As the global chief investment strategist for the BlackRock Investment Institute, Wei Li leads a proprietary research team that provides the world’s largest asset manager with insights on markets, economics, geopolitics and long-term asset allocation.
She attributes her rapid career trajectory—she’s just 38—to her international upbringing, competitive spirit, strong math background (she’s a two-time gold medalist in the Mathematical Olympiad from China) and ability to figure out how to play to her strengths as an introvert.
Li spoke with Bloomberg Markets on April 20 in London about the recent banking turmoil and the unusual challenge ahead for central banks. The conversation has been edited for length and clarity.
KSENIA GALOUCHKO : Do you see any more trouble brewing in the financial sector?
WEI LI : The banking turmoil we saw in March was not a banking crisis. It was more of an expression of financial cracks appearing in markets in response to the rate-hike cycle. Central banks, during the Great Moderation from the mid-’80s to before the pandemic, were able to mitigate economic cycles because their tools were very effective in addressing the demand side of the equation. But now that their tools need to address the supply side, they’re less effective, and the cost is higher. We are bound to see growth slow down, the labor market becoming weaker and financial cracks appearing in the system. The gilt yield spike last September [when UK gilts and the pound fell sharply in response to then-Prime Minister Liz Truss’s proposed unfunded tax cuts] was more evidence of financial cracks appearing.
It’s impossible to predict where the next crack will appear, but paying attention to where there is an asset-liability mismatch, where there is funding stress, where there is excessive leverage, could give you a clue. The area of commercial real estate comes up a lot, because the funding costs have risen, and they are very closely associated with the regional banks for funding, and the regional banks in the US are now facing higher funding cost. The overall credit environment has become a bit tighter.
The banking turmoil’s first leg down has stabilized. The credit tightening, potential credit crunch, is still playing out. That can further weigh on growth and reinforces our view that a recession is coming. Maybe the central banks don’t need to do as much to destroy demand to fight inflation because some of that is being done by credit tightening.
KG : After the financial crisis, we had more than a decade-long bull market in equities with very strong returns. What is this next phase in the equity market?
WL : The framing of “When are we going to enter the next decade-long bull market?” needs to be challenged. In an environment where liquidity was ample and central banks were able to effectively mitigate economic cycles by hiking or cutting rates to address demand, we were able to enjoy a decade-long equity bull market and bond bull market. But in the current environment, the choices facing central banks are really, really tough. They can fight inflation at all costs, but then they hurt growth, they hurt equities. Or they say this environment is shaped by supply—coming from the labor force, net-zero transition, geopolitical fragmentation—and we have to live with higher inflation or implicitly higher inflation.
But when that happens, an inflation premium comes back, a term premium comes back, and bonds suffer. So, the “Goldilocks” outcome where equities go up over a sustained period of time alongside bonds—I think that period is over. I think being very dynamic and tactical, even in your strategic asset allocation, is important. Our research shows that to be spot-on with your equity-bond mix is three times as important versus during the Great Moderation. When everything was going up, it didn’t really matter if you were 60/40 or 40/60 or 20/80 or 80/20. As long as you were invested, you were able to benefit from that rising tide lifting all boats. Now you’ve got to be really selective in getting your equity-bond mix right.
KG : There’s still a huge difference where you take a 10-year return versus if you look on a quarterly and monthly basis. Do you think it’s better to think longer term?
WL : If you have the luxury of a longer-term horizon, there are opportunities you should be aggressively taking advantage of. The investment environment has looked meaningfully better, has improved a lot versus three years ago. If you’re able to look through the upcoming recession that we expect later this year, you can start building equity portfolios, the risky part of your portfolios, already. Currently, we prefer emerging markets over developed markets over the tactical horizon, but over the longer term, we prefer developed-market equities. We’re already overweight developed-market equities. The TAA [tactical asset allocation] is 6 to 12 months. The SAA [strategic asset allocation] officially is 5 to 10 years. That’s the definition as we think about constructing portfolios.
Even if you have a horizon of just two years, in two years’ time, I can say with a huge amount of confidence that we will have already put this “Are we going to have a recession or not?” debate behind us. Already a case can be made to be more positive than we currently are. You know, if there’s one silver lining coming out of the very difficult market that was 2022, it’s that income is finally back in fixed income. I think that’s great. It may not be the most exciting thing to say that you are embracing this, but why not? I want reliable, boring strategies.
KG : What is the most popular question your clients are asking right now?
WL : Understanding the persistent drivers within the different components of inflation, and understanding where inflation will settle, is a super-topical question. We have been of the view that, in the US context, 3% is the new 2%. And then the natural follow-up is how do you inflation-protect your portfolio? Inflation-linked bonds—and then this in part is also why strategically we are overweight developed-market equities, because there is that inflation angle but then also private markets, real assets.
Then in the context of emerging markets, China is restarting this year. For 2023, we think China will grow [6% or more]. More broadly, emerging-market central banks hiked rates early coming out of the pandemic, so they now can cut rates. We have the overweight in emerging-market equities and in local-currency emerging-market debt. We’re not calling for emerging markets to reverse the decades-long underperformance versus developed markets. We’re saying that right now there is a momentum going on, and we want to lean into that, but strategically, we actually have a preference for developed markets over emerging markets.
And the last thing I would say is the impact of artificial intelligence. I’m still trying to figure out what that will mean. The speed at which people are switching to these artificial-intelligence-enhanced kind of tools has been incredible. What that means for productivity gains is a wild factor that we’ve got to think about. We talk about the labor shortage, but in the context of AI, how do we think about that?
I’m an optimist, though. Yes, technology will replace some jobs and destroy some jobs, but it also will create new jobs. Asking if ChatGPT or an AI persona is doing a better investment strategy update than Wei Li, then what is Wei Li going to do?—I think that’s the pessimistic take on things. I think Wei Li can do something else to make that thing even better.
KG : What other big trends do you see that will change the world of finance?
WL : Change the world of finance? Net-zero transition, the US Inflation Reduction Act and the European Green Deal industrial plan. The IRA has a domestic production focus, right? I think that geopolitical angle, that competitive angle and potentially protectionist angle, is going to have really interesting ramifications, both in the geopolitical context but also in the net-zero transition context. It’s a global race. China is in it. Canada, everybody is.
We don’t know who is going to win, or maybe we are not going to have one single winner. Diversifying your baskets to really take advantage of this global race, as we think about positioning portfolios for the long term, that’s important.
I have read this article that referenced the term “ transactional-25.” These are the countries that they call nonaligned, but actually I think they are multialigned. These are the countries that try to strike the balance between the Sino-US decoupling and confrontation. Some are big, some are small, they’re very different in wealth, very different in political system, but they make up like 40% of the global population. China and the US are wanting to win them over, and in so doing, the opportunities that can be created evolve very, very quickly. And then AI: The Investment Institute is looking into the different dimensions that are going to benefit from a macro perspective.
By Ksenia Galouchko / Bloomberg