BlackRock, the world’s largest money manager, has been in the spotlight over its recent management reshuffle. It has also been just as busy in South Africa, where it is engaging with investors about global fixed income. In this Podcast, Blackrock director and former Bank of England economist Marilyn Watson speaks to BlackRock’s position on South Africa, the African Emerging Market story, and her perspective on leading global economies. With the flurry of negative public opinions on South Africa, its future and the strengthening of UK and US markets, Watson provides some welcome, positive insights into expectations of a robust investing environment. – LF
MARILYN WATSON: I basically went from working in an investment bank where I sold foreign exchange derivatives to hedge funds into a global strategy role and then I moved to the Bank of England where I was really focusing on the U.K. economy and in particular, I was focusing on the north-east region of the U.K. That’s Yorkshire and Humberside. I was really trying to put together a very comprehensive picture of how that section of the economy was functioning and then, that was fed through into the overall MPC decision-making process.
ALEC HOGG: Functioning or not.
MARILYN WATSON: Well, it’s a very good question. Interestingly, when I was there – and also for the first few years – inflation has always been so much higher than the target of two percent, and it has been almost a persistently high inflation rate and now it looks as though things are turning around. Inflation is below the two percent target for the first time in a very, very long time. The economy is really starting to pick up. Obviously, we had a period of recession, along with the rest of the world over the last few years, but now the data is becoming increasingly positive. What’s interesting is that the U.K. is one of our strongest conviction positions now, so we are actually in a short duration in guilds. We’ve also bought the British Pound, so we’re putting our money where our mouth is and we have a very strong view on the U.K. economy. It has continued to positively surprise on the upside.
ALEC HOGG: ‘We’ being Blackrock, which you joined after the Bank of England.
MARILYN WATSON: That’s correct, yes, ‘we’ being Blackrock and in particular, the Global Bond team, so we look at bonds globally, not just in government bond but also in credit as well.
ALEC HOGG: You’re in South Africa…also to look at bonds.
MARILYN WATSON: That’s right, yes; we’re here to talk to local investors here about the benefits of investing in global fixed income, to talk about our views on the economy, and also to gain feedback when investors here are looking into what we think the trends are here. It’s really a two-way process and I’m really excited to be here.
ALEC HOGG: You also advise people in South Africa. You have clients here, too.
MARILYN WATSON: We do have clients here. That’s right. Yes, we do. We have clients here who are looking to invest in fixed income in the global bond space; not just in European bonds, the U.S. or local South African bonds, but globally.
ALEC HOGG: But if you put the boot onto the other foot…if you were advising the South African government, which has a huge bond program as well, are there any sore thumbs that stick out at the moment, because we are seeing interest rates rising in South Africa? We are seeing the credit rating of this country coming under pressure.
MARILYN WATSON: We have a very confident and strong view in the South African Reserve Bank as a whole. We actually think it’s a model of how a Central Bank should be. It is very, very transparent, we think they’re very credible, and they’re doing everything they can to try to adjust both the current account deficit to keep inflation down… Obviously, inflation is around the top end of the target rate, but overall, we actually think they’re doing a very credible job. We’ve obviously seen the Rand over the last few months has depreciated so basically, depreciation of the Rand and some interest rate rises, are helping to adjust the balance. I’m already seeing improvements in the current account deficit.
ALEC HOGG: Okay but would you be advising people to buy South African bonds?
MARILYN WATSON: In portfolios where we can hold them, we do have allocations to South African bonds. That’s right, we do. As part of an overall portfolio that’s highly diversified, we do have South African bonds. That’s right.
ALEC HOGG: The Africa story at the moment is an interesting one, with the rebating yesterday by Nigeria of its GDP figures. It has a far less developed capital market than South Africa has, but I guess in time we might see more money flowing that way.
MARILYN WATSON: I think that overall we’re seeing a huge amount of interest from investors looking at Africa as a whole, as well as across the whole emerging market space. Obviously, emerging markets have suffered over the last few months, particularly since the second half of last year when it was suggested that the U.S. Federal Reserve might start to taper. We saw a bit of a sell-off in emerging market bonds. We’re also seeing growth rates changing in emerging markets and developed markets; so actually, the growth rate in developed markets is improving as emerging markets are slowing down. Overall, in the whole fixed income space, bond yields are incredibly low at phenomenally low levels, particularly in developed markets and investors are really seeking yields where they can find it. They’re also really looking for very credible and fundamentally sound investments, and we can find that in South Africa. We can find that in other emerging market countries. It’s just about doing your homework, and really knowing the valuations versus the fundamentals, and then find those opportunities. There’s certainly going to continue to be huge demand from investors to find sources of yield and so I think that across the emerging market space, we’re going to continue to see demand over the longer term.
ALEC HOGG: And perhaps now that Nigeria, after rebating, is a $500bn per year economy – with $370bn for South Africa – that might attract a bit more interest than it did in the past.
MARILYN WATSON: I think it’s true that you’re going to continue to see increasing interest in Nigeria. Obviously, as an energy producing country and a country with huge natural resources, it’s going to continue to grow and continue to see investor demand, and as its infrastructure continues to improve you’ll continue to see improvements in the economy. I think over time, it’s natural that investors will look to Nigeria, South Africa, or other emerging market countries.
ALEC HOGG: Moving to the United States and the whole thorny question of Quantitative Easing: we are seeing tapering and that means they’re still creating money. How is this all going to end up…what’s the end game?
MARILYN WATSON: That’s a very, very good question. I think if we look back at last year, we saw quite a lot of turmoil in the fixed income markets. In May last year, the FOMC suggested they might start to reduce this Quantitative Easing. They actually didn’t do that until December and I think many investors were very confused by the communication and what was going to happen. I think that essentially, bond yields and treasury yields were at incredibly low levels. Interest rates in the U.S. are at rock bottom. They’re very, very low. We have this huge asset purchase program, so the Federal Reserve has been buying more securities. It’s been buying treasuries, so it’s effectively been pumping out Dollar liquidity into the markets, which has then been flowing into more risk assets. It’s been flowing into not just other bond markets or investment-grade bond markets, but probably also into the stock market as well. Obviously, last year we saw the SMP 500 end at a record high, so the impact of QE and the impact of this asset purchase has been to pump Dollar liquidity into the market. Now that they’re starting to reduce the amount that they’re actually buying, this is gradually reducing and so we’re starting to see a change in the dynamics. We’re therefore seeing that there is more concern about the amount of Dollar liquidity that people have to invest in emerging markets. On the other hand, the U.S. economy is growing. The consensus is that growth in the U.S. this year will be between two-and-a-half to three percent.
ALEC HOGG: But the end game…you’ve created a lot of new debt.
MARILYN WATSON: That’s right.
ALEC HOGG: You’ve created a lot of money. How do you rebalance?
MARILYN WATSON: It’s a very, very good question and it’s a very difficult one for the Federal Reserve to balance. In our view, the Fed will continue to reduce QE until it stops buying anything else. Whether they then actually start to resell some of these things into the market is another question. They may wait. They may hold onto it for a long time. They may hold onto it until it matures, but it’s likely that they will reduce QE until its zero and then, at some point a few months after that, they will start to actually raise interest rates.
ALEC HOGG: That could be a way away.
MARILYN WATSON: It could be a way away. The consensus is the first quarter or the first half of 2015. We actually think that the Bank of England might move before the Federal Reserve does.
ALEC HOGG: Coming back to the Bank of England and the U.K. economy (your area, if you like, or speciality): you say you over-weighted Blackrock there.
MARILYN WATSON: What we’ve actually done in our global portfolio is that we’ve bought Sterling, so we have a very strong view on the economy as a whole and on the currency. However, in the bond market, we actually under-weighted the U.K., particularly in the guild space, because we actually think that yields are going to rise and as such, the price will go down, so we’re actually underweight – U.K. guilds.
ALEC HOGG: So the interest rate cycle is also rising in the U.K.
MARILYN WATSON: Eventually…that’s right, I think we’re continuing to see very strong positive data out of the U.K. We don’t think we’re going to see any more in terms of QE. We’ve seen the new governor, Carney, has been trying to talk down yields and rates using forward guidance, he’s mentioned perhaps also looking at the unemployment rate in a similar way that the U.S. do. However, the unemployment data is continuing to improve and the overall macro picture is very positive, and so we’re actually seeing…there’s a limited amount that the Bank of England can do to hold rates down verbally, and at some point over the next few months, possibly at the beginning of next year they might start having to raise rates.
ALEC HOGG: A very pro-business agenda, which the British government has at the moment, and clearly, that seems to have worked for the economy.
MARILYN WATSON: That’s right. We’re seeing a huge improvement in the economy. I think there has been quite a pro-business approach. What’s also interesting though is that we’ve seen a huge boom, particularly in the housing market around London and the southeast. I think another outcome from the last few years of financial difficulty, which we’ve seen across the world, is that a huge number of foreign investors have started to see the housing market in London in particular, as a very stable, strong investment. We’ve seen a huge amount of money flowing in from overseas popping in at the housing market in London and then obviously, spreading out across the economy as well, and in particular in the London economy. I think we’re seeing a huge amount of investment coming in from overseas.
ALEC HOGG: Marilyn Watson is with Blackrock.
