Brace for coronavirus hit to economy, says BlackRock’s Larry Fink

The global head of the $10 trillion BlackRock has also urged Australia to adopt a carbon tax to speed up the nation’s push on renewables.

Larry Fink of BlackRock – the largest money-management firm in the world. Picture: Jane Dempster for The Australian.

The world’s most powerful fund manager has warned coronavirus could slow the global economy with markets mispricing the likely impact of the pandemic.

In the wake of Wall Street’s biggest fall in two years on Monday, BlackRock chief executive Larry Fink expressed surprise that ­financial markets had “under-­appreciated the severity of the virus” until this week.

In a wide-ranging interview with The Australian, the head of the world’s biggest fund manager, said: “Australia should go much faster into renewables, it is blessed with so much sun and wind.” Fink also believes all governments including Australia’s “have to focus on a carbon tax because all the evidence shows there is a reduction in demand (for carbon) when there is a carbon tax”.

With $10.2 trillion under management, BlackRock has an investment exposure to nearly every major company in the world. BlackRock oversees both passive exchange traded funds and active funds across its portfolios.

Fink said it was important the tax be structured well because on its own, it would be a very regressive tax and should “only be introduced if the money is used properly”.

“It is important not to use the tax to pay down the deficit. The money raised should be used to redistribute it to those who can’t afford to pay it and to invest in renewables and alternate forms of energy,” Fink told The Australian.

Fink held a town-hall meeting with local staff in Sydney on Tuesday and will spend the rest of the week meeting clients in Sydney and Melbourne.

Thermal coal exit plan

He hit the headlines last month when he used his annual letter to clients to say BlackRock will divest from any company that makes more than 25 per cent of its revenue from thermal coal.

This followed last year’s annual letter where he urged companies to put “purpose” on the same line as profits.

“Long term you can’t have profits without purpose and that means connecting with employees, clients and the communities you operate in,” Fink told The Australian on Tuesday.

He said at the time he wrote the letter around corporate purpose 70 per cent of the feedback was in support and 30 per cent were against it.

But this year’s climate change letter he said attracted 99.5 per cent support even though he added: “I don’t write the letter to win a popularity contest.”

The need to align profit and purpose “doesn’t go against Milton Friedman” he added, saying he was talking about long-term performance.

Purpose and profits

Chicago economist Milton Friedman is quoted as saying companies’ only purpose was to make profits for shareholders.

Asked about community trust in companies Fink said: “People are frightened about size. They like their local representative but don’t the Senate, a lot of the big companies now were not here 40 years ago and people don’t seem to be frightened about Amazon because they are running towards it spending more.”

As for the global push to regulate the big platforms like Amazon and Google, Fink said: “It will just make China more dominant.”

On the ban on Chinese equipment supplier Huawei, Fink said “it’s not good to have any company so dominant, Huawei has a huge advantage over everyone in 5G because it’s able to price competitively.”

Privacy barriers

“5G will change everything because it will run sensors on everything and the big issue with technology is the increasing changes in software which means you have no ability to control it and the software can create personal issues as it crosses the privacy barriers.”

A registered Democrat, Fink said President Donald Trump had a good chance of being re-elected.

“I am a very centred Democrat” he said noting “it is very rare for a sitting President to be voted out of the economy is strong which it is.”

The coronavirus he said would cause “every company in the world to review their supply chain and it will push more diversification.”

“This will be a big issue because in some cases that will mean more expense and that will drive inflation higher,” he added.

Fink said: “China has done a very good job managing the virus which has proved highly contagious, but the death rate is less than 2 per cent and only where people are compromised by age or being smokers.”

“On the margin it will slow China,” he said.

Fink told The Australian he didn’t think the issue would play into the trade war “because no leader wants to use a disease to win.”

On the issue of climate change, Fink said company leaders “are thankful we are talking about a long transition program”.

“One told me it makes little sense to penalise a company when if it sold its carbon producing assets to a private company that would have little impact on the global climate position,” he added

Fink said just increasing the pressure for more disclosure will make companies act faster.

“Clients are looking for more alternatives,” he said.

Around 27 per cent of BlackRock’s equity under management is actively managed and the rest is indexed.

Fink said “we are just at the start of a revolution because there are $US100 trillion invested in global bond markets and just 1 per cent is indexed whereas global equities are 18 per cent indexed.

“Investors today are actively managing equity portfolios by buying indexed funds,” he added.

On corporate governance, Fink rejected suggestions that in Australia, BlackRock blindly followed recommendations of proxy advisers such as ISS.

“We don’t follow ISS or (CGI) Glass Lewis, we have the largest corporate stewardship team in the world and nobody is more engaged than we with companies. We urge companies to engage with us all year and not to leave it until the proxy season.”

Before the impact of the coronavirus, the global economy was pretty strong although the virus could “slow it down quite considerably”.

The US economy is pretty strong, he added.