European tech set for takeoff 🚀 Plus: What does an inverted yield curve really tell us?

[Goldman Sachs]( [BRIEFINGS] April 7, 2022 Is Europe's Tech Scene Set to Take Off? Innovations in the U.S. and China have largely overshadowed Europe’s tech scene. But the sector is set to take off thanks to a surge of private capital, the accelerated adoption of online services and more supportive government policies. Online usage is soaring. The adoption of online services by consumers and businesses has accelerated dramatically through COVID with three- to five- years’ worth of growth taking place in 2020 alone across sectors such as e-commerce and online streaming, explains Lisa Yang, head of the European Media and Internet team for Goldman Sachs Research, on the [latest episode of Exchanges at Goldman Sachs](. Unicorns are multiplying. “We've seen more and more European online companies starting to scale up and being able to compete at the global scale,” Yang tells Exchanges host Allison Nathan. “The number of European tech unicorns has doubled in the space of just two years.” New platforms and digital enablers underpin the infrastructure behind Europe’s digital economy. “What we've seen is that some of these smaller companies can be innovative and benefit from all of this compute and storage in a highly scalable way, even if they don't have as much specialized IT infrastructure themselves,” says Alexander Duval, head of Europe Tech Hardware, Semiconductors and Video Games for Goldman Sachs Research. “So that's been a huge benefit to the digital economy and will continue to be so in our view.” [Listen to podcast]( [Read more]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Is%20Europe's%20Tech%20Scene%20set%20to%20take%20off%3F&body=https%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DrY-Fq-uCSYQ) Getting Real About Recession Risk and the Yield Curve Investors keep a close watch on the U.S. yield curve — the gap between short-term and long-term Treasury rates — for signs that economic growth could reverse. That measure was inverted last week, meaning short-term Treasuries yielded more than the ones that mature in a decade. Ten-year Treasuries are considered the safest, most liquid investments available, and their yields tend to drop below short-term rates when investors are concerned about economic growth. The yield curve’s predictive ability may have been clouded by the recent spike in inflation, according to Goldman Sachs Research. When inflation jumps, it’s more common for the yield curve to flatten or even invert. Furthermore, researchers at Goldman Sachs have found that the curve using inflation-adjusted yields (real rates) is still positive and hasn’t inverted. Their models using nominal (not accounting for inflation) yield curves suggest the probability of recession is around 41% (as of April 5th), and curves using real and breakeven rates signal a probability that is closer to 39%. Doing the same analysis based on data from periods of higher inflation (from 1971 to 1991), strategists at Goldman Sachs found a slightly lower chance of recession. Real and breakeven rates had a stronger statistical significance for forecasting an economic downturn using data from that time period, and that model puts the current odds of recession at about 35%. “Under any measure, the broader yield curve's signal of recession risk has risen of late, but the magnitude of that change and current odds of recession risk depend somewhat on the assessment of the inflation environment,” according to Goldman Sachs Research. SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Is%20the%20yield%20curve%20signaling%20a%20U.S.%20recession%3F&body=) China Lockdowns Could Disrupt Global Supply Chains COVID lockdown restrictions in mainland China are starting to impede local economic activity, with potential ramifications for global supply lines. Goldman Sachs Research’s global GS Effective Lockdown Index (ELI) — a combination of official restrictions and actual mobility data from 46 economies, weighted by PPP GDP — tightened in the fourth week of March, with China’s national ELI driving higher. This is the first time since February 2020 that China’s ELI has been tighter than other main regions. Slowing activity in mainland China is both regional — in areas like Jiangsu, Jilin, Guangdong, Shaanxi and Shanghai, which play an important role in nationwide supply chains — and within manufacturing subsectors. Industries with notable production or exposure to suppliers in these locations include chemicals, transportation equipment and timber/wood product (like furniture), but anecdotal evidence also suggests that regions designated by the government as “high-risk” or “mid-risk” for COVID are facing both delivery delays and production suspensions. The longer lockdowns stay in place, the greater the potential global impact. Production across some vehicle and equipment manufacturing industries (Shanghai area plays a meaningful role in national auto and equipment production) appears to be most vulnerable to the current local COVID restrictions. For more on the broader supply chain impact, [read the full article](. [Read more]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=China%20Lockdowns%20Risk%20Supply%20Line%20Fractures&body=https%3A%2F%2Fwww.goldmansachs.com%2Finsights%2Fpages%2Fchina-lockdowns-risk-supply-line-fractures.html) As Volatility Rises, Insurers Invest More in Private Equity Global insurers are maintaining a risk-on investment approach with plans to put more money into private equity, as they contend with soaring inflation and tightening monetary policy, according to Goldman Sachs Asset Management’s 11th annual Insurance Survey. The survey included 328 Chief Investment Officers and Chief Financial Officers who oversee more than $13 trillion in insurance assets. Here are some of the key takeaways from the survey: • Almost 60% of those surveyed listed inflation as one of the top three macroeconomic risks to investment portfolios. • More than 40% of global insurers in the survey plan to increase investment into private equity over the next 12 months. • More than 60% of respondents believe that a U.S. recession is coming in the next few years. • 92% of investors said they now considered environmental, social and governance factors throughout the investment process. [You can learn more from the insurance survey here](. [Read survey]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Amid%20Global%20Volatility%2C%20Insurers%20Are%20Ramping%20Up%20Private%20Equity%20Investments&body=https%3A%2F%2Fwww.gsam.com%2Fcontent%2Fgsam%2Fus%2Fen%2Finstitutions%2Fmarket-insights%2Fgsam-insights%2F2022%2FInsurance_Survey_2022.html) The UK Performs Poorly When It Comes to Social Mobility. Here’s How It Can Improve Compared with other countries, the most disadvantaged in the U.K. are less likely to climb the income ladder and the economically advantaged tend to stay at the top. COVID has increased inequality further, and recent rises in inflation, especially energy costs, are intensifying the problem. In a recent report, [Goldman Sachs Research]( has taken a closer look at the issue, investigating what needs to be done to improve mobility and opportunity for people in the U.K. We sat down with authors of the research, Goldman Sachs’ European Strategist Sharon Bell and Chief U.K. Economist Steffan Ball, to discover more. Could you start by defining what social mobility is? Steffan Ball: Put simply, it means doing better or worse in terms of lifetime outcomes than your parents. If you look at the U.K. and compare it with other developed countries, it stands near the bottom of the international league table for both social mobility and inequality. It’s important to clarify that the two things are slightly different. For example, you can live in a very unequal society but still have a very different life outcome to your parents. On social mobility, political debate is often focused on who climbs up the social ladder and that is critical. But it should also consider whether better off families retain their social and economic position. And on this metric too, the poorest and the richest in the U.K. are the most socially immobile. So this exacerbates social inequalities. Only the U.S. and Switzerland have lower social mobility than the U.K. Sharon, this is a relatively new area of research for Goldman Sachs. What would you say are the key takeaways from ‘The Bigger Picture: U.K. Social Mobility — A Tough Climb?’ Sharon Bell: The primary thing is that the U.K., relative to the rest of Europe, looks pretty poor on most metrics on social mobility and things have actually deteriorated further in the last few years. The pandemic has made it worse; potentially the energy spike we are seeing will also make it worse. So the U.K. scores very poorly on most social mobility metrics and the key takeaway from our report is that there are things governments, policymakers and corporations can do to help address the problem. I feel that social mobility, as a particular diversity target and interest, is something that is more nascent than other areas — such as gender, for example — and something which is also incredibly important given that it’s already a wide gap and gotten worse. To learn how social mobility can be improved, [read the full article](. [Read more]( [Read more Briefly Q&As]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=The%20UK%20performs%20terribly%20when%20it%20comes%20to%20social%20mobility.%20Here%E2%80%99s%20how%20it%20can%20improve&body=https%3A%2F%2Fwww.goldmansachs.com%2Finsights%2Fseries%2Fbriefly%2F) April QuickPoll: Will the Fed Stick to a ‘Hard’ or ‘Soft’ Landing? With recession fears on the rise, the market narrative has coalesced around whether the Fed will manage to engineer a soft landing or end up triggering a hard one. Here are the key findings from our latest Marquee QuickPoll survey of nearly 1,500 institutional investors. • Investors have taken notice of the Fed's increasingly hawkish stance and 38% now expect more than 200 basis points (bps) of hikes this year. Markets are currently priced for close to 250 bps of hikes, so there is a small gap here between investor expectations and market pricing. With a terminal rate expected at around 2.5% to 3%, that means the hiking cycle is expected to end in 2023. • When asked about inflation, 54% expected inflation to stay above target until at least 2024, in part because 54% of investors expect the next recession in 2022 or 2023, says Oscar Ostlund, head of content for Marquee, the digital platform for the Global Markets Division. Put another way, the markets now expect the Fed to trigger a “hard landing,” meaning that only thereafter will inflation subside. • Perhaps counterintuitively, investor sentiment has improved at the margin this month likely due to the perceived receding geopolitical risk and the relatively stretched bearish sentiment, Ostlund says. As tail events around the Russian war in Ukraine are perceived to be shrinking, investors have significantly reduced risk premia around this factor. For more information about QuickPoll and Marquee, [reach out to the team](mailto:gs-marquee-sales@ny.email.gs.com?subject=BRIEFINGS%20Follow-Up%3A%20Interested%20in%20Learning%20More%20About%20Marquee&body=BRIEFINGS%20Follow-Up%3A%20Interested%20in%20Learning%20More%20About%20Marquee%0A%0A). [Learn more]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=April%20QuickPoll%3A%20Will%20the%20Fed%20Stick%20to%20a%20%E2%80%98Hard%E2%80%99%20or%20%E2%80%98Soft%E2%80%99%20Landing%3F&body=https%3A%2F%2Fmarquee.gs.com%2Fwelcome%2Fproducts%2Fresearch-insights%2Fmarket-insights) BRIEFINGS Brainteaser: Do You Know World Health Day? Today the world celebrates global health awareness. For this week's BRIEFINGS Brainteaser, can you tell us what factor contributed to the annual celebration of World Health Day on April 7th? [Check your answer here](. A) It’s the same day the bubonic plague was eradicated. B) There is no factor. Health just deserves to be celebrated. C) The birth of Florence Nightingale, pioneer of modern nursing. D) The World Health Organization was founded. [Take Quiz]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=BRIEFINGS%20Brainteaser%3A%20The%20Founding%20of%20World%20Health%20Day&body=https%3A%2F%2Fonegs.iad1.qualtrics.com%2Fjfe%2Fform%2FSV_eKE1ZVhKkYm8W6G) Goldman Sachs Media Highlights CNBC - April 5 [There's No Shortage of Aspiring Goldman Bankers as Record 236,000 Students Apply for Internships]( Pensions & Investments - April 4 [Insurers to Cut Risk, Hike Private Market Investments — Report]( CNBC - April 4 [Russia-Ukraine War has ‘Really Shifted’ ESG Priorities, says Goldman Sachs]( (01:43) [Subscribe]( [Unsubscribe]( Some of the images used in this newsletter are sourced via Getty Images. 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. 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