Joe Cass   00:00:00

Hello, and welcome. My name is Joe Cass. I'm a Senior Director here at S&P Global Ratings and a host and the creator of the FI15 podcast. So on this episode, we have Wei Li, Global Chief Investment Strategist at BlackRock; and Martina Cheung, President of S&P Global Ratings. Very quick reminder that the views of the external guests are their views alone, and they do not represent the views of S&P Global Ratings. So, Wei, I think a good place to start would be around general outlook. So, what is BlackRock's 2024 market outlook with perhaps a couple of words on private markets and infrastructure as well.

Wei Li   00:00:36

Absolutely. Thank you again for having me. This is a very interesting year because we start the year after the Christmas rally into the year-end and people are feeling quite constructive looking ahead this year, which is in sharp contrast to the beginning of last year. So, what do we think that is going to happen for 2024? Well, I will start with macro, and I will make some comments about market implication and private markets in particular. So, in terms of macro, actually, it's going to be quite a journey in that we are going to see inflation continuing to fall. In fact, with good deflation that is still weighing down on broader inflation print, we actually think that alone could carry inflation in the U.S. to 2%, which is the target of the Central Bank by the end of this year. So, inflation will fall. And we could actually avoid a recession as that happens because what we are experiencing right now is really normalizing, adjusting from the pandemic hole that has been created. And nothing was blind before, nothing needs to land, and we actually can just get through in terms of the growth front and still avoid a deep recession. That's our expectation. And also 2024 is going to be a year of rate cuts, which is a wonderful change versus last year versus the year before, very aggressive rate hike campaign, the fastest rate hike cycle since the '80s by the Fed, for example. So, these are the kind of the three things you see that inflation falls, growth avoids a recession and rate cuts starting. They all sound quite good. But there are three caveats I want to add to these three characterizations of this year. So, inflation falls but we actually think that it would then rebound because of structural labor shortage and supply constraint. So, in the U.S., we see inflation stabilizing after falling to 2%, closer to 3% over the medium term. Now we don't need to have a recession to bring inflation down, so we can avoid a recession. But the bigger picture is that growth trend is lower in this new regime compared to the old regime, again, because of some of the supply constraints that we're talking about. So, for example, in the U.S., aging population can support a monthly job creation pace of 70,000, which is way lower than the trend that we have been on so far. Now on the rate cut front, rate cuts indeed are exciting. and markets have been energized by that. But we don't think that we're going to get as early or as many rate cuts as priced in by market. So, at some point, end of last year, markets were looking at six cuts by the Fed. Now it has dialed that back. But still, we think that markets are still applying a bit of an old playbook when it comes to how much central banks can cut rate to come to the rescue of the economy, which is why there is that caveat in terms of yes, rate cuts are coming, but maybe not as many as you may hope for. So, this is quite a nuanced environment. So, what does that mean for risk taking? So, for now, given the Fed pivot that we saw in December, essentially green lighting markets embracing this immaculate disinflation narrative, we think that momentum can run. There is a lot of FOMO out there. Investors are putting cash to work, and earnings are still doing reasonably well. So, momentum of this immaculate disinflationary narrative can still run. But at some point, there will be a wake-up call to the fact that inflation goes down, but it's not going to stay down, and it could go through a roller coaster of a pattern. But that wake-up call may not come anytime soon because macro evidence that would point to inflation roller coaster may not be clear until later, second half of this year, which is why currently, we're still reasonably constructive around kind of this momentum of the U.S. equity market and broad risk sentiment. But at some point, we look to be very nimble and dynamic, and we could dial that back down. Now in terms of private market, private market infrastructure, it's an area that we are very excited about. One could say that rate repricing having more to feed through to private market that takes longer to mark-to-market just by virtue of the market itself, but there are mega that actually create this structural demand for parts of the asset classes. So, you think about low-carbon transition, the demand for infrastructure, you think about the future of finance, the need for private players to play a bigger role as banks withdraw from this space, what does that mean for direct lending? What does that mean for private credit? So, we're very excited about this market on a selective basis.

Joe Cass   00:06:01

Fantastic. Thanks, Wei. Martina, from a ratings perspective, what trends did we see in 2023? And what trends may we see in 2024?

Martina Cheung  00:06:13

Yes. Thanks, Joe. Great comments. I'm so pleased to be on this issue or in this particular podcast with you. We'd say for 2023, it played out broadly from a credit performance standpoint as we expected. So, we saw stresses continue in the system more in the spec grade side of the house than the investment-grade side of the house. But the common themes there for 2023, of course, were interest rates and macroeconomic uncertainty from a credit performance standpoint. Now while we saw overall net downgrades in all the issuance that we track, I would say it varies by sector. So, some of the sectors that experienced more stress, for example, consumer discretionary was one. And then some of the sectors that tend to be a bit more sensitive to interest rates such as real estate. And in aggregate, the U.S. had the highest rate of downgrades, but that is really also a reflection of the composition of the U.S. bond market, which is a higher representation of spec-grade issuers overall. So going into '24, Joe, we would see a continuation of some of these credit stresses. We are expecting on a trailing twelve-month basis, defaults, for example, in the U.S. by September would hit 5%. And by September, trailing twelve-month defaults for Europe would be around the 3.75% range. Again, tenants to be similar sector by sector as well as in the U.S. where we would see more downgrade potential, for example, in the B- category. What we see is continued trends and themes going into '24, rates, of course, but also the increased uncertainty and volatility. It's not just about the macro fundamentals, but we also have almost half the world's population voting in elections this year and the threat of escalation in the Middle East. So continued stress as we go into '24. That's the expectation for our analysts, but with more of a focus on the speculative grade.

Joe Cass   00:08:23

Thanks, Martina. Wei, I'd be interested to know what your view is of AI? And, how are you personally using AI within your position as Chief Investment Strategist at BlackRock?

Wei Li   00:08:35

I have a lot of thoughts about AI. But before I go there, just picking up from what Martina said, like 5% of default and 3.5%, I mean, those are not terrible numbers. It's 5%. It's not 15%. It's not the sort of levels that we got during global financial crisis. So, when people are saying, well, credit is doing so well, wave of default is coming, given the refinancing needs, well, this is not your typical kind of cycle, and we're not expecting as traumatic in terms of repricing for credit as we would have kind of expected in the past, modeling for more traumatic kind of growth environment. So, which is why we still think that there is income opportunities in credit. But moving on to AI. Where do I start? AI is a key mega force that we have been overweight for most part of last year that we continue to have for this year. I was in Davos recently. And what really struck me is not so much about the technology revolution itself, but around the interplay between the tech piece as well as the other sectors, right? So, I was put on this panel talking about AI investing and then the other panelists there was a professional gamer, there was a doctor, there was a data scientist. I'm like none of you know about investing, listen to me. But then actually, the reverse is true. They knew a lot more about AI application investing than me as a generalist could bring to the table. So I actually walked away from the experience thinking that the era of generalist investing when it comes to this very specialized themes is over, and it really does take deep expertise to be able to tell a company, a project that is value accretive from companies that just talk about AI in their pictures, in their earnings calls, which is basically everybody, right? So, I walked away feeling energized that, yes, the first wave of AI may have already washed over us thinking about the very good performance of Magnificent Seven last year. By the way, their valuation is not that stretched if you compare to the levels at the beginning of 2022 and at the beginning of 2020. But I also feel very energized in terms of maybe the next wave of AI is really around the inter play intersection between AI and other sectors. Think about health care, rare disease diagnosis, drug rediscovery, the opportunities are endless. But now just to conclude, I talked about how it takes deep expertise to properly kind of have selective insights in this space. Just to illustrate how shallow my expertise on this is in terms of using AI, of course, I have ChatGPT. I use it to summarize reports. It's in a walled garden type of setup, and we are implementing copilot now, and I'm expecting that to be even more impactful. And I also use it to write e-mails and text messages I described to ChatGPT the situation and then it writes e-mail because while it seems to be a more personable and sociable being than me and he writes better messages and e-mails, and I actually use that a lot. So that's the extent of my dabbling. The last thing I would say about AI is that it brings more meaningful and day-to-day changes to people that are perhaps further away from this, right? So, like compared to me, my parents are even more further removed from the frontier of tech. They are using ChatGPT a lot and because they couldn't program. And now like back in the days, they were using Siri, but ChatGPT is a much better Siri. So, they are really benefiting from this. So that's what I meant by the next wave of AI may not require meaningful tech revolution, but this evolution is already going to have significant impact to the rest of the economy.

Joe Cass   00:12:58

Fantastic. Thanks, Wei. Martina you're meeting investors, issuers and generally senior figures in the market on a very regular basis. What's kind of the mood music of these discussions? And has AI been, as we said, a dominant topic recently?

Martina Cheung   00:13:15

Well, certainly, the continued themes that we hear about, and I think that started in the past couple of years, supply chain continues to be an important theme, particularly with some of the recent challenges in the Middle East, for example. We hear a lot about cyber risk and sustainability, private markets and emerging markets has become an increasing topic of conversation as well. For generative AI, I don't think to Wei's point, you can't get out of any conversation without touching on it at least to some degree. Our view within our research team is that it represents a massive opportunity from a productivity standpoint, which I think bodes well for growth over the medium to long term. But we also look at it by sector. And our team believes that there could be some very interesting opportunities in sectors that they characterize with maybe more flexible business models. So, for example, I think Wei highlighted some of these medical devices, education, even within banks. And there, there could be the potential for new product types, product innovation and ultimately, competitive advantage, which could be generally positive from a credit perspective. And then for our own generative AI initiatives, we work very closely across S&P Global with our AI group that is in Cambridge, Massachusetts. It's called Kensho. And we've got some really interesting work going on with the Kensho team that gets to some of the great capabilities and possibilities of those capabilities such as universal assistant to interact with our data and research across the company.

Joe Cass   00:14:51

Great. Thanks, Martina. Wei, BlackRock have had the iShares Bitcoin Trust approved fairly recently. And I know the future of finance, including digital currencies is one of these mega forces that you're tracking at BlackRock. How do you capture this innovation in your investment views?

Wei Li   00:15:09

Joe, I think it's super interesting that you started the question by framing the future of finance as a mega force. We have identified actually five mega forces in our global outlook. And future finance is the least talked about. The other four are: number one, AI; number two, aging population; number three, geopolitical fragmentation; and number four, low carbon transition. And sometimes what is at least talked about could also be the most exciting. So let me just give you one personal experience. So again, I was in Davos and going to all these panel discussions. And all the other four mega forces were talked about extensively. Everybody has a strong opinion about what's going to happen in the Red Sea, what's going to happen with their tech application. But future finance didn't get as much stage airtime as the other four mega forces. But I always going to pay attention to things that are not being talked about. And sure enough on Friday, my phone had this push notification to me that says that JPMorgan was close to a $3 billion of third-party commitment to private credit and all this report about it. So maybe it's less talked about, but certainly, things are happening, and this is super exciting, and we want to be part of it.

Joe Cass   00:16:35

Great. Thanks, Wei. Martina, how are S&P Global Ratings approaching the topic of DeFi in 2024? And what are we hearing from the market?

Martina Cheung   00:16:46

Just to put it in context a little bit, I completely agree with Wei that we're on the cusp of something really interesting here from the standpoint of the future of finance. And it is private credit. It is some of the increased regulation that has come in Basel III, Basel IV, but also the growth in digital assets, to your point. So this is something we've been monitoring for about two years. We appointed a Chief Decentralized Finance Officer a few years ago in S&P Ratings. And we're looking at the potential for massive growth in tokenized assets. So for example, by some estimates, tokenized assets, tokenized securities specifically could reach around $5 trillion by 2030. To enable our companies to take a view on risk, stability risk, et cetera, with respect to cryptocurrencies, for example, we launched a product in December called the stability assessment for cryptocurrencies. And we've covered quite a few cryptocurrencies as part of that. I think has put us into the center of dialogue around how the asset class is developing and growing, and we look to consistently apply our independent trusted third-party opinions where we can, and this is an area which I think will become more interesting very, very quickly.

Joe Cass   00:18:07

Thanks, Martina. Wei, interesting one for you here. What economic or investment opinion do you believe to be true that a few others would agree with you on?

Wei Li   00:18:20

Well, I started this call by observing that sentiment is more constructive this year compared to this time last year. And that is because the current momentum of immaculate disinflation has more room to run. And that is the journey. But where there is more divisiveness is the destination. So, I think we're all agreeing that the journey with inflation falling and central banks cutting rates feels like a good journey, but the destination may well not be the one that people are familiar with. So we're talking about the new normal, the new regime versus the old normal and the old regime. So our view is that because of the supply-constrained environment coming from transition coming from aging population, all of those mega fores that we just talked about, actually, we're heading towards a destination that is characterized by structurally higher inflation, higher rate as a result of that and also lower trend growth. Markets can only focus on one thing at a time. So right now, it's focusing on a journey, not a destination. But I do think that at some point, there will be a wake-up moment. And I think that's what divides opinions the most because many are still assuming that we're going back to the old normal.

Joe Cass   00:19:42

Thanks, Wei. Martina, moving to emerging markets. As the investable universe grows for investors, Will the potential demand for credit ratings in new markets also grow? And what's your kind of general thinking on that topic?

Martina Cheung   00:19:58

Yes. I mean this is a theme that comes up so frequently, Joe. And one of the reasons why, in fact, is something that Wei mentioned, which is aging demographic. We see the opposite trend, for example, when we look at emerging markets and expectations are that emerging markets will provide the majority of the workforce globally by 2030. Similarly, today, emerging markets are at 40% of GDP. The expectation is that it could be above 60% by 2030. So, a lot of really important reasons to look at emerging markets. We think about the capital markets and the loan markets in some of these economies in new and different ways, I would say. A lot of this depends and the pace at which these markets develop depend on things like foreign direct investment, but also the extent to which there is a thriving local market with the supporting regulations and frameworks to grow a capital market domestically. And a lot of the emerging markets are at different rates of maturity in that journey. So, our view is we look at each one individually, and we don't apply a one-size-fits-all approach to, let's say, offering credit ratings in a particular domestic market. We also have to take into consideration a wide variety of regulatory requirements that are growing to be able to play a role in these markets. So, one by one, I would say there's definitely a lot of interesting markets out there, and we will continue to explore additional opportunities.

Joe Cass   00:21:34

Wei, similarly for you, what's your approach and maybe your view of what could happen in emerging markets in 2024?

Wei Li   00:21:42

I will start by saying emerging markets are very different within the broad banner of emerging markets. Increasingly, clients are coming to us and asking, okay, what do you think about emerging market ex-Asia, ex-China? What do you think about Latin America? In particular, what do you think about India? And, of course, what do you think about China? So, it's hard to paint with a broad brush across emerging markets. Now, having said that, I’m going to try to do exactly that because there are some common macro themes that do impact emerging markets in the same direction. The first is the rate cut environment and the dollar. Emerging markets have been positioned to perform for a while because their own central banks were further ahead in the rate hike cycle to the extent that they started cutting rates sooner than their developed market counterparts. But because the Fed didn’t pivot yet, emerging markets didn’t dare to outperform. After the pivot and essentially the Fed green lighting the immaculate disinflation narrative, emerging markets could finally start to embrace their solid fundamentals and start outperforming. So actually, as we look ahead to the rest of this year, thinking about where the Fed is heading, the rate cut environment, thinking about potentially a softer dollar because of that, and thinking about emerging markets’ own central bank rate hike cycles and the fact that they are more geared to global growth dynamics—and we’re not expecting a deep recession—bringing all of that together, emerging markets could perform. But I would actually want to be more selective within emerging markets. Thinking about how some of the mega forces, be it digitalization, geopolitical fragmentation, or aging populations, could position the likes of India and Mexico differently from the rest of the emerging markets—that’s how we want to think about being selective.

Joe Cass   00:23:39

Thanks, Wei. Wei, at the time of recording, you've got nearly 120,000 LinkedIn followers. So why do you like the platform? And what kind of content do you post to rack up so many followers?

Wei Li   00:23:56

It's funny. I stumbled into it because I realized after I took my role, every time I do a big global investment call, our clients would follow me on LinkedIn. Like every call, I have like 500 people following me and they are our clients. So I travel all across the world. And I see clients on a regular basis, but seeing that I have to travel everywhere, I don't see everyone frequently enough. And I thought, you know what, if I take ownership of this platform and where clients are engaging with me, this is a good way to update our clients and audience with our latest investment thoughts. So that's how I got started. In terms of the content, I think just reliable quality content over some of the maybe more fancy and eyeball catching type of content is the way to go. And I also love it because I actually get good ideas from it. Like I post something, if it's very silly, it gets violent pushback. And then there are some good arguments that I take away and look into. And if it is good, that's always nice. But I see this as a 2-way journey, and it's been a very rewarding journey to engage with more audience, clients, investors than I otherwise could ever do physically.

Joe Cass   00:25:19

Great. Great stuff. Thanks, Wei. Martina, how would you categorize your leadership style? And how do you look to get the best out of your teams?

Martina Cheung   00:25:28

I would say investing in teams and in people is such an incredibly important part and true we are at S&P Global. We put people at the top of our agenda, along with the culture that enables them to be the most successful. So, we highlight things like excellence and integrity and respect, but we also highlight characteristics in our culture like innovation and discovery. So, it's really about trying to maximize our people's potential, and that's incredibly important in S&P Global across our organization. For me, I very much like to work with fantastic leaders. And what I focus on is I'm fortunate to have wonderful people in my teams. What I focus on is not so much having a team of all-stars and more having an all-star team. I think that's really a recipe for success and enabling a team to bring really diverse ideas in a way that unifies us and gives us the best outcomes.

Joe Cass   00:26:25

Great. Thanks, Wei, for any young professionals watching who are looking to succeed in the world of asset management, what advice would you offer based on your own experiences?

Wei Li   00:26:37

I love Martina's point about the all-star team made up of not necessarily all stars. In terms of my advice, I have maybe a couple. Okay, let me start with one, which was the advice that I was given when I first started working, which is to be replaceable. And when I heard it from my senior trader, I’m like, you mean to be irreplaceable? No, he said, be replaceable, and you will understand what I mean. So through the course of all of my career, I have been very open, always very collaborative, open book. When I go on holiday, when I rotate, there is always good coverage. Nothing goes wrong when I leave. And I’ve always been very, very replaceable. And what I then find out is that when opportunities come up and you are good and you are replaceable, people are going to want to take you out of your old seat and put you in a new seat with greater opportunity, with greater responsibility, which is essentially what happened with my current seat. Mike Pyle, my predecessor, was quoted to join the White House, and my sponsors looked across the whole firm. They’re like, okay, we can do this job. Would her team break down if we take her out of the old seat into the new seat? No she’s very replaceable and here I am. So, I think being replaceable is super important and maybe even a little bit counterintuitive advice that I’ve always stuck to, and it just works for me. And then one comment, another, I would say, advice, but it’s important in my specific case because obviously, I am an Asian woman and a bit shy. Maybe it’s not clear on the webcast, but I am an introvert. So as I think about kind of how do I grow my career, and also English is not my native language, right? So, I’m actually not very comfortable speaking in English and no public speaking. At some point, I switched the mindset and wanted instead to think about how do I play my characteristics to my advantage rather than thinking that, oh, I don’t speak very good English, maybe that’s a bad thing. So, in my mind, I then start telling myself, if I say something stupid, people are going to think, oh, she meant something smart, but because her English is not so good. So that’s why it comes across not so great. But if I say something smart, they will think that it’s because I’m very smart. So, in a way, my English is almost like my get-out-of-jail-free card, and I’m going to come out good no matter what. So, once I start kind of switching the mindset, then as a woman in this, I would say, still male-dominated industry, I feel very comfortable, and I feel very comfortable being myself. And I think that mindset change, depending on who you are, of course, like how to play the quirkiness, your personal characteristics to your advantage, I think that’s super powerful.

Joe Cass   00:29:53

Fantastic. That's great advice. Thanks so much. Martina, are there any individuals from the world of finance and also beyond that you always make a point to stop and listen to or to read?

Martina Cheung   00:30:05

Well, I do want to say I was being an ear to ear just listening to you their Wei, and I really hope that a lot of the women that I know very well in S&P Global hear this podcast. And I thought those comments were really inspiring. Thank you for sharing that. As it relates to people that I stop and listen to, well, Joe, I think you've had a lot of them on this podcast starting with Wei, David Rubenstein, Manny Roman, Ray Dalio, Mohamed El Erian and the list goes on and on. I think it's an impressive tour here of the who's who and who you should really be stopping and listening to. I'll give two more names. One is Paul Gruenwald, our Chief Economist at S&P Global. I think his insights are tremendous. And a favorite of Paul and mine is Ian Bremmer at Eurasia, who each of us listen to and follow as well.

Joe Cass   00:30:56

Great thanks, Martina. Wei, the last question of this podcast goes to you. So typically, I'll interview leaders and influential individuals from the world of finance like yourself on this podcast. Thinking about everyone you've met or worked with, who would be the most interesting potential guest I should ask to join a future episode of this show?

Wei Li   00:31:20

Well, I'm going to be very biased, but I am going to say Stephen Cohen, who is now taking on the new responsibility to build out the global product solution group within BlackRock. This is really game changing. He's bringing together various functions, portfolio, consulting, investment strategy in the different product segments together to bring the best of BlackRock to clients. And I think he's formulating his vision as we speak. And I personally can't wait to hear from him, and I think the broader audience would benefit as well. But before I hand you back the mic, it means a lot, Martina, for you to say what you just said. I always speak my mind and to hear your response means a lot. So thank you.

Joe Cass   00:32:05

Fantastic. Well, thank you so much to Wei and Martina, both of you today for your time. For everyone watching and listening, thanks for joining, and see you next time on fixed income in 15.