US-China relations are top of mind 🤔

- Plus: Check out some of the highlights from our Investor Day from earlier this week. --------------------------------------------------------------- In today's edition: - After our recent Global Macro Conference in Hong Kong, we turn our attention to Asia, [including Japan's bond market](. - [Is it time to invest in emerging markets]( - Plus, some [highlights from our 2023 Investor Day](. (Was this newsletter forwarded to you? [Sign up now.]( --------------------------------------------------------------- Will the Bank of Japan cause another shock to the bond market? After a bond rally at the beginning of the year, bond yields have risen sharply over the last several weeks amid signs of better-than-expected economic growth and sticky inflation. Policymakers in Japan sent ripples through the bond market when the central bank [widened its yield curve control (YCC)]( band in December. Goldman Sachs Research's latest Top of Mind report, [(Japanese) Bonds, Bonds, Bonds]( explores the outlook for global bond markets — and especially Japanese government debt — given this year's change in leadership at the Bank of Japan. Columbia University's Takatoshi Ito, former deputy vice minister for international affairs in the Japanese Ministry of Finance, was hesitant to characterize the December YCC adjustment as the first step toward policy normalization, according to an interview with Goldman Sachs Research's Allison Nathan, senior strategist and editor of Top of Mind. However, he believes the Bank of Japan may have been “putting on its shoes” in preparation for it. Meanwhile, Goldman Sachs' Chief Japan Economist Naohiko Baba believes currency management was the primary motivation behind the December YCC shift. Ito and Baba agree that incoming BoJ Governor Kazuo Ueda will take a pragmatic and data-driven approach to policymaking, guided by inflation. When it come to the U.S., Rick Rieder, CIO of global fixed income at BlackRock, doesn't see much more upside risk to rates this year but expects yields to remain high before potentially declining sharply in 2024. As for Japan, he doesn't expect another spike in rates volatility because of BoJ policy shifts. “My sense right now is that while future [BoJ] shifts could create some ripples, they probably won't create a crisis,” Rieder says. --------------------------------------------------------------- China's growth — and relations with the US —weigh on investors' minds Investors and business leaders are optimistic about China's economic growth this year but have concerns about geopolitical tensions between China and the U.S., according to a poll conducted at our Global Macro Conference Asia Pacific. During last week's event in Hong Kong, which returned in person for the first time in three years, we asked attendees to share their thoughts on the biggest risks to global growth in 2023. 44% of respondents said tensions between the U.S. and China are the risk causing them the most concern for the world economy this year — coming in ahead of worries about resurgent inflation (26%), other geopolitical risks (15%) and policy-induced recession (13%). But at the same time, most expect China's GDP expansion to surge as the economy reopens. “For 2023, investors agree that growth will recover after the removal of zero-Covid policy, although there are disagreements on the strength of the recovery, with consumer confidence, property market and local government debt being the top concerns,” Goldman Sachs' chief China economist Hui Shan says. “However, over the medium term, U.S.-China relations are the dominant uncertainty weighing on investors' minds.” --------------------------------------------------------------- For signs of economic growth in Asia, look north The reopening of China and an improving economic outlook in Korea could shift the center of gravity in Asian stock markets to the north, away from India and ASEAN countries, [according to a Goldman Sachs Research report.]( GS strategists break down what these macro developments mean for markets across Asia. Here's a snapshot of their views: - China: The MSCI China index has rallied significantly since it bottomed on Oct. 31, 2022, but GS researchers write that “the market still has further room to appreciate.” Moreover, what they're seeing in China is more than what's been described as simply “China's reopening.” - South Korea: Prospects appear bright into 2024, the report says, noting investors are likely to anticipate the country's economic rebound this year. A poor near-term outlook is expected to improve in the latter half of 2023. Our analysts raise another possibility: The chance that South Korea's economy is upgraded to developed status, which could significantly drive investment in that market and, subsequently, an uplift in its evaluation. - Taiwan: Having been cautious at the end of 2022, due to a downturn in tech hardware and geopolitical concerns, our strategists have upgraded their view of Taiwan. “[The] fundamentals appear to be stabilizing or improving, valuations have reset and geopolitical risk indicators have moderated,” the authors write. - India: The nation's growth story remains strong, with GDP anticipated to moderate from almost 7% in 2022 to a still-solid 6% in 2023. But the authors write that India isn't likely to outperform other markets because its stock valuations remain at a record premium relative to the rest of the region. [Take a deeper look into these insights here.]( --------------------------------------------------------------- Is it time to invest in emerging markets? Stocks and bonds in emerging markets (EM) suffered steep losses in 2022 but have started to rebound, thanks to the reopening of China's economy and healthier semiconductor inventories. EM economies and companies have made structural changes as well to build the case for investment, say Goldman Sachs' Asset & Wealth Management's Kay Haigh, co-CIO of fixed income, and Hiren Dasani, co-head of emerging markets equity, [on the latest episode of Exchanges at Goldman Sachs.]( While a strong U.S. dollar has typically attracted money away from EMs, “emerging markets have done a number of things to make themselves more resilient,” Haigh says. “First of all, they've moved away from having formal pegs to the dollar. Not in all instances, but in a lot of instances. So, they haven't built up these imbalances. They've been much smarter about how they fund themselves. So, they haven't built up a lot of dollar debt or less dollar debt than they used to have in the past.” And while EM earnings are likely to be “tepid” this year, the quality of those earnings will be healthier, Dasani says. “The good news is that the structural growth story is in EM [sectors] such as consumer staples, consumer discretionary, financials, healthcare — these are some of the sectors which are going to witness very strong double-digit corporate earnings growth in '23. So, yes, the overall earnings may not grow that much in '23. But the quality of earnings for '23 is going to be far better than what we saw in '22.” --------------------------------------------------------------- Forecast: US inflation still warm, ECB more hawkish U.S. core personal consumption expenditure (PCE) inflation is expected to fall from [its current level of 4.7% to 3.3%]( in December, according to economists in Goldman Sachs Research. In February, they forecast that core PCE inflation would decline to 2.9%. The modification comes amid upward revisions to previously reported inflation and news that has made the near-term outlook for inflation appear more challenging. In particular, used-car auction prices — which lead consumer prices — have jumped amid temporary disruptions to new car production and a drag on used-car supply. Recent data on shelter inflation and other core services has been more mixed. However, our economists still expect an outright decline in overall core goods prices this year, as continued supply chain recovery, inventory restocking and a waning boost from earlier commodity price inflation will allow the category to resume its normal deflationary trend. The European Central Bank is also contending with inflation data this week that has been firmer than expected. As a result, ECB officials have stressed that the risks to inflation remain to the upside and signaled more openness towards tighter monetary policy, according to Goldman Sachs Research. Our [economists now forecast]( a fourth hike of 50 basis points in May (versus 25 basis points before) and raised their peak rate to 3.75% in June (versus 3.5% before). --------------------------------------------------------------- Focused on the forward: Goldman Sachs' 2023 Investor Day Goldman Sachs Chairman and CEO David Solomon At Goldman Sachs' Investor Day, held at the firm's headquarters in New York earlier this week, Chairman and CEO David Solomon and the senior management team provided an update on the firm's strategic priorities that were first outlined three years ago at the firm's inaugural Investor Day. “We are focused on strengthening our world-class client franchise through One Goldman Sachs to raise the floor on returns and achieve our through-the-cycle targets,” said Solomon, who also shared his thoughts on a recent [Exchanges at Goldman Sachs]( podcast. “This focus, and execution on our key priorities, will help us build a stronger, more diversified firm and deliver for our shareholders.” The senior leadership team provided updates on the firm's three businesses — Global Banking & Markets, Asset & Wealth Management and Platform Solutions — while sharing the financial roadmap and the investment case to shareholders and other investors. [Access the webcast]( [view the presentation](. --------------------------------------------------------------- Creating an all-inclusive future: Lessons from the Goldman Sachs Robin Hood Rising Leaders Forum By 2045, Gen X and millennials will hold 80% of the world's wealth, according to an industry study, giving them an opportunity to build a more equitable future. Nearly 400 of them gathered at the [inaugural Goldman Sachs Robin Hood Rising Leaders Forum]( at the firm's headquarters earlier this year to hear from leading investors, philanthropists and entrepreneurs on how to create lasting and meaningful impact. Featured speakers, such as investor Paul Tudor Jones II, ballerina Misty Copeland and Darren Walker of the Ford Foundation, shared their advice on building new and inclusive work. “You don't have to stay in your box. You can do anything as long as you have the skills, resources and drive.” – Paul Tudor Jones II, founder, co-chairman and CIO, Tudor Investment Corporation; founder, Robin Hood. [Learn more.]( --------------------------------------------------------------- Briefings brainteaser: India's GDP growth outpaces China In the final quarter of 2022, India's year-over-year GDP growth outpaced China's. Do you know by how much? A) 1.5 percentage points B) 1.7 percentage points C) 2 percentage points D) 2.5 percentage points [Check your answer here](. --------------------------------------------------------------- ICYMI: In the media [CNBC]( February 28 [Goldman Sachs' David Solomon: The real opportunity for us is around asset and wealth management]( (3:45) [Change Makers]( February 24 [Charlotte Keenan – Faith in the future: Why we need to champion small businesses]( (34:04) --------------------------------------------------------------- --------------------------------------------------------------- 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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