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[BRIEFINGS]
January 22, 2018
(Un)Steady as She Goes: Staying Invested But Alert to Rising Risks
The US economy is on track for another year of growth in 2018, albeit within an increasingly uncertain and unsteady political and geopolitical setting. In the Goldman Sachs Investment Strategy Group's (ISG) recent publication, Outlook 2018: (Un)Steady as She Goes, ISG Chief Investment Officer Sharmin Mossavar-Rahmani and the team explain why they expect solid economic and financial market fundamentals to continue to support a steady and broad-based global recovery in the year ahead. But they also caution that the benefits of economic growth must be weighed against political and other risks, including escalated tensions between the US and North Korea, a complex US-China relationship, and the rise of cyberattacks around the world. "Forecasting is difficult under the best of circumstances but particularly so after a nearly nine-year-long economic expansion and bull market," according to the authors. "2018 brings the additional challenges of even higher valuations and a stronger undertow of political and geopolitical risks."
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Talks at GS: Lessons in Leadership and Overcoming Adversity
Above (L to R): Michael Carr of Goldman Sachs and Carlos Ghosn of the Renault-Nissan-Mitsubishi Alliance
The automotive industry is undergoing a massive transformation driven by technological advances, changing consumer preferences, evolving policies and regulations and other trends. Carlos Ghosn, chairman and CEO of the Renault-Nissan-Mitsubishi Alliance and a longtime leader in the automotive industry, says the product of all that disruption is almost here: "The car you'll be driving ten years down the road has nothing to do with the car you're driving today." During a recent Talks at GS session moderated by Michael Carr of Goldman Sachs' Investment Banking Division, Ghosn also shared his views on the challenges that business and political leaders face in a world that is increasingly complex, integrated and global. "We need to defend globalization, not as an ideology, but [as a] very pragmatic way to say, What are the advantages that globalization is bringing?"
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Goldman Sachs: 3 Key Takeaways for Investors
Above: Heather Kennedy Miner of Goldman Sachs
Against an improving macroeconomic environment, Goldman Sachs is in "growth mode" and focused on the year ahead, says Heather Kennedy Miner, global head of Investor Relations, who outlined three key takeaways from Goldman Sachs' 2017 fourth-quarter and annual results, announced last week. "Momentum is really on our side," says Miner. "The tax change is stimulating client dialogue." After delivering revenue growth and positive operating leverage in 2017, the firm is "executing tirelessly against [our] $5 billion in growth initiatives."
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Briefly...on the US Tax Law's Impact on Corporate America
The new US tax law is expected to benefit businesses across America. Goldman Sachs' Susie Scher, co-head of the Americas Financing Group in the Investment Banking Division, explains the implications and opportunities for corporate America.
The federal law lowers the corporate tax rate to 21% from 35% and, at the same time, puts a minimum tax on profits overseas, spurring some companies to repatriate "trapped" offshore cash to the US. What sectors of the economy are most affected?
Susie Scher: The impact on businesses will vary by sector and the tax profiles of the underlying businesses. Many domestically based companies will benefit from higher free cash flow associated with the reduction in the tax rate while US multinationals will get greater access to existing and future offshore earnings and cash flow. The technology sector holds a significant amount of cash overseas, followed by large-cap pharmaceuticals and biotech firms, and mid-cap industrials and consumer products companies. Just last week, for example, Apple said it anticipates repatriation tax payments of approximately $38 billion and will ramp up spending in US jobs and capital spending.
How are companies thinking about using the excess cash?
SS: There's currently a debate around capital allocation, but some generalities can be made. For companies that have not been capital constrained, their additional cash from tax reform will provide more flexibility for strategic investments or returning capital to shareholders. The decision between the two will be dependent upon the opportunities in the near to medium term. Some opportunities will arise because of the new lower corporate capital gain tax which we expect will result in more companies deciding to sell non-core businesses. For other companies who have been capital constrained, we expect that many of them will strengthen their balance sheets.
How are companies thinking about the limitation on the deductibility of interest expense?
SS: Deducting interest expense has been a centerpiece of many companies' financing strategy for decades. The new tax law does impose some limits on the amount of debt that can be deducted -- interest expense of up to 30% of earnings before interest, taxes, depreciation and amortization is deductible through 2021. But practically, most large-cap investment grade companies aren't likely to be affected as their debt holdings are below that threshold. However, we could see certain high-yield issuers affected, in particular, starting in 2022, when deductibility of corporate debt becomes more restrictive. So you could see some slight reduction of debt in the near term because of tax reform broadly writ, but we're not predicting a huge drop in issuance.
For those companies that could be affected by potentially higher financing costs, are there any attractive alternatives?
SS: We expect that companies will evaluate their capital structures and look for opportunities to employ lower-cost financing structures, such as floating-rate debt and convertible bonds. Take, for example, a convertible bond, which is an interest-bearing bond that can convert into equity at a future date; in return, the bond has a lower coupon than plain-vanilla debt. Under the old tax law, a company that issued a bond with a 5% coupon would have typically paid the equivalent of 3% after taxes. Under the new tax rules, the after-tax cost would now be closer to 4% and some companies may actually have to pay the full 5% if they are above certain limits on interest deductibility. In such cases, those companies may opt for convertibles bonds as a financing alternative in part because the bonds' lower interest expense would translate into higher earnings per share. If I'm a CEO and considering financing in the bond market, I may be willing to give up some stock price appreciation, and I'd opt for a low coupon convertible bond, especially at today's equity valuations.
Goldman Sachs Media Highlights
CNBC - January 19
[Goldman Sachs' Jan Hatzius on the Government Shutdown, Tax Reform]( (3:57)
Reuters - January 19
[En Route to Davos, Macron Makes Versailles the Place to Be](
Sky News - January 18
[Goldman Sachs' Andrew Wilson on the US Economy and GSAM's Assessment of Trump's First Year in Office]( (2:10)
Institutional Investor - January 18
[Goldman Sachs' Investment Management Wins](
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