This time last year Larry Fink, the head of the world’s largest asset manager, made a bold call for people to move 100 per cent into equities. While BlackRock’s boss maintains that those fully committed to stocks should stay there, he is far less sanguine about the current state of the market.
“I think we’re going to have some indigestion and I’m actually very confused now because, with so much cash sitting on the sidelines still, we could see this incredible upward draft, which probably would be a great sell indicator,” he counsels during a Q&A session at the Opportunities for Tomorrow conference in New York.
“My issue right now though, is I could see a scenario where we have a 12-15 per cent correction.”
While price-to-earnings ratios are currently resting at the high end of average following a 40 per cent surge on US markets over the past 18 months, it is policy uncertainty that has Fink giving notice of potential market turbulence.
At the moment there is ambiguity about what will come out of China’s Third Plenum, doubt as to the potential for Abenomics to progress from a good start to a stable future and, as Fink puts it, the “nonsense in Washington”.
Given Fink’s company manages over $US4 trillion in assets, his views have the ability to move markets. More importantly, his views are an indication of the current comfort of major global investors.
His ‘confusion’ is a significant departure from March this year when he proclaimed to be “hyperbullish on the US economy”, anticipated further improvements in China and Japan and expected the sharemarket to rise 20 per cent in 2013, a forecast that should prove close to the mark.
The BlackRock chief executive is not just questioning Washington politicians but also the Federal Reserve, which has been roundly criticised for missing an opportunity to begin its QE taper in September.
“It was a free option,” Fink says. “I thought the market was accepting that future.”
Tapering, to Fink’s eyes, has “very little impact on the economy” and he contends that the Fed should start the reining in of QE in December while reaffirming that rates are going to remain low for three to four years.
His greatest warning, however, is reserved for France.
The ability of the second largest economy in Europe to turn around its fortunes could be crucial to keeping the eurozone together.
“I don’t think in ten years’ time we are going to have a euro if we don’t have a strong France and a strong Germany,” he cautioned.
“It’s all predicated on two very strong countries and the competitiveness of France is still deteriorating.”
The forthright statement comes as the eurozone shows tentative signs of recovery, but still remains crippled by the legacy of the financial crisis, particularly in the labour market.
Fink isn’t alone in his fears about the French economy, with the International Monetary Fund forecasting the French economy to be the weakest of the top five economies this year, and next. Ratings agency Standard & Poor’s, meanwhile, downgraded the European country’s debt from AA to AA last week.
S&P made the case that the unemployment rate was likely to remain stuck above 10 per cent through 2016, while government debt would continue to escalate until 2015.
And that rising debt, with little to show for it in terms of economic improvements, is like a ticking time bomb as far as market watchers are concerned. It should pay to keep a close eye on France moving forward, even if it doesn’t prove the catalyst for the next market correction.
Daniel Palmer is Business Spectator's North America correspondent. @Danielbpalmer