The head of Blackstone, the world’s largest alternative asset manager, has warned that investors are overestimating how quickly the US Federal Reserve will cut rates.
Jonathan Gray, Blackstone president, said that, while the Fed would probably hold off from further rate rises because of cooler inflation, financial markets have overpriced the odds of the central bank reducing the cost of borrowing.
“The Fed is likely to pause or maybe go 25 basis points higher from here, but I think they’re unlikely to pivot as quickly as the market is expecting,” he told the Financial Times in an interview.
He added that the Fed would “hold rates at an elevated level for an extended period of time” to stamp out remaining inflationary pressures.
Gray, who was speaking as Blackstone reported its first-quarter earnings on Thursday, is the latest senior Wall Street executive to warn investors to expect higher rates to persist.
JPMorgan boss Jamie Dimon and BlackRock’s Larry Fink both argued last week that the collapse of Silicon Valley Bank and broader struggles among regional US banks would not be enough to deter the Fed from keeping rates high.
Investors still expect a final quarter point rate rise in May or June, but for the Fed to then begin lowering rates, with two cuts forecast by the end of the year.
“I think inflation is definitely cooling. It is increasingly in the rear-view mirror and we see it in our portfolio companies,” Gray said. US inflation has eased to its lowest level in nearly two years, with the consumer price index for March up by 5 per cent year on year.
Gray warned that high rates might create additional problems in the banking industry as savers run down deposits at some lenders.
But he said he was not concerned about a sector-wide collapse: “It’s possible we could see further incidents, but I don’t think there’s a systemic problem because we don’t have a systemic credit problem”.
The Blackstone chief was speaking after the group reported that its profits dropped sharply in the first quarter and its fundraising slowed as investors grappled with fears over the health of the commercial property market and a slump in deal making activity.
Blackstone attracted $40bn in new investor capital in the first quarter, a more than 5 per cent decline from the previous quarter, as investors made fewer new commitments to the group’s real estate and private equity funds.
The slowdown left Blackstone with $991bn in assets under management, just shy of the $1tn milestone its executives had already hoped to achieve as a new high water mark in the private equity industry.
Those plans were thwarted by a negative turn in financial markets that caused investors to pull money from two fast growing funds Blackstone built for wealthy individual investors, crimping its growth and profits.
The fundraising challenges, combined with markdowns in some of Blackstone’s largest real estate funds, caused the New York-based group’s fee revenues and profits to fall sharply from this time last year.
Blackstone’s fee-related earnings, a proxy for the base management fees it collects, were $1bn, a 9 per cent decline from this time a year ago, while its distributable earnings — a metric that is favoured by analysts as a proxy for overall cash flows — fell 36 per cent to $1.25bn. The fee revenues slightly missed analysts’ estimates polled by Bloomberg, while profits slightly exceeded expectations.
The group raised the bulk of its capital for credit and insurance based investments, two newer businesses it built after becoming a behemoth in buyouts and real estate investments.
Rising rates have increased the appeal of Blackstone’s credit funds, which invest in floating rate loans that benefit from higher borrowing costs. But the sudden rise in rates has rocked the firm’s $70bn property fund, Blackstone Real Estate Income Trust, which has been plagued by heavy redemption requests since last November. It has caused the fund to fulfil just a fraction of the monthly and quarterly withdrawal requests Blackstone receives.
The restrictions highlighted tremors felt across Wall Street as central banks exited the era of ultra-low interest rates, which then spilled into the US banking system during the collapse of Silicon Valley Bank.
Source: Economy - ft.com
