Here’s Where Blackstone Sees Opportunities Now

Here’s Where Blackstone Sees Opportunities Now
Russell Burns

over 1 year ago4 mins

  • Blackstone’s quarterly outlook highlights the investment firm’s concerns about sticky inflation and its impact on margins and valuations

  • Crowd sentiment is sharply negative, and a rally in equities and bonds is possible.

  • Higher inflation tends to move stocks and bonds in tandem, so if stocks fall, bonds may too.

Blackstone’s quarterly outlook highlights the investment firm’s concerns about sticky inflation and its impact on margins and valuations

Crowd sentiment is sharply negative, and a rally in equities and bonds is possible.

Higher inflation tends to move stocks and bonds in tandem, so if stocks fall, bonds may too.

Mentioned in story

Blackstone’s latest overview of the global economy doesn’t make for cheerful reading: the way it sees things, there are three massive threats facing the world’s economies. But the New York investment firm also sees opportunities…

What are the three big risks?

1. Recession

The risks of a recession are higher in Europe than in the US – and mostly that’s down to the Russia-Ukraine war and sharply higher energy costs. And the economic slowdown in China has everyone feeling the pinch: it’s been one of the world’s key economic drivers but now is seeing meager (for China) growth of less than 3% per year.

For the US, meanwhile, Blackstone uses a six-point checklist to determine when a recession has hit. And the world’s biggest economy already has four checkmarks. That means just two remain unchecked – unemployment hasn’t spiked, and estimates for corporate profit growth haven’t turned negative. But Blackstone expects that both may soon happen – and it’s not alone in that view. A recent Bloomberg survey showed that 75% of economists expect the US to be in a recession in the next 24 months.

2. Inflation

While inflation may have peaked for this cycle, Blackstone expects it to remain sticky (i.e. higher for longer) and that’s largely because some key components of inflation – shelter (notably: rent) and wages – have risen by so much. The asset manager’s experts don’t see an easy fix to the country-wide housing shortage, and so they expect rents to remain high.

There are 13 inflation charts in the quarterly report, but here’s one I found particularly interesting. These different inflation measures all show how high inflation is. One of these, the Cleveland Fed 16% trimmed-mean (gold line) is the measure that the Fed referred to when arguing that the current inflation was transitory. This measure removes the top and bottom 8% parts of the basket, and assesses the price increases on what’s left in the middle. Until recently, those price rises were well contained at around 2%, but now it’s also exploded higher.

US CPI measures. Sources: US Bureau of Economic Analysis, Atlanta Federal Reserve, Cleveland Fed, NY Fed, and Bloomberg.
US CPI measures. Sources: US Bureau of Economic Analysis, Atlanta Federal Reserve, Cleveland Fed, NY Fed, and Bloomberg.

This is significant: the longer inflation and interest rates stay high, the more pressure there’ll be on companies’ profit margins. That’s why Blackstone expects estimates for the S&P 500 to be revised downward for next year, and sees market valuation multiples becoming more expensive.

3. Global interest rate hikes

In 50 years of data, we’ve never seen monetary tightening (chiefly: interest rate increases) at this intensity on a global scale (black line). And this increases the risk of “something breaking” – in other words, something going very wrong in the economy. You can see from the chart, in previous tightening cycles, it’s when an unforeseen crisis has occurred.

Global monetary tightening. Sources: BIS and the World Bank.
Global monetary tightening. Sources: BIS and the World Bank.

What’s more, Blackstone takes a look at the US central bank’s key interest rate, the fed funds rate (in gold) – and notes that it’s always higher than the inflation rate (green line) before the Fed’s tightening cycles end. So we can’t really expect to see a cut in the interest rate until the inflation tiger has been properly tamed.

Fed funds rate and inflation. Sources: Federal Reserve, Bureau of Economic Analysis.
Fed funds rate and inflation. Sources: Federal Reserve, Bureau of Economic Analysis.

What is the opportunity?

It's not all bad news. Crowd sentiment is particularly low now (green line, lower chart), and that typically signals the potential for investment opportunities..

Investor sentiment. Source: Ned Davis Research.
Investor sentiment. Source: Ned Davis Research.

Blackstone vice chairman Byron Wien co-authored the quarterly outlook, and in presenting it to investors recently, he quoted Warren Buffett, reminding them of the wisdom of being fearful when others are greedy, and greedy when others are fearful. It’s how you can best position yourself to benefit from a rally.

And if the Fed hints at an earlier-than-anticipated peak in interest rates or even a slowing in the current pace of hikes this week, that could be a catalyst for a rally. However, if Blackstone’s economic outlook is correct, earnings estimates will have to be revised downward and valuation multiples are set to contract, so the worst is not over and markets remain vulnerable. So any rallies we see in the near term may well be short-lived.

For now, where stocks are concerned, Blackstone likes the travel and leisure, enterprise software, and energy sectors. Longer-term, it still likes energy. Recent earnings in oil companies remain robust and valuations remain cheap. The Energy Select Sector SPDR ETF (ticker: XLE US; expense ratio: 0.1%) offers exposure to the largest oil companies. For software, you could consider the iShares Expanded Tech Software ETF (IGV US; 0.43%).

As Blackstone specializes in alternative investments, it recommends very short-term maturity 1-year mortgage bonds and other private-equity-type investments. That may not be really accessible for retail investors, however. Instead, you could consider investing in shorter-maturity government bills and bonds, and higher-quality investment-grade corporate debt. The Vanguard Short-Term Treasury ETF (VGSH US; 0.04%) invests in 1-year to 3-year US government bonds. Blackstone also noted that many companies have taken advantage of the long period of ultra-low interest rates to refinance their borrowing at cheap rates, so many have less immediate funding needs – which places them in a strong position. So the riskier idea would be in high-yield bonds, and for that, the iShares iBoxx High Yield Corporate Bond ETF (HYG; 0.48%) could be a good bet.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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