From Our Briefings Newsletter

Published on28 JAN 2019

The article below is from our BRIEFINGS newsletter of 28 January 2019:

Briefly . . . On Davos, Geopolitics and Diversity

At last week's gathering of political and business leaders at the World Economic Forum in Davos, the mood among participants differed markedly from prior years. Sheila Patel, chief executive officer of International Goldman Sachs Asset Management, discussed key takeaways from the gathering.

Sheila, you've attended Davos several times before. What was the overall mood at this year's gathering in comparison?

Sheila Patel: Last year, the mood and conversations at Davos were positive and constructive. There was extensive government representation by officials who had relatively hopeful messages. Both the US and China expressed an openness to engage with the rest of the world. Meanwhile, there was constructive dialogue around the plans and prospects for Brexit, while the International Monetary Fund had provided positive indications for global growth.

This year, the mood was decidedly more somber. Government representation was light. At a time when geopolitics is likely the top concern on attendees' minds, US President Donald Trump, French President Emmanuel Macron and British Prime Minister Theresa May were absent. In addition, the IMF cut its GDP forecasts for global growth while PMI data indicated a slowdown in the eurozone economy. Against the backdrop of the US-China trade dispute and the US government shutdown, there was more nervousness at Davos than we've seen in the past.

Given the heightened concerns over geopolitics, where there any particular themes that emerged in your conversations with clients?

SP: On one of the panels I spoke on, there was a robust discussion over whether a difficult geopolitical environment could be hurting investments and the pace of innovation in certain sectors. For example, we're seeing developed market economies pare back investments in areas that can help foster growth and innovation, such as technology and healthcare, while also increasing regulatory oversight. As a result, some investors are questioning whether emerging market economies, which often have a more "friendly" regulatory environment, could outpace DMs in terms of innovation. From our perspective, we see opportunities for relative value in EMs in places where there is both strong government engagement and levels of investment. To be sure, there's less regulation in EMs, but the bigger consideration is the overall level of investment.

More broadly, investors are becoming overly negative about global growth and the timing of the economic cycle. But a challenging growth environment still yields opportunities. EMs, for example, are attractively priced with valuations down 20% from the last year's highs. And the global stock market lost $19.9 trillion of value from the January 2018 high to December's low. That's close to the $20.7 trillion that represents the entire US GDP and is excessive in our view. And Goldman Sachs Research's forecast for US growth this year is 2.4% -- that's not dire, that's just slower.

Amid prospects for slowing growth, how are investors thinking about their asset allocation decisions?

SP: At Davos, it appeared that clients were interested in being cautiously proactive about investing for the long-term, knowing they're in a short-term volatile environment. Despite shakier markets, investors are continuing to allocate more of their portfolio to private markets and alternatives given that underlying market fundamentals have fundamentally changed. We're seeing fewer public companies in the US. and globally, we're seeing more innovation happen in private companies -- many of which are staying private for longer. Meanwhile, given the recent US government shutdown, there could be a backlog of companies going public or private companies deciding to seek funding in other ways.

Given your role in charge of GSAM's global investing business, what were some of the regional concerns that emerged from your conversations with clients?

SP: In Europe, the level of uncertainty is very high among different leaders and investors around the various Brexit scenarios. It was possibly the most discussed -- but least conclusive -- topic at Davos. In addition, many global corporations are also rethinking their supply chains in light of a more geopolitically challenged world. Large technology or consumer packaged goods companies, whose supply chains are often tied to China, were discussing how to diversify their suppliers to other countries, such as Vietnam. Customs and border delays under a hard Brexit scenario would also disrupt a just-in-time approach to manufacturing. So rather than wait for a possible solution, companies are proactively diversifying their supply chains, and the primary beneficiaries will be in Asia and Southeast Asia.

Goldman Sachs' 10,000 Women and Launch With GS programs also co-hosted a "When Women Lead" event at Davos where GS CEO David Solomon and the IMF's CEO Christine Lagarde spoke about gender equality. Can you talk about the firm's role in that event and what it means to you?

SP: The event was very well attended and the discussions resonated with many in the room. From Goldman Sachs' perspective, we believe that supporting women's economic empowerment and leadership opportunities will drive meaningful economic growth across multiple stakeholders. My own view is that diversity is important -- not only because it's the right thing to do -- but diversity leads to better decision making and better outcomes. We live in a world where the problems we face are complex. Having different voices and narratives around the table will lead to stronger analyses and the best decisions for our clients.