Chidem Kurdas
The message from Blackstone group is notably upbeat. The sunny outlook is in part due to confidence in the Federal Reserve’s ability to reduce its bond purchases without causing economic mayhem and in part to the specific situation of alternative investment managers, especially Blackstone.
Several related points were made at a conference call last week. One, the likely scenario is slowly rising interest rates, carefully managed by the Federal Reserve so as not to harm economic expansion and kept below the economic growth rate.
Two, rising rates accompanied by growth is beneficial for Blackstone’s businesses. “It has always been a good thing for us at the firm,” said chief executive Stephen Schwarzman.
Three, traditional bond and stock portfolios don’t look promising. Mr. Schwarzman’s colleague Tony James says surveys of clients show they expect returns of between zero and 2% on bonds and around 6% on stocks. No matter how you mix those two components, you get a return in the low single digits, which is insufficient to cover pension liabilities. Hence institutions are moving money to alternative investments.
With $230-billion in total assets, Blackstone is one of the largest alternatives managers – probably the largest freestanding such business worldwide – and well regarded by investors. It has already received a chunk of the money that is moving out of traditional bond investments and into credit investments that don’t come with fixed rates—and hence are not negatively affected by higher rates.
So the asset flow trend is in Blackstone’s favor.
My own concern is that if the economy perchance looks weaker – and between the recession in Europe and slowdown in China that’s not impossible – the Federal Reserve will be in a trap of its own making. If it delays tapering its purchases, that will be like announcing: “The economy is going down!”
Tags: Federal Reserve, Interest rates
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