Why This BlackRock Managing Director Wants You To Take ‘Overinflated’ Stocks Seriously

There is no shortage of Wall Street wisdom showing that the booming U.S. stock market is not reflecting the widespread economic pain across the country, and specifically pointing out companies like Tesla and Zoom whose valuation bonanzas seem to be driven less by financial metrics than by name recognition among a crowd of new investors.

But just writing off these stocks as inflated may overlook a larger lesson about the new world of investing, a lesson that could inform smart investment strategies going forward.

These companies’ meteoric — and perhaps disproportionate — rise in the world of U.S. stocks suggests that equity investors are willing to pay a premium for a stake in companies they see as disrupters in their market, according to BlackRock Managing Director Kate Moore. 

“When it comes to companies like Tesla that have captured the hearts and minds of individual investors, it’s not about being Tesla, it’s about being the disrupter,” Moore told Walker & Dunlop CEO Willy Walker on Wednesday’s Walker Webcast. “It’s not just about the investment itself but what it represents about the industry. You can look at these companies that are disrupting and broaden out your investment from there.”

As head of thematic strategy for the global allocation team at BlackRock, the world’s largest asset manager, Moore's mandate is to seek out places where changes in policy, demographics and culture have created investment opportunities. While she was confident that the stock market would perform well overall through 2021, she also said the year was likely to be ripe for stock picking and that there would be numerous companies whose stock would significantly outperform the market as a whole.

Identifying not just companies that are disrupting the market but the other companies and investing that can take off from those disrupters’ success can inform investment strategies going into 2021.

While investing in companies like Tesla and Zoom has certainly made a great deal of wealth for many institutional investors, Moore said she is more interested in investing in the larger structural change that underpins the growth in these company’s valuations. She described how one part of her fund invests not in equipment manufacturers or car companies themselves but around the supply chain for electric vehicles and the batteries that power them, including semiconductor and raw materials manufacturers.

Looking at alternatives to equity investing is becoming increasingly important, Moore said, since many of the vehicles that institutional investors have relied on for decades to hedge the risk in their portfolios are no longer available to them.

“Sovereign [wealth funds] globally, not just Treasurys, don’t offer the same kind of ballast that they have historically,” Moore said. “You can sit on cash, but if you’re a benchmarked investor, you have to ask yourself if that is the prudent thing to do. Where are there markets and assets that move out of sync with our core U.S. equity holdings?”

Investors large and small are looking to new geographies like China, as well as alternative investments like precious metals and even alternative currencies like Bitcoin to add some diversity to their portfolios, Moore said, but there is generally a dearth of assets outside of equities where investors feel good about making large, long-term bets. 

Fortunately for investors, though, Moore’s team believes the outlook for those equities is strong. BlackRock recently released its 2021 Global Outlook; the report’s central prediction is that with national monetary authorities around the world keeping nominal yields low on government bonds, inflationary pressures will drive up values for equities as real rates fall. 

On the webcast, Walker expressed some skepticism about where these inflationary pressures will actually materialize given that labor and fuel costs — traditional drivers of inflation — are so low. But Moore contended that the global recovery from the coronavirus itself is likely to create a “pop” in inflation as demand for goods and services outpaces how much existing suppliers can actually produce.

Another factor that bolsters Moore’s confidence in equities comes from surveys of American executives that show that CEOs and chief financial officers are more focused on driving shareholder value than they are on bringing back employees who were laid off or furloughed. 

“Companies have been laser-focused on cost control,” Moore said. “I don’t think that behavior shifts even if growth improves through 2021.”

On Dec. 16, Walker will host Aneel Bhusri to discuss how he built Workday into one of the world's largest providers of software as a service. Register here for the event.

This feature was produced in collaboration between the Bisnow Branded Content Studio and Walker & Dunlop. Bisnow news staff was not involved in the production of this content.