Rob Kapito is an optimist. Or at least that's the impression he gives when talking about the Mexican economy. The president of the world's largest asset manager says Mexico is "an emerged emerging market."
Mexico's economy expanded around 2.5% in the second quarter after growing just 0.6% in the first three months of the year. The slower-than-expected growth prompted Mexico's central bank to revise down its expectations for the year.
Kapito says that investors and the media focus too closely on the short term when the long term is what really counts-and his optimism carries weight in financial markets.
BlackRock has 3.79 trillion dollars in assets under management across 30 countries. In Latin America, it manages investments worth nearly 75 billion dollars.
"BlackRock's influence is enormous," says Bartlett Naylor, former chief of investigations for the U.S Senate Banking Committee. "It is, possibly, the most influential financial institution when it comes to dictating the structure and framework of general financial policy."
Kapito, who founded BlackRock 25 years ago alongside Larry Fink , spoke about the Mexican economy's long-term competitiveness and the perils of short-term thinking. He also criticized the conservatism of Mexican funds, which invest little in foreign markets.
Mexico is being seen in a different light this year after the change in administration. What are your expectations regarding growth, especially after seeing some not-so-good numbers this year?
I'm very bullish on Mexico. I think there are two reasons for that. One is I think that manufacturing is very important to many parts of the world and I believe now that Mexico for the first time in a very long time is very competitive in manufacturing, especially with China. So I would expect that companies will look very favorably upon moving some more manufacturing to Mexico. I think location-wise, it offers a strategic advantage to many companies that are serving very large economies.
The second thing, of course, is energy. Energy is very important to many economies and the (oil) finds and natural gas here are going to make a very bright future for Mexico as well. Mexicans should be able to take advantage of that not only for their own use but also for export. I think you now have an administration that recognizes that growth is very important and stability is very important. And having a growing middle class is very important. So I think the discussion is going to be more in terms of how we can grow the economy and be pro-growth.
But with the weaker-than-expected growth, some people are taking another look at the situation. Is that of any concern?
Not to me because I believe that investors and the media as well are too focused on short-term numbers and there is too much concern about the short-term blips in the market and not enough concern about the long term. That's both in describing what's going on and especially investing.
In describing what's going on, due to 24-hour news coverage around the world, every time a number comes out everyone tries to figure out why it happened, what it means. Last week, rates were going up, now what if rates go down? It's very confusing to a lot of investors.
On the investment front, it's causing a lot more volatility. People today need to be invested for the long term. They cannot be focused just on the short-term numbers. If you ever did a study, you'd be fascinated by the revisions that occur the following month or the following quarter. If you acted on a number and then it gets revised, no one talks about that as much.
So I think there's just too much attention placed on the short term versus the long term. So if we take a look at the factors I just discussed-the change in energy use and the potential change in manufacturing, which would create jobs-I think all of those are very positive going forward. So I look at those things as better indicators than short-term numbers.
Investors are pouring money into stocks, bonds. Is there any risk that there's going to be disappointment?
I think investors around the world are not diversifying enough, and I think that might be the case for many of our clients in Mexico.
They have been very focused on the bond and equity markets locally, and I think any prudent investor has learned over the years that diversification is important, not only among equity and bonds but also where they're investing.
So, just as in the United States, where people have recognized that it is important to diversify into the emerging markets, the emerging markets have to recognize that it is important for them to diversify as well. Sometimes people get very myopic about their investments.
Just as people in the United States are recognizing what I just described to you about energy and about manufacturing and about a growing middle class and a better political environment in Mexico, they now want to have access. Our creation in the etf market has been very popular in Mexico and in that track we're probably about 40% of the volume of equities on a daily basis.
That's providing liquidity and the ability for people to have access to markets in Mexico, and we're going to continue to innovate and come up with smart ways for our clients to get exposure to Mexico, not only in the companies directly but also in a basket of companies as well. I will tell you that there's been a very large demand to be invested in Mexico and others in the region, as well.
Diversification must be one of your messages to clients here. What is stopping them from investing outside Mexico? Is it lack of expertise?
There is certainly a fear, not only among clients in Mexico but clients around the world. Today there are over 10 trillion dollars sitting in banks in cash, earning almost nothing. How could that be? So that tells you that people are very concerned about moving into other asset classes.
This poses a very big problem because when you look at the demographics of the world, including Mexico, people are living longer and they're realizing they haven't saved enough. We have a responsibility to talk to investors about how sitting on cash is going to harm them. You can't invest for the future in the future. You have to invest now.
How does Mexico rate internationally in terms of how easy is it to invest here? BlackRock's Mexico office is larger than its Brazilian counterpart, and BlackRock doesn't have a presence in Argentina-the No. 1 and No. 3 economies in the region, respectively.
The No. 1 advantage that Mexico has is its location. Its proximity to the United States is very important. There's no question about that. The more the world sees Mexico as a stable environment, a growing environment that has a government interested in the nation's growth, the more people look at the natural resources here and the cost of doing business here, the more people will want to invest. It's a very fertile country for investment. That's why we have our largest Latin American office here.
Around the world, I think people look at Mexico less as an emerging market and more as an emerged emerging market relative to others. I think the pension plans here are more sophisticated and knowledgeable than many others around the world. I think the financial system here is more sophisticated than in other Latin American countries. People recognize that and are therefore more comfortable and confident in investing here. There are a lot of advantages to wanting to invest here.
From an investor's perspective, has Mexico surpassed Brazil? There's a lot of talk about competition between the two countries.
I think Mexico is perceived as having less volatility than Brazil, which, in times of uncertainty, really pays off. Investments in natural resources and in companies in Brazil have been much more volatile than similar investments in Mexico. Mexico benefits from the period of uncertainty in which we find ourselves.