a very consistent way based on our level of confidence, and this is something that exists not just in the markets, but outside of the markets. The trends in fashion, repeat the trends in architecture, repeat the trends in politics, repeat. There's so many different ways that confidence sets up what we're doing outside of the markets that then become useful to investors in the markets.

Oscar Pulido: So, some of that you had real world experience, working in financial services and now when you stepped out into academia, you had an opportunity to just see the role that emotion plays in markets. And I think for certain, anybody who's watched the markets this year, or even over a longer period of time, could attest to the fact that it is an emotional, exercise investing and those who can control it probably do a better job in the long term. Peter, we appreciate you joining us and sharing with us your framework. congratulations again on your second book, the Confidence Map. And thank you for joining us on The Bid.

Peter Atwater: Thank you so much, Oscar.

Oscar Pulido: Thanks for listening to this episode of the Bid. Subscribe to the bid wherever you get your podcasts.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0823U/M-3026434

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido. Today we continue our best of summer series, which means I'm joined by our Bid producer, Stevie Manns. Stevie, this is becoming a nice little pattern, having you on the podcast.

Stevie Manns: It's fun. I'm enjoying my Bid debuts.

Oscar Pulido: So let's keep going through some of our favorite episodes, of this year and I think it's my turn.

Stevie Manns: It is your turn, and this is the final one.

Oscar Pulido: Okay. I was thinking back to earlier in the year in March when a seemingly quiet week in the markets turned into a lot of headlines around Silicon Valley Bank, a bank that I had not really paid a lot of attention to in the past, and it was a reminder that markets are stable until they're not, and all of a sudden we have a lot of volatility to talk about.

And we had to spring into action to record an episode with one of our favorite guests, Alex Brazier. Alex is the deputy head of the BlackRock Investment Institute, and Alex came on to talk to us about why these events that were occurring at the time in March were not like 2008, because I think a lot of us feared that it was a repeat of the global financial crisis.

Stevie Manns: Yes, we had to spring into action, like you said, we're speaking about it on Monday, we recorded it Tuesday and we put it out Wednesday. And to your point, there was a lot of panic about are these events the start of another 2008 crisis? What's going to happen next? Is this just limited to the us? Is this going to happen across the globe? And as you say, the market panic seemed to be everywhere.

Oscar Pulido: Exactly, and having lived through the 2008 financial crisis, I was reminded of how there are probably a lot of people who don't really understand how a bank works until it fails, and it really is, the banking model is all built on confidence and Silicon Valley Bank.

And we subsequently recorded a few more episodes in the weeks ahead, but Alex's was really the first one that reminded people that a bank is built on confidence and when, depositors deposit their money with a bank and the bank goes out and, invests it in an asset, when that asset,

underperforms, when it behaves a certain way, it can be difficult for that bank or perhaps impossible for them to pay their depositors who want their money back the next day.

And so to me it was like people, they walk by a bank, they drive by one, they go in one. Probably pretty frequently or they interact with one, but do they really know how it works? And this crisis reminds people just like the basic functioning of a bank.

Stevie Manns: And the way technology has changed, now that you're able to access your funds and your money so much quicker, and to some extent that exacerbated some of these circumstances. It was unprecedented in some ways and no one really knew how this would play out.

Oscar Pulido: And let's be honest, Alex is one of our favorite guests. You and I talk about this pretty often. I think maybe he's only made one mistake ever when he did a recording for us. He's very eloquent. Everything he describes makes a lot of sense, he can take very complex topics and make it easy for people to understand. So anytime we have Alex in the studio, it's just always a pleasure to listen to him.

Stevie Manns: Fabulous storyteller. And you're right, a one take wonder!

Oscar Pulido: Well, you get to hear his voice again. Here's Alex Brazier.

Oscar Pulido: Alex, we're both sitting here, it's Thursday, March 16th, financial markets have been spooked by events, in the banking industry on both sides of the Atlantic. so, can you just explain what's happening and what led to this crisis?

Alex Brazier: It's been, an eventful week, I suppose. The story goes back some way, but before we look in depth at the last week, I think it's useful to remind our listeners that really what's happening here is that the fastest rate hiking cycle since the 1980s was clear that was always going to cause some economic damage and expose some cracks in the financial system.

And what we've seen in the last week is those cracks actually beginning to appear and as we'll come on to discuss, that means more of the economic damage is yet to come.

So that's really the scene setter, the sharpest fastest rate hiking cycle since the 1980s. But then what actually happened over the last week, well, really useful to talk about three things that have happened.

The first is what happened with, Silicon Valley Bank and US regional banks. Then what did the authorities do? And perhaps, the third thing, bringing us up to date is how it's rippled across the Atlantic to European banks.

And starting with the first of those, US regional banks. What really happened at Silicon Valley Bank, well, it was a bit of an outlier in two important respects. The first is that it had a very large share of its deposits, greater than USD250,000. So, they're uninsured deposits, and those are typically more flighty and more likely to, be withdrawn in stress than insured deposits. And the second thing it had in which it was an outlier, was that it had a very large book of US treasuries and mortgage-backed securities. And of course, as interest rates have gone up a lot over the last year, the market value of those securities has fallen a lot.

Now, Silicon Valley Bank hoped that it wouldn't have to sell these securities. It hoped to just hold them until they matured. But to link these two outlying characteristics together, a lot of its depositors were spooked and asked to withdraw their money, and as a result, it was forced to sell some of these securities at today's market prices and realize some of the losses. That meant that more depositors withdrew their money as the bank realized some losses. and so, it entered this kind of spiral, downward and the authorities then stepped in to take control of what was at that stage, a failing bank. The issue of course, then prompted depositors, particularly uninsured depositors, to withdraw money from other regional banks like Signature Bank, and the authorities stepped in there, as well.

So, what did the authorities do when they stepped in? Well, they've seized control of these banks written down the equity, and they've protected the insured deposits as they normally would. But very importantly in these cases, they've also used what's called a systemic risk exemption, which allows them to protect the uninsured deposits as well.

So, these banks failed, over the weekend and on Monday morning, all the depositors. Whether their deposits were insured or previously uninsured had access to their money on Monday morning. So, the authorities have dealt with these banks not by giving a bailout to the shareholders. This isn't shareholder friendly, but by protecting, the depositors in those banks, so that was the US authorities.

And then the third aspect really of what's happened in the last week is that the crisis has rippled across the Atlantic. And it's not that European banks have in any way the same underlying issue as these regional US banks. And they're not directly connected either, but there is a channel of contagion, which is that following what happened in the United States. Markets are now applying greater scrutiny to banks around the world, including in Europe, and they're applying greater scrutiny to banks that have challenges or even where those challenges have been going on for years.

And as a result, we've seen market confidence and volatility in Europe, we've seen the Swiss National Bank step in with liquidity support for one of its banks, Credit Suisse, and so we see how this evolves from here.

But it's important to note that we don't have the kind of contagion channels that we had in 2008, but there is still this contagion channel across the Atlantic where markets are now looking at banks differently even where they don't have new challenges.

But I just go back to the root cause of all of this, which is the fastest rate hiking cycle since the 1980s, which was always going to cause some degree of damage and expose some financial cracks. And that's really the underlying root cause of everything that's gone on in the last week.

Oscar Pulido: Alex, you mentioned 2008, which is hard to believe it's a decade and a half ago, but the headlines of the past week, for those of us who lived through 2008 and that crisis, it's hard to not try and draw comparisons, and during that financial crisis, you were part of the team concerned with financial stability at the Bank of England, so you were in the thick of it then. How do you see what's gone on over the past week compared to what happened in 2008?

Alex Brazier: There are uncomfortable echoes of course, anytime you get any sort of problem in the financial system but there are some really important differences this time, which mean it's not quite the same.

The first really important difference going to what's happened in the US is that, back in 2008, the issue was really exposures on banks, balance sheets, subprime mortgage exposures that were really opaque, really difficult to find where they were, figure out how much they were worth... and so there was a lot of uncertainty across the banking system about who was holding the problem assets. And so, the contagion spread through the system as people lost confidence in all banks.

And the only way to solve it was effectively to dig into banks’ balance sheets with the stress tests at the time, and provide state recapitalization, taxpayers money, into banks that it was found had a hole in the value of their assets.

I think what's different this time in an important respect is that the assets at the heart of this in the US banking system, far from being opaque are actually the most transparent and easy to value of the lot. It's US treasury bonds and mortgage-backed securities. And so, it's very clear to assess where the losses are on those assets and who's holding them.

And that makes it very different in an important respect. And it's clear when you do that, that Silicon Valley Bank, for example, was a very big outlier. Relative to the whole of the banking system. So that's a big difference from 2008, we've gone from opaque losses. To very transparent, losses on some of these really transparent securities.

I think the other thing that's really different is where the system starts the banking system in particular, in terms of how much capital it's got, and that capital's there to absorb losses while protecting the deposits. So, we've started in a position where banks have lots more of their own shareholders money on the line than they did back in 2008.

And so even though pretty much all US banks hold US treasuries and mortgage-backed securities, and so they will have incurred some mark to market losses as interest rates have gone up over the last year.

The losses over the system as a whole are significant, but eminently manageable within the capital base that US banks have now got. So unlike 2008, this isn't a problem with asset values, that's going to overwhelm the kind of capital base of the whole banking system.

So those are two big differences, from 2008. And I think the third big difference is that the authorities now have more tools to deal with this.

We saw last weekend the Fed stepped in very quickly. I think because it was able to assess the problem and mark down assets and figure out who had the issues.

The Fed came in very quickly with a new lending facility, the bank term lending facility, to effectively support banks that were experiencing a withdrawal of deposits. So, where this had a knock-on effect from Silicon Valley Bank to some of the other regional banks, people with withdrawing their deposits to put them into bigger banks. The Fed was able to launch a facility to basically make that process run much more smoothly and stop regional banks needing to undertake forced sales of some of these securities like US treasuries and mortgage-backed bonds.

So, the authorities have more tools, they also now have more to deal with banks when they fail in a way, they didn't in 2008, when they faced a kind of invidious choice between bankruptcy, which of course means depositors money is locked up, and bailout.

This time they've got so-called resolution tools to deal with failing banks. So, in those three important respects, transparency of where the problem is, the ability to use the tools they've now got and a bigger capital base in the banking system. That makes this a very different proposition,

Oscar Pulido: And maybe specifically on that third point that you mentioned central banks and the toolkit that they have now, which is partly a learning from 2008. So, you've mentioned the Federal Reserve, putting that toolkit to use. You also mentioned the Swiss National Bank, which is acted as a backstop to one of their important financial institutions.

So, are we okay now or does this have ripple effects from a macroeconomic perspective going forward?

Alex Brazier: Yeah. I think despite this being different and despite all the tools at their disposal, this will have ripple effects for the economy, in the US and in Europe actually. And why is that when we're in this different situation? Firstly, in the US regional banks are still under pressure and they'll be under pressure for two reasons.

The first is that despite the way these failing banks were resolved over last weekend, Depositors are still withdrawing their money, in some cases, to place it with some of the bigger banks. So regional banks are finding it more difficult to raise deposits and fund their lending.

Now, as I said, because the Fed has launched this, bank term lending facility, that process can be much smoother than it might otherwise have been but nevertheless, what we're going to see is some of the regional banks need to adjust their businesses, shrink their balance sheets, and that means. Tightening their, credit supply conditions, the loan officers at these banks won't be extending lots of credit now, and that means for the economy as a whole, a tightening in credit supply means less credit available.

Now, that's going to have an economic effect. It's going to tighten financial conditions for businesses and households and that's going to help to slow the economy in the way the Fed's rate hikes were actually designed to do.

That's one ripple effect onto the economy and I think in Europe, a similar thing's going to happen. So even though it wasn't the same underlying problem, because of this contagion channel where markets are applying more scrutiny to banks, it is more costly for banks to raise equity, to issue debt. And that's going to be passed on to lending conditions to the broader economy.

And it's also going to tighten conditions in financial markets because those banks are going to be less willing to make markets, and act as dealers in those markets.

So financial conditions for the economy are going to tighten, not on the scale that, they did in 2008. And in a way, what we're seeing here is just the normal response to a rise in interest rates. It's happening through some sudden channels, but I go back to this point that the ripple effects here are really the effects of the sharpest rate hiking cycle since the 1980s, but it is going to affect economic activity through these channels.

Oscar Pulido: And so that fastest rate hiking campaign that we're seeing since the 1980s, what do central banks do now? Do they take a, pause, with hiking rates and remain in this, whatever it takes type of mode to backstop financial institutions?

Or do they continue with hiking rates to combat what has been a, an inflationary background, really globally?

Alex Brazier: This is a very different episode to 2008 in one other respect as well, which is that we go into this with central banks facing an inflation problem. Both the Fed and the ECB have got the problem of stubbornly high core inflation.

So, inflation's come off its highs, but it's still not on track either side of the Atlantic, to actually come down and settle close to their 2% targets. So, they were needing to raise rates, slow their economies probably generate recessions if they wanted to get inflation all the way back down to their targets, and that's a very different situation to the one we were in 2008 and the one we've been in every kind of financial wobble over the last 30 or 40 years, in fact.

So, the playbook where central banks respond both with tools to address financial problems like lending facilities like we've seen this week, and rate cuts isn't on the table this time. What we think they'll try and do, to the extent they can, is effectively separate two issues separate.

On the one hand, maintaining financial stability, where they'll be using lending facilities in the way they've done over the last week, and monetary policy, interest rates, where they'll be looking to deal with their inflation problem.

And in a way what the Bank of England did last September is a good model for this, a good guide for this, faced with problems in the UK gilt market, it launched one operation, some temporary purchases, of gilts to deal with that financial problem, whilst at the same time raising interest rates to deal with its inflation problem.

And that is the playbook we're more likely to see here at this stage, central banks using lending operations to deal with financial issues whilst using interest rates to continue to deal with their inflation issues.

Now that's very different, and we've seen actually the ECB just before we've recorded this, go through with its earlier guidance that it would raise interest rates by 50 basis points. this month it's gone through with that suggesting its use of interest rates isn't being diverted to addressing other issues in the banking system. That said, with credit conditions tightening as a result of these issues in the banking system, that's effectively going to do some of central bank's work for them. It's going to tighten credit conditions; it's going to slow the economy. Central banks won't need to raise interest rates as much as they otherwise would've done to deliver the economic outcome they're looking for- which is a recession and getting inflation down.

So, they're going to do a bit less than they would otherwise have done. So, more rate hikes, but not as many as we might have seen. But the big point here is that they won't be coming to the rescue of markets, in our view, with aggressive rate cuts because of the inflation issue, that they're facing and that's a big difference, I think to the past.

Markets have priced in now some big rate cuts over the course of the year, but as it stands, they're likely to try and maintain this clear separation of two sets of tools, two targets, lending facilities for maintaining financial stability and interest rates and monetary policy for dealing with inflation.

Oscar Pulido: The scenario you're describing sounds like central banks are going to be multitasking for the foreseeable future. Alex, I know you've had a busy week, thank you for spending part of it with us here on The Bid

Alex Brazier: Thanks Oscar for having me.

<<MUSIC>>

Stevie Manns: So Oscar, we talked earlier about how banking is all about confidence. Did you feel more confident about how things were going to progress and a few months later, what are your thoughts in terms of hindsight?

Oscar Pulido: Well, I think whenever you hear Alex you're talking to somebody who has many years of experience in the financial sector, and in this case, he has worked in the halls of monetary policy, in England someone who's speaking with credibility. So you immediately, are listening to him and thinking this is somebody with a credible opinion. But at the same time, in the midst of this market crisis and market volatility, living one day to the next.

And now that we can fast forward five months, and the banking crisis was relatively confined- it did not spread more broadly, we did not see another 2008. Actually markets have ground higher, over the course of the last few months. Stock markets are higher, inflation is starting to come down and so we're almost not even talking about this anymore, we're resurfacing this episode because we remember in the thick of the moment what it was like. But I did come out of that feeling more confident after listening to Alex and now five months later, a lot of what he said has really come true.

Stevie Manns: It must be great being Alex and you can be right about a lot of things.

Oscar Pulido: That's why we have him on as a frequent guest.

Stevie Manns: Definitely. Well, Oscar, it's been so fun reliving some of our favorite episodes for this summer series. Perhaps we can do it again sometime?

Oscar Pulido: That'd be great. Let's do this Best of summer series maybe every year. And for those of you that are listening, thank you for listening to The Bid. And don't forget to subscribe to The Bid wherever you get your podcasts.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0823U/M-3041417

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido. Today we continue our Best of Summer series, which means I'm joined by a guest, Stevie Manns, our producer of The Bid podcast.

Hi Stevie.

Stevie Manns: Hey, Oscar.

Oscar Pulido: So you and I have both picked one of our favorite episodes that we've done this year, and hopefully our audience has enjoyed re-listening to it or maybe listened to it for the first time. It's now your turn to pick one of your favorite episodes again. Which one is it?

Stevie Manns: It's the Art of Negotiation. How to ask for more with Professor Alex Carter. Norm Shah, was the host of this episode. you weren't here because it was women's history Month and sorry, Oscar, but that's not you.

Oscar Pulido: I understand.

Stevie Manns: So during the month of March we had senior leadership from around BlackRock interview women from the world of business and beyond, inspirational leaders that they look up to. And Alex Carter came in to talk about negotiation. She is a professor at Columbia Law School. She's written a book asking for more. It's and I love this episode. I think this is something that I will listen to at least once a year.

So many people think that negotiation is something that perhaps you do at work or it's always something where someone loses out on something and it's this idea that she talks about of steering, we are always negotiating to get to where we want to go, and it doesn't have to just be in a difficult conversation or situation.

Oscar Pulido: That's right. And I, recall as well from the episode that, there was a point in her life where she realized she needed to start putting into practice some of the things that she was telling people to do. So sort of following her own advice, and there was this moment of hesitancy, but she powered through and ultimately now following her own advice.

Stevie Manns: Absolutely. And there was something that Normandy said about the steering thing, and she, she said, um, she loved that metaphor you are steering and she said that she'll use it, going forward and every day.

And I checked in with her this morning. I said, Hey, Nirmitee, do you remember talking about this and saying that you were going to use it? How is that working out for you? And she said, Oh my God. It is so ingrained in everything that I do now, I almost forgot where it came from. And I love that, and it's so fun when you listen to an episode or a podcast and there's something that you take away and you really implement that. This podcast has been something that I've taken away and implemented. I even read Alex's book, she was kind enough to give me a copy, I think it's such a fabulous episode to re-listen to. There aren't that many episodes that I would do that for.

Oscar Pulido: Great. Well let's re-listen to this one again.

<<MUSIC>>

Nirmitee: Alex, welcome.

Alex Carter: Thanks, Nirmitee I'm happy to be here.

Nirmitee: So, let's start with the first question. Who is Alex Carter?

Alex Carter: Big question. I was born in Brooklyn. I am a lifelong New Yorker who made a 17-year temporary pit stop in New Jersey for the sake of my marriage. I am somebody who loves to learn. and now I'm really fortunate to be a person who is in her dream job.

By day, I'm a professor at Columbia Law School. I teach conflict resolution. I help people work out their problems, and I help students to step into their futures. And then outside of that, I'm a published author and a keynote speaker, a mom of a 12-year-old girl and a wife.

Between your tenure at Columbia and the book and motherhood and other things, when did you realize it was your Ah-ha moment that this is what you were meant to do?

Nirmitee, I'm a lawyer, so when you ask me for one aha moment, I'm going to give you two.

Nirmitee: Okay. Buy one, get one free. Indeed. Yes.

Alex Carter: The first moment was this. You know, I think a lot of people look at my CV and they assume that I always knew where I was going in life, and that couldn't have been further from the case.

I went into law school. I had absolutely zero idea of what I could do after graduation, and it wasn't until my last year there that I took the course that would change my whole professional life. The reason I took it is a friend of mine pulled me aside and she said, Hey, I just took this class. It involves a lot of talking. I think you'd be great at it.

So, shade aside, I enrolled in the class and this was mediation. And mediation is the art or science. We'll get to it of helping people work out a dispute, helping people negotiate. And the first time I stepped into this dingy room in the New York City courthouse and helped these people work out a dispute, it was as though I heard Morgan Freeman's voice coming down saying, Alex, this is it. This is what you should do for the rest of your life.

But here was the second moment, because you see after that, I grew really comfortable helping other people negotiate. I was really good at it. Then came the moment where for the first time, I had to negotiate for myself.

Early on in my career, I was in these jobs that were all lockstep. You walked in, the comp was but then I had to finally put on my power suit and my tall heels. That was my thirties back when I was wearing heels, walk into the office, and I got a good offer, and inside I had a crisis. Why? Because I realized that I thought I had to just accept the first offer I was given.

I realized that I had absorbed this message, that negotiation was something I could do for other people. But if I did it for myself, I wasn't collaborative, I wasn't going to be liked or worse, I would leave less for other people. But I had just enough on the ball to call a senior woman in my field, and I asked her, What should I do?

And she said, I'm going to tell you what to do, Alex. You're going to get back in there and you're going to ask for more. And here's why. Because when you teach someone how to value you, you are teaching him how to value all of us, meaning all women. So, if you're not going to go in there and do it for yourself, I want you to do it for the next woman who's coming after you, do it for the sisterhood.

That was the moment I realized I don't just have to do this for other people. I am worthy of applying my own skills to myself, and in fact, it doesn't leave other people with less. It builds a bigger table for other people to sit.

Nirmitee: I just want to comment on the fact that you make the table bigger, I agree with you 100%. But let's go back to the first point you made which was around art or science. So, what is negotiation?

Alex Carter: Well, it's interesting art and science are actually much closer than we think. They're just two different ways of trying to understand humanity, who we are, and to make sense of our world.

And negotiation, therefore, is both. There are observable phenomena that have been documented in research, and that's part of the science. But then you sit down at the table and it's two human beings or maybe more human beings looking at each other and talking, and that's nothing but art. Because I may go in with all of the research, but then in the moment I'm relating to another human being.

So, it's interesting because there have been all sorts of technological advances even when we think of negotiation, programs that can simulate bargaining, but in the end, unless the negotiators themselves are replaced by machines, we have to have some creativity, some differentiation, some sense of, the art, the creativity, the imagination behind negotiation.

Nirmitee I agree with you. So ChatGPT, everyone's talking about it! So, what happened is someone from BlackRock went to ChatGPT And said okay, create a portfolio that will be the market for the next 10 years. And ChatGPT instead of creating a portfolio actually created a disclaimer saying that you cannot beat the markets with predictability. But I feel like that's the machine versus human, that humans transcend logic sometimes or fall apart in face of logic. And that's what might make a negotiation more interesting

Alex Carter: Oh, we are, predictably irrational. In fact, Nirmitee, I start a lot of my negotiation classes by setting up a simulation.

Here it is. I set people into teams of two. and I tell them, each team, one person needs to raise their hand and volunteer for something. The person who raises their hand, I say, I've just handed you $20 and here's what you're going to do. You have one chance to turn to your partner and make an offer for how much of the $20 you'd be willing to split with them.

Here's the catch one offer. Accept or reject if your partner accepts you keep the $20 in the proportion that you propose. If they reject the $20 comes back to me. Do you know what happens, a lot of times, especially in shared groups? People offer $10. They might offer eight. They might

Nirmitee: I was thinking I would offer 10

Alex Carter: Okay. And why would you offer 10?

Nirmitee: Because it seems fair, and the chances of them wanting to split are higher. Maybe I would offer nine. But not more than that. Like I wouldn't go to eight. I would feel like maybe 11 bucks for me, nine bucks for them. Maybe a good offer and then that way we both get to keep some money.

Alex Carter: Yeah, because you took the risk, you raised your hand. So maybe you apply a little premium Yes. To the $10 to get a little extra, right? Yes. Okay. But you're thinking about risk.

Here's the thing. The economically rational thing to do, is if you're offering me to offer me one penny, and the economically rational thing for me to do would be to accept that penny

Nirmitee: Because you're better off with that one penny than you were a minute ago when you didn't have the penny.

Alex Carter: Correct.

Nirmitee: This reminds me of, Daniel Kahneman's experiments in behavioral finance.

Alex Carter: Absolutely. And I love his work, I'm always thinking about whether my brain is in system one or system two. But here's the thing, human beings don't act rationally when it comes to economics. And you see this play out all the time. You get a monetary offer. Maybe it's a deal you're striking with a client. Maybe it's for salary. And yes, you're thinking about, I want to be better off financially. But the money also means something, doesn't it? It stands for something. It stands for fairness. It stands for achievement. It stands for recognition. And so, we have to be aware that even though at the table there could be a Pareto optimal outcome, we're almost never going to be there because of the human beings at the table, who value sometimes things more than rationality.

Nirmitee: So, coming back to the art versus science have you seen a change in the last 20 years in terms of how people approach some of these negotiations, has the general level of understanding of negotiations improved?

Alex Carter: So yes and no. I will say when I look now at popular media, movies, tv. You remember that Show Entourage, right? You would see these high stakes negotiations all the time, and so I think in general public awareness has been raised about negotiation but not always accurately.

And that's part of the reason I wanted to write a book, because I felt like I was seeing depictions of negotiation everywhere that didn't mirror what I knew negotiation to be. If you look at Succession, for example, or Entourage, you're going to see a negotiation that means the following, it cuts to us. And actually, then we would be two guys in suits.

If you look up negotiation on Google and you go to the image search, I've done it. It's a lot of white men in suits. So that's part of the depiction we get about negotiation. And it's part of the reason I think that I've read a lot of negotiation literature and I didn't see myself in any of that.

 It was tough for me to pick up a book and to find something that I thought, yes, I can actually use this with my friends and colleagues and family. So, there's definitely a representation element to it, but there's also a substantive element in which I felt popular portrayals were falling short. They show the last couple rounds of a heated monetary negotiation to get to an agreement. And most people, in fact are taught negotiation is a back and forth over money to get to some kind of compromise.

Nirmitee: Yeah, when everybody loses, I'm so everybody loses right? There is no win-win in negotiation.

Alex Carter: And I reject that on a number of fronts. First of all, negotiation is not just about money. I actually learned what negotiation was on my honeymoon. And it's not just because I married another lawyer, okay? But picture this, we're in Hawaii. The two of us are in a kayak on the Waialua River, and our guide up ahead turns back and says, all right folks, let's negotiate these things to the left because we're going to hit that beach up there.

And I gotta tell you, everybody else was enjoying the scenery and my brain, love of learning was immediately somewhere else because of all places in the world a kayak in Hawaii was where I learned what negotiation really means because I thought, that's right, if I'm negotiating my kayak toward a beach, what am I doing? I'm steering.

And what if negotiation wasn't haggling over money? What if it was just the process, like a kayak of steering my relationships in the direction I wanted to go? And with that in mind, I went back to the office the following week and I saw opportunities to negotiate everywhere because it wasn't just about asking for salary once a year. It wasn't just about the twice a year I would sit down with a client and say, let's hammer out this retainer agreement.

I could be proactively calling and saying, tell me What's happening in the company? What's keeping you up at night?

And all of a sudden, we were negotiating, and our relationship grew closer. And then when I do have to deliver difficult news, when we do have to have a monetary conversation, we are in such a better place than we would be if I was in a kayak, and I just took my hands off the paddle.

Nirmitee: Steering, there is a part of me, the bossy part of me, which feels like I'm going to now use this as a metaphor for pretty much everything I do in my personal and my professional life. That was very insightful, but you started off your conversation with the space you wanted to create, so a woman not being represented, and as a woman, you wanted to make the pie bigger. So, what's the purpose? What drives you and what do you want to accomplish?

Alex Carter: Do you know the reason I'm sitting here with you today, and the reason I have a book published at all is that six years ago, a student of mine who had graduated and was now in law practice asked me to go to coffee. And we went to coffee, and I thought we were there to discuss some career advice for her.

And instead, she said to me, you've had such a profound effect on my life. I want to help you achieve your legacy. What do you see as your legacy on this earth? Her name's Kristen Ferguson. I was floored. And in that moment, I answered instinctively, and I said, my mission on this earth is to hold up a mirror so that every single person who comes to me, whether it's as a student in my course, somebody I'm training in negotiation.

And when I go into large companies, it's just a bunch of individual relationships. I see each person in that room in this way. I want them to hold up a mirror and see their highest and best and then I want to help them open up a window between them and somebody else to be able to resolve conflict, see the other person better, and see situations more clearly.

Nirmitee: And then if somebody asked you, somebody told you, where do I start? Besides reading your book, how does one start down this journey of steering and or looking at the world in a way where you create these situations for everyone around you to be better?

Alex Carter: The place you start is where every negotiation starts, and that's with yourself. If negotiation is about steering relationships, the most important, the most central relationship of your entire life, will be the one you have with yourself. And so, it starts with self-knowledge.

People ask me all the time, what's the source of my power in negotiation? I think they think it's how much you can go in and physically fill up a room and I'm five two in sneakers.

Okay? I will never be the biggest person in any room. But the expert negotiators are the people with the most knowledge, they understand themselves extremely well. They understand the situation extremely well, and then from that stable base, they're able to get to the table, listen minutely to every word the other person says, and by doing so, crawl up inside that other person's brain space and get to know them better than they know themselves.

That's how you become an expert negotiator.

Nirmitee: So, Alex, in your Wall Street Journal bestseller, Ask For More 10 questions to Negotiate Anything, what are the two or three most important questions? What's the distillation there?

Alex Carter: Back when Ask For More came out, I spoke to the Wall Street Journal and they asked me, Alex, where should everybody start in negotiation? And I said, you should start here, what's the problem I want to solve?

Most of your negotiation success, and if you're at a company, most of your company's innovation success will rise or fall on whether you are solving the right problem. That's number one.

A question I love for people to ask is, What do I need? And making a complete list in a negotiation of the tangibles and the intangibles. The tangibles spring to mind immediately, right? It could be money, a particular role, headcount, resources, but the intangibles are really important.

People might say, I need autonomy in this role. recognition. respect, and then I want you to ask, what does that look like for me? Because Recognition, respect, autonomy, can look totally different for you than for somebody else. So that's really important.

And then when you're talking to somebody else, I can't tell you how many teams I train, where people come into a business development meeting, and they start with a pitch. Hi, I'm Alex. Here's what we do. Here's what we can offer.

I tell people to walk in and ask what I call my magic question. Two words. Tell me about your business. Tell me what success would look like for you. here Tell me what's keeping you up at night? Tell me, if we were to work together and we had a phenomenal result, what would that look like in your business a year from now?

But it doesn't matter, whether you're asking that question in a business development meeting or you're asking it of your 16-year-old when they come home from school instead of “how was your day? tell me about your day. It is the broadest possible prompt. It gives you the most information, it creates the most trust, it is the number one question that you should ask in any scenario.

Nirmitee: Nice. I'm going to go and ask my 16-year-old “tell me how your day was instead of how was your day? Where I get meh and her staring into her phone, as most 16-year-olds do these days.

Alex Carter: Do you know why your 16-year-old doesn't respond when you say, how was your day?

Nirmitee: No, I wish I did

Alex Carter: It's because how was your day is not a real question. It's a social script. It's what we do when we are sitting down together. How are you today, Nirmitee? I'm great. How are you? How was your weekend? Wonderful. How was yours? It means let's get through this so that then we can discuss the real thing we're here to talk about. And nobody recognizes a fake question more than children. They smell it and they will not answer it.

And so, I started pivoting and I would ask my daughter, tell me about art class today. Tell me who got in trouble. Tell me the silliest thing somebody did today. And then I allowed for lots of silence and all of a sudden, we start rolling.

Nirmitee: Nice. So, I have homework. This is awesome. Alex, thank you for your time today.

Alex Carter: Thanks for having me.

<< MUSIC>>

Stevie Manns: So Oscar, I know you weren't part of that conversation, but listening back, How has that made you reflect on some of the conversations or negotiations that perhaps you may have in your everyday life?

Oscar Pulido: I think it goes back to something you said at the intro, which is that negotiation isn't just something that takes place in the workplace, that it's ongoing in our lives. And I actually like the part where Alex says, her job and her mission and her passion is resolving conflicts and helping people resolve their conflicts.

And, that has applicability in so many parts of your life. And frankly, if we did a little bit better job at that across the world, I think we'd be in a better place.

Stevie Manns: this was super fun. Thank you very much for going through this with me, and I look forward to your final pick next week.

Oscar Pulido: Sounds good. We'll keep you in suspense until then.

Stevie Manns: Okay.

Oscar Pulido: Thanks for listening to this episode of The Bid. We'll be back next week with our final best of Summer series episodes. Subscribe to The Bid wherever you get your podcasts.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

And today we continue our best of summer series, which means I'm joined by Stevie Manns, our Bid producer. Hi Stevie.

Stevie Manns: Hi Oscar.

Oscar Pulido: So, I think it's my turn to pick another one of my favorite episodes, and I'm going to pick the one on geospatial data and how it can impact investing. I thought this was a really fascinating episode that had an interesting personal story attached to it that I didn't anticipate. You might remember Josh and Mike joined us to talk about how they're processing all of these, I think they used the word petabytes of data, that was the quantity that they about.

Stevie Manns: Yes, and we had to figure out how much a petabyte actually was!

Oscar Pulido: Yeah, I don't think I had heard that term maybe before they mentioned it, but the personal story was interesting because Josh talked about a set of friends that he had living in California who were constantly having to move due to wildfires. And it was that impact that wildfires had on California families that led him down this path of wanting to understand weather patterns and one thing led to the next then all of a sudden, they're processing all these different types of data points to think about the next investment decision.

Stevie Manns: Yes, and to be someone who's able to see something out in the wild and then bring it in and have it inform something that you do in your day job that's able to help clients, that's able to help other people. I thought that was really cool and impactful and I've found the whole conversation really insightful.

Oscar Pulido: it also made me think that I'm just a walking data point. I'm constantly leaving some sort of trail, whether I'm at an airport, if I'm checking into a hotel. and it's not just me, all individuals have a data trail that they leave, and businesses leave data trails. And he talked about alpha hiding in plain sight and for those in the investment industry, alpha's really hard to generate. it is what you're going after, excess return versus the market. So, the fact that he painted this picture of, well, it's actually right in front of you, you need to know how to put it together and where to look was an interesting visual.

Stevie Manns: I completely agree.

Oscar Pulido: Well, with that, why don't we give it a listen?

Stevie Manns: Let's do it.

<<PREVIOUSLY APPROVED EPISODE RO 2856997 PLAYS>>

Stevie Manns: So, Oscar, I know you work with Josh and Mike. Was there anything from that episode that perhaps you didn't know? Was there something new that you learned? What were your thoughts coming out of that discussion?

Oscar Pulido: I think it was just a reminder of how modernized investing is becoming how much almost science there is behind it. When you think about the quantity of data, when I went to business school and was taking finance classes, we were kind of digging through a balance sheet, trying to understand the financials of a company, and that still happens, but 20 plus years later since I've graduated, there are folks processing, petabytes of data. And so, I think for me it was just a reminder of how modernized investing has become and how much you have to stay ahead of the game if you really want to truly outperform the market or try and outperform the market.

Stevie Manns: Absolutely. And I think we're going to see AI allow for much more of that data analysis and will, I'm sure take this technology forward and take investing forward so it's an exciting space to watch.

Oscar Pulido: I agree. And I also thought, I'm glad Josh and Mike are doing this, because I certainly couldn't!

Stevie Manns: Oscar, this was fun. I think next time I'm going to pick the next episode.

Oscar Pulido: Indeed. Well, thank you for listening to this episode of The Bid. If you've enjoyed The Bid so far, do subscribe wherever you get your podcasts.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

Oscar: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Today I'm pleased to welcome a co-host, Stevie Manns, The Bid's producer. Welcome, Stevie.

Stevie: Thank you, Oscar. It's lovely to be here.

Oscar: Stevie. I'm just the voice, but it turns out you're the mastermind behind the production of the podcast, so it's great to have you on the microphone.

Stevie: Well, thank you Oscar, and if I may say, I think you're the host of the most!

Oscar: I appreciate that. So, Stevie, as we wind down our production for summer, we thought we'd take a look back at some of our favorite episodes so far this year in case our audience has missed any of them. And so, you and I are each going to pick two of our favorite episodes and talk a little bit about what made them stand out for us. So, you're going to kick us off for this summer series. What's your first pick for us?

Stevie: I'm really excited about this. So, my first pick is the Metaverse episode we did with CEO of Magic Leap, Peggy Johnson. I just loved this conversation, I loved her insights, it was such a visual episode. I loved picturing all of these future devices that we're going to be wearing, imagining what the future's going to look like. And you know what, it just brought me back to being a kid, watching the Back To The Future of Trilogy.

Oscar: That is also one of my favorite trilogies of all time. I have the music going through my head right now.

Stevie: Huey Lewis and The News?

Oscar: That is definitely one of the classics. And I love the scene where he's also judging the band early in the movie, which is like a nice irony that maybe the younger generations don't fully appreciate right now.

Stevie: I never got that until I watched it much later. I was like, that's Huey Lewis!

Oscar: Exactly.

Stevie: I'm a huge Star Trek fan as well so it really tickles me to see this come to life. Peggy mentioned these devices that we would be wearing, we only did this a few months ago and Apple has already come out with this new, very expensive device and that's what she threw forward to, that these devices are going to be so expensive when they come to end-consumer initially. What was it like for you to record this episode because you didn't know what she was going to say, so how did it feel to be interviewing Peggy?

Oscar: I didn't know what she was going to say and that's probably what made it very interesting, the visual that she painted. And I was picturing myself wearing these, augmented reality glasses walking down the street, thinking about how they would help me get to the location that I need to get to. So, it did feel futuristic, but also that it wasn't that far into the future.

Stevie: It's here. I don't know if it's here with Apple now, but it will certainly be in the next few years, I would think.

Oscar: So, let's take a listen to the episode.

Stevie: Let's do it.

Oscar: So, Stevie, what was one of the key takeaways as you listen to that episode again?

Stevie: I thought the stat about reducing training costs by 80% was astounding. And what that's going to give businesses the ability to do and the capacity and all the, all of those efficiencies. I think that's incredible. What about you? Was there anything else you took from that episode?

Yeah, I think going back to the visual nature of her discussion, just the comment around the factory worker. Learning how to use a piece of machinery in a very digital format, that really resonated with me as opposed to having to leaf through a very lengthy manual of instruction. I think we've all been in a job where we've been given a manual or a handbook or a guidebook and wish that there had been a much simpler way to do it. So, I hear you there.

Oscar: Sounds more fun. So, I think this is usually where I do the outro, but I'm going to let you do this part now.

Stevie: Ooh. Okay. I thought you would never ask! Next up on The Bid, we’re continuing to introduce a new short-form series from the BlackRock Investment Institute on Mondays, and then it's Oscar's turn to pick his favorite Bid episode as we continue our “best of” summer series. Thank you for listening to The Bid. I'm Stevie Manns.

Oscar: And I'm Oscar Pulido.

Stevie: Make sure you subscribe to The Bid wherever you get your podcasts.

Disclosures

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. 

For Investors in Switzerland: This document is marketing material.

In South Africa: Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288.

 ©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

The first half of 2023 has seen its fair share of headlines and volatility across global markets, including higher interest rates, bank failures, and a dramatic US debt ceiling moment.

As we look ahead to the second half of 2023, what are the emerging trends investors should be watching and what opportunities might these factors present?

I'm pleased to welcome back Alex Brazier, Deputy Head of the BlackRock Investment Institute to help us look ahead to the rest of the year. Alex, welcome to The Bid.

Alex Brazier: Thanks Oscar for having me back.

Oscar Pulido: Well, Alex, you are back. In fact the last time we talked, we were discussing the relief that markets were feeling from the U.S. Debt ceiling agreement, and you mentioned that there was an upcoming investor Outlook forum taking place at BlackRock's headquarters in London. So perhaps, we can start with some takeaways from that forum.

Alex Brazier: Yeah thanks, it's been a busy few weeks and as you say, we did assemble, BlackRock's most senior investors, in London two weeks ago now for two days of intense discussion. And really I think the top line conclusion I took from that is a wide acceptance that we're in a new regime, a new macro and market regime, that brings new and different investment opportunities. So this new regime is something we've been talking about for a long time, it's actually playing out now. We had 30 years of stability where central banks always came to the rescue whenever anything looked to be heading south in our economies, and we had sustained bull markets. And now we've seen major developed markets flirt with recession, and yet central banks have raising rates and certainly holding tight with their policies.

So that's the new regime playing out from a macro perspective, but that's really not a council of despair. And the thing I took away from our meetings in London the other week is that, far from it, the opportunities may be different, but they are no less than they used to be. So, sure, this is an environment where, simple static portfolios at the broad asset class level won't any longer be the best you can do, and it's not an environment really for taking big macro risks when central banks aren't coming to the rescue.

The opportunities now come from zooming in being precise, finding the disconnects in the way markets are pricing some of the volatility, finding relative value, and also from harnessing some of the mega forces- the big tectonic shifts in our economies that are playing out now.

So yeah, I took away it's a new regime. It's a different regime. It's playing out but actually that means there are new and exciting opportunities that are different from the past, but no less than the past.

Oscar Pulido: I love some of these terms that you mentioned, Alex. "Zooming in, being more precise." I think you said "mega forces" and tectonic shifts. So it sounds like it was a lively debate in London to say the least. And we've talked about this new investment regime with your colleague Wei Lee a little bit earlier in the year.

So maybe just go into a little bit more detail about what we think this looks like when we say new investment regime and how this is playing out?

Alex Brazier: The big shift here as I say, is we're going from a world in which most major economies, their supply capacity was just growing steadily over time. And so the job of central banks was really just to keep stoking up growth and come to the rescue whenever growth threatened to head south. And that's the way they achieved their inflation targets.

So they had a structural easing bias. Rates were always below their neutral level. Central banks were always stoking things up, now we're moving to the opposite. And as I say, in develop developed markets, we've seen growth stall, Europe's had a recession as the energy shock has squeezed incomes. The US even on some measures, may have just about had one too, if you look at measures like gross domestic income alongside measures like gross domestic product.

And all of this is before the full effect of central bank actions come through- tightening financial conditions, tightening credit conditions- and yet central banks are not coming to the rescue with rate cuts. In fact, they're signaling further increases. Why is that? Well, it's cuz their economies are basically overheating despite having had recessions. And that's because economies aren't able to produce as much now without generating inflation because of things like labor supply problems and energy supply problems.

So central banks have gone from, having this sort of structural easing bias to having a structural tightening bias. They're constantly trying to hold back growth in order to get inflation down to their targets. So they're, they're holding tight, they're holding policy tight, and markets have been gradually adjusting to this. We've seen it in fixed income markets, for example, as bond markets have started to price in that, central banks won't be cutting rates this year, even as growth slows, they'll actually be keeping rates pretty high. The U.S. two year yields now up pretty significantly, and that's the market adjusting to the fact that central banks aren't coming to the rescue.

That does create challenges for risk assets. It means more volatility, means more growth, volatility, it means more earnings volatility means more equity volatility, and risk asset volatility, but... does also mean serious opportunities for income from particularly short dated bonds where yields have risen pretty sharply and increasingly emerging opportunities to lock in some of that income with longer duration too.

So this is a regime where there are challenges, sure, the macro regime creates more volatility, but also, central banks holding tight means higher yields means real opportunity for income in portfolios as well.

Oscar Pulido: Yeah, and it's interesting to hear the side by side. On the one hand you're saying there are big parts of the world that might be in recession, maybe you have to look closely at the data to really see it but by textbook definitionthey're experiencing a recession or certainly a slower growth environment.

You're saying there's gonna be more volatility, central banks are not coming to the rescue as they have in the past. But despite all of that you mentioned the opportunities are there. They're different, but they're no less. So where can investors look for those investment opportunities?

Alex Brazier: I think this is actually the big thing coming out of our discussions in London the other week. So the first is obviously that income is back with yields, higher central banks holding tight, there are opportunities now in portfolios to lock in some of that income.

Now, it's not a great environment for overweighting risk assets as a broad category in a portfolio, but nor is it an environment to bunker down and wait.

Partly because in this new regime, macro volatility is just something that's here to stay. It's a fact of the regime, so it's something to adjust to rather than wait to pass. The big thing is that we're not taking big macro risks in portfolios. We're just taking different risks in portfolios. and let me, give an example of a few here.

The first is that zooming in, within equities, there's an increasing population of stocks where investors are now compensated for some of the risks in the macro environment. And US equities, for example, remain the lion's share of our baseline portfolio. But there's also opportunity in zooming in further within developed market equities to tilt portfolios because we see opportunities, for example, in tilting equity exposures to towards Japan, where the macro pictures quite different to other developed markets.

The Bank of Japan is still in the business of ensuring inflation that actually gets up to its target rather than trying to squeeze it down like other developed market central banks. That means growth prospects are somewhat stronger there. We also see opportunities outside developed markets, tilting portfolios towards emerging market equities where many of the macro risks are actually better reflected in market prices.

And there's opportunities from zooming in within fixed income exposures as well. For example, towards US inflation linked bonds and away from European inflation linked bonds, given the ECBs even greater determination, we think, than the Fed to get inflation down to its 2% target. Now. All of that is just examples of how broad asset class exposures might not be the way to generate additional return in this environment, but by being precise, by zooming in to find these relative value opportunities within asset classes, actually there's real opportunities In the old regime where central banks were coming to the rescue, you didn't need to be particularly precise- broad macro exposures did the job as well as anything else in terms of generating investment return.

But now you can do a lot better by being precise and finding some of these relative value opportunities within the asset classes.

Oscar Pulido: And it's interesting you said don't wait for macro volatility to pass. it's here to stay, so adjust to it. And that gets me thinking that maybe investors tend to wanna wait for the coast to be

clear and everything is calm and then they start looking for those investment opportunities but maybe by then it might be too late and markets have moved and you've highlighted some of the areas that they should be identifying. You also mentioned mega forces. How many are there and why are these important?

Alex Brazier: we're highlighting five,in our outlook. what do we mean by megaforce? we mean these sort of big tectonic shifts in the way the world economy works and the way economies work that are gonna have a big effect, not just at the macro level but also on which companies win out relative to others, so they're gonna be a big driver of returns. And again, this is part of the general theme of focusing less on the macro picture and more on what are the underlying forces and what winners are they gonna create? So a good example of that's in the first half of this year. Where one of these big forces, these mega forces, turned out to be as important as the Federal Reserve in driving the SNP 500. And that is, the growth of artificial intelligence.

Over the first half of the year, much of the US equity performance has been driven by a handful of stocks reflecting the realization, I think, of the potential of some forms of AI and in particular the need for semiconductors and other chips to enable that to happen. So it's a real example of how even in a difficult macro situation, some of these mega forces, these themes, can be much more important as a driver of return. And actually, as we say in the Outlook document, we think that artificial intelligence theme could actually have further to run too, because looking carefully at it, there's not just opportunities in some of the chip needs but also in the needs for data to actually really exploit the power of AI.

So people who are involved in putting data sets together, cleaning data, making it able to be accessed for large language models, for example, stand to gain from this trend. And it's not the only mega force in town either. As I say, we've got five of them in the report, it's not just the growth of artificial intelligence, it's also aging populations.

It's also a rewiring of globalization, of course, the transition to a lower carbon economy, and also a reshaping of the financial system as well. So these are big mega forces, big drivers of relative returns, and as we say in our outlook, things to be harnessed, opportunities to be gained to increase returns in this new regime.

Oscar Pulido: And these mega forces feel like they have a long-term nature to them. but you mentioned that they've also impacted year to date returns with artificial intelligence being just as important as what Jay Powell was saying at the Fed. And you see that in the performance of markets, but AI gets a lot of attention so maybe talk about a few of these other, mega forces in more detail. You mentioned aging population, the rewiring of the global economy, I think is how you phrased it. Why are these important?

Alex Brazier: Well, it's not just that they'll shape the macro picture looking ahead. The forces we're looking at here, unlike AI actually are all things that will limit the capacity of economies to supply goods and services, at least for a period. Take aging populations, for example, as we age,as a collectively age at least, dependency ratios go up, there are more older people relative to people in the working age population. That means economies produce less, but they don't, in and of themselves demand less. The mix of spending in economies shifts towards things like healthcare, and that means they're generally inflationary. Central banks face a challenge. They have to, as we were saying in this new regime, hold tight to try and keep inflation down towards their targets, but

they don't just affect the macro picture. Because they change the mix of spending towards things like healthcare, they actually changed the mix of, earnings in the economy as well.

And so looking for opportunities where the aging of populations isn't really fully reflected in company growth expectations in things like healthcare or elderly care. It potentially creates interesting investment opportunities.

The other around, the rewiring of globalization is really the ongoing fragmentation of the global economy. We've been through a very long period where the only thing guiding supply chain construction was economic efficiency. We're now entering a period where it's not all about efficiency, it's about geopolitics as well. That's gonna reduce the efficiency of supply chains. It's gonna, again, hold back the supply capacity of economies, it's gonna shape the macro picture, but potentially creates really interesting investment opportunities as those supply chains rewire.

So where will new industrial capacity be built as supply chains are rewired? Is that reflected in pricing of securities in those geographies? Those are interesting questions to us for harnessing this particular megatrend, which sounds like it's a negative. And maybe is at the macro level, but actually creates interesting opportunities at the sector or company level.

And then of course, there's the transition to a lower carbon economy, which to us is being driven by policy, by technology, by changes in consumer preferences. And we're trying to assess how are those things changing? How is it gonna shape company earnings over time? And is that reflected again in, in market prices?

So to us we treat all of these mega forces in the same way as we treat Jay Powell. We ask, what does it mean for where the economy is heading? Is that reflected in prices and where it's not? That creates interesting investment opportunities.

Oscar Pulido: So, Alex, if I were to summarize a lot of what you mentioned, there's a lot happening. The new investment regime that you and colleagues from the BlackRock Investment Institute have mentioned. It's playing out, it's here to stay. And the investment opportunities are there. They might be different than what they've been in prior regimes, but they exist.

Alex Brazier: Absolutely right.Not the same opportunities, but lots of new opportunities.

Oscar Pulido: And Alex, maybe just a final question, which is when you describe this investor forum in London, is it a pretty cordial discussion or is it some good debate between the investors.

Alex Brazier: Yeah, it's, it's always pretty cordial, but, pretty healthy debate, I would say, especially in something like a new regime where we're collectively getting to grips with what the new dynamics are and where the new opportunities are. But I think everyone feels this is an exciting time. It's a new regime with a new playbook and new things to figure out, and that's a real opportunity for us to help our clients.

Oscar Pulido: All right, we'll look forward to hearing more c color commentary the next time one of these investor forms takes place. And Alex, as always, thank you for joining us on The.

Alex Brazier: Thank you.

Oscar Pulido: Thanks for listening to this episode, or The, Bid. Next up on The Bid. we're introducing our new weekly short form series from the BlackRock Investment Institute called Market Take.

Market. Take is a quick digest of what's driving markets and will be available as its own podcast where you can subscribe. You'll be able to hear the first three episodes right here on The Bid for the next few weeks on Mondays. So look out for our new market take series starting in July.

Disclosures

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. 

For Investors in Switzerland: This document is marketing material.

In South Africa: Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288.

 ©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.

Mark Wiedman: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Mark Wiedman. Today we're talking about food: from the farm to your fork, to your recycling or compost bin. I'm pleased to welcome Mark Schneider, the CEO of Nestle. Nestle is the world's largest food and beverage company1 with more than 2000 brands and products in 188 countries. What does Nestle have to do with the transition? Well, the processing, the packaging, the distribution and the consumption of food actually produces about a third of human greenhouse gas emissions2. In this episode, we're going to talk about why and how Nestle is transforming their value chain in the transition to a low carbon economy. Mark, welcome to The Bid.

Mark Schneider: Thanks for having me.

Mark Wiedman: Why don't we start by talking about Nestle and your business?

Mark Schneider: To a US audience, Nestle is mainly known as a chocolate maker, but of course we do cover wide range of food and beverage products. In fact, we're the world's largest food and beverage company with about 94 billion Swiss francs of revenue in 2022. And we cover all the main categories in food and beverage from coffee to pet care, to medical nutrition, infant nutrition, and of course, the chocolate that we're so well known for. And, that also means, we are exposed to a wide number of agricultural commodities that are needed to make these products.

Mark Wiedman: Let's talk about Nestle and carbon emissions and start by why does it matter to Nestle what your carbon emissions are?

Mark Schneider: It matters to Nestle because when people think about greenhouse gas emissions, what comes to mind first is: air travel, automotive, energy generation, a heavy industry. But in fact, food production around the world is very much linked to greenhouse gas emissions. So depending on what study you look at, between a quarter and a third of the world's greenhouse gas emissions are caused by agriculture, so food and beverage production, and unlike many other activities, eating and drinking is not something that we can go without. As the leading company in this space, we feel an obligation to do something, and I believe this is part of future proofing the business. Just like you futureproof the business through convincing research and development and new products. So one additional feature that you want to work for is a better greenhouse gas footprint.

Mark Wiedman: What is your roadmap layout in a few simple bullets, and how are you tracking?

Mark Schneider: So minus 20% by 2025. This is judging from 2018 levels and it's regardless of the growth we achieve in between and it's the totality of all greenhouse gases, so not just co2. So that means we also need to tackle methane, which in some cases is trickier than co2. It's minus 50% by 2030. then it's that famous net zero by 2050.

Mark Wiedman: What are you most concerned about in terms of achieving your 2030 objective? What's the biggest obstacle?

Mark Schneider: There's a set of pretty steep mountains to climb. There's not just one individual obstacle here, but, clearly, we all had to run these projects. Some of them have tremendous lead time, so something you're doing now may give your results two or three years down the road only. And so learning how to try that to be sure that there is consistent improvement over time. I think that's also something that we had to train the organization on because, we had not done it before.

Mark Wiedman: Could you explain how food and the production of food and its disposal emits carbon? How does that work?

Mark Schneider: There's of course the carbon footprint of our operations. Some of the operations in our factories, the logistics both inbound in factories and outbound. All the things you would associate with the company's operations, including travel. That is the easiest part. And that's the part where we are already picking a lot of low-hanging fruit. And then there is about more than two-thirds that really sit in our agricultural supply chain. So this is the greenhouse gas emissions that come about as the key commodity ingredients that we use for our products are produced. And that's the hardest part, and that's the steepest hill to climb.

Mark Wiedman: So what produces those carbon emissions in the chain from planting food to getting it into your factories?

Mark Schneider: Well, It depends on the ingredient. But the key greenhouse gas emissions are related to everything associated with livestock. Think about dairy production. Think about meat. So there you have to first of all generate the food. And then, cattle in particular, you have methane emissions that come from the digestion and so it all adds up to a very powerful mix of CO2 emissions, methane emissions, that are very significant and a lot higher than with plant-based products.

Mark Wiedman: So animals, especially cows, lead to lots of carbon emissions, but there's also carbon emissions even with producing plants and vegetables, and other ingredients that feed into your food. Where does that carbon get emitted?

Mark Schneider: So a lot there has to do with the way we do our farming. In some cases, unfortunately there's deforestation to begin with, to create farmable land. Then the way we look after our soil, we tend to deplete the soil and that of course leads to a lot of, CO2 release from that soil into the atmosphere. It also leads to degradation of the quality of soil over time. So clearly changing our methods of farming and switching to either conservation agriculture or regenerative agriculture is a key unlock when it comes to improving the greenhouse gas footprint.

Mark Wiedman: What is regenerative agriculture?

Mark Schneider: Some of the common themes as part of regenerative agriculture are taking good care of the soil, keeping it covered at all times, having cover crops, having intermittent cropping minimum or low tillage. And just trying to keep the water management of the soil at its optimum. This way over time, not only do you avoid the depletion of the soil, but you can also in fact add to it and capture some additional carbon. There's also conservation agriculture. All of them are a material improvement over some of the traditional agricultural methods that are being used widespread today.

Mark Wiedman: So how are you working with your supply chain? How do you work with farmers?

Mark Schneider: So this is the key challenge. In addition to intermediate suppliers, commodity exchanges, we're dealing with six to 700,000 farmers directly around the world, or in some cases cooperatives. And, you can't just throw your weight around and tell them how to do it in a different manner the next day. You have to give them help. They're the most exposed part of the supply chain. They're immediately exposed to the maladies of the climate and weather, their capital cushion is a lot lower than many of the other businesses in the supply chain. And so this is where we need to give a helping hand. We call that concept a just transition. So it's about giving technological help. It's about also giving some of the micro lending and, financial support or paying a premium for products that are made according to these practices.

Mark Wiedman: Mark, give us some concrete examples.

Mark Schneider: So a good example is in cocoa farming where independent of the size of the farm, we are paying for a number of practices that we consider to be important for the long-term success of the farm, and also for preserving human rights and avoiding child labor , for example. So independent of the size of the farm, if you send your kids to school, we pay premium for that. If you're pruning your trees we pay premium for that. And if you fulfill all of the requirements, we pay some additional premium on top of that. And so this way, we're helping the farmers switch to more regenerative practices at the same time avoid issues such as, child labor and lead to higher farmer incomes.

Mark Wiedman: What's the biggest resistance that you hear from farmers?

Mark Schneider: The initial conversion from that traditional industrial agriculture to regenerative agriculture, day one requires some additional investment, and usually comes with a period of 2, 3, 4, 5 years of reduced outputs. So literally it's investing more and earning less, which of course, to anyone around the world, would not be an attractive proposition. And so people are reluctant to do this. You also then have to provide that safety net that people can make it through that period, and without too much of a financial disadvantage.

Mark Wiedman: How much of a production loss might that experience during those first few years?

Mark Schneider: Very much depends on the location of the crop, and this is another thing we have to do, it's not about basically writing one set of guidelines and then, one size fits all, rolling it out. You really have to work on that location specific solution. But it depends a lot on the specific circumstance.

Mark Wiedman: At Nestle, you touch farming, packaging, the production of actual food, logistics, recycling. Across that whole chain, where do you see the most promise for decarbonization?

Mark Schneider: Clearly in the supply chain, and unfortunately, that is the hardest part. And of course, you're literally removing greenhouse gas emissions, one kilogram, one ton at a time in so many places around the world. So there's not one factory that you switch around and turn around and then all of a sudden problem solved. It's an incredibly decentralized job that is why it takes some time to be effective.

Mark Wiedman: What about the product itself? Is there low carbon product?

Mark Schneider: I think there are products that by design have a lower greenhouse gas footprint, and so any plant-based alternative compared to a meat based one, for example, has that and consumers like that feature, in addition to any potential health benefits.

Mark Wiedman: What are you hearing from customers about their willingness to shift to plant-based alternatives from traditional cow-based production?

Mark Schneider: I think there is significant interest out there and for a number of different reasons. So clearly, environmental concerns are one. Animal cruelty, especially among the youngest of consumers, that's another key reason to switch to those products. And then for quite a few middle-aged consumers, there is an interest in switching to plant-based, simply due to health considerations, because quite often, we're offering a similar amount of protein with lower amounts of saturated fat and lower total calories.

Mark Wiedman: Many of your products are sold to supermarkets. How do the prices compare for low carbon versus high carbon food?

Mark Schneider: So in the case of plant-based initially they were more expensive and they still are more expensive. Some of that is simply the fact that they were positioned as more premium products. Some of it is the fact that, some key ingredients such as, soy isolates, pea isolates were initially in short demand. I think over time this will even out. And there is no reason why, in the long term, these products should be more expensive, because, when you look at the way they're being made, it's so much simpler to just basically have the crop and turn it into a product, as opposed to, having a crop, feeding an animal, and then making the product from that.

Mark Wiedman: I think a lot of our listeners understand decarbonization in the automotive sector. What's the biggest opportunity for making consumers more aware of the carbon impact of what they eat?

Mark Schneider: I think, some sort of standardized consumer facing labeling would certainly be helpful. Because right now everyone is using their own terminology. So I could easily envision a world where, in addition to some basic nutritional information, there would also be another label that gives basic environmental information, but gives it in a way that is standardized and harmonized across the industry. And then when it comes to the companies, I think, a pretty harmonized carbon disclosure is also very helpful so that investors and other stakeholders can basically form their own opinion.

Mark Wiedman: Where do you look to for having standardized disclosures for customers and shareholders?

Mark Schneider: Well, I think for the customers, it tends to be pretty much a country by country approach. It's the same for nutritional values so this is where you have to respect, you know, sovereignty and people taking care of their consumers within their jurisdiction. When it comes to, the corporate disclosures, I think there you have a better angle when it comes to international standards. You know, it could be under some of the disclosure rules, it could be under international agreements. There has been, for example, a very promising project led by

the World Economic Forum, trying to harmonize some of those. And obviously the audit firms also have an interest in agreeing on harmonized standards here.

Mark Wiedman: From a policy perspective, it may not be a straight line, but from consumer demand, is it a straight line? Are we seeing continuous demand increasing for decarbonized product?

Mark Schneider: So generally it was, then came COVID and then came the inflation wave. And so currently we're also dealing with affordability issues. Understandably when these products are more expensive, that diminishes some of the growth expectations short term. But I would be very surprised if, longer term you wouldn't see a resurgence of interest because the interest in the environment, interest in animal rights, I think all of those are on the rise.

Mark Wiedman: As a CEO, you have to disclose your carbon footprint. What are the biggest barriers for Nestle? What are the biggest obstacles to an efficient, clean, clear disclosures?

Mark Schneider: I mean, the key problem is, I don't have to disclose it as a CEO, and so people don't. And we do, we're quite committed to this, and every year you can see our progress. And in fact, we're one of the few companies where, in spite of our growth, the greenhouse gas emissions are already below our 2018 baseline and year after year, you'll be able to track our progress and you'll be able to judge whether we are in line with that net zero roadmap that we issued. But many companies don't bother to disclose. You have no idea where they are. And of course, you have to assume that it's not a priority, and that to me creates an uneven playing field and something that needs fixing.

Mark Wiedman: Mark, you joined Nestle six and a half years ago. How has your vision of decarbonization and your Nestle strategy changed during that period?

Mark Schneider: I think it gathered intensity, and to me, the key starting shot was that we were taking that pledge, according to the science based targets in 2019, that we were basically managing our greenhouse gas emissions consistent with the goals of the Paris Agreement, and that means limiting the rise of temperatures to one and a half degrees over pre-industrialized levels. And under those rules, then once you take that pledge, which of course is a highly public thing, within two years, you're required to issue a set of, time-bound intermediate targets and also specific steps on how to get there. That's our net zero roadmap, which we issued within one year of taking the pledge. Cause frankly, one of the reasons we had here was we, didn't wanna wait two years, this is an urgent matter and clearly plans rarely get better in the second years of their making. And so, when that came out, it was seen as the gold standard in how to do it in food and beverage, and that really gave incredible clarity to the organization and what they had to do and what the levers were, and it really galvanized the entire firm and added a lot of intensity.

Mark Wiedman: When you look at what Nestle needs to learn from other sectors, other industries, and what other industries can learn from Nestle, what would you highlight?

Mark Schneider: I think on the inside of the firm, our operations, this is where we do a lot of benchmarking with other industries, to see what the best practice is and, uh, what we can do, where we have no role model to look to is when we look upstream in our supply chain. This is where everyone is learning with us. And so this is literally learning by doing. And sometimes you make mistakes. You find a dead end that's not giving you the results you want. You have to give up on that, and then double down on something else that gives you better results. So this is a lot of trial and error. But of course at the same time, you have to work fast because, if you want to meet the first intermediate goal, which is a minus 20 percent by 2025, there's not a lot of time left.

Mark Wiedman: What's the number one criticism you receive either at Nestle or in your industry that you think is fair?

Mark Schneider: I do think in addition to the greenhouse gas footprint, the one other key concern that is highly visible is plastic spillage into the environment as a result of packaging being discarded. And so plastic has a lot of advantages when it comes to product safety and shelf life and avoiding food loss. But obviously, we have to work on better recycling systems. We have to work the spillage of plastic into the environment, and that one is highly visible. Unlike carbon, which is not visible, the plastic bottle on the beach somewhere that is highly visible and so consumers are quite concerned rightfully so.

Mark Wiedman: What's the most important thing to get the world to net zero?

Mark Schneider: I think consistent effort. That to me is key. And not just in our industry, but also elsewhere. If regulators and the public sort of fade in and out of this, nothing will get done because whether it's our industry over industries, I think all of this is long-term effort and, step by step we can get there.

Mark Wiedman: Mark, thank you for being so generous with your time and your thoughts.

Mark Schneider: Thanks for having me.

Mark Wiedman: Thanks for listening to this episode of The Bid. Make sure you subscribe to The Bid wherever you get your podcasts.

Disclosures

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. 

For Investors in Switzerland: This document is marketing material.

In South Africa: Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288.

 ©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.

Oscar: Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

As we approach the midway point of 2023, the economy has had a turbulent ride thus far. This year, we've seen bank failures across the globe, a debt ceiling showdown in the US, high inflation and central banks raising interest rates to their highest rates in over a decade.

The typical 60:40 portfolio. needed an overhaul after a rocky 2022, and investors are looking for a new balance. But during that reassessment, one asset class seems to be having a standout moment among investors That asset class is gold. In this episode, we will take a look into the history of this commodity and what investors should consider when allocating to gold in their portfolios.

I'm pleased to welcome back Gargi Pal Chaudhuri, Head of iShare's Investment Strategy, to help us take another look at why gold is having its moment to shine.

Gargi: Gargi, welcome to The Bid. Oscar, it's wonderful to be here.

Oscar: You have a special seat, on The Bid podcast Gargi, you're a frequent guest. And today we're talking about gold, which is having a bit of a moment, and I think when a lot of people think about gold, they think about the gold rush of the 1800s or maybe a piece of jewelry, or maybe the color of the sky in New York in recent periods. But we're actually talking about gold as an investment. So, tell us a little bit about the history of gold as an investment in a portfolio.

Gargi: So, you ask an important question around the history of gold and thinking back, 2-3 thousand years ago, gold was still very much a medium of exchange.

It was a store of value and artifact of beauty. I think more recently, if you look back to about 700 BC, that's when we were really thinking about gold as a medium of exchange, a medium of payment. If you think about what happened in the 1790s with the Mint And Coinage Act US Congress passed that act putting a fixed price on gold with parity to the dollar.

And more recently, in 1971 when we broke the gold connection with the dollar, I think all of this was the period where, Gold came to the forefront as an investment as that second thing that we were talking about, which is around the medium of exchange and a store of value.

And I think it's important to think about why we as investors gravitate towards gold, and I'm sure we're going to talk more about it, but why is it gold? Why isn't it something else? When we are talking about precious commodities, and I'm Indian, as you can hear from the voice.

And obviously historically my family, has invested in gold. But why? And if you think about the periodic table and you look at all the elements and you take out the ones that are reactive to air or react with water or rust

too easily, you're left with very few that can actually stand the test of time, that can be stored without getting rusted, that are ductile and malleable.

That is why it has, held its value held its status as something that can be a source of investment and also be all of those other things like a medium of exchange and of course, artifact of beauty.

Oscar: So, you took us back to 700 BC, so you went way back in the history books to start to tell us a little bit about gold as an investment, but why is it having a moment right now if it's been around for so long? What is it about this particular period that is bringing it back into the spotlight?

Gargi: A few things. So, number one, there is a lot of concern around economic growth and historically we have found when there are periods of concern around the future of global growth, investors have turned to assets like gold, which are likely to be a good diversifier to traditional investments such as equities, such as bonds. So, number one, there is some concern right now around the growth dynamic globally of the US. So that's one reason. Number two, I think geopolitical fragmentation, geopolitical risks. Especially when you think back to just last year with the war in Europe, with Russia, Ukraine, that led to a lot of angst. Again, if we thought about what were some of the concerns you had for 2021, none of us put war in the forefront in 2021, for 22. So, I do think this geopolitical risk that arose and actually frankly concerns around more geopolitical political risks that might be abound is another reason that investors are thinking about gold as an alternative.

Another reason, and I think this is a very interesting and important one, is the path of interest rates and the part of the US dollar. And we talk about the path of interest rates, and particularly it's the path of real interest rates, so inflation adjusted interest rates. Remembering that while gold bangles are beautiful, and while gold can be stored in a vault for centuries, it still doesn't have a yield. So, when you buy a bond, you have an income associated with it, you have a coupon associated with it. When you buy a stock, you might earn some dividends associated with it. Gold does not have that. It's a non-yielding asset. So, in a world if interest rates are moving higher, you can gravitate towards the bond markets to earn that higher interest rates. You might not be as attracted to gold.

But in a world where you expect interest rates to move lower or remain stable, if you expect real interest rates, so that inflation adjusted interest rates to move lower, I think investors could find gold, more attractive in those moments. And I certainly think that's happening right now.

And then another one, we talked about the dollar, but I do think, historically the dollar and the gold has had a negative correlation. So again, if your expectation is for the dollar to decline or even just not to increase anymore, that could be another powerful dynamic for adding gold to a portfolio.

But for all of the things that I mentioned, I think two that are probably in the forefront of investors' minds right now, are number one this diversification away from the dollar, and we've seen many central banks, especially in the emerging markets, we've seen central banks such as China, India, Russia, that have been adding to their gold reserves to diversify away from the dollar. So that is something that's happening. It's been happening for a few years now, but certainly has been pretty profound in the last couple of months. And then the second one is this fear of a geopolitical event or a global growth slowdown that is driving this current moment and this current price action.

Oscar: So, you mentioned a number of things that impact the price of gold. But maybe just to go back to interest rates for a quick second- because it feels like that's always something that we're talking about, especially when we have you on The Bid- which is on interest rates if they're high, that all else equal doesn't make gold that appealing. But you're saying that it's not just the level of interest rates, but what they look like adjusted for inflation, and if those are headed lower, then that might provide a little bit of demand for gold in the market.

Gargi: So, it's a very good clarification, Oscar. We have to remember that markets are forward looking, so it is what investors expect interest rates to do. So, if I own a real rate, so if I own an inflation linked bond, for example, and I expect that real interest rate that I'm earning by owning that bond to go lower in the next six months or next year. Those are the two options, you own the bond that real interest rates that you're earning right now, it could go lower, or you could own that, and you expect that real interest rate on that inflation like bond could go higher.

So, in each of those scenarios, you are still earning a coupon on your inflation-linked bond. When your expectation is that real interest rates can either remain here or actually real interest rates are so low and remember in the US that real interest rates were zero or negative for a long period of time, then you might think that you could own a non-yielding asset, which might give you a better outcome.

But if real interest rates are you hold them, you expect them to remain pretty steady and you don't expect them to go lower in the near term, that's when you might want to gravitate towards gold. So, it's that relationship between real interest rates falling in a falling real rate environment you might want to gravitate towards gold as opposed to in a rising real rate environment where you might want to think about waiting to buy the real rates. Does that make sense?

Oscar: It does make sense? And I think another reason that investors look at gold is the belief that it's a hedge against inflation. is that a correct assumption for investors to make?

Gargi: Yeah, a lot of times, I have clients that talk to me about inflation and they're looking for that ultimate inflation hedge and investors turn to gold.

Historically, if you look at price performance, there was one period of time in the seventies, very, specifically in the early seventies where inflation, as we know, was in the double digits, and when gold was a hedge. Outside of that though no other period of high or very high inflation has actually resulted in gold being a good hedge.

So, outside of that very early 1971-1974 period we haven't found gold to be a good inflation hedge. What it has been is a good geopolitical hedge. What it has been is not so much an inflation hedge, but a hedge where more of a stagflation hedge actually, where again, if you expect real interest rates to go lower, which you would in a stagflationary environment, that's when it has actually worked as a better hedge.

So, I think it's a little bit of a misconception. And when you look at the performance of gold, it's been more mixed in inflationary or very high inflationary periods outside of that one time that I mentioned, but when we expect real rates to move lower- and by the way right now, I do expect real rates will stay at current levels for some time and then eventually by the end of this year or next year, start moving lower- I think that could be one catalyst for gold to remain in the forefront of investors' minds.

Oscar: You also mentioned the periodic table, I must admit I pulled it up, a couple days ago, but partly in anticipation that you and I would be speaking and actually, do you remember the symbol for gold on the periodic table.

Gargi: Come on! Au!

Oscar: Okay. Okay I remembered it too, but I needed to look at the periodic table and you touched on that there are other metals That have similar characteristics, there's not many, but there's things like silver, platinum, palladium,

Gargi: Rhodium, palladium,

Oscar: Very good, so now, why are those, not benefiting from this moment that gold is having? Or are they?

Gargi: Historically gold has been this really respected, metal, right? I would classify gold and silver in the same bucket. Obviously silver, not as much as gold. Rhodium and palladium were discovered much later, centuries later, we weren't reading about them in the time of the Egyptians and Bhagavad Gita and the Iliad and Odyssey, which all mentioned gold actually. So, they weren't around because they just weren't discovered. Platinum has a very high melting point, which again, you couldn't use that, especially in the olden days, you couldn't use that to build gold blocks or gold nuggets, et cetera. You couldn't use that melted down to create jewelry, now you can because modern technology- high temperature furnace- but you couldn't back in the day.

So today silver certainly can have its moment, but this risk of hedge characteristic, so all the things that I talked about earlier when it pertains to, geopolitical risk, that certainly resides more with gold. And that's because gold has, historically, we went back and talked about the 700 BC, the form of payment the 1792 Coinage Act, if you look forward 1934 Act, historically there has been a lot of correlation of gold as currency, gold as method of payment. Until 1971 you had to have your currency backed by gold, and then of course, in 1971 that was, dismissed. But silver and platinum never had that. So now, even though we don't live in a world when any currency globally is backed by gold anymore, those other elements just don't have that same cash to them, if you will.

I'll also add that when we think about silver or when we think about, any other precious metals, we always think about what are the users of it. So, silver does have many other users, obviously, in addition to being used for jewelry, you can use it for, other purposes, which gold can't be. So, I, I think depending on what you are looking for as an investor, Silver can be a very good addition to your portfolio, but it might not have the same risk of geopolitical risk, hedge diversifier for your US dollar reserve that gold does.

Oscar: Essentially gold just has a longer history and sort of unique aspects to its story of why it serves as an investment in a portfolio. And I think for much of that history, only until maybe recently, buying gold was a clunky exercise, literally buying gold bars, which are heavy, and you've stored them somewhere, in a personal safe. But that's changed dramatically over the last 15 or 20 years, right? So maybe talk a little bit about how investing in gold has modernized.

Gargi: So, to your point, you could invest in gold as a form of jewelry, but if you invested in gold bar form then there was the cost of storage, not only is it finding a place to store but the cost of that storage, not everybody has the capability of renting out space in a huge vault to store their gold bars. Or even if they do, I think that that's an expensive proposition. I think what we have seen in modern days today if you're an investor looking to invest in gold, there are a few ways to do it.

Obviously, you can participate in the futures market that's the right or the option to buy gold in the futures market - that's not actually gold. What many investors, especially those that are truly worried about a geopolitical risk event or a massive global growth shock, you actually want to see that asset that you own, and I think the rise of gold ETFs where when you buy that ETF you know that your ETF is backed by gold, which is in a vault in New York or London.

That has risen in the past few decades and that has given everyone, you don't have to be a rich billionaire with a home in Switzerland and a vault to have access to storing gold. You can, buy an ETF that gives you access to gold and do it in a very liquid and very efficient manner.

Oscar: I'm laughing a bit because I think about some of the recent episodes we've done, which hopefully you've listened to as well, and we talk about things like artificial intelligence, we've talked about digitization, and here we are talking about gold, which, feels like a bit of a relic in investment market. So how is it that gold has endured during this digital age?

Gargi: Sure. the risk of sounding like a relic, which I don't want to, I will say that gold has survived because it can be a diversifier in your portfolio. It gives you that ballast, and it can be tactically an opportunity for investors looking to invest in the face of slowing a growth shock or geopolitical tensions. And that has held through many business cycles. I'll also say another big reason that we're talking about gold now is that historically for institutions looking to trade gold, it has been a pretty expensive venture. We talked about that, the storage costs and things like that.

ETFs now more recently have helped and accomplish the digitization, for gold for every type of investor. For more sophisticated clients using technology such as blockchain ledger, having a digital gold currency could help institutions trade even more efficiently.

So, we have alleviated some of the issues that may have existed a few decades ago with digitization. And the main reason that we are still talking about gold is some of the drivers of gold that existed a hundred years ago. And what we talked about when we started the show in terms of holding its value, being a medium of exchange and being an artifact of beauty. Many of those things still hold, and that's why we are here talking about it. But the good news is it has entered the digitized age with ETFs, allowing every type of investor to have gold backed, ETFs in their portfolio.

Oscar: Gargi, you've given us a great history lesson. You also wore a piece of gold jewelry today that I noticed, and I think there's a little bit of a story behind it.

Gargi: I did. So, I got married 15 years ago, and as I mentioned, I'm Indian, so for many of you who don't know this, Indians are actually the largest buyers of gold for wedding jewelry purposes. And I wore my wedding jewelry for this podcast to bring home that point. And there is such a thing as wedding season demand. So, every year in September, August or September, October, you'll hear people in the western world talk about demand for gold coming from Indian wedding season. And it's so exciting whenever I hear someone random talking about it! And based on what I'm wearing, in my hands right now, it is factually correct. Lot of Indian wedding gold demand.

Oscar: Well, thank you for bringing that special token to today's podcast. And thank you again for joining us on The Bid.

Gargi: Thank you for having me.

Oscar: Thanks for listening to this episode of The Bid. Don't miss the next episode featuring our midyear outlook. And subscribe to The Bid wherever you get your podcasts.

Disclosures

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. 

For Investors in Switzerland: This document is marketing material.

In South Africa: Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288.

 ©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

Historically, cash has often been seen as a temporary parking place for funds or as a means to bridge the gap between investment opportunities. However, with higher interest rates in effect and global economic uncertainties looming, cash has emerged as an asset class that demands another look. So how might investors consider cash as an asset class right now?

I'm pleased to welcome Beccy Milchem, Head of International Cash Management at BlackRock. Becky will join us to talk about the role of central banks and their recent rate announcements, how technology might impact the future of the asset class, and the top three things investors should consider when it comes to cash in uncertain market conditions.

Becky, thank you so much for joining us on The Bid.

Beccy Milchem: Thank you for having me, Oscar.

Oscar Pulido: So, Becky, today we're talking about cash, which I have to imagine is a topic that is of interest to a lot of people. but when I think about cash, I think about currency and bills in my hand. But when you think about it from the context of an investor's portfolio, I think it means more than that. So maybe you can help elaborate on that a bit.

Beccy Milchem: Yeah, and I think it's a really good point. The term cash can mean different things to different investors. From readily available overnight cash, which could be held in a bank deposit or an overnight money market fund to cash and cash equivalents, which could encompass things that term out a little bit more, typically out to three months. Or even anything out as far as 12 months to two years and physical, money market securities that are held within a portfolio.

Oscar Pulido: And I think of the. phrase "cash is king" that seems to be something that gets said once in a while, but actually for many years, over the last 10 or so, with interest rates so low, it was quite punitive, I think, to have cash- you weren't earning much of a rate of interest. Now we're going through a cycle where central banks have been hiking interest rates quite aggressively, so how does that impact now the way in which investors are thinking about their cash allocation and their portfolios?

Beccy Milchem: Yeah, and I've always preferred the term Cash Is Queen! I think we went through a long period of time where people really didn't focus on it. As the world went into lockdowns, central banks were responding quickly to help economies, and many reacted by taking interest rates down to near zero or maintaining negative rates. These lower base rates were intended to feed through to lower borrowing costs for businesses and households so that lending didn't grind to halt and that people were able to keep spending.

As an investor of cash through our money market funds, we really had to be focused on client needs through those initial lockdown periods, and the reactions to problems that we all faced and what that meant for clients’ liquidity needs. In times of market volatility, we know that liquidity is a priority for all types of clients, and we will typically hold much higher levels of overnight and weekly liquidity in the money market funds that, that we manage. The aftereffects of the pandemic though and how central banks are reacting now is also having a very direct effect on cash investors. Global shutdowns meant that we have experienced a huge global supply shock with certain parts and goods very limited in availability, which has had a knock-on effect on prices increasing as demand has outweighed supply, and the war in the Ukraine has further compounded this issue but also not helped investor confidence levels. While some of those higher cash balances that people had through the peak of the pandemic are being spent down as a necessity.

What we're finding is investors are still really cautious about dipping a toe back in and taking more risks, so actually there are a lot of people still holding higher levels of cash.

From late 2021, we saw the Bank of England make the step to increase interest rates, and they have been followed by the Fed in March 2022 and the ECB, which moved its deposit rate back to zero in July last year, having maintained a negative deposit rate since 2014. Each central bank is attempting to combat rising prices by slowing demand, and we have seen a steady pace of increases up to this point.

From a cash perspective, we've gone from an environment where the opportunity costs of returns, to your point around different cash investment options was really low, and thus cash probably became a bit of an afterthought within portfolios. And what we've seen in the last few months is that with interest rates constantly moving higher, a more proactive approach to managing cash is definitely warranted.

One of the reasons that many investors have turned to money market funds is to help them proactively manage duration, risk, and effectively outsource this to a team of portfolio managers whose job is dedicated to the cash investment options available through money markets. Typically, money market funds will position themselves extremely short in duration ahead of expected central bank hikes that the fund has dry powder to deploy post the rate increase and will quickly reflect a prevailing market rate.

Oscar Pulido: I think we're used to seeing sort of volatility in the stock markets, and for that matter, we've seen a lot of volatility in the bond markets, but you've also highlighted that there's just a lot going on in the cash markets with changes in interest rates across the world. Now this also reminds me, I've heard you say that not all liquidity is created equal. So, what do you mean exactly by that?

Beccy Milchem: So, one thing that I think tends to be common amongst cash investors is that when you have a need for cash, you want to make sure you have access to it and a reasonable amount of certainty as to what you have to hand.

Now, for us and for many investors, the ultimate liquidity is that overnight cash bucket, because you know you've got it there when you need it. And as I touched on earlier, one observation I would make about the last year is that coming out of near zero or negative interest rates into an extremely dynamic interest rate environment has meant that it has been very challenging to make the right call if you are terming out your cash investments beyond overnight.

When you've been at zero and suddenly there is something on the table, it's quite easy to have that bit of a magpie moment of something bright and shiny that's not zero and jump straight in. And what we've seen is a lot of investors locking up money for a few months or even a year, which might have looked really attractive at first, but when you consider how far central banks have moved, The Bank of England, has moved, 12 times in between that December 2021 and May this year. So many of the term exposures that clients may have invested in might not have paid off through the duration of that investment. We often hear of term deposits with banks being self-liquidating, which is true if you don't need the cash until maturity, but it's definitely not the case if you need it before. Term bank deposits are typically unbreakable, meaning that you have to pay a penalty if cash is accessed early. And similarly, if you need to

raise cash by selling direct investments in money market securities, there will be a price to pay if that instrument is not offering the prevailing rate.

Now, the case in point here has really been the short-term US T-Mobile market. In the run up to the debt ceiling debate, so highly rated short-term government bills typically offer significant liquidity in that they are easy to sell if you need to raise cash. But spreads on these exposures have been more volatile as investors have been avoiding holding positions with maturities close to the X-date, which is the date that would potentially mark the treasury running out of funds.

And to give you a live example, the yield on a US T-bill maturing on the 1st of June has at times been trading 200 basis points higher than a bill maturing at the end of May. That's a huge difference if you are a forced seller in this market, which is why we think that money market funds or liquidity funds make so much sense for investors.

They give you access to a sizeable pool of readily available cash, as well as portfolios of very high-quality holdings that evolve as the circumstances change. Now, we love T-bills for the liquidity that they would typically offer but what we typically do in this kind of scenario is rotate portfolios proactively in a way that as an investor, if you're not focused on the cash markets, you might not be able to do readily yourself.

Oscar Pulido: And you highlighted an example about investors who, as interest rates were going up, started to allocate to instruments that offered them a higher interest rate, but also locked them in at that interest rate and therefore they missed out as central banks continued to hike interest rates. And so therefore, as much as that is cash, it wasn't as liquid as they wanted it to be.

Beccy Milchem: Exactly, it's still cash and if you know you can hold that investment for the duration, it's fine. You're going to get your cash when you need it,

but sometimes those unforeseen expenditures can come and hit us at a personal level or even at the institutional level, and so that's where liquidity and it not all being equal comes into it.

Oscar Pulido: You've touched on central banks, you've mentioned the Bank of England, the Fed, the ECB, all have embarked on one of the fastest rate hiking cycles that we've seen in a few decades. As we're appearing to reach the cycle where maybe those rate hikes are going to slow or potentially even pause, what does that mean for some of those cash markets that you've been talking about?

Beccy Milchem: Yeah, central banks have a really difficult battle on their hands. They're continuing to grapple with bringing inflation down when economic growth is also perceived to be in a very delicate balance.

The recent May meeting saw a further 25 basis points increase from the three majors you mentioned, but it's definitely slowing the paces as we look forward, and we're probably close to the peak, but with a huge amount of uncertainty around inflation, numbers still running so high, and the added overlay of politics in each domestic market and at the global level, I think there's still a bit of an uncertain path ahead. Central banks themselves are now much more data dependent than they were a few months back with a growing awareness that the lag of transmission of previous hikes still has to catch up with within consumers. Now markets themselves are predicting that many central banks will go too far increasing rates and thus need to bring them back down a bit within the next sort of six to 12 months depending on which currency you are looking at.

This means investors are facing a yield curve that includes market pricing of those rate cuts, and in some cases has become inverted in that timeframe. So as a cash investor, you may plan your strategy based around when you have a known cash need and have different buckets for everyday use. A big expenditure for you and I might hopefully be something like a holiday, a car, or a house purchase, for institutional investors, that might be like a known acquisition or a transaction from a portfolio positioning taking

place, in a few months. But from a practical perspective, an inverted yield curve in short term markets means you're probably not going to get compensated appropriately for the risk of locking up your cash for say, six months or a year. There is also still a lot of risk in turning out your cash if markets have got it wrong and rates stay where they are or perhaps even move higher still.

So, the way our portfolio managers are thinking about this is that throughout most of this hiking cycle, the market has underpriced the level at which rates will be moved to by central banks. So, unless you're looking at the markets all day, every day, that's a really difficult thing to keep on top of.

And at the end of the day, an investment strategy comes down to tolerance and appetite for risk. But if you are a cash investor with daily or short-term need for cash, there are not too many downsides to staying short at the moment. So, options that give you daily or next day access to your cash will allow you to be nimble, but you do still need to make sure those options are reflective of where interest rates are, as with inflation running where it is right now every basis point earned on cash is also critical.

Oscar Pulido: So, Becky, one of the underlying themes that you've touched on is, being nimble, and being active and flexible with your cash portfolio, which is again, I think an area of the market that many people don't realize you need to be as nimble in. You've also touched on a number of things that have clients concerned, and perhaps one of the reasons why they continue to maintain a higher cash allocation. It's things like inflation, you touched on the war in Ukraine, you touched on the debt ceiling. What are some of the other concerns that clients are raising?

Beccy Milchem: The cash investors, are typically concerned about whether they're going to be able to get access to their cash when they need it. And the mantra that most cash investors live by including ourselves, comes under a three-pillar approach.

So, the first being safety or capital preservation, knowing what you're going to get back, the second being liquidity and knowing you've got access to it when you need it. And the third being yield. And when it comes to concerns or things being raised by clients at the moment, they've typically fallen under one of those pillars.

Firstly, the vulnerabilities in the banking sector this year have highlighted concerns of having all of your eggs in one basket, both from a capital preservation perspective, but also about always having that timely access to cash. As we talked about earlier, investors might be more defensively positioned than usual, given broader market sentiments. The level of cash they have may be much more than they are used to holding. Now in the past this may not have warranted too much thought, but now they may be thinking they need to practically diversify their exposures. Individual investors may have some level of government protection on bank deposit products, but investors with much larger cash balance, particularly on the institutional side, will need to think about how they prudently diversify their risk to individual counterparties and monitor their exposures.

Again, outsourcing the diversification and credit monitoring to dedicated products such as money market funds with their dedicated resources looking at this on a daily basis might be the most efficient way to manage those risks. Secondly, and as I've already mentioned, most investors are concerned about having access to their cash when they need it, and their liquidity and the debate around the US debt ceiling has prompted investors to be cautious around exposures in US T bills that may have some risk of delayed payments.

Now, I would hope by the time this recording goes out that we may have a resolution on the debt ceiling. But having been here before, this feels like a world trodden path for dedicated money market portfolio managers who will typically naturally rotate out of maturities in that X date window. And where investment guidelines allow, they'll rotate into overnight repurchase agreements.

They're collateralized by US government debt to give that portfolio the resiliency it needs. Now. Finally, my third pillar was yield, and the return on cash investments has also been much more in focus, in part spurred on by media coverage, prompting investors to review what their cash is earning. But cash has really gone from being the afterthought thought to being the asset class that many conversations are focused on as investors survey the options available.

Oscar Pulido: Beccy if we can switch gears a little bit and talk about technology. We hear a lot about artificial intelligence and how it's affecting virtually every industry, including asset management. How do you see the role of technology impacting the cash industry?

Beccy Milchem: So, in response to the US Regional Bank challenges, it's been widely reported that cash moved much more quickly in 2023 than it did during the global financial crisis.

Now, I think that is partly down to how quickly digital media spread the news of troubles in regional banks, but it is also down to the fact that physically moving cash can be a lot easier via technology today. We see a lot more of our investors accessing our money market funds through some kind of platform which can offer trading efficiencies and straight through processing, all enabled through the technology that exists today that didn't in 2008.

Similarly, a lot of the technology that helps companies look at things like cash flow forecasting means that a lot of institutional investors simply have a better line of sight on what cash they have available to invest today. Now we are seeing a lot of asset managers and banks investing in cash investment technology, and we're starting to see some of the functionality that we are used to in our personal lives through banking and investment applications on our smartphones be rolled out on institutional cash trading platforms.

I'm not quite sure it's in the realms of AI, but a big thing for investors is the level of automation that can be driven and across certain institutional investors, we see a lot of demand for sweep technology whereby the investment platform can simply take the level of excess cash determined by an underlying client and efficiently sweep this into their chosen investment products such as a money market fund.

And I think the other area that's really moved along is that technology can really help with all of the important reporting elements. And so, we look at the ways that clients interact with the technology, and they're looking at things like simplifying and automating things such as positions reporting, or what aggregate exposure is across a number of credits across their overall portfolio, even down to the cash.

Oscar Pulido: So maybe just looking ahead, you've touched on a lot of different aspects around the market environment right now, but what are two or three things investors should be thinking about with respect to their cash allocation as they look forward?

Beccy Milchem: So hopefully it's come through today, but I think cash is most definitely an asset class you need to think proactively about, and I think it comes back to that mantra that we live by capital preservation, liquidity, and yield, but maybe put slightly differently, know where your cash is, know how quickly you can access it and what it is earning.

Most of us don't have time or dedicated people in our teams to look at this all day, every day, so think about the tools you can use to more efficiently help you manage your cash and whether it's right to outsource it. And similarly in these uncertain times, which I don't think are going away, navigating terming out cash investments will continue to be challenging, but there are dedicated products that will continue to help proactively manage these risks. And my advice would be really to talk to an asset manager who has a specialty in this space.

Oscar Pulido: Well, Beccy, thank you so much for shining a spotlight on an area of the market that, maybe doesn't always get the attention that it needs. And thank you for joining us on The Bid.

Beccy Milchem: Thank you so much for having me.

Oscar Pulido: Thanks for listening to this episode of the Bid. Next week on The Bid, Mark Wiedman talks to Mark Schneider, CEO of Nestle, on the role of food in the transition to a low carbon economy. Subscribe to the bid wherever you get your podcasts.

Disclosures

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. 

For Investors in Switzerland: This document is marketing material.

In South Africa: Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288.

 ©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido. Today is Thursday, June 1st.

The debt ceiling has been capturing headlines for weeks now. And the recent vote in US Congress has drawn a line under the drama on Capitol Hill for the next two years. But what does this mean for markets and are investors feeling reassured?

In this special episode of The Bid, I'll be speaking to Alex Brazier, Deputy Head of the BlackRock Investment Institute to look at what happened, how markets are reacting, and what investors can expect going forward now that the debt ceiling crisis is behind us.

Alex, thank you so much for joining us on The Bid.

Alex Brazier: Oscar, thanks very much for having me again.

Oscar Pulido: So, Alex, we're talking about the debt ceiling, which has been in the headlines for some time now, and I wonder if you can just take a step back and fill us in around, what has happened and where are we now?

Alex Brazier: Well, yeah, it's been front and center for the last few weeks really what happened is that the US government reached its debt ceiling, which is a level of debt set by Congress that it can't go beyond, and that limit was $31.4 trillion. And given the US government's spending and tax plans, it needed that to be lifted. But of course, its opponents wanted it to change its plans in return for lifting the ceiling. Now, importantly, without an agreement, US government would've basically run out of money to pay its bills. The US Treasury estimated that it would've run out of money on the 5th of June, so that would obviously have been hugely disruptive, both for the economy directly, but also for the financial system with the US government unable to pay interest on or make scheduled repayments on existing debt.

It would've been in default. And that's absolutely critical because the financial system relies on the US government and its securities as ultra-safe, reliable assets, hence the real focus on all these negotiations in Congress. But now, an agreement has been reached at the 11th hour, and it's been passed by the US Congress.

Now the debt ceiling limit has been suspended until 2025. And in return for that, the US government has moderated some of its spending plans. That means markets are breathing a sigh of relief now. But that just means really attention is shifting back to the underlying economic situation in the

United States, which hasn't really changed very much while everyone's been focusing on the debt ceiling.

Very sticky inflation, very tight labor markets, US economy is, effectively overheating. And the question that markets and policy makers are grappling with is, what will it take to bring inflation down? And that took a backseat for a while, that really important question, while everyone's focus was on the debt ceiling, but now that's coming back front and center.

Oscar Pulido: Alex, you said $31.4 trillion, which is a big number even for an economy as big as the us. Can you help clarify some terminology though? We talked about the debt ceiling, you mentioned default, and then we also were hearing about a government shutdown. How do those three things interrelate to each other?

Alex Brazier: So, the debt ceiling, as I say, is set by Congress and it limits the amount of debt that the US government can have issued at any one time. So, as I say, that's 31.4 trillion, even as you say, relative to the size of the economy, that's 120% of US GDP. So, it's a big number. Now default is a situation where the borrower, in this case, the US government, can't service the debt, that it has in issue, so it can't make scheduled interest payments, it can't make scheduled repayments of that debt. And the risk here was that because it was going to hit the ceiling and not be able to issue more debt, the US government would've had a cash flow problem. and been unable to make some of those payments, and therefore it would've been in default on its existing debt.

Now, a shutdown is also what happens if the government doesn't have the cash to run its operations and to pay its employees. And we've seen that in previous debt ceiling, episodes. And all these things are linked because if the government hits the debt ceiling and has a cash shortage, it effectively needs to shut down its functions.

It needs to stop paying its employees, furlough its employees, and it risks not being able to make payments on its debt and therefore it would be in default. So, the debt ceiling, the risk of default and the risk of a shutdown of its operations are all inextricably linked.

Oscar Pulido: It makes sense. And curious then, how has this impacted markets now that the risk of a default seems to have passed, I think that risk is now firmly off the table, if I'm not mistaken?

Alex Brazier: That's right. I think that the immediate risk is off the table. The debt ceiling itself has been suspended for two years now until 2025. But I think what's really critical, is that this doesn't mean we can just move on and forget this ever happened. We can't forget US fiscal policy, the tax and spend policy.

And this episode, this, negotiation will actually have a bit of a hangover on US economy and markets in two respects, really. Both of which will add to volatility in bond markets, in fixed income markets.

The first is that the position of US fiscal policy, by which I mean the government's tax and spending plans, is still pretty challenging. The agreement doesn't change those plans very much. the congressional budget office yesterday estimated that spending's going to be about 65 billion lower next year as a result of this agreement. But that's just 0.3% of the US economy. And you set that against a deficit, which is how much higher spending is than tax revenues, of around seven and a half percent of GDP at the moment, and you can see that actually the impact of this on the overall tax

and spend position is actually pretty small. Now. That deficit, that seven and a half percent of GDP deficit is higher than any time outside the second World War post the global financial crisis and the Covid crisis.

And it's happening at a time when the US economy is actually overheating. So, the US fiscal position is actually in a pretty challenging place and stabilizing government debt in the United States, in a situation where we've got higher interest rates, a big deficit actually means that tax and spending plans need to adjust quite a lot over time.

And in our view, market attention will increasingly focus on that over time, rather than on the kind of immediate debt ceiling risks. And that will add to, volatility in bond markets.

The second hangover, I think, is that we're going to see now a burst of issuance by the US government in coming months to effectively replenish its bank account. So, we're going to see issuance, particularly of short-dated treasury bills, all of this at a time when the Federal Reserve isn't buying US government debt through quantitative easing, but actually running down its holdings of government debt through so-called quantitative tightening. So that second hangover too, is going to contribute probably to some volatility, in fixed income markets. So, the immediate risk is off the table, but some of these important hangover effects are going to increasingly come into focus particularly in bond markets.

Oscar Pulido: And Alex, what about. Equity markets. You mentioned that there's going to be volatility in bond markets and sometimes that then unnerves the stock market investor, but perhaps the stock market investor is now saying, we have this headline behind us and time to take risk, or how do you think about that situation?

Alex Brazier: I think the equity market, a bit like the rest of us, will be breathing a sigh of relief that this agreement has been reached, but also focusing back on the underlying economic picture, which as I say is one of really sticky core inflation evidence of a tight labor market and rising wages and an overheating economy really, that presents real challenges for the Federal Reserve. And that's where the equity market, we think will turn its attention back to, and it's where it was before the debt ceiling episode, but that too was going to contribute to volatility, I think.

Oscar Pulido: And Alex, as we approach the mid-year point, what are you focusing on for the second half of the year?

Alex Brazier: Well, now that we've moved on from the debt ceiling issue, we are focused on this underlying economic situation of sticky inflation, tight labor market. And there are really two important macroeconomic questions in the United States now.

The first is how material and economic slowdown is needed to deal with that inflation? The Fed itself thinks a recession might be needed to do that. And the second is, how high will interest rates need to go to do what the Fed wants to do? Recent developments in the labor market and inflation actually suggests there's a real possibility now of more rate hikes over coming months.

And we're also focused on some of the longer-term trends, like how AI, demographic shifts, geopolitics and the energy transition will actually affect the economy and markets. It's difficult to lose sight of those, even amid some of this volatility around the debt ceiling.

So next week, BlackRock's assembling a hundred senior portfolio managers in London to debate many of these issues. I expect it to be pretty lively with some fierce exchanges. I mean, we’re pretty passionate about these issues because this is a new macro environment, it's really difficult. This inflationary environment's very different to anything we've had for the last 30 years.

And we are totally focused now on how we can unlock the investment opportunities in this new regime for our clients. And that's what we'll be debating fiercely, next week. And I hope you have us back to discuss some of our conclusions,

Oscar Pulido: We will absolutely have you back, Alex, thank you for providing us this update and we look forward to having you back to hear more about that convening that is taking place in London. Thanks for joining us on The Bid.

Alex Brazier: Thanks, Oscar.

Oscar Pulido: Thanks for listening to The Bid. Don't miss the upcoming episode on our mid-year outlook later this month. Subscribe to The Bid wherever you get your podcasts.

Disclosures

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. 

For Investors in Switzerland: This document is marketing material.

In South Africa: Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288.

 ©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.

Oscar Pulido: Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

What's the difference between developed, emerging and frontier markets? How do differences in per capita wealth, technological advancement, and liquidity affect the investment opportunities across these various economies?

Here to shed some light on this topic is Emily Fletcher, portfolio manager from BlackRock's Fundamental Equities business. Emily will highlight some of the risks and opportunities that emerging markets present and provide her observations as an investor who is meeting with companies and handpicking stocks across the world's developing economies.

Emily, welcome to the bid.

Emily Fletcher: Thanks so much for having me, Oscar. It's great to be here.

Oscar Pulido: So, Emily, maybe we could start with a simple definition, emerging markets and developed markets, we hear these terms a lot in investing, what's the difference between the two and then why is it so different to be investing in emerging markets?

Emily Fletcher: I think there's a bit of a misperception around emerging markets that they're countries that are less economically developed and poorer than developed markets. And whilst that is true for some countries such as your India or your Indonesia, which do have a much lower GDP per capita, it's not at all true of countries such as Qatar and the UAE, which are some of the richest in the world. It's also not really about level of technological development. Korea, for example, is extremely developed from a technological perspective.

Actually, definition of emerging markets is all about the level of development of the stock market, its settlement custodian, currency trading systems. Countries are analyzed and they're split into two buckets. Those that have the most developed systems in place, classified as developed markets, and those with less comprehensive trading systems classified as emerging markets.

Also, I think in the majority of cases, there tends to be a difference in the level of institutional development between emerging and developed markets with the institutional frameworks stronger within developed countries. In terms of what really sets apart emerging markets from developed markets, I think it’s the complexity, the volatility, and the dispersion that we see across the universe.

In terms of complexity, we're talking about 25 countries, each of their own political and economic cycles. They all have their own currency and bond markets. In aggregate the markets trade for 20 plus hours a day over six days a week, whereas developed markets tend to have harmonized economic cycles. In terms of volatility, emerging market index has had a peak to trough move of more than 20% in 19 in the last 20 years. And on top of these index level moves, we see huge dispersion between stock performance. Typically, two thirds of the stocks with emerging markets move more than 40% in each year. So, this makes it a really fantastic place to be an active investor because you'll get an opportunity to buy most companies at some point during each year.

I think there's a perception that high volatility is a negative feature for emerging markets. The historic emerging market narrative was that countries would grow faster than in developed markets and given how deeply cyclical all of the emerging markets are individually I think this illusion of smooth growth was never an accurate portrayal. Instead, what we really have is a wild, exciting, volatile hunting ground for active investors who can benefit from the complexity of 25 nonsynchronous markets, offering 4,000 highly diverse stock opportunities.

Oscar Pulido: So, you mentioned a few things there, and maybe just to recap, while the term emerging markets is one terminology to describe all these different countries, they can be very different. Some on a per capita basis are poorer, some are actually quite rich. The stock markets could behave very different from the economies. There's a lot of volatility, which I think for you as an investor represents good opportunity. We've heard from Wei Lee, our Chief Investment Strategist at the BlackRock Investment Institute, she's talked about how emerging markets are an interesting, investment opportunity, part of the reason being that coming out of the pandemic, the central banks in these countries were quick to raise interest rates and perhaps they're towards the end of that rate hiking cycle. So, talk a little bit more about what other reasons are there that excite you about emerging markets?

Emily Fletcher: Yeah. First to just follow up on Wei Lee, was saying, I agree. Inflation did start to rise in emerging markets and developed markets about the same time, so beginning of 2021. But interestingly at this point, the emerging markets generally started to hike interest rates, but in developed markets, we didn't see them start to hike until about a year later, so early 2022. And emerging markets have generally continued to hike interest rates since then. So as a result, for most of the countries in emerging markets, interest rates are now higher than inflation. Most of them have a positive real interest rate. And this early increase in those rates has meant that in some countries, particularly those in South America, we have seen an economic impact already feeding into the economies. And we've seen that slowdown in economic activity already happen in these countries, as we are perhaps worried about in more of the developed markets now.

When we went through Covid, developed markets such as the US the governments were able to give their population some handouts. And that was something that we didn't see in emerging markets to the same extent. They just didn't have the same capability to replicate that and in a way that has some benefits for emerging market now, because we are seeing lower second round impacts going into inflation to the point where we think inflation has fairly clearly peaked across the majority of emerging markets.

So emerging markets, they started raising interest rates first, and they're likely to be the first to cut interest rates. And as those interest rates come down, then we should see consumers and

companies that will end up with more money in their pockets as the cost of debt becomes cheaper and we should then see growth accelerate across emerging markets. And that turning point is normally a time when emerging market, equity markets, start to do quite well. And it's a good time to think about investing into these countries on the back of that cyclical activity pickup. I think another area to comment on would just be the huge credit expansion we've seen in China year to date. So, in the first quarter, China added total social financing of about $2.1 trillion, and that's something like adding the entire Indonesian banking system every month in terms of size. We did see significant slowdown in Chinese economy last year as they battled covid but with this credit extension, and we think we, that should really drive significant benefits with reopening, particularly with this liquidity we're expecting transaction volumes and values in the property market to pick up, and then as consumers feel wealthier for that wealth effect to then trickle down into growth in a lot of Chinese consumer areas.

I think another area is just around margins, so emerging markets have really progressed from copying to innovating to in some areas now actually being global leaders such as electric vehicles or leading-edge chip manufacturing. And these are areas where we now see higher margins in emerging market corporates versus their developed market peers.

So far, this isn't the predominance of emerging market investing and the aggregate margin difference across emerging and developed markets still remains high, but it would be really interesting if we could see any closure of this gap in the future, which would then mean that emerging markets, which are currently trading on trough from very low earnings, could arguably look really interesting from a valuation perspective.

Finally, I think it's just important to think about liquidity. For the majority of my career, emerging markets have been fairly out of favor, and as a result of that, I think we have seen liquidity come down in terms of the volumes that are traded on emerging markets, stock markets. There's a lot of commentary at the moment that, investors are looking for the Fed to stop hiking, looking for a pivot, and post that, they'll start looking at emerging markets, but I think we do need to remember that liquidity is low in these markets and sometimes it's actually hard to buy post-event when everyone is trying to move in the same direction.

Oscar Pulido: So, Emily, you've painted a really interesting background of the opportunities in emerging markets. I heard you mention profit margins are lower than in some of the developed markets, like the US, you’ve talked about companies that are, becoming innovators and leaders in their space. You also mentioned China. I think the amount of stimulus that China has enacted being the equivalent of the banking system of Indonesia, it feels like you could spend all your time just looking at investment opportunities in China as the largest emerging market but talk about maybe what other countries are of interest to you.

Emily Fletcher: Yeah, I wanted to pull out a couple of opportunities here actually. And the first one of them would just be Indonesia, which is a country that we think has seen a fairly substantial improvement in its economic outlook over the last few years. Indonesia's the world's largest exporter of nickel. Historically, nickel was predominantly used to make stainless steel, but by 2030, we think nickel will predominantly be used to make batteries for EV cars. So, Indonesia in 2020 exported nickel to the of about 12 billion. by 2025, that'll be $45 billion, already a pretty substantial growth. Now it's a country that historically has borrowed from abroad, it's run a current account deficit to finance its domestic growth. But the size of the increase

we're seeing in those nickel exports is such that that structural current account deficit was about 3% of GDP pre-covid. It's already shrunk by about one to one and a half percent of GDP. And we think it will do the same again over the next couple of years. So that should have the benefit of making Indonesia much less reliant on borrowing from abroad and needing to attract foreign capital. And that should result in improved domestic liquidity in higher domestic economic growth. The cost of borrowing in Indonesia should come down slightly, and the volatility and currency movements in Indonesia should reduce a bit, and that should make Indonesia a much more attractive investment destination.

And another country I'll pull out is very much a cyclical opportunity. But I think Brazil stands out at the moment. It's a country in the world, with the highest real interest rates. So, interest rates are very high, despite the fact inflation peaked in March, the economy at the moment has slowed. Brazilian companies and consumers have struggled with that really high cost of debt. And part of the reason that rates have been so high is that investors have been concerned, post the election of Lula as President in Q3 last year, that his administration would pursue very expansionary fiscal policies, but this really hasn't been the case to date. And as we go into the second half of this year, Brazil's likely to be in a position where the central bank could cut interest rates. As they do the pressure on companies and consumers will ease and we should see an acceleration of growth and that is a market that's currently trading around historic trough valuations, so I think potentially a cyclical opportunity there.

Oscar Pulido: When you talk about some of these individual countries you've mentioned the exports of nickel will be very helpful to Indonesia, so does that help every single company that's trading in Indonesia or does the economic backdrop in Brazil help every single company? Or do you then have to dig in and really sort of identify the winners and losers from that economic backdrop?

Emily Fletcher: Mm, so emerging markets is really about pulling together all the sources of information. So, what is happening in a country, those trends I talked about in Indonesia and Brazil are really important in kind of setting the backdrop for where you should be looking for stock opportunities. Then it's about digging in, as I said, it's about 4,000 different stocks within emerging markets that will all have their own specific company drivers. and all trade again with additional dispersion on top of that. So, you can see that that is just a huge amount of information to pull together, and you really want all of it to be pulling favorably, to be finding the best opportunities, so to be a great company, a great stock in a great market, and to pick it just before the turning point and then you can do really well. And that need to have all of those boxes ticked, I think is again, what makes emerging markets so interesting from an active perspective that you can, really find some interesting opportunities in and amongst.

Oscar Pulido: And Emily, it turns out you have a special expertise in frontier markets, so help us understand what is the difference between an emerging market and a frontier market?

Emily Fletcher: So, I really see Frontier markets as a sub-category within emerging markets. If we go back to thinking about the difference between emerging markets and developed markets, being around the level of development of the equity markets, frontier markets is really just a step down from that. It's the set of markets that are even less technologically developed than emerging markets, or it can be the set of markets, that trade with lower liquidity than emerging markets, so where you see a much smaller volume of trades executed over any given year. And actually, what's been interesting over the last 10 years since I started looking at frontier markets is that we have seen quite substantial technological advancements in a number of stock markets, that would've

historically been considered frontier markets such as Saudi Arabia or Qatar, and very much now promoted to become emerging markets.

Oscar Pulido: I think there's a reputation amongst these emerging and frontier markets of high volatility and in fact, you touched on it in some earlier comments about these big swings in stock markets that you see. How do investors manage these dramatic ups and downs?

Emily Fletcher: I think that's a very fair point to pull out and especially in some of these smaller markets in and of themselves they can be inherently and deeply risky and volatile.

But one of the really interesting things about these smaller markets particularly is that if you create aa basket of them put together a portfolio of them, you actually generally end up with something that in aggregate is much less volatile than if you were to look at emerging market indices at that level.

And it's a really interesting one, but they actually are still places in the world where you can find diversification. In these smaller markets and tends to be the smaller you, get with markets, the more there's a dominance of local political and economic events, and those events tend to impact performance more.

There are generally minimal trade flows between smaller, emerging and frontier countries, so problems in the real estate market in Vietnam will tend to have no impact on the level of oil production in Argentina. Recent election in Thailand had no impact on the subsequent Greek election. Constitutional change in Chile won't impact interest rate movements in Saudi Arabia. So, it's very interesting that you still have huge benefits of diversification from looking at some of these smaller markets.

Oscar Pulido: So, you, mentioned that you're an active investor, which means you're picking individual companies in each of these emerging and frontier markets and part of being an active investor, I imagine, is you're visiting these countries to be on the ground to understand what's going on in, the local economy. So, what are some of these countries you've visited and any good stories about some of your recent visits?

Emily Fletcher: So, I've been to about 35 emerging market countries now. Actually, I always find it rather unnerving traveling with security. I think it's having grown up in the UK I'm not used to seeing guns around at all. Luckily all the guns I've seen on my travels have been those held by my security detail. But there was one time in Nigeria where I was followed by Security on a track with, probably the largest sort of sub-machine guns I've ever seen that I did find a little bit unnerving.

I did get the opportunity once to visit the Zimbabwean Stock exchange while it was still using an open outcry system, which was absolutely fascinating to see but is now transitioned to a fully electronic system. Otherwise, I reckon I probably could have a successful second career as a travel agent. I would highly recommend visiting the mountains in Oman, the Polo Club in Lahore, Pakistan, the dead cow oil fields in Argentina, and there's some fantastic palm trees inside the Central Bank of Kuwait. My favorite food comes from Vietnam, but the best meal I've ever eaten was in Mexico.

Oscar Pulido: I thought I had some interesting stamps in my passport, but I'm realizing that it probably pales in comparison to yours. Emily, thank you for giving us this tour of, emerging and frontier markets and thank you for joining us on The Bid.

Emily Fletcher: Thank you. It's great to be here.

Oscar Pulido: Thanks for listening to this episode of The Bid. On the next episode, we will consider the world of cash investing and the opportunity for investors in an environment of higher interest rates. Make sure you subscribe to the bid wherever you get your podcasts.

Disclosures

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. 

For Investors in Switzerland: This document is marketing material.

In South Africa: Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288.

 ©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.

Oscar Pulido: Another month, another Fed meeting, and yet another increase in interest rates. For the first time since 2007, the federal funds rate in the US is above 5%. Where does the Fed go from here? Have we reached a peak in inflation? Here to help answer these questions. Here to help answer these questions, I'm pleased to welcome Gargi Chaudhuri, Head of iShare's Investment strategy. Gargi will help us make sense of today's market environment and the investment opportunities that lie ahead.

Gargi, thank you so much for joining us on The, Bid.

Gargi Chaudhuri: It's great to be here. Thank you for having me.

Oscar Pulido: Gargi, it's May, the Fed has just raised rates for the 10th straight meeting. We're above 5% on Fed funds rate for the first time since 2007. Inflation is still a problem. The markets are volatile, and we've had the collapse of another bank this time, First Republic, getting taken over by JP Morgan. So with all of those concerns that, you're hearing, what are clients saying right now and how are you responding to them?

Gargi Chaudhuri: So to your point, we've had the fastest rate rising cycle with 500 basis points of rate hikes in a course of 14 months. It's hard to believe now that in the beginning of last year, rates were still at zero. the big thing that clients are reiterating over and over again to us is the need. To be flexible in this time, the need to be nimble in moving around portfolios because the story keeps shifting, right?

So, if we look back to the first quarter of 2023, when you came into January was actually a pretty good month. Remember, that was when the reopening of China story came about. Then you had February, not such a great month, then March, nobody saw the bank turmoil coming about, but that happened.

April comparatively was a lower volatile month, but of course you had some idiosyncratic risks and now we're sitting at May with what we think is the final rate hike for this cycle. So I think there's a huge amount of discussion around nimbleness in portfolios. That's one thing. And the second thing that we're talking a lot to clients about is really the return of income.

Clients are so excited that you can actually earn some income, especially in fixed income and where they should do that, how they should do that, and how they can reallocate back to the fixed income market. So that's been very topical for us. And this is across clients in the us LatAm and Canada, and globally,

Oscar Pulido: As you mentioned, every month has been different in 2023, so there's been no consistent pattern. Tell us a little bit about, the three P’s framework that, I know you've been talking to clients about. What are the three Ps?

Gargi Chaudhuri: One of the things that we discuss when we talk about markets is, what are the important things that clients should remember as they're thinking about asset allocation? What will drive markets right now for the next quarter, for the next few months, and at this juncture.

Those are number one. The Pause, that's the first P. Number two, profitability, and the number three, portfolios. So if we look at each of these individually and why they matter now. The first one is really about the pause, which is that the Fed has raised rates by 500 basis points, over 10 rate rising cycles over 14 months, and now, they pause.

The Pause is not the same as the other P word, which is pivot, which many investors expect. Actually, the market expects the Fed to cut rates. We don't think that's going to happen. And why not another P for you? Prices! Inflation remains pretty high, much above the Fed's target, which is 2%. As of right now, we're sitting in May, when we last looked at inflation numbers, they were closer to 5% than to 2%. So, all of this allows for the Fed to pause, but not pivot, not to cut. So that's the first P.

Also we're talking a lot about profitability, which is actually related to one of the, Ps, which is prices in a world where prices are going up, where inflation has been a consistent problem over the last 18 months.

Looking at companies that have the ability to pass on prices, that have the ability to have margin resiliency, to be able to be profitable, even in a period of slowing growth is really important. Finding those companies, finding those sectors that have pricing power, that have profitability, which have earnings growth, which have a strong balance sheet.

Those are really important. And then we'll move to the third P that we spend a lot of time talking about. As I mentioned earlier, which is around portfolios and specifically the role of fixed income in portfolios. How at this juncture with the Fed Funds rate being a little bit over 5% allows for investors to earn a lot of income in very high-quality parts of the market. So, you can sit in treasuries, which are backed by the faith and credit of the US government and earn 5% in certain parts of the treasury market. You can earn close to 6% in certain parts of the very high-quality corporate credit market. So again, thinking about the portfolio construction in this environment is really exciting.

Oscar Pulido: You mentioned Pause, and that's your view that the Fed is going to, take a chance to kind of just assess what they've done over the last 10 meetings for the camp that's out there that thinks that they will pivot, that they will cut rates. What's their argument as to why they think that will happen?

Gargi Chaudhuri: So, I'll talk a little bit about why we're in the pause camp, and then talk a little bit about the Pivot camp.

So, the Pause camp is entirely because of inflation, Congress has given the Fed two mandates. The first mandate is to have prices be stable which is defined by the Fed as 2% on PCE. The second mandate is having the job market remain pretty resilient.

Now they are doing very well on the job market front, unemployment rates as of right now, are sitting at close to 50-year lows. We haven't seen a labor market this strong in a very long time. But on the inflation side of the mandate, they are actually not getting to that 2% level that is their target. So, they don't necessarily need to raise rates higher at this juncture, 5% is a pretty high and a pretty restrictive level of interest rates, at the same time, they don't really need to cut rates either because they're so far away from their inflation target and the labor market remains strong.

The question is why then is there so much discussion and debate around whether the Fed should cut rates? There have been some financial cracks that have emerged more recently, as you pointed out earlier, was in the banking sectors where, especially for the small and medium sized banks, they have begun to come under a meaningful amount of pressure and the fear that pressure continuing would mean that credit will continue to tighten.

Small and medium sized banks are a big resort for small businesses for loans. If you're a small business in this country, you are responsible for a majority of the jobs of this country. So, if small and medium sized businesses are unable to get the credit that they need from the small banks, that becomes a problem for the entire economy in the US. So, investors and the market actually, that is now pricing in that 'pivot narrative' that is pricing in rate cuts by the end of 2023 is actually foreseeing this credit tightening becoming a larger issue as time goes on and the Fed needing to cut rates to stimulate growth as a result.

I'll also say that certain interest rate sensitive parts of the economy have already begun to show some slowing. You've seen that in the housing data, you've seen that in the auto sector. So there have been certain manufacturing components that have begun to slow down. there is the senior loan officer survey we were talking about earlier, Oscar, the Slews that's become a very common or very hip data point to look at these days because the Fed has popularized it and talked about it quite a bit.

All of that is showing a little bit of credit tightening in the economy as well. So those investors that are thinking about rate cuts for the remainder of this year are thinking about that because of the slowdown that is already emanating and expectations of more slowdown because of the impact on small and medium sized banks and the ramification that would have on the small businesses.

Oscar Pulido: So, can we go back then to profitability? Now you talked about quality companies and what does that mean? Are there particular sectors or industries that when we talk about quality, that tend to come to mind more than others?

Gargi Chaudhuri: So, when we say quality companies, what we really mean is a group of companies or certain sectors, that have really strong fundamentals. And what do we mean by those strong fundamentals? We talked a little bit about the ability to be profitable. It's really important for them to have low debt, especially in a world where interest rates are higher, where debt servicing costs can be going up, having that low leverage ratio can be important, and having free cash flow. That

ability to weather slowing economic periods and having the cash flow that allows them to do so. And all of that can be manifested in companies that are higher quality companies, so they have stronger balance sheets. Now, in a world, if interest rates were back to being zero, let's say we were back in 2020 and it rates were at zero.

I think in those environments that resiliency of balance sheet isn't as important because rates are at zero and companies, are not paying as much for the financing of their debt. Real rates were actually negative instead of, the very positive, amounts they're at now.

A lot more could be done in a zero real rate environment if you were a company that wasn't as profitable because you didn't have that debt burden or that debt financing burden. Right now though, we are in the camp of higher for longer. We've reached that higher part. We've gotten to above 5%, we haven't reached that longer part. So, the longer is going to happen for the remainder of the year, and in that environment of staying higher for longer, we think that quality characteristic really comes to head in both the equity as well as the bond markets. So, looking at sectors like energy, technology a lot of free cash flow, strong balance sheets. And frankly, those are the parts of the market, that have done very well. people have gravitated towards those very strong companies with strong balance sheets that have cash flow and are profitable and have earnings growth power.

Oscar Pulido: And then maybe to go to portfolios, you touched on there's income in the market now with interest rates having gone up, the investments in one's portfolio are generating more cash flow. You look a lot at flows. Where are people, what are they buying? What are they selling? what are you seeing are investors allocating away from stocks into bonds because of that income that they can generate? Or are they moving out of cash or is a little bit of all the above?

Gargi Chaudhuri: So first of all, last year, as we all know, and experienced, 2022 was just a rough one for investors, whether or not you were in the safest parts of the, market, which is, which tends to be bonds or if you were in the equity market, which tends to have a little bit higher volatility, you had a pretty rough, investment period for at least 20, 22.

Many investors had they chosen to be in cash, would have actually had a safer outcome. This year though, what has happened is quite the reverse. Both equity markets and bond markets have done well, but many investors because they had this negative experience last year have chosen to remain in cash. So, one of the things,

we are seeing investors do is actually step out of cash for the first quarter of this year, we saw them step out of cash to the very front end of the fixed income market, so to treasuries and investment grade credit in the front end, so you could earn a lot of income, but not take a lot of interest rate.

And more recently, in April and May, we're actually seeing investors taking a little bit more interest rate risk in the fixed income markets, but still remaining high quality. Still looking at companies or sectors that are most highly rated within the fixed income market, so whether that be treasury bonds, or whether it's very strong companies like investment grade credit rated companies. So, we are seeing those flows gravitate towards the fixed income markets.

The other thing that I would say that has been more of a recent phenomenon is actually investors moving away more from the value like stories. And when you think about the different types of, investments there are there's value and growth. Value of course tends to do well and the part of the business cycle where the growth is beginning to take off and now when there's some fear or

expectation of a slowdown, growth is where people are allocating capital to. Our research shows that growth does make sense, but allocating to those areas of the growth companies that are still fairly priced, so growth at a reasonable price.

And again, energy sector and certain areas of tech sectors could be things that investors could consider. The last thing that we are looking at or that we have found interesting in flows is gravitation towards gold, which is interesting. you have the trifecta of real rates that are moving lower remaining constant, you have a little bit of a fear, a flight to quality, if you will. And you also have, investors are, that are worried about a growth slowdown. And all of that has pointed to investors moving towards gold. So that's something, it's a pretty recent phenomenon, not something we often talk about, but certainly gold has, begun to shine again, to use, a very overused expression, but certainly seeing, some flows there.

Oscar Pulido: As you point out, last year was such a difficult year that investors are saying, if I had been in cash, I would've been fine. And so maybe I should do that again in, in 2023. But you've highlighted a number of different investment opportunities that have presented themselves this year and that you think are still very worthwhile going forward.

Gargi Chaudhuri: Yeah, look, if you need the cash for liquidity reasons, of course holding cash, especially, depending on how you're holding it, you can be something that is absolutely needed in your portfolio for liquidity reasons, and that makes sense.

But if you're holding it for fear reasons, if you're holding it because you expect an exact repeat of 2022, what I would say is the valuations have changed meaningfully, especially in the fixed income market. And this is where earning some yield in the fixed income markets and having that ability to make some total return in the fixed income markets, that opportunity has now risen because the Fed had not raised by 500 basis points this time last year.

Oscar Pulido: I'm just curious, you speak to a lot of clients and investors around the world, whether it's in the US and Latin America, Europe, you name it. And so, is there a common question or concern that you hear from them?

Gargi Chaudhuri: There’s a couple. One that comes up a lot is around the fears of a global recession. Interestingly, that was something that was coming up a lot towards the end of last year. There was a huge fear of a stagflation, so an environment where growth is slowing down, but inflation's remaining high. That slowed down pretty meaningfully in January, and perhaps some of that was because in Europe the winter wasn't as bad. China had the reopening. There was some sense of optimism, so that slowed down.

But more recently, I would say over the last three or four weeks, the questions around a recession have come back. They're not around a stagflation this time around, they're much more around a recession. If that's going to happen in the US if we expect that in Europe, so that's something that's definitely top of mind. And what should investors do in a recessionary environment? Where should they turn to in a recessionary environment? Especially because last year fixed income wasn't that appropriate allocation. So having that conversation around where in fixed income and why this time is different because of course we talked about, the US but globally, many other central banks like the Bank of Canada, for example, done with their hiking cycle. If you look at, Bank of England, they're closer to being done than not. And ECB probably still has some more rate hikes to go, but again, many of them have moved a lot further on that hiking process.

And then the second thing for the first time in a long time, US investors are asking about emerging markets as an option. So, I think that's interesting because I hear from for example, investors in the LatAm or investors in Europe who have historically been allocated to the emerging markets, especially in the equity space, but in the US this is the first time that we are seeing US investors ask about emerging market debt, local currency, emerging market debt, and single countries within emerging markets.

So not viewing emerging markets as a monolith, but a view around should we be allocating to India because they've heard about India now being larger in population than China, or thinking about China because of the reopening or thinking about Mexico because of friend- shoring.

So, the view of US investors thinking about, different emerging market countries has been really exciting and something that's new and hopefully will continue for some time.

Oscar Pulido: I'm listening to the comments that you're making and the statement that, or the phrase that comes into my mind is, it's a marathon, not a sprint. When you think about the discipline that you need to exhibit with long-term investing, and speaking of marathons, one thing I learned about you recently is that you've run 25 of them, in your life. So talk to us a little bit about the parallel between the marathons that you've run and what it is that your day-to-day looks like working in iShares investment strategy.

Gargi Chaudhuri: Thank you. Love this question. I want to write a book about this one day. So a couple of things immediately come to mind, when you train for a marathon, you have to put in the work, You have to go for your long training runs, and I think the work that we're doing with our clients and helping them understand the markets, and invest accordingly.

The other one I would say is, and I often don't do this, but I should, and after 25 marathons, I've learned the lesson is start slow and then get comfortable because it is a long run. And similarly, to running, I would say the same for investing.

Start slow. If all you can do is take a small amount and put that away in a diversified fashion. And that's all you can do. And you don't have to get too crazy. Don't have to listen to every earnings call of every company. You don't have to do that. Later, once you've gotten used to the investing lifestyle, once you've gotten used to looking at data or earnings or any kind of economic indicators, you can become a more sophisticated investor.

But start slow. The last thing, I guess I would say, and I use this for markets, but also for people's careers, run your own race. When you're running a race, you might be on mile 20 dying and someone might pass you by running seven minute miles. They are having another race. You are not running their race.

Similarly in investments, if you have a friend that's invested in something very cool and something very esoteric, that might be amazing for them. But you think about your own portfolio and what it needs. So run your own race in the markets in your career, but certainly in the investing landscape.

Oscar Pulido: It's great insight and we wish you luck on your 26th marathon whenever that takes place. Gargi, thank you so much for joining us on The Bid.

Gargi Chaudhuri: Thank you.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you enjoyed this episode, check out our recent episode with Way Lee on the new investment playbook in action.

Thanks for listening to this episode of The Bid. On next week's episode, I'll be talking to Emily Fletcher for a Stock Picker's Guide to Emerging Markets.

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Mark Wiedman: Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Mark Wiedman. Today we are going to India. You know that India has the biggest population in the world, but what you probably don't know is that it is leading the world in digital payments.

The man inspiring this leap forward is Nandan Nilekani. He is the co-founder of Infosys, the digital services firm and for 14 years he's dedicated himself to the digital transformation of India. I met with Nandan in Mumbai this year and invited him to share his story at our new Hudson Yards office in New York. In this episode, you'll hear about how Nandan landed the job to create this digital ID system. Why India has been able to leapfrog technologies and how building a digital public infrastructure has brought a new model of economic growth to India. Welcome Nandan. Nice to see you.

Nandan Nilekani: Thanks Mark. Thank you for having me here.

Mark Wiedman: The building out of Infosys. What was the founding vision and what is it today?

Nandan Nilekani: Well, the idea of Infosys was to create a globally respected technology company and it took us a long time because we began in 1981. And, uh, that was an India that was very different. There was no economic reforms. It was difficult to do business. But I think come the nineties when India had the first wave of liberalization we were able to grow very rapidly. And we set many, many records. We were the first Indian company to list in the U.S. We listed in NASDAQ in 99. We are among the first to deal with foreign investors so we introduced a lot of sort of cutting-edge reforms in the way capital markets work in India and set the bar for corporate governance and so on. And we have 1700 clients around the world. And, it's been a very successful 40-year journey.

Mark Wiedman: What was your contribution as a leader for the many years you were with Infosys full-time?

Nandan Nilekani: Well, I was primarily on the business side. I was looking at global sales, global marketing. And I was also the CEO for five years from 2002 to 2007.

Mark Wiedman: So we get into the mid-2000s, you're CEO. Take us on your personal journey from there to when you started embarking on the transformation of your country.

Nandan Nilekani: So I stepped down as CEO, I was the co-chairman. I also wrote a book in 2008, called Imagining India. It's a broad sweeping book about many ideas - why urbanization didn't happen, why education didn't happen, why something else happened, and so on. And one of the ideas was, let's also look at having a Digital ID and use technology to make a difference. So that was embedded in that book somewhere.

And then I got a call from Prime Minister Manmohan Singh, to implement this idea. And he said, we have this project for giving everybody an ID. At that time it was not a digital ID, it was just an ID. It had to be unique and unique meant that Mark gets only one number in this system. And why did we need this ID? The two reasons.

First was India was building its welfare state and was going to be sending money to people and wanted to make sure it reached the right person. Because without an ID, you can't do that. The second reason was that India didn't really have a very robust birth registration system in those days, and many births were not registered because the birth happened in the village far away from the district, you couldn't get a birth certificate. So, in some states, more than half the babies born did not have birth certificates. Again, that did not matter when they lived their entire life in the village, but the moment they started migrating without ID, they couldn't get anything done. They couldn't board a train. They couldn't get a job, they couldn't open a bank account. They couldn't explain to the cop who stopped them. So ID became an essential you know, asset for people. So both the inclusion of getting everybody into an ID system and the efficiency of giving money directly to them, drove the government to think of the ID project. It had actually begun conceptually in 2006 by the time I came on the scene in 2009, it was ready to roll and I stepped into that job.

Mark Wiedman: So that was the genesis, the birth moment. What was the founding set of actions you took in 2009?

Nandan Nilekani: So I brought a bunch of very good bureaucrats from the permanent bureaucracy, but I also needed deep technologists. I assembled a bunch of technologists from all over the world who all volunteered to make this happen. And then I brought this group together and they were from two different cultures. So I didn't want internecine warfare. So I set such an audacious goal that they forgot about the differences and focused on the job.

Mark Wiedman: And your big audacious goal was what?

Nandan Nilekani: I'll just take one intervening point. I served in the government from 2009 to 2014 and when I began my term, I had made a public statement that I, I would deliver 600 million IDs and then step down, which I did.

Mark Wiedman: So zero in 2009. 600 million by 2014. When was your first ID issued?

Nandan Nilekani: September 30th, 2010. Peak was one and a half million a day.

Mark Wiedman: I think something the, particularly the U.S. audience might not fully appreciate is that when you started, you had a huge portions of the population that had no formal other than the voting booth had no real actual status in the eyes of the government.

Nandan Nilekani: Yeah, exactly. Because the lack of birth certificates. In the U.S., maybe 98% of births are registered. So a birth certificate becomes your root document based on which you vote or whatever, decide your age. But if you don't have a root document, then how do you take a few hundred million people and give them an ID and they have no id. That was the challenge we had, and the only way we could do that was a very complicated technological thing called biometric de-duplication, where we took each person who enrolled and compared them to all the people we had in the database to see whether the person was duplicate or not. So if we had 500 million people in the database and a million people enrolled, we do 500 trillion matches every day to eliminate duplicates, very sophisticated technology wise, but the politics was more difficult than the technology.

Mark Wiedman: India is famously decentralized so getting all those individual states to sign up, how did you get it done?

Nandan Nilekani: First of all, I made it non-threatening because what happens in any organization and in the government is if we come with a new idea, they would've said, what do they do to me? So I had to prove to people that this was not in any way affecting anybody. All I was saying, John is John, Ashok is Ashok, Mohammad is Mohammad. Whether John deserves a passport, the passport guys will decide. Whether John deserves a driver's license. So I said, I'm not taking away your power or agency, I'm just helping you do your job better. So the moment you position this as something enabling them to do the job better, and you don't take away any of their power, they're fine with it. So I had to do that with all these players.

Mark Wiedman: So you get to 600 million, where are we today?

Nandan Nilekani: Now we are at 1.3 billion people have the ID.

Mark Wiedman: So right now, 1.3 billion. . Indians have the id. How do they use the id? What are the applications?