RICK RIEDER shared these views at the Morningstar Investment Conference, India. Rieder is managing director and chief investment officer of global fixed income at BlackRock. He is responsible for roughly $2.4 trillion in assets.
What is your view on Emerging Markets, particularly Indian debt?
China has gone through some volatility recently and it has caused some reason for near-term concern about keeping exposure nominal.
But India is an interesting opportunity relative to the rest of the world.
The economy is moving along pretty well. There's still slack in the economy. The markets have priced in a lot of anticipated hikes from the central bank. We have a reason to believe the currency could be stable to improving over time. India is a place where we've done some investing. It's still a challenge like a lot of countries in the world today that are not energy independent. There's still a challenge around negative exposure, I should say, to shocked energy prices, which is a potential. But India is a place where we've found some opportunity in the credit markets.
Our EM exposure is lower than it's been in recent history, despite the fact that yields are attractive. EMs are in and will continue to be in a rate hiking cycle to stave off inflation. And somewhat challenged by growth in these energy dynamics for some places. So, I'd say our EM exposure is lighter than usual. India, Mexico and Indonesia are some places where we think there's general stability and where we have some exposure.
In terms of thinking about broad systemic risk, is there anything out there that worries you?
The dynamics around China are something to keep a close eye on today. I think people underestimate how big their influence in the world is. Looking at the size of GDP. I mean, you go back 20 years ago, it was $1 trillion economy, equivalent economy, it was at 16 or 17 now, and it's just – the influence of global trade and geopolitics and some of the regulatory dynamics that have happened recently, the property sector dynamics, so China, because of its global influence is the number one thing I focus on from a risk perspective. The second – and again, I'm throwing out the obvious – for there's a COVID reacceleration that is concerning.
The other one is, I think the liquidity in the system is so big today, and the overzealousness around structures and leverage and volatility being low relative to the risk, we're seeing, and I think you'll continue to see more idiosyncratic risk play out and potential pullback of risk taking. And I think one of the things about quantitative easing that it does is it reduces volatility in the system, because the thesis is, they'll just keep going until they fixed the problem. When you start to pull it back, all of a sudden, the idiosyncratic risks start to come to the fore. And so, anyway, that – and then, if those were to become more significant, markets pull back, and they go on pause for a bit of time. And I think, like I said, I think QE, I think it's gone on too long, and I think the central banks need to pull it back a bit, particularly in the U.S. And I think it's healthy. But landing the plane softly is a really hard thing to engineer, particularly when you put so much in for such a long period of time. So, that's something I'll keep my eye on.
I'm not that worried about durable, long-standing inflation. But you know, when you got it, like I say, you got to manage your portfolio (assume), and maybe others worry about it, and maybe you do get some shocks. But that's one that's definitely – because it will require – I mean, I think, because part of the central banks waiting too long, the idea of, oh, now we've got to try and tighten aggressively, I mean, that is the markets are not good with that. And it's part of why I think that central banks need to tap on the brakes a little bit.
With rates where they are, we see a hunger for yield. Your views in terms of the traditional 60-40 portfolio. How do you think about that broad asset allocation today versus what you would have recommended maybe the past 30 years or so?
It's rapidly changing. If you'd said to me a few months ago, I'd say 60-40, it's like that's something that won't work, because the rate goes – rates are so egregiously low, and the balance is owning more risk assets, equities, private equity, venture, and then hold more cash, and then get some yield in fixed income. But rates backing up, you're starting to get to levels where these yields are not – getting to be a bit more reasonable. I think rates can still move a bit higher, and I think next year, they'll move a bit higher. But 60-40 is still a tough model. And I still think holding more equities and some yielding assets. But I've been pretty interested – if you're running a pension fund today, you get these yields back and you get closer to fully funded, fixed income as a defeasance mechanism are a way to match your liabilities. We've been in a place like we talked about European high yield, the levels of cheapened up considerably.
I still think 60-40 is tough. I don't think your returns are not going to be driven by the fixed income side for certainly in the next number of months. But if we get yields back to reasonable levels, the central banks allow that to happen, that's healthy. I mean, if we got – to get – 60-40 works over the long term for a good reason, as you get income, you get some balance because the risk-free rate is a significant portion of your portfolio. But when you press rates too low, it loses its efficacy. And I think if you get rates back to a more stable equilibrium, I don't think we're that far away. Then, 60-40 becomes interesting.
Even the front end of the yield curve – market is now starting to price in hikes. Markets were like the Fed would move to – I mean, our most good economists saying 2024-25, you're pricing in almost two hikes in '22 and three hikes in '23. Once you start to price things like that, and maybe the Fed doesn't do it, that becomes a hedge. So, anyway, I think it's all healthy. I'm excited about that. It'd be nice to run a bit more balance in a portfolio and a bit more – using the traditional tools to manage your risk and manage your portfolio return.
