Last week, a delegation of BlackRock, Inc. investment house executives arrived in Israel for a conference whose goal was to attract institutional investment overseas through iShares' exchange-traded funds (ETF) controlled by BlackRock. In an exclusive interview with "Globes," the BlackRock executives explain why it's worthwhile to be especially aggressive right now, and to invest in shares and in emerging markets, and why it is better for investors to ignore the Iranian threat when making investment decisions.
"The current economic environment is still tough. There is high level of risk aversion in Europe and the Middle East, and the chance of running into problems exists. It is difficult to deal with this, as it has been over the past year. However, the most important issue is that the global economy is recovering, mainly in the US," says BlackRock head of investments Fiduciary Mandate Investment Team Richard Urwin. The team handles asset management for institutional investors.
Urwin draws his optimism about the market from macro data in the US and leading emerging markets, from the Fed's commitment to leave interest rates at extremely low levels at least until 2014, and from the fact that, in his opinion, there is no threat of rising inflation rates. "Commodity prices will be stable, and it is hard to see how inflation could increase while there is moderate growth." In addition, Urwin predicts that there will be monetary easing in China, India, and Brazil, which would provide a further catalyst for global growth and fuel for market rises.
"The Eurozone will not break up," Urwin says, and provides another bullish forecast for stock markets this year: "The shares are cheap, and the multiples are attractive"; and Urwin has news for whoever thinks that the rally that began in October has run its course: "Many investors are still cautious because high-risk assets were bought aggressively last year, and as a result there is a lot of money sitting on the fence. In a world that has economic growth and monetary incentive plans, I think that this year will be reasonably good for shares."
On the other hand, Urwin adds that , "The two big risks are that something bad could happen in Europe, or there could be a rise in tension in the Middle East; but it is extremely hard to predict this, and at the end of the day, we live in a world where shares rise when forecasts improve."
At the beginning of the month, BlackRock CEO Laurence Fink gave an extremely bullish forecast in an interview with "Bloomberg". He claimed that investors' portfolios need to have 100% exposure to shares. This is an unusual forecast that has never been heard before in the market, especially not from a big investment enterprise such as BlackRock.
Urwin tries to explain: "If you look at the value of shares and bonds, then you can see that the shares are very attractive. It will be difficult to make money in bonds over the next five years, and the shares will outperform the bonds. We are in an extreme environment in terms of value. The statement that 100% of portfolios should be in shares was more of a declaration about the potential of the shares. Of course if you are 80 years old and not 20, we do not recommend putting all of your money in the stock market."
"Political clouds are contained in the market"
In 2009, the level of exposure of Israeli investors' assets overseas reached $8.3 billion, mostly in shares (86%). A year later, the level of investment rose 27% to $10.5 billion. The crash in 2011 reminded many investors of the horrors of 2008, and reignited the aversion to risk: investments overseas dropped sharply to only $2.3 billion. The reawakening began in the last quarter of 2011, when markets began recovering.
Now, maybe more than ever, there are many reasons for Israeli investors to increase exposure to markets overseas: Whether it is thin trading on the Tel Aviv stock market, the amount of individual stocks that can be traded, the tightening of capital market regulation, or the rise in the geopolitical risk.
The bottom line is that we need to fill in what is missing in the local market compared with markets overseas. In 2011, the Tel Aviv 25 Index showed a negative yield of 18%, whereas the S&P 500 had a flat yield and the Dow Jones rose 5%. Investors in Israeli shares did not benefit from the rally that began last October. Whereas the S&P 500 has risen 24% since October 3, the Tel Aviv 25 Index rose only 4%.
The search for high returns overseas is seemingly more difficult; institutional investors' ability to thoroughly analyze specific shares is limited due to the wide variety available, making stock picking more complex, not to mention choosing foreign corporate bonds. BlackRock is trying to fill this vacuum by convincing institutional investors to choose it to manage their money overseas, mostly through iShares, but also through portfolio management. Today, BlackRock's clients include some of the largest and leading pension funds in Israel.
"We are trying to fulfill the international ambition of Israeli investors," said BlackRock managing director for Middle East and Africa Nick Anderson. BlackRock representatives have been holding meetings with insurance companies and pension funds, among others, and Anderson says that there has a great amount of interest, mostly in shares: Israelis' appetite to invest overseas is growing. We visit institutional investors here at least once a month. We have seen massive growth in investments in iShares funds over the last few years, and the level is continuing to grow. Israelis have incorporated these funds into their investment portfolios, and more and more investors are choosing this path."
It is evident that the Israeli market is less attractive to Israelis and to foreigners, who exercised $1.3 billion in shares in the past quarter.
Anderson: "It's all a question of diversification. The multiples overseas are simply more attractive."
Are you concerned about the threat of an Iranian attack on Israel?
Anderson, like the rest of the delegation, looks at us full of wonder at the question. "There is a political cloud, but much of it has already been taken into account by the market. It is difficult to predict what will happen, but we do not take this into consideration in our day to day decisions. We are continuing with business as usual." Urwin adds, "There are always risks. Sometimes they are higher and sometimes they are lower. There will always be the chance of unfortunate occurrences happening, but we must look past them."
The latest hit: corporate bonds in emerging markets
ETF funds have apparently made investing overseas simpler. Every investor is just a few clicks of the mouse away from Brazilian infrastructure shares or Indian corporate bonds. Unlike the domestic swamp, investment opportunities overseas are boundless. There is no need for extensive research to choose specific shares. All investors need to do is to simply let their portfolio do what it's good at passive investment.
"Investing in emerging markets is a good investment for 2012," said iShares head of investment strategies in EMEA (Europe, Middle East and Africa) Steve Cohen. Cohen says that the money is being invested in Latin American, mostly in Brazil. He recommends investing in bond funds and funds that invest in shares of large companies that distribute dividends.
What is the latest hit among investors?
"In this past quarter, a significant amount of passive money was injected into secure assets. In Europe, we saw a lot of money flowing into gold, money-market funds, and German government bonds. US investors were more positive than Europeans, and invested in corporate bonds. Since the middle of December, after the European Central Bank injected capital into banks, we saw that investors diverted capital to stock markets, and began taking more risks. This trend accelerated in January, when heavy amounts of capital were invested in the S&P 500 and high-yield bonds. We are now seeing even more massive injections of capital into shares and bonds in emerging markets. A portion of the money is coming from the US, as their appetite for risk grows."
According to Cohen, in January there was a 50% rise in the amount of money invested in high-yield and rated bonds compared with December. "It is worthwhile to invest in the credit and corporate bond markets. This is a trend that will continue for the next few years," Cohen believes.
It seems like today there is an ETF for almost everything. Is there still room for this industry to develop?
Cohen: "The industry was created in the stock market, and it will develop more in the bond sector where there is more room for growth. Last year there was 24% growth in assets that were managed by bond funds, and we are seeing capital injected into them every month. From our point of view, as the supplier, there is potential to expand the variety of products available in the bond market.
"Another evolution that the industry will experience is the improvement of existing funds, in other words, current exposure. In January, we launched a dynamic commodity fund that offers improved exposure of oil, for example, since it can buy a contract one month ahead of time and be dynamic in terms of the contracts that it has to make, and thus obtain a better yield. We have seen that there are a number of funds that did not reach the asset's base yield, or that reached the base yield, but had no added value, so we decided to improve the funds."
Published by Globes [online], Israel business news - www.globes-online.com - on February 21, 2012
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