INDUSTRY AND ECONOMIC OUTLOOK
As a global provider of financial services, Goldman Sachs is affected
by overall macroeconomic and market conditions in various regions around the
world. For a number of years, we have operated in a generally favorable
macroeconomic environment characterized by low inflation, low and declining
interest rates and strong equity markets. In particular, the U.S. economy, the
largest in the world and an important influence on overall world economic
activity, has been undergoing one of the longest periods of post-war economic
expansion. As of March 1999, the current U.S. expansion had lasted 96 months
compared to a post-war average period of expansion of 46 months.
Recognizing that the favorable macroeconomic and market environments
will be subject to periodic reversals, which may significantly and adversely
affect our businesses, we believe that significant growth and profit
opportunities exist for financial intermediaries in the United States and
abroad. These opportunities derive from several long-term trends, including the
following:
- Deregulation. Financial market deregulation, including the
elimination of bank deposit interest rate ceilings and the expansion of
commercial banks and other financial institutions into securities
underwriting activities, has resulted in the creation of new and broader
sources of credit, which have reduced the variability and the
cyclicality in the supply of credit. This, in turn, has in the past
reduced volatility in economic activity, leading to longer economic
expansions with increased investment spending, resulting in higher
levels of capital raising;
- Globalization. Heightened global competition has created a need
for cross-border capabilities and economies of scale, resulting in
increased joint venture and mergers and acquisitions activity;
- Focus on Shareholder Value. Increasing focus on shareholder value
has fueled an increase in restructuring and strategic initiatives,
yielding additional financial advisory and capital-raising
opportunities;
- Consolidation. Moderate growth, limited pricing flexibility and
the need for economies of scale have substantially increased
consolidation opportunities in certain industries, and record levels of
profit have provided companies with the resources to pursue strategic
combinations, creating substantial demand for mergers and acquisitions
advisory services and subsequent capital raising;
- Demographics. Changing demographics in the United States and
other developed economies have increased the pool of savings available
for private investment and the need for increased funding of pension
plans due to the aging of the population, creating substantial demand
for investment products and services; and
- Financial Product Innovation. Technology and financial expertise
have led to the development of new financial products better tailored to
the risk/reward requirements of investors, increasing trading flows and
proprietary investment opportunities.
We believe that over the last 15 years these trends, coupled with
generally declining interest rates and favorable market conditions, have
contributed to a substantially higher rate of growth in activity in the
financial services industry than the growth in overall
economic activity. The future economic environment may not be as favorable as
that experienced in the last 15 years and, in particular, the period of
declining interest rates in the United States may not continue. There may also
be periods of adverse economic and market conditions. Nonetheless, we believe
that these trends should continue to affect the financial services industry
positively over the long term. However, see "Risk Factors Market
Fluctuations Could Adversely Affect Our Businesses in Many Ways" for a
discussion of the effect that adverse economic conditions and market
fluctuations can have on our businesses.
The following table sets forth selected key industry indicators:
Key Industry Indicators
($ in billions, except gross domestic product)
(volume in millions of shares)
|
As of or for Year Ended December 31,
|
|
|
|
|
|
1983
|
1988
|
1993
|
1998
|
CAGR(8)
'83-'98
|
General Economic Activity:
(in trillions) |
|
|
|
|
|
Worldwide gross domestic product(1) |
$ 10 |
$ 18 |
$ 24 |
$ 29(9)
|
8%(9) |
U.S. gross domestic product(2) |
4 |
5 |
7 |
9 |
6 |
|
|
|
|
|
|
Advisory Activities/Financing: |
|
|
|
|
|
Worldwide mergers and acquisitions(3) |
96 |
527 |
460 |
2,522 |
24 |
Worldwide equity issued(3) |
50 |
51 |
172 |
269 |
12 |
Worldwide debt issued(3) |
146 |
631 |
1,546 |
2,932 |
22 |
|
|
|
|
|
|
World Equity Markets: |
|
|
|
|
|
Worldwide equity market capitalization(4) |
3,384 |
9,728 |
14,016 |
27,459 |
15 |
U.S. market capitalization(4) |
1,898 |
2,794 |
5,136 |
13,451 |
14 |
FT/S&P Actuaries World Indices The World Index(5)
|
NA |
129 |
178 |
359 |
11 |
Dow Jones Industrial Average |
1,259 |
2,169 |
3,754 |
9,181 |
14 |
S&P 500 |
165 |
278 |
466 |
1,229 |
14 |
NYSE average daily volume |
85 |
162 |
265 |
674 |
15 |
|
|
|
|
|
|
Invested Funds: |
|
|
|
|
|
Worldwide pension assets(6) |
$1,900 |
$3,752 |
$ 6,560 |
$10,975 |
12 |
Number of U.S. mutual funds(7) |
1,026 |
2,715 |
4,558 |
7,343 |
14 |
U.S. mutual fund assets(7) |
$ 293 |
$ 810 |
$ 2,075 |
$ 5,530 |
22 |
(1) Source: The Economist Intelligence Unit, January 1999.
(2) Source: U.S. Department of Commerce, Bureau of Economic
Analysis.
(3) Source: Securities Data Company.
(4) Source: International Finance Corporation.
(5) Index is calculated on a local currency basis based on total
returns. CAGR is based on 1988-1998 data. The FT/S&P Actuaries World
Indices are owned by FTSE International Limited, Goldman, Sachs &
Co. and Standard & Poor's Ratings Services. The Indices are compiled
by FTSE International and Standard & Poor's Ratings Services in
conjunction with the Faculty of Actuaries and the Institute of
Actuaries.
(6) Source: InterSec Research Corp.
(7) Source: Investment Company Institute.
(8) Compound annual growth rate.
(9) Data as of December 31, 1997; CAGR 1983-1997.
We believe scale, global resources and leading market positions are
important competitive advantages for financial intermediaries in this
environment. In addition, we believe that circumstances in certain regions
should provide opportunities for financial intermediaries.
Europe
The European Economic and Monetary Union commenced on January 1, 1999
and created a monetary union in Europe with a single currency. As a result, we
believe that over time a pan-European capital market will develop that is likely
to rival that of the United States in size and liquidity. We believe that
financial intermediaries generally are expected to benefit from a number of
anticipated developments, including:
- pan-European consolidation and financial restructuring yielding an
increase in mergers and acquisitions activity;
- an increase in third-party assets under management and a major shift
towards investments in equity securities due to an expected move to
private pension fund systems, changing demographics and the elimination
of intra-European Economic and Monetary Union currency risk;
- a reallocation of equity portfolios to reflect pan-European indices;
- the establishment of a European high-yield market to fund the growth of
emerging high-growth industries and to satisfy investors' demands for
higher yield; and
- increased equity issuance and higher equity trading volumes.
Asia
Since 1997, the currency weakness and disruptions, the deterioration in
certain of the region's banking systems, the weakness in the property sector in
many of the region's countries, as well as slowing consumer income growth, have
led to a significant and continuing weakening of these economies and their stock
markets. These developments have adversely affected the economic and market
conditions in the region and at times have affected economic and market
conditions elsewhere. We believe, however, that financial intermediaries could
have significant opportunities in this region if stability improves and the
economies, which represent approximately 60% of the world's population, resume
their growth. In the near term, these potential opportunities could include:
- an increase in mergers and acquisitions and other financial advisory
services in connection with corporate restructurings;
- an increase in trading opportunities as financial intermediaries meet
the liquidity needs of their clients; and
- an increase in capital raising as Asian corporations and governments
access the international capital markets rather than the regional
banking system to refinance and to fund future growth.
In the longer term, these potential opportunities could include:
- the emergence of corporate and real estate principal investment
opportunities as a result of corporate and government restructurings;
and
- an increase in third-party assets under management and a major shift
towards investments in equity securities due to an anticipated move to
private pension fund
systems, changing demographics and the relaxation of foreign exchange
restrictions.
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