Where the US and China go from here

- Plus: Why corporate separations are gaining popularity in board room playbooks. # # --------------------------------------------------------------- The key takeaways today: - What heightened tensions between the U.S. and China could mean for the global economy. - Why market participants are pricing in the possibility of a recession.  - And the CEO of Porsche joins us on an episode of Goldman Sachs Exchanges. Was this newsletter forwarded to you? [Sign up now.]( --------------------------------------------------------------- U.S.-China: more decoupling ahead? Geopolitical tensions between the U.S. and China have intensified with the recent U.S. downing of a suspected Chinese spy balloon and President Biden's plans to unveil further curbs on China investments. In the [latest Top of Mind report from Goldman Sachs Research]( longtime China scholars explore how relations between the two powers may evolve and what it means for the global economy. Today, the relationship between the two countries is the worst it's been since Henry Kissinger and Zhou Enlai met in Beijing in 1971 to begin normalizing U.S.-China relations after decades of hostilities, Harvard China scholar Graham Allison says on [Goldman Sachs Exchanges](. “When a rapidly rising power seriously threatens to displace a major ruling power, stuff happens,” says Allison. “This is a classic Thucydidean rivalry.” But while he expects relations to “get worse before they get worse” as China challenges the U.S.'s long-standing position as the predominant power in Asia, he says it's still possible for the governments on both sides to balance competition in some areas with cooperation in others. And while bilateral trade is still high, it is well below the level it would have been in the absence of trade frictions, and investment flows between the two countries have declined sharply, says Rhodium Group founding partner Dan Rosen, who is closely tracking U.S.-China investment and trade flows. Meanwhile, the differences between the economic systems of the U.S. and China are likely to prevent deepening engagement, he says. However, “decoupling in no way needs to be maximal,” Rosen adds. --------------------------------------------------------------- The Markets: Watching out for tighter credit 🎙️ While recent economic data shows cooling inflation and continued resilience in the U.S. economy, market participants are still pricing in the possibility of a recession. In this week's [episode of The Markets podcast from Goldman Sachs Exchanges]( Joseph Briggs, an economist in Goldman Sachs Research, says investors remain concerned that tighter lending standards by regional banks will throttle growth and force the Fed to start cutting interest rates. “Our analysis suggests that the size of the hit is probably more likely to be a headwind, but not enough to push us into a recession and prompt the Fed to actually cut rates,” Briggs says. The results this week of a Fed survey of senior loan officers, which showed tighter lending standards and weaker demand for commercial and industrial loans in the first quarter, were “less bad than feared,” he says, and a separate survey showed that the share of small businesses reporting having trouble getting credit actually declined in April relative to March. He sees the pullback in interest rates since banking stress emerged in March as “a bit overdone.” Start your Friday mornings with our new podcast, [The Markets, from Goldman Sachs Exchanges.]( In just 10 minutes or less, we break down the key issues moving markets. Find us wherever you listen to podcasts. --------------------------------------------------------------- Suburban offices may be a haven as pressure on commercial real estate grows [Stress has been building on commercial real estate]( in the U.S. — and on office buildings in particular — as interest rates climb and occupancy falls, according to Goldman Sachs Research. [Three categories are likely to bear the most risk]( analyst Caitlin Burrows says: - Major markets. In New York, for example, office occupancy has dropped more than 4.5% since 2019, notably worse than occupancy rates in secondary and tertiary markets. - Offices with the biggest loans. The drop in occupancy in buildings with loans over $50 million is almost twice that of buildings with loans under $10 million. - Central business districts. Burrows says suburban and medical offices, which are backed by smaller loans in smaller markets, are most insulated from the stress. This last category is particularly important as U.S. banks have most of their exposure in insulated areas, such as suburban and medical offices, Burrows says. “While we see signals of trouble ahead for certain types of loans, we think the pain may be limited,” she concludes. [Watch our video & read the article to learn more.]( --------------------------------------------------------------- Breaking free: The rise of corporate separations Basic math tells us the whole is equal to the sum of its parts. But [companies leading a wave of corporate separations]( clearly believe their parts add up to more than that — and [a new paper]( from EY and our M&A structuring team at Goldman Sachs suggests that they may be on to something. “There's been a change in corporate sentiment over the past decade,” explains David Dubner, global head of M&A structuring in Goldman Sachs' Global Banking & Markets, on [Goldman Sachs Exchanges.]( “If you rewind the tape to the global financial crisis, 2008, there was a focus on portfolio diversification, consolidation, increasing complexity. That is changing and shifting sentiment towards one of simplification where there is enhanced focus across a portfolio and unlocking some of the discounts that may exist within a portfolio.” In [Strategies for Successful Corporate Separations]( the authors' analysis showed that when corporate separations were executed well, they led to an excess blended return of roughly 6% from announcement to two years after closing, compared with their respective company's sector index. The study analyzed roughly 160 global transactions during the 2012-22 period. “These are complicated decisions for companies to make because it's not always a straightforward separation of a business,” Sharath Sharma, global vice chair at EY, notes on [the podcast.Â]( the parameter right, the equity strategy right, having a clear evaluation of what [the remaining company] would do are all complex decisions." --------------------------------------------------------------- Private credit may outperform public bonds as defaults rise The opportunities for private credit may be expanding even as financial markets grow more turbulent and uncertain, according to [Goldman Sachs Asset Management.]( Higher-quality borrowers that may otherwise have issued debt in the public markets [are seeking financing in private markets]( attracted by the certainty and speed of completing these transactions, Stephanie Rader, GSAM global head of Private Credit Client Solutions, and James Gelfer, in Portfolio Solutions for Alternatives Capital Markets and Strategy, [write in a report.]( As interest rates climb, these loans are pricing at wider spreads (relative to high-yield bonds of similar maturity or leveraged loans) and higher overall yields, and they have more conservative capital structures. And while they expect default rates to rise in the next few years, Rader and Gelfer project private debt to outperform public credit as more borrowers struggle to repay their obligations, owing to “selective sourcing, robust diligence, enhanced structure, direct access to the borrower and financials, and the ability to influence workout situations to maximize recovery value.” --------------------------------------------------------------- Quoted at GS  “The draw of the brand was super strong, and it required that, because very few other things would have worked in that size, in that market, if it hadn't been Porsche.” Porsche CEO Oliver Blume joined Goldman Sachs' Christoph Stanger, who chairs the European equity capital markets team and helped take the company public, in a recent episode of Goldman Sachs Exchanges to reflect on the luxury car manufacturer's navigation of choppy conditions last year to launch a historic initial public offering. The IPO is the largest ever by market cap in Europe and the second largest in German history. Today, Porsche is the most valuable automotive company in Europe. [Listen to more here]( Christoph Stanger of Goldman Sachs and Oliver Blume of Porsche --------------------------------------------------------------- Briefings brainteaser: How big is the influencer market? The so-called creator economy, which includes the work of influencers or people with their own brands and online audiences, is expected to roughly double in the coming years, according to forecasts by Goldman Sachs Research. How big is that ecosystem now? A) $120 billion B) $150 billion C) $180 billion D) $250 billion [Check the answer here.]( --------------------------------------------------------------- Goldman Sachs in the news [Bloomberg]( May 10 [Goldman's Oppenheimer sees opportunity in stock picking, alpha (1:34)]( [Bloomberg]( May 10 [ECB starting to think rate hikes won't end in July]( (1:17) [Bloomberg]( May 9 [Not resolving U.S. debt ceiling would be catastrophic: Goldman's Hammack]( (7:01) [Wealth Management]( May 9 [Direct investing brings customization, tax benefits to more individual investors]( --------------------------------------------------------------- --------------------------------------------------------------- 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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