The Long View: Economic Insights From a Legendary Investor

GLOBAL UNREST. TERRORISM. THE ZIKA VIRUS. Slowing growth in China. Lower oil prices. Negative interest rates. The list of developments that confound and alarm us can seem endless.

Here, Byron Wien, vice chairman of the Blackstone Group and an authority on U.S. and global economic trends, offers his perspective on the market volatility that such events have caused and shares reasons for his optimism about long-term opportunities in this world of never-ending change.

MERRILL LYNCH: Let's talk about Europe first. It's been facing a host of challenges. What's your outlook?

BYRON WIEN: The Brexit vote on June 23, 2016 was an obvious economic setback for both the U.K. and Europe. The actual meaning of Britain leaving the European Union will be worked out over the next two years. My hope is that both sides will take a practical approach to the separation with minimum negative effects on both sides. My fear is that Europe will try to punish the U.K. to discourage other defections, but I believe a reasonable approach will take place in the end.

Even before Brexit, the refugee crisis in the region, caused by unrest in the Middle East, has called into question the long-term survival of the European Union, and some leaders have lost a lot of political capital over the crisis. However, if handled properly, the influx of refugees could be a net positive, because Europe has a seriously aging population, and this is a way to bring the average age down and bring more workers into the workforce. You could actually revitalize the economic spirit of Europe through the refugee influx. So I'm still a believer in Europe and I think investors should view Europe as an opportunity.

ML: What about the threat of terrorism? It's unsettling—mainly from a safety perspective, of course, but also in terms of its potential economic impact. How should investors be thinking about it?

BW: Terrorism certainly adds to investors' apprehension, and apprehension contributes to market volatility. At the same time, just as we have to go on living our lives, we need to continue investing. The threat of terrorism doesn't prevent me from investing in the United States and it doesn't prevent me from investing in Europe.

ML: The Federal Reserve began to slowly raise rates at the end of 2015. Meanwhile, the European Central Bank and Bank of Japan both have seen negative interest rates, as have some smaller countries. What do you make of this?

BW: I think it means we're seeing some desperation on the part of central bankers who are trying a number of measures to stimulate greater economic growth. World growth in 2016 is probably going to come in around 2%, and no developed country wants that slow a growth rate because that's flirting with recession.

One response these bankers are trying is to lower interest rates in the hope that they will encourage business investment and consumer spending. I don't think it makes a lot of sense, nor will it have a dramatic impact on the global economy. It does underline the fact that overall global growth is going to be slow, and you have to be very selective in choosing where you put your money.

ML: Smart devices, robots and other examples of disruptive tech play an ever-larger role in our daily lives. How do you view these changes and where do you see opportunities?

BW: The positive side to technology is that it makes us more productive. We can get goods and services out the door with fewer workers, and thus the price of those goods and services tends to come down.

The down side of tech is that it can displace a lot of employees, many of whom have not been able to find jobs that pay anything like what they were making before. That's going to be an important issue in Washington, and certainly adds to the pressures to address income inequality.

But you're not going to stop technology, and on balance that's a positive thing. Thanks to advances in biotechnology, we're all living longer and healthier lives. I think we'll soon see breakthroughs in treatments for heart disease, cancer, Alzheimer's and Parkinson's disease, and we should celebrate these advances. From an investment standpoint, I favor both technology and biotechnology companies.

ML: What's your outlook for emerging markets, which have been struggling for several years now?

BW: I do think there will be opportunities in emerging markets, but only when commodity prices stabilize. That's starting to happen, but to be convinced I really need to see more evidence that commodity prices have bottomed. That may still be several years away.

One emerging market country I'm favoring right now is India. It's showing growth at a time when its neighbor, China, is slowing down. The government under Prime Minister Narendra Modi has implemented some positive reforms—not as many as they had intended, but I think they are making progress and that India is headed in the right direction.

ML: What is your long-term outlook for China?

BW: There's no question that China is slowing. It's probably growing at 4% to 5%, compared with the 10% annual growth we saw for so many years. But it's slowing for a good reason—to rebalance its economy. China has been too dependent on borrowing to increase the growth of state-owned enterprises and to build infrastructure. They couldn't continue to incur debt at a high rate and maintain sustainable growth.

The current leadership is making a conscious effort to rebalance the economy to be more based on consumer spending. And I don't think China is going to have a hard landing. Keeping things in perspective, for the second largest economy in the world to be growing at 4% to 5% is pretty impressive. It may be a little early to invest there, but I'm positive on China for the long term.

ML: Considering all of the market volatility we experienced in 2016—and with predictions of more to come—what steps can investors take to minimize the impact on their portfolios?

BW: There's no easy place to hide from volatility. I think we're going to have to live with it for as far as the eye can see. So the best thing you can do is allocate your assets prudently.

Fortunately most of us are long-term investors. We shouldn't be traders. We shouldn't be trying to time the market. What we should do is establish a sensible, diversified portfolio knowing that, whatever happens in the near term, the historical long-term trend for the markets is up.