(Yicai Global) April 10 - The economic impact of the Covid-19 pandemic is the result of voluntary decisions to ease business activity and is dissimilar to a usual downturn, Blackstone Group Chief Executive Stephen Schwarzman told Yicai Global in a written interview.
The US banking system is on a much stronger footing than in 2008, added Schwarzman, who has witnessed no less than seven previous market recessions and remains confident in the recovery from Covid-19.
“While some companies and sectors will experience difficulty, the system is in better condition. Governments around the world appear to be providing strong support and economic stimulus in the near term,” he said, while also expressing confidence in China’s logistics sector thanks to rising demand for online purchasing.
Yicai Global: How far are we from a Minsky moment or a full-blown crisis?
Stephen Schwarzman:Never before have we voluntarily suspended economic activity at this scale, and the impacts will be extensive. The efforts of governments to help individuals and companies bridge this period will be critical. I have no concerns that we will not make it to the other side. The US government is taking important steps to avoid a more severe scenario. We have seen China, Korea and Japan respond very well to the pandemic and I give these countries very high grades for their initial steps to bridge the economic gap.
YG: You worked for Lehman before starting up Blackstone after the global financial crisis in 2008, which exposed the sub-prime mortgage distortions in the US. But the banking system is more resilient now because of strict regulations to keep crises at bay. What are you concerns about the current financial market dislocations and the problem facing the real economy? Will the situation become even worse than the “Lehman Shock” era?
SS:I have been through a lot of different market cycles in my career, and without a doubt this one is far reaching. However, it is important to remember that the economic impact of this crisis is the result of voluntary decisions to cease business activity -- not a normal downturn. Another fundamental difference between now and 2008 is that the US banking system today is on much stronger footing. While some companies and sectors will experience difficulty, the system is in better condition. Governments around the world appear to be providing strong support and economic stimulus in the near term.
YG: Policy makers are racing to offer both financial and economic support. What do you suggest the US government do to alleviate the pain of the financial system and the real economy? What kind of global cooperation do we need facing the pandemic challenge?
SS:The US government’s financial stimulus package does all the right things -- it provides a direct infusion of money for the unemployed and individuals in society who need immediate support, gives significant funding for small businesses so they can keep people hired and on their healthcare plans, and supports larger corporations so they can bridge this period of shutdown. The initial financial stimulus bill is probably not the full amount of support that the US economy will ultimately need, but as a start, it is really big.
The Federal Reserve, our central bank, is doing a variety of things to make sure credit is flowing through the US economy. This, combined with the stimulus bill passed by Congress, are significant and positive efforts to ensure the health of our economy through this period.
You are seeing countries across the developed world take similar steps. China, Korea and Japan -- which faced this crisis before Western countries -- have responded very well to the virus. I think you will see countries looking to each other for examples on how to best respond.
'Don’t Lose Money' Principle
YG: Your simple mantra “don’t lose money” has helped Blackstone to become a leading private equity and real estate investor and manager of alternative assets for institutional investors globally. Can you explain the principle?
SS: People often smile whenever they hear my number one rule for investing, but it’s just that simple: don’t lose money. At Blackstone, we haveestablished an investment process that helps us accomplish that basic concept.Our investment decisions are all about disciplined, dispassionate, and robust risk assessment.
This discipline is even more critical in today’s environment with high levels of volatility and uncertainty. We must continue to focus on our process and the potential downsides of any decision we make on behalf of our investors.
YG: What kind of opportunities do you envision as we start to see more investor capitulation?
SS: The current situation will impact prices and create dislocation in a number of sectors. It is difficult at this point to predict exactly where that might be, but our firm has USD150 billion in dry powder to deploy in high-quality companies and properties for the benefit of our investors -- including assets dedicated to Asia. We also have a significant credit business and believe we can play an important role offering liquidity and flexibility to companies. That said, our primary focus right now is the safety of our people and helping our portfolio companies manage through this challenging time.
YG: As the Fed is hitting the zero-lower bound faster than the market has expected, more investors are moving toward private equity for greater yields. What challenges and opportunities will arise from the zero-interest-rate era?
SS: Even before the current crisis, there was a global trend towards low and even negative interest rates. I had some fear that this would leave countries in a challenging position during a downturn, like we are facing today. But right now, it is important that central banks do whatever they can to support global economies.
A low interest rate environment can make alternatives more attractive for investors. Blackstone has proven to have a strong track record across cycles, including in challenging times like the global financial crisis.
Opportunities in China
YG:Covid-19 showed the world that risk in the Chinese market has declined significantly. What kind of opportunities you see in China in the mid-long term? What is your strategy in China’s property market?
SS:Blackstone has been active in China since 1992 and will continue to look for compelling, long-terminvestment opportunities. In real estate, we are high conviction investors behind themes that have strong tailwinds. For example, we continue to see compelling opportunities in logistics from the growth in e-commerce and demand for warehouses. In China, we have warehouses that are located in key distribution hubs and leased to leading third-party logistics and Chinese tech companies. We’re also focused on Grade A office assets in China and more broadly in Asia, where we continue to see positive demand.