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Marty Flanagan, President and CEO:
It's hard to imagine we're wrapping up 2022. It was a year of surprises and unexpected developments, which we'll talk about. I'm thrilled to be here with Kristina and Andy, and we'll have a wide-ranging conversation of looking back a little bit, but probably more importantly, looking forward into 2023.
I believe really, all of us coming into 2022, after what was a spectacular market in 2021, we knew that we'd be dealing with inflation in some of the more developed countries. And that was topical, and people were prepared for it. No one saw the invasion into Ukraine. No one would have imagined that China locked down for COVID again and the impact on supply chains. All really harsh developments for inflation.
And then on top of it, the geopolitical challenges that we dealt with, principally between the United States and China. They all made for a really challenging market year, and so it'll be good to wrap up those thoughts as we look into next year.
And let me start with inflation. Needless to say, it's topical, and countries like the United States and the UK and the continent are trying to deal with very high inflation rates that we've not seen in decades, and everybody has a view on it. And let me start with Kristina, who is really thoughtful on the topic. So Kristina, can I ask you to pass on your thoughts?
Kristina Hooper, Global Market Strategist:
Well, Marty, to answer your question, I don't want to embarrass you, but I have to start with saying that you were one of the first to call inflation as being persistently high, when many, including Fed officials, were still calling it transitory. So of course, unfortunately, your prediction came true, and we had a very difficult year when it comes to inflation. However, I believe we have peaked, and we are moving in the right direction.
Now, Jay Powell looks at inflation. I think he did a great job deconstructing it into the three key components: goods inflation, housing inflation, and services inflation. And so what we've already seen is prices going down in goods. Think about used cars. We're seeing housing rollover, which makes sense, given high mortgage rates. But the stubborn component is services, and that's likely to continue to be as we move into 2023, just because such a significant component of it is wages, and labor force participation is relatively low. It's a tight labor market.
So that suggests we'll continue to see inflation moderate through 2023, but I don't think we're going to get to the Fed's inflation target of 2% by the end of 2023, although that's okay if it's moving in the right direction and we see longer-term inflation expectations on the part of consumers continuing to be relatively well-anchored.
Marty Flanagan: Really thoughtful, and I think you're right on the mark, and I think we're all looking forward to 2023, for many different reasons. But let's look at inflation from a different point of view.
So Andy, the US passed the Inflation Reduction Act in 2022, and the whole intent was to drive down cost for individuals, Americans in particular. As you look into next year, what does your crystal ball tell us about impact on officials and quite frankly, also corporations, from the legislation that was passed?
Andy Blocker, Global Head of Public Policy:
Well, Marty, you're welcome. Inflation Reduction Act: We are going to take the bow here in Washington. Actually, I'm really not a fan of the name. I actually think it should probably be the Inflation Mitigation Act. It doesn't roll off the tongue, but it's actually more accurate. And what I mean by that is that the key inflation mitigation points of the legislation are one, that on a macro level, it's that it raises more money, around a trillion dollars, than it actually spends, around 700 billion. So it's not adding to the deficit and just throwing money out there.
And the second thing, on a micro level, is that especially the prescription drug cost parts are mitigating the effects of inflation by basically lowering costs for people in specific sectors. I will say, just to add to that: There's one other key part of the Inflation Reduction Act; it's nowhere in the name. It's probably one of the largest investments in clean energy and to fight climate change we've seen: almost 400 billion dollars, and so we'll see some real effects from that in the future.
Marty Flanagan: Andy, really helpful, and those are some good points that I think people don't really understand on the surface there. Let's talk about global monetary policy. It goes hand-in-hand with inflation, and Kristina, I'm going to start with you again. As we look into 2023, what do you think the possibilities and the likely direction of monetary policy are, with central banks, maybe starting with United States?
Kristina Hooper: What we've seen has just been an extraordinary year of monetary policy tightening. The World Bank has referred to it as the most synchronized monetary policy tightening on the part of central banks in more than five decades, and so I think we're in the final innings of that tightening.
Many of those major central banks felt it important to front-load, because of the very high and persistent levels of inflation, and so they're getting far more satisfied, and what we're likely to see is a downshifting in the size of rate hikes. And I think we're going to be coming to a pause relatively quickly. I would expect the major central banks to all hit the pause button, essentially get to their terminal rate by the end of the first half of 2023. And it could likely happen significantly sooner, if we see inflation moderate enough.
So this is definitely not an ideal environment, but I think 2023 is going to be a lot better, in terms of monetary policy, than what we saw in 2022.
Marty Flanagan: That's great. So Andy, anything you'd like to add, if you don't mind, as you respond? Put on your Washington, DC hat. What you hearing, walking around the streets?
Andy Blocker: Well, it really depends on which side of the aisle that you sit on. If you're Republicans, they're more likely to support the Fed remaining hawkish for longer, to ensure that inflation is fully under control, even it means going into a slight recession. While Democrats, they're more willing to see the Fed ease off the rate increases sooner, to avoid even a milder, deeper recession. I think the Fed is more aligned with the Republican view at this time, but you're going to see a lot of Congressional hearings and a lot of pressure from both sides.
Marty Flanagan: So let's stay on that. So obviously, here in the United States, we just wrapped up our midterm elections. They continue to get more contentious as the years go on. But Andy, with the outcome of the midterms, what are you anticipating happening in Washington, DC? What are the big agenda items, and how might it impact markets and the way people might invest?
Andy Blocker: That's a great question, Marty. I think first, we expect Congress to accomplish actually a lot more in the lame duck session of Congress that we're currently in now, in this two-month period, than we do over the next two years of Congress. Already, we've seen them pass legislation to avoid a rail strike and to protect marriage equality, and they're now working to complete the government funding legislation, as well as the National Defense Authorization Act, along with disaster relief, Ukraine spending. And they're also going to try to get the Electoral College reform and retirement security legislation done, as well, so that's a mouthful right there.
For the next Congress, we really see a lot of noise, with not much getting done, other than must-pass bills. We expect a lot of oversight hearings of the Biden administration and their regulatory actions, a potential government shutdown, which will probably be short-lived, and a potential impeachment of a Biden administration official, if not Biden himself.
But we see none of these as market-movers. However, there is one potential market-mover, and that would be a potential breach of that ceiling, which is scheduled to be reached in the second half of 2023. And we really see that failure as a possibility, because of the current makeup of Congress, with specifically the split government of having a Republican House and a Democratic Senate.
Marty Flanagan: Well, Andy, let's stay in DC, if you don't mind. And lots of discussion, over the last few years, of the future of things like Bitcoin and the like, and very, very disparate views on where it was going and the possibilities. And the collapse of FTX has really been somewhat breathtaking, and from my personal opinion, we're just at the early beginnings of what we might see come out of it. And so the debate around regulation was everybody pointing the other way. What do you think is going to happen now, from a regulatory point of view, in DC, and other thoughts you might have there?
Andy Blocker: So I think the answer to the question on what's going to get done here on Bitcoin and the whole digital asset space is: Something's going to happen, and not much is going to happen. What I mean by that is first of all, you've already seen hearings start, with respect to FTX. You're going to see more of those hearings as we go into the new year. But I do think there's going to be an attempt to get something done in the longer term, especially with respect to dividing the jurisdiction between the SCC and the CFTC: who's going to do what and divvying out the different powers to actually regulate this area. But that's going to take some time.
I think the one area of a potential quick action, maybe legislation regarding Stablecoins, which I think the House had made some progress on last year, and I think the new Chairman of the House Financial Service Committee, Patrick McHenry's, going to spend some time working on.
Marty Flanagan: That's great, and Kristina, over to you. If you don't mind, let's say on the same topic. And put on your investor hat, and what's your sense of the appetite for cryptocurrencies? The people that believed, they really believed, and so do they still believe? What do you think is going to happen in 2023?
Kristina Hooper: Well, I certainly think there's still a very significant portion of investors that still believe. Keep in mind: What FTX was, was a platform issue, not an actual crypto issue. And we've actually seen that before. Mt. Gox was something rather similar. So we tend to see interest go in waves, and in fact, I've seen interest go in waves, in terms of even institutional investors. I think that will continue.
We also have to recognize that there is another macro factor that has, I think, made cryptos less popular in the near term, and that has been the giant liquidity suck that has been created by so many central banks. So I suspect that when we see central banks hit that pause button, especially when we get to the point where some central banks start to cut rates, that could create an environment that's very different and again, drive greater investor interest. But there's always going to be a significant cohort that is dedicated and remains invested in cryptos, no matter what that larger environment is.
So Marty, I have to ask you. We've seen other asset management CEOs say that cryptos are a Ponzi scheme, a scam, and that very few cryptocurrency firms will survive. Can you share your views on cryptocurrency and the potential for digital assets, broadly?
Marty Flanagan: Yeah, happy to, and look, I think what's undeniable is the underlying blockchain technology is meaningful. It's impactful. Really, there's no industry that will not be impacted by it, so that's really the good news. I personally have been a skeptic of cryptocurrencies like Bitcoin, from the standpoint of unregulated claims of money laundering, and some not-so-great things happening with the use of bitcoins. And I also believe, too, that if they ever got to the size where they'd be a challenge to central banks, that they would somehow be regulated. They're not going to let that get in the way of monetary policy. So I remain skeptical of the cryptocurrency element.
That said, very strong believer in digital assets and the way forward there. When you look at our industry, for example, the idea that you can tokenize real estate and put an asset like that and allow a greater group of individuals to access asset classes they can't necessarily get to, because the sheer size of it, that's a really powerful development, and we're going to continue to see that happen. Smart contracts are another area that I'm a very strong believer in. But again, all around the certain digitization element that we speak of, so there are lots and lots of very positive possibilities, and we're in the very early stages of what we're going to see.
Andy Blocker: Well, Marty, while we have you, I was curious. Invesco was early to identify the opportunity in China, and I was wondering how you're thinking about our business in China now, in the context of the global economy, geopolitical tensions, and the long-term outlook.
Marty Flanagan: Yeah, Andy, you're right. I mean, Invesco's been in China, through Invesco Great Wall, the joint venture, since 2003.
We look at China from within asset management as the single greatest opportunity in the global asset management space right now. And you can look at various estimates of net flows in our industry over the next three to five years, and some of the estimates are somewhere between 30 to 40% of all net new money into our industry will come from China. It's a massive opportunity.
So now contrast this, Andy, with the geopolitical tensions between the United States and China. They're real. They're acknowledged by the Chinese. They're acknowledged by the United States. My view is that the two largest economies in the world need to find a way to work together. There's many things we can disagree about, but what we both need is we both need growth. We need growth in China. The Chinese need growth; we need growth here. But if we set our agendas on developing mutual growth in the two countries, it would be good for both our countries and really, for the world.
I think it was a really important development that the President Biden presidency recently, when they met, they took the temperature down with the relationship, and I think that's really important. But it's going to be very noisy, from a geopolitical landscape, over the foreseeable future. But again, I'm just very hopeful that we keep all of our heads on straight and look to create a mutually positive relationship, recognizing we're not going to agree on everything.
So when we talk about investing, you can't talk about investing without thinking about risk and analyzing risk. And so Kristina, let me ask you: What do you think is probably one of the most underappreciated risks in the market right now?
Kristina Hooper: So Marty, I might surprise you by my answer. I really believe the most underappreciated risk is the risk of not participating in the market. What I think is the biggest mistake made by investors during the global financial crisis was getting out at or near the bottom and locking in losses, because they understandably got spooked. But then not participating in what became a very strong bull market, as a result of those fears.
So I think when investors consider all the risks out there, they can get very fearful, and especially if they don't have an investment policy statement or a plan for long-term investing, they can miss out on capital appreciation. They can miss out on exposure to risk assets that can help them meet those long-term goals. So to me, that continues to be the single greatest unappreciated risk for investors.
Marty Flanagan: Kristina, I'm going to pile on. You are so right, and inevitably, it's the individual investor that gets scared, gets out at the bottom, stays out, misses a run-up, and never will be able to accumulate the wealth that they had. And what's amazing: If you pick any index and go look back 100 years, and if you look, it just goes up. But by the way, it doesn't go straight up; it does this.
And so I'm really fond of saying, "Time in the market is more important than timing the market." If you try to time the market, you're going to be wrong all the time. And so your advice is really spot-on, and being very thoughtful about how can you plan your portfolio is essential.
Let me turn to you, Andy. And any thoughts?
Andy Blocker: No, no, I'm going to interrupt you, Marty. You guys are all Pollyanna here. So let me just go to you. You're a CEO. What keeps you up at night? There's got to be something.
Marty Flanagan: You know, Andy, I've been doing this so long, I sleep like a baby every night. The reality is, though, I think if you just think of this conversation, it is really, really important to constantly be challenging yourself about the future. What are the opportunities? What are the real risks in the market? What is the probability of those happening? And really just trying to stay on top of it and really have a broad view of engagements with very smart people with different points of view that you can learn from. And use that as a guide as you're making your decisions.
So that said, I'll put it in the context of the last few years. The notion that we would have had a global pandemic, the notion that the economies would be negatively impacted and shut down for so long, is just unimaginable. It's unimaginable that in this day and age, you see the Russian invasion in Ukraine and the level of inflation that we've seen not for decades. If you look back before all this and say, "Let's use that framework and test our hypothesis of how you would manage through that," you would say, "Oh, that's silly. That all can't happen. It's not going to happen."
Well it did; it has. The good news is we have all found a way to manage forward through it. I recognize some really horrible outcomes along the way, but the world is resilient, individuals are resilient, and 2023 is going to be a much better year than 2022.
Andy Blocker: Okay, so let's look to 2023. I want to look at the market, and I want to look at the industry and where we're going. So Kristina, let's start with you. What's your outlook for 2023? What's your best-case scenario for the year upcoming?
Kristina Hooper: So our outlook for 2023 is dependent upon central bank actions, which are, in turn, dependent upon inflation. Now, I already said our expectation is that inflation will moderate substantially through the course of 2023, and I do believe that will enable the major central banks to hit the pause button by the end of the first half of 2023. And we could actually see it happen even sooner. I think we could certainly very well see the Fed hit the pause button by the end of the first quarter, which would mean a terminal rate for the Fed funds rate of about 4.75 to 5% that band.
So what that does is it triggers an improvement, a rise in the global risk appetite. Now, that doesn't mean that we don't see an economic downturn. I think we will see a brief shallow global economic downturn, because so many of these major developed countries have experienced very aggressive tightening, and there will be lagged effects of that tightening. But markets will be looking ahead, will be anticipating a pretty shallow downturn, a pretty brief downturn, and so we're likely to see that risk appetite rise as we move through 2023.
Andy Blocker: Well, thanks for that, Kristina. That's an excellent market outlook there. Marty, let's turn to you on the industry's perspective. What trends do you see as we head into the new year? You've said in the past that the strong will get stronger and the weak will disappear. Is that still your view?
Marty Flanagan: It is, Andy, and look, it's not really so insightful. It's very reflective of a typical maturing industry, and it's being driven by a simple fact: Every one of our clients around the world, not just ours, but all money managers, are demanding more from their money managers and depth, breadth of capabilities. And they have choice, and the reality is, they are also working, choosing to work with fewer money managers. So the impact is, bottom line, there are too many money managers.
So those firms that have the resources to build capabilities that can meet and serve client demand are going to thrive. And the good news: Invesco happens to be one of those, and we'll just continue to see this development that again, the stronger will get stronger. And the good news is, clients will be better served, so I look at that as a win for all.
Well, Kristina, Andy, thank you very much. Your insights are always so meaningful, and I've learned something every single time we have a conversation.