Alternatives are essential

Mark Everitt: Today, we are joined by Wei Li, who is BlackRock Global Chief investment Strategist. And it's very timely to have Wei with us, because never before have these macrotrends, these high-flying, kind of economic trends been more important to the private markets. And we have three to discuss today that have come out of our investment forum.

One is inflation. The second is infrastructure. And the third is China. And we're looking forward to digging into these.

So welcome Wei to the floor-- to the video today. So let's get going with our first topic. And the first topic is inflation. And we're clearly seeing a lot of inflationary pressures, whether we're seeing that in goods or in wages.

And although our time frames in private markets are long, we are deploying capital now. And we have active investments now that are going through these inflationary periods. So understanding and being able to interpret inflation in the context of private markets is of incredible value and importance. So, Wei, I would like to hand over to you and hear your thoughts on the outlook for inflation and look forward to hearing from you.

Wei Li: Thank you, Mark. And it's great to be here. On the topic of inflation, which divided a lot of opinions at the investor forum that you just mentioned, our view is this we are entering a structurally higher inflation environment.

And to your point, time horizon matters. So I'm going to unpack that a bit by bit starting with the near-term restart dynamics. In a near-term, what we're witnessing right now in the US, but also more broadly as well, is that we're seeing a bit of a restart-related inflation pop. And that has everything to do with the nature of restart.

We're really in an environment, where supply is struggling to catch up with demand. If you think about last year this time, it was easy for companies to cancel their orders, to shut down their factory. It was not easy, but it can be done, but now to switch things back on, it's not as easy as just switching on a switch. So what we're seeing is the pent up demand getting unleashed across all sectors are really not being met by supply that had been somewhat disrupted. And that is leading to near-term pop inflation, which we believe can stay with us for a while.

Now going for the near-term to the medium-term, there are three sources of drivers for inflation pushing higher, which we believe are somewhat underappreciated by market. The number one driver for medium-term inflation pushing higher is this idea of supply chain, shifting from previously focusing on cost efficiency to now focusing on resiliency. And that is likely going to push up cost base.

And number two driver for inflation in the medium-term pushing higher is the fed's new policy framework, which we believe they are still operating within. They are still very committed to that. And that framework wants to push inflation higher over the medium-term in order to make up for past losses.

And a third reason for why we believe inflation will push higher is really this idea, this concept of fiscal dominance. What we have seen so far is during the course of the pandemic, debt-to-GDP ratio has increased significantly as most part of the developed world embarks on this policy revolution, policy experimentation. Now at this level of interest rates, it's fine.

It's serviceable, this rising debt level. It's manageable, but if rates were to push significantly higher, this debt pile may not be as serviceable. And that is a big challenge and making monetary policy potentially a political decision. And because of that, we believe rates, yes, they can push higher, but they cannot push higher significantly.

And that actually creates a path for inflation to push higher. So because of this reason, we believe in the near-term inflation is going through a pop, because of the restart dynamics. That is very real. That is very powerful.

That is broadening out, and also in the medium-term is pushing higher as well, ultimately taking us into a new inflationary environment that is very different from what we have gotten used to in recent decades. And a lot of questions I've been getting from investors and clients is around the how do we inflation hedge, inflation protect our portfolios. And here looking beyond the usual suspect of inflation-linked bond and cyclical and equities more broadly, investors are increasingly looking at the private market, real assets, in addition to commodities.

Mark Everitt: Yeah. It's interesting to hear you talk about real assets there, because clearly across the scope of private markets, there are some assets that just have natural protection against rising inflation. And real assets is one such area, real estate in particular. Similarly on the corporate side, private equity, et cetera, we have some resilience there as well built in.

And when you think about some asset light industries which have a lot of pricing power going forward. So that's definitely an area of focus in the private markets, but what we think is key here is taking the outlook, as you present it, and having that in our underwriting process, because resilience is actually what's going to get you through this. And that coupled with good portfolio construction, then enables us to move forward through this cycle of inflationary pressures and into the long-term and realize value over the long-term, which is what we're all about in the private markets.

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