Laurence D. Fink
Despite global political volatility, uneven economic recovery and uncertainty over monetary policy, the S&P 500 Index, the gauge of large cap U.S. equities, rose 30 percent in 2013, its largest annual advance since 1997.
Equities in developed regions outpaced those in emerging markets as well as commodities at a historic rate, while the end of a three-decade-long bull market in bonds produced losses in long-duration fixed income.
This market behavior highlighted the importance not only of being invested, but also of taking a balanced approach.
We remain believers in global equity markets. Developed markets continue their recovery and, while emerging market performance has lagged materially, those economies retain their role as substantial long-term drivers of growth.
Yet market performance remains stubbornly tied to political outcomes. In recent years, central bank policy in the U.S., Europe and Japan has been a dominant factor in generating asset appreciation and aiding global economic recovery.
Today, the impact of monetary policy tools on economic growth is diminishing, portending greater volatility, given the unpredictability of political activity in many parts of the world.
As the first months of 2014 highlighted, geopolitical instability remains elevated and investor confidence is likely to be tested further.
The next stage in expanding economic and market growth will depend on the willingness and ability of governments and the private sector to provide leadership.
To broaden recovery, strengthen markets and, in particular, tackle persistent unemployment, political leaders must look beyond monetary policy and enact fiscal and economic reforms that address the structural challenges to the global economy and the investment landscape.
Leadership must also involve changing the culture of savers worldwide to encourage long-term investing and smart, measured risk-taking in the markets, which creates the potential to generate growth and meaningful income over time.
As the investment environment evolves, it is imperative that we are focused on understanding the mega-trends shaping the future.
We’re living longer, but we’re not prepared
Among of the defining challenges of our age are longevity and the associated retirement crisis it is helping to drive. People are living longer lives, but they’re not prepared: In the United States, for example, only 40 percent of Americans take part in any retirement plan. Savings for pre-retirees average just $12,000.
But that’s not the worst of it. In the coming decades, longevity is only going to increase. What does this mean to you? Well, more years to live mean more years to pay for. We all need to save more ― a lot more. The old wisdom of putting away 5 percent a year just won’t cut it in today’s world ― people need to be thinking about doubling that figure, or going even further.
Technology reshaping job market
Whether it’s a U.S. restaurant replacing waiters with tablet computers or an Indian car factory adding robots to the production line, machines are replacing people all over the world.
Exacerbating the problem, many companies can’t find enough workers to do the more highly skilled jobs created by these transitions ― programming, engineering and more.
Part of this job loss is inevitable, but there’s an opportunity here as well.
The infrastructure opportunity
As the world struggles with digital pressures, it must also confront a very concrete one ― the massive need for infrastructure investment. The World Economic Forum estimates that $5 trillion a year in global infrastructure investment is needed through 2030.
It can be easy to dismiss bad infrastructure as a nuisance on the drive to work, but it’s actually a tremendous obstacle to economic growth.
Infrastructure projects can also help relieve some of the pressure on workers displaced by technology, since construction requires large amounts of unskilled and semi-skilled labor.
And since most governments can no longer afford to self-fund massive infrastructure projects, there is a tremendous opportunity for long-term investors to form crucial public-private partnerships.
Investing isn’t what it used to be
The conventional wisdom used to be that your portfolio should be 60 percent stocks and 40 percent bonds. But as the financial crisis proved, that sort of simple breakdown doesn’t work in today’s markets.
Stocks and bonds are too tightly correlated. For instance, since they move in tandem, holding both doesn’t necessarily mean you’re diversified. And furthermore, bond yields just aren’t what they used to be.
Reacting to the crisis and the challenge of finding returns, investors are exploring a variety of new strategies-alternative investments, “unconstrained” mutual funds that offer fund managers more flexibility, and low-cost products like exchange-traded funds, which track an index like the S&P 500.
Whether it’s longevity, technology, infrastructure or the markets, these trends are all deeply affecting each other ― and they will be for years to come. The most important thing is to get out in front of them, and to peel back the surface to see what other major trends will begin to shape our world.
By Laurence D. Fink
Laurence D. Fink is chairman and CEO of BlackRock. The opinions reflected in the article are his own. ― Ed.