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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.

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.

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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.

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

<<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.

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.​

MKTGSH1124U/M-4007442

<<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.

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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.​

MKTGSH1024U/M-3938330

<<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. 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.​

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-3924445

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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.​

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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.

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

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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.​

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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.

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.

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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.

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

<<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.​

MKTGSH0924U/M-3820671

<<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.

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.

<<THEME MUSIC>>

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.

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-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>>

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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 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.

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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.

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

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-3658779

<<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.

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.

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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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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.​

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-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>>

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-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.

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MKTGSH0324U/M-3399493

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.

<<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-3399745

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.

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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.

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.

<<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-3342452

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.

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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.

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>>

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-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>>

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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>>

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