The fundamentals of global capital markets have never been stronger, and the world is “OK”, a panel of global funds management executives told delegates at the Milken Institute Global Conference.
Michael Corbat, chief executive of Citigroup, which has 200 million customers in 160 countries, said the drivers of growth in the US – housing and jobs – were both looking good, and the full benefit of its tax reforms was still to come.
“The world is OK,” Corbat said. “We are 106 months into this recovery and it wasn’t until the second half of 2016 that we started to match or exceed the expectations of what growth looks and feels like; 2017 was the first full year of that.”
JP Morgan Asset Management chief executive Mary Callahan Erdoes, who oversees $2.8 trillion in assets, said there were many things to be concerned about, but the longevity of the recovery was not one of them.
“We are at a 44-year low in unemployment in the US, the fundamentals could never be stronger,” Callahan Erdoes said.
She said volatility in markets would return to normal and that the lack of volatility in 2017 was an anomaly.
“On average, once or twice a week the stock market will have a 1 per cent move either way; in 2017, there were only eight of those days in the whole year,” she explained. “The whole market is moving in sync. Volatility won’t upheave markets, it will take them back to normal. But for those who were affected in 2008, there could be some psychological effect. It’s the greatest time ever for active asset management.”
Guggenheim Partners chair and chief investment officer Scott Minerd warned, however, many excesses were building up. He noted that the ratio of corporate debt to GDP was at a record high. He also said US stimulus fiscal policy was colliding with monetary policy and other strategies, such as in immigration, and there would be a breaking point.
“Labour and immigration is interesting; for example, there are shortages of workers in key areas, like painters and carpenters in real estate,” said Minerd, who sits on the Fed’s investment advisory board alongside JP Morgan’s Callahan Erdoes. Investors should be focused on this because it’s going to lead to something serious.”
While the panel agreed, to a large extent, that fundamentals were strong, Joshua Friedman, co-chief executive of Canyon Partners, who is also on the board of the Harvard University endowment and a trustee at Cal Tech, pointed out that there was a difference between the fundamentals of the economy and how markets perform.
“Markets are creatures of moods,” Friedman said. “The inflows into passive have skyrocketed, so structurally it is a very different market. And the mismatch between assets and liabilities is a problem.”
Ning Tang, chief executive of CreditEase, a Chinese fintech conglomerate specialising in finance and wealth management, also sat on the panel, which addressed the outlook for capital markets.
He said a new era was being driven by China’s middle class of 200 million, with education, healthcare, and all services industries doing well.
“Digital transformation is key for small businesses in China,” Tang said. “The new economy financial system is happening. All the bottlenecks can be solved by technology and small businesses can invest and borrow through their mobile phones. We can lend to them in real time.
“China is asking for a new financial system. In the past, it was dominated by banks but it will shift to more direct markets, like private equity and venture capital, supporting innovation and technology. But investors must know that patient, long-term capital is very new to Chinese investors and regulators. In China, long term means the same day.”
JP Morgan’s Callahan Erdoes – ranked the number one woman in finance by American Banker – says cyber-risk is the single most important danger and everyone should be thinking about it.
“[There’s a] need to worry about keeping control; technology can hijack your whole life,” she said. “Cyber-warfare in this world is unknown and uncontemplated.”