Buenos Aires — Axel Christensen, Chief Investment Strategist for Latin America at BlackRock (BLK), is optimistic about the possibilities for the U.S. to avoid a recession, amid an adverse scenario not only because of the war in Ukraine, but also because of the rate hikes by the world’s central banks.
And regarding Latin America, he highlights the short-term tactical opportunities for investors in the region, both in equities and fixed income, in commodity-related items, and also in sovereign bonds, since public accounts will be improved precisely because of the higher revenues from commodity exports.
BlackRock is the world’s largest mutual fund manager, with total assets under management of $9.6 trillion at the end of the first quarter of 2022, almost half of the Gross Domestic Product of the United States.
An engineer and Chilean national, Christensen, who has been with BlackRock for 13 years and has worked at Citicorp, McKinsey and Banco de Santiago, spoke to Bloomberg Línea from Miami about Latin America’s most attractive sectors for investment.
Christensen also highlights the case of Colombia, whose economy is expected to grow above the regional average in 2022, and also points to Brazilian companies that serve domestic demand in that country, as they will likely benefit from the end of the cycle of hikes by the Central Bank of Brazil.
As for the outlook for the technology sector in the face of a lower liquidity environment, he stresses that it is normal for some to seek to adjust the size of their teams, and in that sense, he does not raise any alarm bells.
“We have many technology companies in the region that have been able to successfully weather cycles of ups and downs in previous years,” he says.
The following conversation was edited for length and clarity.
If Europe and the United States had raised rates and reduced bond purchases earlier, would global inflation be lower today, or was this scenario inevitable?
This is a difficult question to answer, because you have to understand the context. The uncertainty of the pandemic made it difficult for them to act more hastily in terms of withdrawing stimulus, either by raising interest rates or reducing purchases. Yet there are other sources that also generated some price pressures. Inflation is mostly explained by a supply-side problem. On the one hand, the process of economic reopening, with a demand that was very contained and which began to emerge with great force, came up against supply chains that were still very fragile. The process of opening up production plants, for example, was not uniform. It was gradual, even at the regional level, to the extent that we had to deal with variants of the pandemic. So that part that had little to do with the Central Bank’s economic policy or fiscal stimulus has been a very important factor, unlike previous inflation cycles. And with the war in Ukraine, that supply shock has only deepened. Central banks can go red or blue. They can raise interest rates and they are not going to generate more oil production, or more grain to be harvested.
The war in Ukraine appears to be more protracted than initially expected. Can we expect inflation to continue to accelerate?
Probably a scenario of permanent acceleration is a bit difficult to sustain, even on a mathematical basis. Think for example of these recent days where Russia announced a total supply cut to a couple of countries in Europe. The inflationary impact that this may have in the very short term. But one can draw some lessons from what happened before the conflict in the effect on supply from the pandemic. The economic actors are accommodating themselves. They are looking for other types of inputs, they are diversifying their suppliers. People will drink, I imagine, less coffee and a little more tea, or mate as in the case of Argentina. One is accommodating either as a consumer or a producer in the face of a reality. And that makes us see that in the medium term, probably those inflationary acceleration pressures that I mentioned will start to ease. At BlackRock we use the motto of learning to live with more inflation. Everyone, as a consumer, as an investor, as entities that make economic policy decisions, is going to have to adjust to an environment of higher and more persistent inflation.
How do you read the data that was released on April 28, showing an economic contraction in the United States in the first quarter, taking into account that several major banks are already forecasting a growing risk of recession next year in that country?
The truth is that this contraction for the first quarter may in some ways lead to erroneous conclusions. An important part of the figure is explained by the change in inventories and also an increase in the U.S. trade deficit, which basically reflects that imports have grown much more than the export base. Certainly we see the current effect of supply and inventory problems, which affects export activity. But at the same time, seeing an increase in imports reflects an economy that is still quite healthy. In this sense, to draw conclusions that the United States would be on the verge or would imminently enter a stage of contraction of activity, a recessionary stage, would be, in our opinion, a bit hasty. There are several indicators that still show activity in the labor market to be quite robust. Although there has been a drop in consumer sentiment indicators, in practice, consumption is also still quite fluid, with a debt capacity that gives a little bit of slack. When one enters a year in which central banks begin to withdraw stimulus, to move towards levels of greater neutrality in terms of monetary policy, it is certainly usual that the probabilities of an overreaction on the part of this withdrawal of stimulus leads to a situation of lower growth, even recession, to the point that it is usual in this monetary policy cycle for recession risk adjustments to increase. Now, this probability will have to be compared with the future moves made by the Federal Reserve.
How does the region stand in this context in terms of capital flow and investment? In recent days we have learned that several Brazilian technology unicorns have laid off hundreds or dozens of employees.
I believe that this has more to do with sector situations rather than a generalized situation. On the one hand, the inflationary situation includes that the price of raw materials, of commodities, also remains at higher levels and in a more persistent manner. And that in general for Latin America is good news. That means that more flows are coming in from the trade balance, but also from investors who perceive this improved situation where the rest of the world has to face rather the negative effect of higher raw materials. But there is another track that has to do with domestic-focused activities. Let’s remember that the central bank of Brazil has been pushing interest rates above 10% for more than a year now. And that has certainly had an effect on activity, particularly in the consumer sectors. And that is perhaps where investors looking at the region view it more cautiously in relation to the commodity route. So a two-sided region. Going a little bit more into the detail of different sectors, I understand that those unicorns that you mention in Brazil are mostly fintechs or related to activities that are much more sensitive to adjustments, in this case rising interest rates. When there are changes in conditions they often have to respond by adjusting the size of their teams. This might have happened in other industries, not necessarily unicorns that are adjusting to a change in the macroeconomic environment, but which are perhaps drawing more attention. It is certainly journalistic to see it in these companies that had exorbitantly high growth as well. We have a lot of technology companies in the region that have been able to successfully weather the up and down cycles of previous years.
From BlackRock’s point of view, what are the asset classes and sectors that you are seeing as the most attractive in terms of opportunities?
Firstly, the more commodity- or energy-related segment, which benefits from a higher price environment, higher demand, being able to place your products in times when there is a shortage of supply. Each investor can choose which channel, through fixed income, which also allows for the possibility of investing in government bonds, which see their fiscal accounts improve when there is an influx of more foreign currency. Or through shares in companies in the sectors that can be taken advantage of in this more cyclical stage, and which can probably be extended into the following year, but without losing sight of the fact that many of the opportunities are also more structural, long term. In copper, lithium or nickel, we believe that the demand associated with the climate transition will be extremely strong. In other sectors, we may have to be a little more selective. The IMF made some downward adjustments to growth expectations for the region. But not all countries saw adjustments in the same direction. In Colombia, they adjusted slightly upwards for this year. This is an example of how to look at the country level. The same can happen at the sector level. In the case of Brazil, which has probably already largely completed a very rapid cycle of interest rate hikes of a thousand basis points in just over a year, while central banks in the rest of the world are still on the rise, we could see a more favorable domestic demand situation as the U.S. dollar stabilizes. And that has consequences both in the positioning one wants to have in fixed income, as well as in the decision of which industries I want to be in. And the most sensitive ones, which may be suffering today, may eventually be a good entry point: the real estate sector, for example, or the financial sector itself.
What opportunities do you see in Argentina?
I believe that Argentina, and this has always been the case, has very interesting opportunities precisely in many industries that fall within commodities. Hydrocarbons, agro-industrial, etc. I believe that investors have never lost perspective and vision regarding those opportunities. What has also been somewhat cyclical is the ability to have access to those investment opportunities and that has more to do with the financial market conditions in Argentina than with the situation of the industries.
For a global investor, access to the local Argentine market is difficult for many reasons, from the exchange restrictions to the fact that many investors pivot around a benchmark index. In the case of equities, Argentina is no longer in the main index. Much of that exposure has been channeled through companies domiciled or originating in Argentina, but with a very broad regional coverage, which is accessed through issues in the United States directly. So there are ways to look for opportunities in the country. Sometimes through slightly more indirect channels. A larger investment would require laying down a better financial access facility, bearing in mind that the attractiveness of the industries that finally receive that investment is still very much in force.
And does this have to do with a medium- or long-term process of recovering credibility and market confidence?
On the public debt side, the memory of the debt restructuring process is still very fresh. These are elements that have an impact on the appetite and perhaps the immediacy of interest in investing in Argentina. The size of its economy, the attractiveness of its industries, will always put it on the radar. Investors see those opportunities. To execute in the short term will require an improvement in access conditions. But I think they are more present than ever. They are being channeled through different channels, either through issues in other markets or private markets. You can see it in the explosion of investment in the technology sector with several technology unicorns being created and developed from Argentina. This is something that investors from other segments, perhaps not so close to the ones we invest in at BlackRock, private investors, venture capitalists, are also looking at very closely. And I think it is a channel that we have to pay attention to, and not only the larger and more traditional fixed income or equity markets.
Companies like Ualá, for example.
I cannot mention companies in particular. There are many companies in Argentina, in Brazil. And from Mexico as well. And in the rest of the region. Many of them with success stories exploring segments that traditional companies had not attacked, or explored as strongly as they have. In the field of fintechs, it is incredible to see how they have enabled the incorporation of literally millions of people who previously might not have been able to access traditional banking channels. And their impact is not only economic, but also in improving inclusion and the participation of broader segments of the population in our region, which has always been an Achilles’ heel. It is something that investors are watching with great interest.
How does BlackRock see the growing adoption and investment in crypto assets in the region?
At BlackRock we manage the resources that our own clients entrust to us. And our approach has led us to be extremely cautious about cryptocurrencies in general. We have been exploring with investments in some investment teams, quite small, to understand the behavior. We understand that it is an asset that is very volatile. At the same time, we understand that cryptocurrencies are creating an ecosystem that is growing every day. So in that sense, maybe I could make an analogy with the California gold rush at the end of the 19th century. Before we were encouraged to look for gold and to mine, we have been concentrating on the suppliers of those miners. We have started to venture into some strategies that look at those who are going to provide the shovels and picks, in terms of the development of the cryptocurrency ecosystem, and there we believe that there are interesting opportunities, either platforms that allow people to invest in this type of assets, or other types of providers, which for example allow secure transactions.