An advantage of being in the media business is invitations you get to engage with global heavy hitters who pop into the neighbourhood. Ed Fishwick, a board member of the giant Blackrock, is one of those. He made his first trip to SA this week, an overnight visit to address a conference being held by a major client. I spend an hour with Fishwick during which we shot a short interview. It was broadcast long after he’d arived home to help Blackrock CEO Larry Fink work out ways to help the US Fed and sovereign wealth funds make the right calls. The most interesting part of our discussion was the way risk analysis – Fishwick’s speciality – has changed since the financial meltdown. As you’ll read from the transcript that follows, political risk is no longer just relevant to Developing Countries. – AH
To watch the video of my interview with Ed Fishwick for CNBC Africa Power Lunch, click here.
ALEC HOGG: Earlier this week I had the pleasure of sitting down with Ed Fishwick. He’s co-head of BlackRock’s Risk & Quantitative Analysis Group and on the main Board of BlackRock. It’s a massive organisation – $3trn in assets they under management. I kicked off by asking him about the expansion into Africa.
ED FISHWICK: When you look at the distribution of what we do around the world, we do a great deal in the States, we do a great deal in Europe and Asia, but over the recent past, we see an increasing number of clients from Africa looking to invest globally with us.
ALEC HOGG: Your focus is obviously on risk. If one talks risk you think 2007/2008 – the whole financial meltdown. Have things changed?
ED FISHWICK: Well, 2007/2008 changed lots of things and it either taught us lessons or reminded us of lessons that we knew all along, but had forgotten. So the global financial crisis transformed the way in which you think about risk, particularly in the developed world. So when I think about risk-management pre the crisis, I would say that risks in developed markets, are about economies and markets. All the risks in emerging markets/developing markets were political. Investing in emerging markets, you worried about political risk. Investing in the US or in Europe you worried about the economy. The global credit crisis changed all that. It changed it in such a way that policy risk and political risk is everywhere. When you think about investing in South Africa or the USA or the UK, you’re now very focused on government policy, monetary policy. And if you think about the current debate globally around QE (Quantitative Easing) and tapering – the changing of monetary policy – the way that’s impacting asset prices in the US and the UK and here, you see this pervasive of policy, all of which stems from the credit crisis.
ALEC HOGG: The whole quantitative easing story must make risk management pretty tricky because it introduces new risk which we possibly don’t understand yet?
ED FISHWICK: That’s right. It might even be better described as uncertainty. There are just things we don’t know about. So sometimes I think of risk management as managing the things you understand and can quantify. Then uncertainty is the stuff you just don’t know. And so QE is uncertain in many dimensions. So firstly, all the obvious things like the timing – we don’t know when it’s going to happen, the scale – we don’t know how big that reduction in asset buy-backs will be. But then, we don’t really understand the mechanisms by which QE affects the outcome. So after the announcements on May 22nd when the Fed said ‘we’re going to begin tapering’, you saw that huge reaction of asset prices everywhere, including in South Africa where the price of high-yielding assets fell and the behaviour of currencies was very dramatic – all of a sudden very highly-correlated. But beyond that, it’s very hard to gauge how long-lived these effects are. So, from a risk management perspective it makes it harder. It increases event risk. It increases the potential for upset in markets, so it makes life pretty interesting and it makes it harder.
ALEC HOGG: As a private investor, what should one be watching for on QE?
ED FISHWICK: So private investors, to the extent they hold high-yielding assets, to the extent that they look for income through that route; I think the elimination of support for assets probably reduces asset prices in some of those higher-yielding areas and actually just look for short-term volatility. You can see that every time there’s a new piece of news around tapering, it introduces big asset price volatility. My only view would be it’s probably a mistake to respond to that because a lot of this stuff dissipates through time. I should also worry about the fact that it makes things more correlated – but again, in the short-term. And so, my instinct is that, for a long horizon investor QE probably doesn’t change very much. It might throw up a few opportunities, but it probably doesn’t change very much. For anybody with short-term objectives, it’s a big deal because it has the potential to disrupt asset pricing a great deal in the short term.
