Global Macro Outlook 2022...John Waldron Interviews Medtronic CEO...Banks Pivot on Cyberdefense

[Goldman Sachs]( [BRIEFINGS] November 11, 2021 2022 Macro Outlook: The Long Road to Higher Rates Coming off a year of surging global growth and inflation, Goldman Sachs Research expects 2022 to be broadly defined by more moderate expansion and normalizing monetary policy as the world navigates the next leg of an unusual pandemic recovery. Our economists now see the Federal Reserve responding to above-target inflation with the first interest rate hike in mid-2022, joining several advanced and emerging economies that will already be well into their tightening cycles at that point. In China, the property market is likely to soften further, and macro policy looks set to ease only modestly, with policymakers doing just enough to stem major downside risks but stopping short of the level of easing in prior cycles. The combination of comparatively sluggish growth in China, a rebound in India, solid growth in Russia, and near-term acceleration in advanced economies should lead to another strong year of global expansion, with real GDP likely to rise 4.5%. [Read the outlook]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Goldman%20Sachs%20Macro%20Outlook%202022%3A%20The%20Long%20Road%20to%20Higher%20Rates&body=www.gs.com) Medtronic CEO Says More Data Key to Innovation Above (L to R): John Waldron of Goldman Sachs and Geoff Martha of Medtronic In a recent Talks at GS session, Goldman Sachs President and Chief Operating Officer John Waldron spoke with Geoff Martha, the chief executive officer of healthcare company Medtronic. Here are some highlights from the conversation: On the ventilator shortage that bedeviled his early days as CEO: “It was clear that we were going to have to do something dramatic and really focus on this. And the other thing that was going through my mind is once we realized how big the gap was between the demand and our ability to supply...how do you allocate what you have, too? How do you decide who gets what? So there were a lot of heavy questions going through my mind at that point.” On the medical innovations in Medtronic’s pipeline: “We spent years building what we’re saying is the best pipeline in Medtronic’s history, and it’s coming to fruition right now. We’ve got a lot of meaningful innovation across the company broadly, and then sprinkled in with that is some disruptive innovation that’s either disrupting existing markets or creating whole new markets.” On data’s role in Medtronic’s future: “The amount of data that you have is, I believe, the rate limiter on our innovation. The more data we have, the more we're going to be able to innovate because this data is allowing us to, first of all, monitor more patients, diagnose and personalize the therapy to the patients.” [Watch video]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Geoff%20Martha%2C%20Chairman%20and%20Chief%20Executive%20Officer%20of%20Medtronic&body=https%3A%2F%2Fyoutu.be%2F-Ox3FKfp3MM) Banks Band Together to Beef Up Cyberdefenses Banks used to resist sharing information about how they were protecting themselves against cyberattacks to try to maintain a competitive advantage. But according to Goldman Sachs’ Chief Information Security Officer Matthew Chung, now they have no choice but to work together amid a surge in increasingly sophisticated and destructive cyberattacks. “Information sharing is an absolute must,” he says in an episode of Exchanges at Goldman Sachs. “The cyberthreat, the tactics and tools and procedures, what we call TTPs, have gotten quite sophisticated...And no one company can defend the whole field. So we rely on our peers to share information. And we rely on governments…to provide us with threat intelligence and give us some help when necessary.” Having “trusted, sharing relationships with other organizations” can also help build that “margin of safety to get ahead of various threats that might be a risk to the sector,” adds Wesley Williams, head of Goldman Sachs' Security Incident Response team. And while cyberattacks are increasing in scale and impact, companies are getting better at protecting their businesses, says Andy Boura, Chief Information Security Officer for the firm's Consumer Banking business. “The quality of software is getting better from a security point of view. And the quality of infrastructure is getting better...with regards to the pristine cloud environment giving you a fresh baseline, a fresh capability.” [Listen to podcast]( [Subscribe on iTunes]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=An%20Evolution%20in%20the%20Cybersecurity%20Landscape&body=https%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DR49SvFbbI3c) Briefly…on the Case for Investing in Emerging Markets Beyond China Is there a case for dropping China from emerging market (EM) indices? We sat down with Goldman Sachs Research’s Timothy Moe and Sunil Koul to discuss the drivers behind the growing debate to invest in EMs, but without China. What’s driving the discussions among investors to separate China from the rest of their emerging market equity allocations? Timothy Moe: First of all, a key factor is China's significant market size and its rising dominance in the EM benchmarks. China’s weight in the MSCI EM index has roughly doubled over the past five years, from about 20% in 2015 to a peak of 43% in Q4 2020. And we expect China’s weight in global and EM benchmarks to increase in the coming years, especially as index providers begin raising the weight of mainland China stocks, known as “A shares.” With the rising dominance of China in EM benchmarks, EM investors inherently have to take a large exposure in China. Secondly, idiosyncratic factors, including geopolitical concerns such as U.S.-China tensions and China’s recent regulatory crackdowns, have driven sharp underperformance of Chinese equities versus other EMs. This has fueled the need for investors to better manage China risk and highlighted the merits of separating China from the rest of the emerging markets. Just how large is EM ex-China as a separate market or index? Sunil Koul: EM ex-China as a separate market or index is quite large in terms of its capitalization and offers significant depth and liquidity. Within the MSCI EM index, EM ex-China currently includes about half of the 1,400 stocks and two-thirds of the index capitalization. And within a universe of larger-cap listed stocks globally (measured as having at least $2 billion of market capitalization), the U.S. market, not surprisingly, has the highest number of larger cap stocks while the EM ex-China region has the third highest number, with about 1,200 larger-caps stocks. In terms of liquidity, more than half of these larger-cap stocks in EM ex-China trade at least $10 million a day. Why would investors opt to invest in EM ex-China? Sunil Koul: While an EM ex-China index is less levered to China's growth, it offers different market, sector and macro exposures to investors. EM ex-China, for example, has greater exposures to the tech and semiconductor sectors than China. It's also more sensitive to U.S. tightening and commodities than Chinese equities. The benefits of portfolio diversification can have a significant impact on returns as shown by the wide disparity in performance of China and the rest of EM this year. So how would a separate asset class for EM ex-China equities impact investors and their allocations? Timothy Moe: With a separate asset class for EM ex-China equities, asset managers could control their China risk better, as historically they would have to take a large exposure in China given its index dominance. Against the current backdrop of geopolitical concerns and domestic regulatory risks in China, having a separate asset class will also allow global equity managers to create more efficient portfolios. In fact, our own analysis finds that the optimal portfolios—based on the efficient frontier created by separating China from the EM benchmark and having separate allocations to China and EM ex-China—would have offered higher returns or a reduction in risk compared with ones created by using EM as a single asset class. More broadly, we could also see greater allocation of resources towards EM ex-China markets, more EM ex-China financial products and greater investment flows, which bodes well for the asset management industry. The last time a dominant country was separated from an equity index in the region was in January 2001 when the MSCI launched its Asia ex-Japan index. Are there any lessons learned? Timothy Moe: Japan serves as a useful case study for how the investment terrain could change if investors separate China from the rest of the emerging market index. Both Japan and the region (ex-China) continued to receive cumulative net inflows and at a fairly consistent, roughly 60%/40% proportion. Based on the experience of how indices evolved and portfolio flows progressed following separation of the rest of Asian equity markets from Japan, it appears likely that both China and EM ex-China can be viable indices and attract investment flows with no cannibalization effect. [Read more Briefly Q&As]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Briefly%E2%80%A6on%20the%20Case%20for%20Investing%20in%20Emerging%20Markets%E2%80%94Without%20China&body=https%3A%2F%2Fwww.goldmansachs.com%2Finsights%2Fseries%2Fbriefly%2Findex.html) Goldman Sachs Media Highlights CNBC - November 9 [Oil and Copper Are Our Two Favorite Commodities Here, Says Goldman’s Courvalin]( (3:40) CNBC - November 5 [Goldman Sachs Chief Economist Weighs In on Inflation, Labor Market]( (3:04) [Subscribe]( [Unsubscribe]( The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. Goldman Sachs believes the data in this newsletter is accurate, but does not verify its accuracy independently and does not warrant or guarantee that it is accurate or complete. Goldman Sachs has no obligation to provide any updates or changes to the data. 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