- We sat down with Richard Turnill, global chief investment strategist for BlackRock, the world's largest money manager.
- He's bullish on stock markets around the world.
- While BlackRock is exploring blockchain technology, Turnill says there's no way to assess a fair price for bitcoin, and doesn't own any.
Richard Turnill is the chief investment strategist at BlackRock, the world's largest money manager with $5.98 trillion under management.
In an interview with Business Insider's Sara Silverstein, Turnill spoke candidly about market valuations, and why he's still bullish on stocks today, despite fears that equities may have reached a peak.
He says that, despite record-low volatility and a longer streak of economic growth than has been seen in recent history, there's still room left to profit from the current business cycle, which isn't close to a downturn just yet.
Here's the full interview:
This transcript has been lightly edited for length and clarity.
Sara Silverstein, Business Insider: After looking over a bunch of your research notes, you seem to be bullish on almost everything.
Richard Turnill, BlackRock: We're certainly bullish on stocks, on risk assets right now.
Silverstein: To jump right in there, how do you feel about valuations? We've been talking a lot about valuations seeming really high for equities.
Turnill: The market's gone up a long way, and that's making people nervous. When people look at valuations, there are two concerns actually. When we look at most parts of the stock market today, we think they're reasonable. Importantly, when you think about what's the right value or fair value for the stock market, you have to think about what's the economic environment and interest environment we're in? Actually, in an environment of sustained economic growth and low interest rates, relatively high valuations can be supported for some time. We're actually much less concerned about valuations than many others.
Although we would say that there are parts of the market which do look more highly valued. The US market looks more expensive than many international markets for example. So whilst we think the US market can do well, we see more upside in some of the international markets today.
Silverstein: Within the US market, are you seeing opportunities there as well?
Turnill: We absolutely see opportunities within the US market, and actually the economic environment in the US is very attractive. We see the Fed gradually raising interest rates going forward. That's an environment which is very good news for technology stocks.
Getty
Tech stocks are set to do well, according to Turnill.
Silverstein: Are you concerned at all about the Fed unwinding its balance sheet and what the valuations will look like when interest rates start rising?
Turnill: One of the big risks to markets is that we have a policy mistake, that the Fed raises interest rates much more quickly than markets anticipate, unwinds its balance sheet much more aggressively, and we have a repeat of the taper tantrum. That's something that many investors, many of our clients, have been worried about for some time. We think the risk of that scenario is quite low. It's quite low because the Fed has been extremely deliberate in signaling what it's going to do. The Fed has now started the process of reducing its balance sheet, but it's done that in a way where actually the market has been extremely strong through that process, and that's because the Fed has signaled the move well in advance. Really the only piece of uncertainty there is what the endgame is. We can see the path of balance sheet reduction, but we don't know quite how far that will go.
Our expectations on interest rates are that the Fed will end up doing more than the market's currently pricing in. The market today is only pricing in around two interest rate hikes between now and the end of next year. We actually think the Fed will do what it's telling us it will do, which is raise interest rates up to four times over that period. That could create some volatility, but it's still a very gradual path of interest rate hikes over time. So in that scenario, we think the market could continue to make good gains.
Silverstein: Even if there is a little bit of volatility, you still see volatility staying low for a long time? I know a lot of people don't necessarily agree with that.
Turnill: We're in a very low volatility environment right now, and many people see that volatility as a sign of complacency or a sign you should sell equities and take profits. Purely statistically, that's just not the case. If you sold every time we were in a low volatility environment, you'd miss a huge amount of upside.
If you sold every time we were in a low volatility environment, you'd miss a huge amount of upside
The low volatility environment we're in today reflects the very stable economic environment we're in. The economic data is incredibly stable, it's low volatility economic data. We're somewhere in the middle of a very long expansion. While that continues, we think the low volatility regime will continue, that's an environment where you're generally being paid to take risk. There are areas of the market where you're being paid more than others to take risk. It's an area where you effectively buy the dips. It's not like you won't get dips, of course there will be, there will inherently be turmoil in the market, there will be drawdowns. But in these low volatility regimes, you should be buying those dips rather than selling out.
Silverstein: So you think we're somewhere in the middle of this economic expansion and not towards the peak of it?
Turnill: Yeah I think one of the notable features of the cycle is it's been extremely long. We're now in the 8th year of the expansion. For my entire career, the average length of an economic expansion has been around eight years.
Silverstein: So why do you think it's not about to end?
Turnill: Because recessions don't start on a clock. You shouldn't measure the length of a cycle in years, you measure it in terms of the excesses that are building up in the economy. To what extent is excess capacity being consumed? So when you adjust this cycle for the fact that it's been one of the slowest cycles we've seen in economic history, actually, you come to the conclusion that rather than being at the end of a cycle, we're somewhere in the middle. Actually the time to the next recession could be measured potentially in years, so we feel like we've got some way to run.
The time to the next recession could be measured potentially in years, so we feel like we've got some way to run
Silverstein: Why do you feel like we're somewhere in the middle? Is it because of wage inflation?
Turnill: What you're not seeing is any of the signs of excess in the economy that would typically build up if we're towards the end of a cycle. We don't see that in the labor market today. So you're right, wage inflation is low. We don't see that in broader consumer prices, so we think there's some upside potential to inflation going forward, but we're still in a very benign price environment. We don't see it in terms of leverage. We think about the signs of excess leverage that built up towards the end of the last cycle, we see very few signs - some pockets in areas like auto loans - but you don't see that broad increase in leverage that would flash a red warning sign that perhaps we're close to the end of the cycle.
Silverstein: You like all of the equity factors right now? You like value? You like momentum?
Turnill: We think factors are a good thing to have exposure to. Typically factors, if you're patient, will drive excess return over time. The two factors we prefer in this environment are the two you mentioned. We think momentum, typically does well. We're you're in this period of sustained expansion, winners typically keep winning. When we look at how expensive momentum stocks are right now, we come to the conclusion that they're not expensive. Look at how crowded momentum has become. Actually, contrary to many people's beliefs, momentum is very diverse right now. It's not about a handful of tech stocks. You see great momentum in financial stocks, in many industrial stocks, in many material stocks right now. It's very diverse group of stocks. We think momentum can continue to run.
Value typically does well in this phase of a cycle as well. That's because value is typically associated with economic growth. It does well when interest rates gradually rise. So we'd focus on momentum and value.
On the other side of that, factors like low volatility stocks, we think they may struggle, they typically do less well in this phase of the cycle.
Silverstein: Is there anything else you think people are not getting paid for all the risk they're taking?
Turnill: The one area we're a little more cautious about right now is small-cap stocks.
The one area we're a little more cautious about right now is small-cap stocks
They've done extremely well. I would say there's a lot of hope priced into US small-cap stocks today, hope around corporate tax cuts in particular. Russell 2000 is now trading around 25 times forward earnings. Those forward earnings themselves imply something around 20% earnings increases over the next 12 months, or a lot of hope that we're going to get significant tax cuts. That's an area where there's a lot on the price. Whereas if we look at areas like emerging markets, which have also done well, actually valuations are much more compelling. I think investors there really are being paid for taking the risk.
Silverstein: So the economy will continue to expand, volatility can stay low, equities look good, mostly international. How do you feel about bitcoin?
Turnill: We've been looking a lot at particularly blockchain as a technology. BlackRock, we're starting to use blockchain. I think it's a technology which is going to get more and more adoption over time. What that doesn't mean is that the value of bitcoin and broader cryptocurrencies should continue to go up and up. I would say that cryptocurrencies show many characteristics of a bubble right now, which is [to say] you've seen spectacular price increases. The main argument for buying them is that prices have risen, and are therefore going to continue to rise over time. But there's no inherent right or wrong price for bitcoin. You could say 'what's the fair value?' you know, I'm an investor, I like to think about the fair value of stocks of bonds. I can't answer what's the fair value for bitcoin or any cryptocurrency. For that reason, I'm not an owner.