BlackRock Inc. (BLK) Chief Executive Officer Laurence D. Fink, who last week predicted a chance of a 15 percent correction in stock markets, said he’s “less worried” now as China announced economic reforms and signs are mounting that U.S. policy makers will pass a budget deal.
“It looks to me like China has had substantial reforms,” Fink said today on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhle. “I would say overall, it appears the policy changes in China are good for forward growth.”
Fink said there may be a small bipartisan deal in Washington that happens next week or the week after Thanksgiving, which may lead to a “true grand bargain” in the future.
Stocks have been pushed to record highs in three rounds of bond purchases by the Federal Reserve, which have channeled money into risk assets such as equities. Investors who are fully invested in stocks should stay there, even as pension funds will probably reduce their stock holdings by year-end and add to bonds in a “reverse rotation,” Fink said.
The Standard & Poor’s 500 Index (SPX) rallied 25 percent in 2013, forcing pension funds to rebalance before the end of the year, Fink said.
“There is going to be some pressure into year-end from their rebalancing,” Fink said. “So I think we’re going to have a noisy quarter.”
Reforms in China laid out last week by President Xi Jinping will boost the private sector by looser state controls, while local government officials will be evaluated not only on increases in GDP but also on indicators such as energy consumption, overcapacity and new debt. The changes are the biggest since the late 1990s, when Premier Zhu Rongji’s shake-up of state industries cost millions of jobs, according to Shen Jianguang, an economist at Mizuho Securities Asia Ltd. in Hong Kong.
In the U.S., the backlash against Washington after the political stalemate on the debt ceiling will force lawmakers to do a small deal and then wait for a bigger accord “where you could have a lot more gnashing of the teeth,” said Fink.
President Barack Obama signed legislation Oct. 17 to suspend the debt ceiling until Feb. 7. The deal between Democrats and House Republicans sets the stage for another possible showdown early next year.
The deadlock also led to creation of a Senate-House conference committee with a Dec. 13 deadline to offer ways to resolve the fiscal disputes between Democrats and Republicans. U.S. lawmakers are at odds over whether ending some tax breaks for wealthier Americans should be part of a deal to replace the automatic spending cuts approved in 2011 that have trimmed funding for defense and domestic programs.
Fink said while he’s optimistic about a budget deal, he expects less liquidity in financial markets as the Volcker Rule, which prohibits banks from doing speculative trades on their own accounts, is being implemented. Banks, which have already shut down proprietary trading desks, will face “severe restrictions” on taking positions as regulators look closely at whether they are holding assets to make markets or to make an investment profit, Fink said today.
“What is the definition of flow trading versus proprietary trading?” Fink said. “The bottom line is we have not seen the full effect yet” of the rules.
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