‘$4 trillion of cash is sloshing around the sidelines,’ says BlackRock exec. Here’s where he thinks that’s headed.

What’s unclear is when that money will start to work its way through global capital markets, as he said, the “real economy adjusts when you have to refinance.” But he touched on some “regime changes” he believes are at the driver’s seat of that global capital from the West and Japan specifically.

The first, and a big overhang for BlackRock clients in putting that money to work, has been the direction of interest rates as central banks have moved to tackle inflation, he said. A second regime change is the transition to a low carbon economy, and he noted that currently the world invests roughly $2 trillion a year in energy, of various forms.

“That number we think is going to go to about $3.5 trillion…so we’re talking about $2 trillion in the transition and that is a perfect pairing. Most of those are very long-dated cash flows that marry very nicely with pension and insurance assets,” said Wiedman.

The third change is the coming shrinkage of western banks. “We’re going to see…$4 trillion is coming off bank balance sheets in the next five year. It will come off in the form of loan sales or securitizations and ultimately will end in the hands of pensions insurance companies and wealth.”

Finally he says infrastructure could draw $300 billion of capital that could be put to work on such themes as global supply chains due to geopolitical tensions, though he says that’s a much tougher investment.

Others on the panel also chimed in on the money that’s not being put to work, saying there’s fear involved. “I think our biggest issue is there’s too much cash on the sidelines and what are we going to do to bring it back to the marketplace,” said Andrew Schlossberg, president and CEO at Invesco.

Among Invesco’s wealth management advisers and individual investors, he said from a third to a quarter of portfolios are in cash and cash-like instruments. And while the interest rate picture resulting from central bank monetary tightening to quell inflation has something to do with that, “one of the greatest challenges” is ongoing geopolitical tensions and wars that are “really playing on the psychology of individuals and wealth advisers,” he said.

“So not only does the interest rate picture need to get more clear, but also the political environment, which is going to be difficult. We’re seeing portfolios positioned in a pretty defensive way and what it’s going to take to get them off the sidelines is sentiment and psychology,” said the Invesco head.

So Schlossberg said investors and managers are getting “paid to stay in cash,” as they wait for a big “catalyst moment” to dive back in. “That may be interest rate policy, but it’s probably not political certainty over the next year,” he said.

Bonds have been a popular spot for investors this year, as amid increasing short term interest rates they’re getting paid to keep money parked with little risk, and money managers on the panel highlighted that opportunity.

“From the last hike to the first cut is the window of opportunity in bonds,” said Mike Gitlin, CEO of investment manager Capital Group.

“What hurt people in 2022 was duration because rates went up so fast. The forward market expects the Fed to cut 75 basis points over the next 13 months…if that is true, and yields are high, you have an opportunity to own bonds at 6%, 7%, 8%. I think that window’s open and I think that’s an opportunity,” Gitlin said.

BlackRock’s Wiedman backed up Gitlin as he highlighted bonds when asked for three areas he’d look for yield going forward. He called it a “golden age for getting back into long-duration assets” right now, and that will be a bigger part of their portfolios going forward.

“Picking exactly when to leg into long-term assets and spread assets is a difficult game. But if you liked bonds or even if you didn’t back in 2019, you gotta love them now. On risk-free assets you’re earning a real return of 2% 2.5% and then from there you can stack on that with credit,” he said.

Wiedman said he also likes private credit, whether insurance companies or individuals, going forward, as he pointed to another massive yield opportunity to come.

“The world needs huge sums of infrastructure…it’s also aging societies. All large economies are facing fiscal constraints. Everybody is going to have a problem with not enough workers relative to retirees, so the state is going to have a fiscal constraint on how they can fund infrastructure. So there’s only one place that can come from, which is long-dated investors,” he said.

One last word from Wiedman, who discussed a risk on the horizon that markets aren’t pricing in right now nor is anyone paying attention, which is the “fiscal unsustainability of the U.S.”

“One morning, people are going to wake up and decide this is one of the most important forces for global markets. I don’t know what will trigger it..at that time it won’t be a funding problem…the U.S. can fund into perpetuity, there are plenty of people out there who will buy Treasuries. The issue is yields will rise and every asset in the world will reprice.”

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