Investors who are overweight cash and fixed income are in danger of missing a stock market melt-up, rather than protecting themselves from a meltdown in global equities, according to BlackRock (BLK) CEO Larry Fink.
After a fall of almost 9% in 2018, including a 13.5% decline in the final three months of the year, investors took flight from equities, instead parking their assets into cash. Since then, though, we’ve seen some of that dry powder put to work. However, it’s largely flowed into fixed income, rather than equities.
Speaking after BlackRock’s first-quarter results, which widely beat expectations with 9% growth in the asset manager’s total asset base, Fink claimed the mix of flows BlackRock saw through January to March “was quite extraordinary”. Investors put $80 billion into fixed income mandates, while global equities saw huge outflows, Fink says.
Wider data, from EPFR Global for Bank of America Merrill Lynch, show that in the year to April 10, European retail investors have withdrawn $44 billion from equity funds and invested the same amount into fixed income offerings.
Investors Are Too Pessimistic
With such under-investment, on both the retail and institutional side, Fink thinks there “a risk of a melt-up, not a meltdown” in equity markets as cash is finally put to work into stocks. “There is too much global pessimism,” Fink continues.
“People are still very under-invested. There’s still a lot of money on the sidelines and I think you’ll see investors put money back into equities.”
Indeed, the MSCI World has bounced heavily in 2019, with the index up 15.5% in the year to April 16. That’s largely been a result of central banks being “more dovish than ever”. The US Federal Reserve looks likely to hold interest rates at current levels and has rowed back on the unwinding of its balance sheet, boosting equities further.
But investors have largely been caught on the hop by this combination of the Fed’s abrupt dovish turn and the equity market rebound, Fink says. “Many people thought we were going to be in a period of rising rates … so people had to rush in to invest in fixed income,” he explains.
“We have not seen that in equities … with the market rally as large as it is, I would clearly tell you at this moment that most investors are exposed by being under-invested by this time.”
With such volatility in markets, 2018 was a tricky year for asset managers with the S&P 500 Asset Management & Custody Banks sector losing 26% in the 12 months to December 31. BlackRock itself sunk 23.5%.
But the share price is up 18.7% in the year to date and results for the three months to Match 31 were ahead of analyst expectations despite its overall revenue falling 7% year on year. But assets under management climbed back above $6.5 trillion thanks to 3% year on year growth.
