In a tone more gloom and doom than sunshine, BlackRock CEO Larry Fink spoke today about a major test ahead for the markets as investors grapple with a changing investment environment and fears of a deepening global trade war.
The largest asset manager in the world with over $6 trillion in assets, BlackRock announced its second quarter earnings on Monday, reporting revenue of $3,605 million, slightly above the consensus estimate of $3,594 million (all figures in US dollars). BlackRock says its stronger-than-expected topline was in part the product of base fees, performance fees and technology services revenue.
The company also posted a beat on earnings, coming in with an adjusted EPS of $6.66 versus the consensus $6.55, which represented a 28 per cent year-over-year growth in adjusted earnings.
At the same time, BlackRock reported long-term net inflows of $14.5 billion, which were down from the consensus estimate of $38 billion. CEO Larry Fink chalked up the decline to investor uncertainty during these times of trade tensions between the US and its trading partners.
While refraining from calling the current climate one of an all-out trade war, Fink said that what we’ve seen so far in terms of tariffs from the US Administration and their resultant retaliatory tariffs has unquestionably impacted investment.
“It is a minor trade war [currently] but it has very little impact on global GDP; it’s just too small yet,” said Fink in conversation with Bloomberg News. “But symbolically, it is having an impact. It’s having an impact on investor sentiment and that’s what we’re seeing right now. We’re seeing investors pausing until there’s greater certainty.”
Fink says a full on trade war could be triggered by the next round of US tariffs on Chinese imports, said to include a potential $200 billion in products, and that such a scenario would likely cause a ten to 15 per cent drop in the markets.
“The market may be wrong right now in that GDP will continue to grow, that the trade conversation is not that difficult for international commerce and that M&A and share repurchase will continue. If that’s the case, we’ll wake up a year from now and the markets are going to be up,” he said. “[But] if we have a true tariff war, we’ll see the markets down ten to 15 per cent.”
Fink also spoke today of the risk involved in the current market climate where a small handful of tech stocks are driving market gains. At this point, four stocks, Amazon, Netflix, Apple and Microsoft are responsible for 83 per cent of the S&P 500’s five per cent gain in 2018.
“If you strip out a handful of outperforming tech stocks, the lack of breadth in the equity markets is troubling,” said Fink in a conference call with analysts on Monday morning. “We are at a pivotal point. Clients are struggling to better understand increased risk and uncertainty. Market dynamics are shifting, causing those clients to pause as they think about the future.”
Shares of Blackrock are down more than one per cent in Monday’s trading.
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