You were quoted recently saying you see a 30% chance of the US in a recession at some stage. Do you see a stagflation kind of scenario with high inflation, low growth?
To be clear, what I said is that Goldman Sachs Research predicts a 30% chance of recession. The inflation we are dealing with around the world is significant given a whole variety of factors that occurred leading up to and during the pandemic, including the various government and monetary responses. Now we have to unwind and it’s going to take some time through a variety of different scenarios. In the US, the Fed has a lot of tools at its disposal. It is certainly on the case and using them. As you can see, US economic conditions are starting to tighten. That is having an impact and will have a broader effect on demand over time. When you have economic tightening like this, one plausible scenario is a recession where you wind up with some sort of economic slowdown. There are, as you know, long, deep recessions or short, shallow recessions, making this an uncertain time. I am hopeful though that the Fed can navigate and make it as soft as possible.
If you have to predict, which one will you pick – a short, shallow recession or deeper longer one?
I would say, at the moment, the US economy is actually in pretty good shape. The consumer is still in very good shape. If you look at metrics such as consumer credit, the US economy overall is healthy. There are, however, definitely some troubling signs. Definitely, tightening monetary conditions are taking asset prices down, which has an effect on how people feel about their wealth and that should start affecting spending habits moving forward, but we haven’t seen it yet. So, it’s very, very hard to predict or be sure of anything. I don’t think there’s enough data (yet).
So the argument really is that after four decades of low interest rates, they could now rise to kill inflation?
Well, that is the logical thought process, whether or not that will be the actual journey undertaken is unclear. Rates could rise enough to slow down the demand side of the equation and we could see some normalisation of the supply chain – so you get enough slowing to have a relatively soft landing without having to bring great cost. It’s a very uncertain period, in terms of the direction of monetary policy and the impact that will have. Also, it’s unprecedented. When have we ever had a situation where we’ve turned off the economy all over the world at the same time? Could that not perhaps create real imbalances and disruptions of unprecedented scale and dimensions?
How has the current geopolitical situation, the war in Ukraine, exacerbated the situation?
There was great demand and pressure on energy prices coming out of the pandemic. The war in Ukraine just accelerated that and furthered those imbalances.
There’s been much talk about the deglobalisation and supply chains getting uncoupled. Much before the Ukraine war, we had the US-China trade tensions and the pandemic. Would you say the war has accelerated that process?
There are a handful of things that have occurred in the last few years causing people to re-evaluate certain supply chains. It’s leading them to think more about security and resilience, both in terms of the supply chain and access, as opposed to manufacturing at the lowest possible price. I’ll give you a couple of examples. When the pandemic started, there were a whole variety of resources associated with healthcare, including things as basic as masks where people didn’t have a supply chain they could access. Consequently, there was a great deal of talk about rethinking the health security supply chain should there be a significant disruption in the future. There is now also no question commodity price pressure has started. Geopolitics with China was starting to lead people to think differently about minerals. When you think about Western Europe’s energy supply from Russia, post Ukraine, people are forced to really think about energy security and alternative sources of gas. It’s not that this was “a” tipping point, but given the macro environment, it’s been a variety of things that led people to think more about supply chain security around energy, commodities, food and healthcare, particularly related to ensuring access, including through localisation.
But volatility is great for Goldman’s traders. Revenue from your trading division is up 4% to $7.8 billion, above pre-pandemic levels.
Those businesses have grown significantly even before the pandemic, as overall market cap has grown, the trading business mirrors that. There’s no question what’s going on in the world is accounting for more volatility and people are repositioning their portfolios. The world looks very different in 2022 than what people expected it to. When that happens, there is more activity from clients and our trading business benefits from such periods. But sometimes, when there’s less activity, we don’t benefit at all. These are relatively cyclical businesses. Yes, trading was up 4% in the first quarter, but I wouldn’t say that is “gangbuster growth.” Our clients have been active, because inflation is high and there is now a different perspective on the world geopolitically, so they are repositioning and our job is to serve our clients in those areas.
On the other side, there was a 42% drop in profit despite the surge in the trading activity. Is it largely because deal making is cooling down? There seems to be a slowdown in the transformational dealmaking that Goldman is renowned for.
If you go back and look at my comments from our January 2022 earnings call, you will hear me clearly say we won’t see a repeat of the level of capital markets activity seen in 2021, and that is what has played out. That said, the level of activity across M&A is relatively robust. We are also seeing a significant pickup in take-private dialogue and in activism. So, while we not seeing a great deal of large-scale transformative M&A transactions, there has still been a bunch. The sale of VMware and Twitter come to mind.
Is the Twitter transaction happening?
I appreciate you asking, but we are actively engaged in the transaction and representing Twitter, so I can’t comment on that situation I’m afraid.
You recently bought a European asset manager NN Investment Partners. You bought a buy now pay later fintech company GreenSky last year. Is this to build more sustainable revenue flows?
Two and a half years ago, we had our first-ever investor day where we laid out a relatively straightforward strategy (that’s) continuing to be amplified today. We said Goldman Sachs will look to invest in our core investment banking and global markets businesses and then to apply a focused investment programme across four principal areas where we saw real opportunity for the firm: One, the expansion of our asset-management business with a particular emphasis on alternatives; two, the expansion of wealth management capabilities to serve a broader array of clients; three, the buildout of a transaction banking platform and a digital format for corporate cash management; and four, the expansion of our digital consumer bank, Goldman Sachs Marcus. We’ve been executing on all of these four pillars. GreenSky was an acquisition to accelerate the growth of the digital consumer bank. NN Investment Partners was an acquisition to accelerate the strategy of the asset-management business. Both were tied to moving forward our strategic growth initiatives. If we see inorganic growth opportunities, we will consider them.
Isn’t it going to be a tough balancing act, because these are very crowded and competitive spaces on the one hand, and you have to pursue these M&A opportunities at the expense of share buybacks? How do you address investor sentiment quarter on quarter?
We have laid out a strategy to grow the firm, diversify the revenue base and make it more durable, and yet produce accretive returns for our shareholders. This February we updated our return on equity (RoE) targets to 14-16%. We believe we can meet those over the next three years. Certainly, I think for a shareholder, if we can produce a 15% RoE over the next three years, they would much rather have us investing in businesses that drive RoE rather than just returning capital.
India doesn’t fit into any of these four pillars like in terms of bolt-on acquisitions or acquisitions for India. Where does it fit in your overall strategy?
India is very, very important to Goldman Sachs. We have two principal activities here. One is the business led by Sonjoy Chatterjee, where we serve clients across the country related to our broader global investment banking franchise. We were just part of a very significant IPO here in the life insurance space and have been involved in several major merger transactions. Considering the economic growth momentum, where we are quite bullish on India over the next three to five years, it will only get more significant. Second, from a human capital perspective, we’re extremely committed. Bangalore is a tech engine and the second-largest office in our global ecosystem. We have 8,500 people in India. We find the talent extraordinary and compelling as exemplified by our 4,000 engineers, who are deeply embedded in our strategy on a front-to-back basis and allow us to execute on our global growth strategy. When you look at the digital buildouts in transaction banking, as in our digital consumer platform, many of those engineering resources are here in India.
How does your India franchise fit into the global Goldman Sachs network? How does it now compare with Brazil or China?
We serve clients on a global basis; we are a true global platform. It is very critical that we can connect all the dots related to important opportunities, including to do significant business in India. Global clients want our advice and the ability to leverage and connect our resources here. That business is bigger than in Brazil, but still meaningfully smaller than the business in China. Additionally, and importantly, we are a big investor here. Since 2006, we have invested nearly $7 billion and continue to see opportunities for ourselves and the client capital we manage, given the growth prospects. A great tech ecosystem coupled with innovation has developed here in India and that is also an important part of our business. So, the role of India will only grow bigger.
The Indian government has been positioning India as an alternative to China or part of a China-plus strategy. Has India been turning up more in the top CEO conversations that you been having over the past three years?
India has benefitted to some degree at the moment from the geopolitical situation with China. Previously, when people were talking about moving supply chains, India was not at the top. Has that changed? No, I don’t think so. There are other places in the world that are up higher on the list of destinations for building alternative supply chains, but that doesn’t mean some people are not investing in businesses here. India is an attractive investment opportunity in and of itself.
Several MNCs are exiting or have exited India–Holcim, Metro AG, Ford, Harley Davidson etc. Is that a cause for worry?
Two or three companies do not make a trend. There are vast variables and different reasons why people make business decisions. Global companies move their portfolios around and make decisions for a variety of complex reasons.
The Indian government is very focused on making it easier to do business in India. From a big-picture point of view, what would you like the Indian system to work on?
We think positively about the system here, particularly the extraordinary talent ecosystem, which is one of the reasons why we have 4,000 engineers here. The government is currently easing the bureaucracy to make doing business simpler. The changes in the bankruptcy laws are an example of that progress and I think the positive direction has to be good for economic growth and participation, which in turn will bring about more investment.
What do you make of the technology stock meltdown that we have seen recently. How different or how severe is it compared to 2019?
Well, I wouldn’t call it a “meltdown.” When the stock “melted up” in 2021, nobody called it so. Yes, there’s been a lot of volatility in big tech companies, but valuations had run up very significantly tied to the monetary and fiscal policy in place during the pandemic. If you actually look and retrace the big tech stocks getting attention currently, they have basically given up the gains of 2021 and are back to levels in 2020.
That’s an interesting term-melt-up.
I think “meltdown” is too severe. In contracting economic conditions, it’s not surprising that asset prices are coming down. I would say that what we’ve seen so far has been relatively controlled and expected in a world of tightening after there has been such a run. While it is fine now, we should watch out for credit contraction though. Such a scenario would put more pressure on valuations.
What role and influence do you see for crypto in traditional financial services? There was a lot of reporting about your supposed meeting with Sam Bankman-Fried in the Caribbean in March for possibly forging closer ties with the bank. Do you see crypto as an alternate currency or an asset class?
I’m more focused on the technology infrastructure than I am on cryptocurrencies, which I don’t see a use case for as a currency and feel are extremely speculative. By regulation, we can’t be in the custody business. How these underlying technologies will allow us to innovate and take friction out of a whole variety of processes in the financial markets is my primary interest in the underlying technology of blockchain. Such digital disruption has a real significance. It’s going to benefit everyone from individual customers to big institutions, and we’re trying to be at the forefront and making sure we are well-positioned. A great example is our transaction banking business. It’s using digital technology where traditionally it’s always been done on an analog basis. There is a great deal of innovation and disruption coming.
Coming back to your investing business. Will that be a key growth pillar for you in India going forward?
We’re going to continue investing where we see interesting opportunities across corporate and growth equity, real estate and credit. There are super innovative technologies and entrepreneurs emerging out of India. We are one of the most significant investors in the world, the fourth-largest alternatives investor in the world and the fifth-largest active asset manager in the world. We invest everywhere across the globe. What differentiates our asset management platform is that it’s broad, global and multi-product, and India is a part of that.
Business leaders you really admire?
There a many incredible business leaders who have done a great job managing their businesses and looking after their people. It’s not my place to be calling out specific names, but things that I look for include a sense of purpose in what they are doing; great ability to lead and inspire people; and the vision to grow and expand the platform of their business. Leadership is not easy and the pandemic has certainly made it more difficult for everybody.
You will be performing as DJ D-Sol alongside artistes like Doja Cat, Dua Lipa and Green Day at this year’s Lollapalooza.
That’s in July. I will be performing on the smallest stage on the side I can assure you (laughs), but I will enjoy it and be able to contribute the proceeds to charity.