Soaring US deficit a negative for equities: BlackRock chief

Singapore

THE ballooning US federal deficit - projected to surpass US$1 trillion next year - is set to dampen the equity market as it raises the prospect of even more debt issuance, says Larry Fink, BlackRock chairman and chief executive.

"I do believe with the deficit at (over US$1 trillion), that we're going to have more and more debt. Investors are going to demand a bigger premium, and we have greater risk of higher rates which will not allow equity markets to flourish.''

He was speaking during the Bloomberg New Economy Forum in Singapore yesterday, in a panel to discuss "The Geopolitics of Markets''.

The Trump administration's tax cuts and spending bills are expected to raise the deficit to around US$1 trillion in 2019, and breach this level in 2020, according to a report by the Congressional Budget Office.

BlackRock is the world's largest asset manager with over US$6.3 trillion in funds under management.

Also part of the panel was Gary Cohn, former assistant to the US President for economic policy, who defended the tax cuts as a way to raise the competitiveness of the US economy, and attract companies and jobs.

Mr Cohn said: "Prior to the (current) administration, we had corporate tax rate of 35 per cent on a worldwide basis. All the countries we competed with had a tax rate in the lower 20s. Many had the ability to get to single-digit.

"The reason we did it was to drive the economy, wages and growth... If you can drive GDP by 1 per cent you create US$3 trillion of deficit reduction over 10 years, create 12 million jobs and US$10 trillion of extra revenue. Over a 10-year period, if you do that, you pay for the tax cut.''

Mr Fink, however, suggested that the assumption of an additional one percentage point of growth may not pan out. "I like what Gary said to be true, that we do have an extra 1 per cent of growth over 10 years. If we don't have that we're going into recession...

"If the economy does slip because of trade imbalances or trade problems, we (could) see less growth. The problem is the deficit is very large and we're fighting with our creditors worldwide. Generally when you fight with your banker, it's not a good outcome.''

He pointed to huge spending needs, such as US$2 trillion of deferred maintenance in the infrastructure space. "If we do have the (more than US$1 trillion) deficit, and the economy isn't growing at 3 per cent, then we'll have a far bigger crisis in the coming years. And then the fear about the end of the big bull market will probably be a reality.''

Mr Fink reckons central banks will play a smaller role in what BlackRock does as a fund manager. "We're spending time on political issues like populism. (There are) issues we had to deal with - relating to Saudi Arabia - where companies had to make a decision before government.

"I do believe investors are focused on issues away from central banks more than ever before. I believe millennials will play a bigger role - the whole issue of ESG (environmental, social and governance) and how we are performing as companies, whether companies have a purpose or not, and living that purpose - those are what I believe are transformational change. Whether central banks are tightening or easing is secondary to the narrative today.''

Mr Fink was one of a number of chief executives who withdrew from a three-day conference in Saudi Arabia over the disappearance of journalist Jamal Khashoggi. Subsequently he said he expected to continue to invest in the country.

Mr Fink made waves earlier this year when he made social purpose the centrepiece of his annual letter to chief executives. Society demands, he wrote, that companies, both public and private, serve a social purpose. They must not only deliver financial performance, but also show how they make "a positive contribution to society''.

READ MORE: Issues behind trade war are the real problem: Tharman