The week sterling was pounded £

--------------------------------------------------------------- Hello! It's Friday, September 30. This week, we look closely at the slump of the British pound and the possible path forward for the U.K. economy after a volatile week. And although Halloween is a month away, we have [zombies on our minds]( — but not the living-dead creatures you are probably imagining. (Was this newsletter forwarded to you? [Sign up now.]( --------------------------------------------------------------- Why the British pound fell to a record low The U.K. currency, already buffeted by an energy price shock, traded at a record low against the dollar after the government unveiled a spending plan that some fear could spark higher inflation. Michael Cahill, a foreign-exchange specialist in Goldman Sachs Research, says he expects larger rate hikes from the Bank of England than were previously anticipated. - Goldman Sachs Research now expects the BOE to deliver 100-basis-point hikes in both November and December (up from 75 basis points), taking the terminal Bank Rate — the U.K.'s most important interest rate — to 5%. - The pound is forecast to weaken further in the near term to 1.05 against the U.S. dollar. “Typically, fiscal expansions can lead to a stronger currency when they are met with tighter monetary policy, but given the current constraints from the energy crisis we think Bank of England policy will only partially offset the new fiscal spending the government has announced,” Cahill says. - Whether the British economy tips into a sharp recession — or a shallow one — will likely depend on whether energy prices and fiscal policy force the central bank to hike rates more aggressively, he says. [Read the full Q&A on the falling pound here](. --------------------------------------------------------------- Why sustainability is a fashion staple One of the fastest-growing sectors in the fashion and apparel industry has been the resale market, fueled by price and environmental concerns. In the [latest episode of Exchanges a]( Goldman Sachs]( James Reinhart, CEO of thredUP, one of the world's largest online resale platforms, and Karen Levin, a managing director in the Consumer Retail Group in our Investment Banking Division, sit down with Allison Nathan of Goldman Sachs Research to discuss the opportunities and challenges for retailers, shoppers and investors. The global secondhand apparel market was just shy of $100 billion in 2021 and could more than double over the next five years. “There's been a number of factors that are fueling this outsized growth, but two of the most salient ones for me have been technology and conscious consumerism,” Levin says. “The conversation that's at the forefront, particularly for the younger generation, but it's impacting all generations, is the impact of fashion on the planet and how can you minimize or reduce your impact.” Creating a more sustainable supply chain. “It's very clear that once the clothing is made, resale is the best thing you can do to drive sustainability,” Reinhart says. “Buying a secondhand product typically uses 82% less resources across carbon," he notes, citing independent research firm, Green Story Inc. "It uses a tenth of the amount of electricity. A tenth of the amount of water.” Apparel companies are getting hit by a slowing economy, but secondhand marketplaces could weather the macro storm better than the average company, Reinhart says. At the same time, he adds, “the American consumer is resilient. People might sit out the apparel markets for three months or six months but we don't typically sit out apparel markets for one year, two years or three years. We're Americans. We shop. People will be back. I think it's just a question of when and what kind of ferocity.” Subscribe wherever you get your podcasts [Spotify]( | [Apple]( | [Google]( | [Stitcher]( --------------------------------------------------------------- The zombie apocalypse that wasn't As bond yields ratchet higher, worries about ultra-low interest rates seem almost quaint now. But investors have long worried that the rock-bottom rates of the past decade or so would give rise to a legion of zombie companies — firms that survive mainly because borrowing is cheap and plentiful. Fortunately, there are reasons to think the number of zombies is smaller than some feared, according to Goldman Sachs Research. Zombie companies are typically defined as firms that haven't produced enough profit to service their debts (also known as an interest coverage ratio below one) for three straight years. Some 13% of companies based in the U.S. could be considered examples of the living dead, based on that definition. But that metric captures a swath of high-growth enterprises, typically technology companies, according to Goldman Sachs Research analysts Michael Puempel and Ben Shumway. Investors see these as promising companies that will have high profits in the future. Looking only at firms whose equity has underperformed the S&P 500 Index by at least 5% in each of the past two years, the number of so-called zombies shrinks to less than 4% of U.S. companies. “There are not nearly as many zombies as some of the headline data might suggest,” Puempel says. “The public markets are actually pretty good at efficiently allocating capital away from the zombies.” [Learn more about the reality of so-called zombie companies](. --------------------------------------------------------------- Basak Yavuz: We believe the best-performing companies can be found in emerging markets Despite the heightened geopolitical tension and fallout surrounding Russia this year, opportunities to make the right investments in other emerging markets (EMs) can be found, according to Basak Yavuz, co-head of Emerging Markets Equities for the Fundamental Equity team in our Asset Management Division. "Macro and geopolitics will always be at the forefront [for EMs] and it can be very hard to predict…but investors can still seek to generate significant excess returns above the benchmark return by investing in sound businesses with a disciplined valuation framework," she says. Yavuz is optimistic about other emerging markets, particularly India and China, which she describes as being home to some of the best-performing companies in the world. “Over the past 10 calendar years, an average of 80% of the top companies have come from outside the U.S.,” she says. “Many of these companies were in emerging markets…Even with the regulatory volatility in China [in 2021], 50% of the best companies were from China.” She believes conditions in China may stabilize and potentially improve despite recent issues surrounding the property sector, COVID-enforced lockdowns and increased regularity scrutiny on the tech sector. Why is she so constructive about EMs? It's partially down to demographics, Yavuz says. “Eighty-six percent of the world's millennials live in emerging markets and China alone has 400 million…Their aggregate income is expected to surpass that of the U.S. in the coming decade.” Want to discover more about the prospects of EMs? [Watch the full webcast.]( --------------------------------------------------------------- Companies should think ‘circular' to cut waste, costs and emissions “Our take-make-waste linear economy is increasingly becoming outdated and will eventually become counterproductive to economic growth given the finite resources available,” says Evan Tylenda, head of GS SUSTAIN in EMEA. [Transitioning to a circular economy]( in which industries reuse resources and the consumption is less than what the planet can regenerate, is essential to decarbonization and would benefit the environment, people and businesses. Here's why: - The traditional take-make-waste economy leads to excess emissions. According to Tylenda, solid waste management alone is estimated to have generated around 1.6 billion tonnes of CO2 emissions in 2016 — the equivalent of about 350 million cars on the road. Applied more broadly, circular economy solutions can help cut 39% of global GHG emissions, putting the world closer on track to achieving net-zero outcomes by 2050. Transitioning to a circular economy, he says, where we'll get more value from the resources and materials we use, is essential to decarbonization. - Developing countries are expected to see the highest growth in waste generation, causing issues to the environment and public health. “The vast majority of waste in low-income countries is mismanaged through open dumping, leading to excess methane emissions and public health issues. This makes it critical to establish proper means for recovery or safe disposal,” according to Tylenda. - Recycling, reuse and remanufacturing could help unlock $1 trillion a year in wasted resources by 2025, according to the World Economic Forum and Ellen MacArthur Foundation. “Corporates could substitute difficult-to-recycle materials with more circular alternatives, increase the life of their products through enhanced durability and switch consumer focus towards service-oriented business models,” Tylenda says. - Rising energy prices, increasing focus on low-carbon solutions and extending the EU Taxonomy to include circular economy categories will promote greater recognition of the benefits of circular solutions, Tylenda adds. [Read the rest of our Q&A on the circular economy here](. --------------------------------------------------------------- Briefings Brainteaser: King of the bill U.K. banknotes will be updated to feature King Charles III's portrait, according to the Bank of England. Can you tell us how many U.K. banknotes featuring the late Queen Elizabeth II are currently in circulation? A) 3.2 billion B) 4.1 billion C) 4.7 billion D) 5.2 billion [Check the answer here](. --------------------------------------------------------------- ICYMI: In the media [Bloomberg]( September 29 [Goldman's Currie: Oil market will continue to tighten]( (6:01) [Wall Street Journal]( September 26 [Small businesses get creative as they still struggle with hiring]( [CNBC]( September 26 [China is unlikely to see ‘significant easing' of Covid measures till next spring, says Goldman Sachs (2:11)]( --------------------------------------------------------------- --------------------------------------------------------------- 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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