'It is going to take a period of weeks and maybe months in the market to bottom': BlackRock Portfolio Manager

Russ Koesterich, BlackRock Global Allocation Fund Portfolio Manager, joins Yahoo Finance’s On The Move to weigh in on the global markets hitting record lows since the 2008 recession.

Video Transcript

JULIE HYMAN: We want to talk more about what's been happening in the markets here, as we see kind of not much action today, which is a switch from what we have seen in recent days, and also as we come to the close of the first quarter, which was the worst for major markets going back to the financial crisis. We're joined now by Russ Koesterich. He is portfolio manager of the BlackRock Global Allocation Fund. He's joining us on the phone from Princeton, New Jersey.

Russ, if you can unmute yourself now, we'll have a chat about what's been going on here. Because you say in your note to us this morning that perhaps we are starting to see a bottoming process in the stock and credit markets. And I'm curious what it is that is drawing you to that conclusion at this point. Russ, if you're muted, you can unmute yourself. You can press star-6. That might be a good way to do it as we are all grappling with this new technology.

RUSS KOESTERICH: Julie, can you hear me now?

JULIE HYMAN: I can. Please.

RUSS KOESTERICH: Fantastic. Sorry about that.

JULIE HYMAN: That's all right.

RUSS KOESTERICH: It's interviewing in the age of social distancing.

JULIE HYMAN: Exactly.

RUSS KOESTERICH: So I think there are a couple of things going on. I think one of the words you said is really key, which is the process. This is a process. Your listeners know there's never a point where there's a green flag and the market bottoms. And I think that's particularly true this time, given the just unprecedented nature of this catalyst-- the health concern, the questions about how the economy starts again means that it is going to take a period of weeks and maybe months for the market to bottom. But some things have started to happen, which I think are constructive-- the most important of which were all of the actions taken last week both on the monetary side by the Federal Reserve and the world's other central banks as well as the fiscal side, which is this massive bill-- roughly 9% of gross domestic product, much larger than we saw even in 2008.

These are helping. They're helping, one, to hopefully create a bridge for small and mid-sized businesses and larger ones as well. They're also helping the financial plumbing to go back to normal. So markets such as the money markets, currency markets, treasury markets where you saw massive dislocations over the past couple of weeks, they're starting to calm down a bit. They're not back to normal, but at least this process of having the volatility reduced, having something close to normal in credit markets-- that is a critical precondition for the equity market bottoming hopefully in the coming weeks and months.

ADAM SHAPIRO: But that bottom, Russ, could be quite a while. I mean, we're watching demand destruction, which is still accelerating to the downside, isn't it?

RUSS KOESTERICH: I think that's exactly true. And this is why I keep coming back to the word, process, because it's unlikely we're going to have that, you know, one single day of capitulation after which the market goes straight up. I think this is going to be a backing and filling process for a couple reasons. First of all, if you look at history, one thing we do see-- and I think this time will actually be no different-- this is where history is likely to repeat itself-- volatility peaks before the market bottoms.

What I mean by that is if you go back to '08 and other periods of dislocation, you'd see this surge in volatility. That surge in volatility didn't ultimately mean the low for stocks. That actually came sometimes weeks or months later. Now, we've probably seen the peak in volatility. But exactly as you suggest, until we get a better feel for how bad that second quarter contraction is going to be and what type of rebound follows it, we are probably going to see more probing of the downside before the market can have a sustained rally.

JULIE HYMAN: So, Russ, as somebody who looks at a variety of assets around the globe, how are you allocating right now? I mean, we've heard a lot of advice just around rebalancing right now. Is that what you guys are doing? Or are you being more aggressive and strategic in terms of where you're allocating?

RUSS KOESTERICH: Well, I think we're being strategic. I don't think I'd say we're being particularly aggressive right now, because of all the things we just spoke about. So we're pretty close to benchmark. We have a long term benchmark of a 60-40 portfolio. And of that 60-40, about 60% for the US, and 40% is outside the US. So right now, we're close to our benchmark when it comes to equities.

We've actually been nibbling, I think, it's the right verb for how we've been adding back for long term themes-- whether in technology, communications, health care-- that we like. We're paying a lot of attention to what are our hedges. In other words, what do we have in the portfolio, whether we're talking about US treasuries, the dollar, gold, the yen that is going to help dampen that volatility?

And then in terms of where we're really focusing on, I'd say we are still overweight the US. And the reason for that is, obviously, there's going to be a lot of challenges to the economy. But the big theme right now in our equity book is quality. And what I mean by that are companies with fortress-like balance sheets that can get through this period, companies with earnings consistency and secular growth. We find more of those companies in the US than anywhere else in the world.

ADAM SHAPIRO: Russ, you brought up your hedges, and the dollar is one of those hedges. How does the news today from the Federal Reserve-- these extended dollar swap, the facility they're setting up with central banks worldwide-- how does that, if in any way, impact what you're doing as a hedge?

RUSS KOESTERICH: Well, it's important I think-- it goes back to one of the things I mentioned in the beginning about the Fed getting the financial system to start to work somewhere approaching normal. And the reason what the Fed is doing today, it's one part of the process. But they are helping deal with what is effectively an acute shortage of dollars outside the US. And this has been a multi-year, maybe multi-decade phenomenon as more companies borrow in dollars, particularly in emerging markets.

Their central banks need to be able to back them, and they need dollars themselves. Some of those were able to get dollars through swap lines that were set up by the Fed. This is an additional program. And what it's going to help do is relieve some of the really acute pressure we've seen on the dollar since the financial crisis began. And this is particularly critical for emerging markets. So I think this is another positive step, and, again, helping us get on that path back to normal.

JULIE HYMAN: I like it-- a little note of optimism today. Thank you, Russ. Russ Koesterich is the portfolio manager of the BlackRock Global Allocation Fund. Thank you so much for joining us.