The factors contributing to the highest inflation in the U.S. in decades are more entrenched in the U.S. economy than many investors realize, said Blackstone Inc.
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President and Chief Operating Officer Jonathan Gray during a Thursday interview with MarketWatch.
And as a result, the Federal Reserve will likely need to keep interest rates elevated for a while if it hopes to finally bring price pressures to heel.
But investors who are patient enough to wait out the volatility could emerge with strong profits.
As U.S. stocks, bonds and the dollar fluctuated wildly on Thursday following a hotter-than-expected inflation report and corporate earnings from a few key S&P 500
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components, Gray added that opportunities abound for investors able to stomach the volatility in the near-term.
“Well if you step back and you look back at the U.S. economy, the good news is it has been remarkably resilient. The bad news is that the U.S. economy has been remarkably resilient,” Gray said during an interview with MarketWatch editor-in-chief Mark DeCambre to commemorate the website’s 25th anniversary.
Asked about pockets of strength across the U.S. corporate landscape, Gray cited the energy sector, travel and technology companies with a focus on connecting users over the Internet as potential opportunities for retail investors looking to put money to work.
When asked about his outlook for inflation, Gray said that he expects the Federal Reserve will likely need to keep interest rates elevated at their eventual peak, whatever it may be — some economists now expect the Fed funds rate could peak at 5% or higher — for longer than many investors might expect if it hopes to finally bring price pressures to heel.
He cited the robust labor market, elevated energy prices and a shortage of residential housing as examples of shortcomings in the U.S. economy that could keep inflation elevated.
“All those are headwinds to the Fed’s objective, which is getting inflation down,” Gray said.
When it comes to housing, the main imbalance keeping rents and home prices elevated is that the growth in the supply of residential homes hasn’t kept up with demand — although construction has accelerated over the past couple of years as home values have soared.
While the impact of higher interest rates is immediately felt in financial markets, the impact on the real economy takes longer to filter through.
“As banks make credit much tighter, as the cost of funds goes up people start to alter their behavior, but it takes time for that transition mechanism to work through,” Gray said.
Asked about where Blackstone
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sees opportunities, Gray said “we like floating-rate credit” and hard assets like real estate — specifically, logistics focused properties like data centers, which have become a major holding for BlackStone’s real-estate group.
An early Blackstone employee, Gray helped pioneer the firm’s multibillion-dollar real-estate business.
As far as the equity market is concerned, Gray said “we love some of the sectors that have long-term real tailwinds that the market sold off today.”
He rattled off technology companies that focus on “the migration of our lives online,” as well as companies involved with the transition to greener energy, as well as “life sciences” companies — particularly those focused on the cross section of genomics and big data.
When asked about the U.K. toward the end of the interview, Gray responded that U.K. assets “absolutely” represent an opportunity for investors.
The next-twelve-months price-to-earnings ratio on the U.K.’s FTSE 100 has fallen below nine times earnings, according to FactSet data, a fact that Gray mentioned while rattling off a list of factors that make U.K. assets an attractive buy, in his view.
He also cited the U.K.’s relative stability, strong legal system, the fact that it’s an English-speaking country and London’s status as a “magnet” for talent.
Finally, Gray concluded with some thoughts about one of his best-known deals at Blackstone: the buyout of Hilton Worldwide
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(then known as Hilton Hotels). The firm completed the buyout just before the bottom fell out of the U.S. economy and U.S. stocks crashed during the great financial crisis.
However, Blackstone held firm, and eventually took Hilton public in 2013, seven years after buying it, earning a cool $14 billion profit in the process. The deal is still remembered as one of the most profitable deals in the history of the private-equity industry.
“The lesson of Hilton was we owned a great business…it was at a terrible time in 2008 and 2009 but we had staying power…we reinvested at the bottom and we were able to come out the other side,” Gray said.
