The rise of geopolitical swing states

- Plus: Investor expectations over a Fed rate cut are rising.  # # --------------------------------------------------------------- The key takeaways today: - What role will geopolitical swing states play in global affairs? - “Greece is an exceptional economic story” — and it's close to regaining investment-grade status. - And 75% of U.S. small businesses are worried about access to credit, according to our survey. Was this newsletter forwarded to you? [Sign up now.]( --------------------------------------------------------------- The rise of geopolitical swing states As the U.S. and China coexist, compete and confront each other to determine who will set the geopolitical rules, they will either court or thwart an emerging group of countries to gain an edge. This new class of influential nations are the geopolitical swing states of the 21st century, writes Jared Cohen, president of global affairs and co-head of the Office of Applied Innovation at Goldman Sachs, in an [in-depth article]( published this week. These countries fall into four overlapping categories: - Countries with a competitive advantage in a critical aspect of global supply chains — e.g., India, Brazil and China - Countries uniquely suited for nearshoring, offshoring or friendshoring — e.g., Vietnam, Mexico and Canada - Countries with a disproportionate amount of capital and willingness to deploy it around the world — e.g., Saudi Arabia, Norway and Singapore - Countries with developed economies and leaders with global visions that they pursue within certain constraints — e.g., Germany, France and South Korea In American domestic politics, swing states can be won by either party, and they decide presidential elections. In geopolitics, swing states have agency to chart their own course on an issue-by-issue basis, and they may decide the future of the international balance of power. Geopolitical swing states are relatively stable countries that have their own global agendas independent of Washington and Beijing, and the will and capabilities to turn those agendas into realities. They are using their economic advantages more assertively to bolster their standing and influence. They are more demanding, flexible, dynamic and strategic than they could have been in the 20th century, whatever their shared interests with one great power or another. And they will often choose multi-alignment, a strategy that will make them critical — and sometimes unpredictable — forces in the world's next stage of globalization and the next phase of great power competition. [Read more.]( Related: Cohen and George Lee, co-heads of the Office of Applied Innovation, discussed the shifting geopolitical and technological landscape on [a recent episode of Goldman Sachs Exchanges]( --------------------------------------------------------------- The Markets: Why European stocks are beating US equities and Japan's stock market is soaring 🎙️ European stock markets are outperforming equities in the U.S. as the Continent's economy rebounds, according to Luke Barrs, global head of client portfolio management for Goldman Sachs Asset Management. Japan, meanwhile, “is a fascinating market, has always been, but right now really is something we're very interested in,” he says in [The Markets podcast from Goldman Sachs Exchanges.]( Energy concerns were overblown. A year ago there were serious worries about Europe's dependency on Russian energy, as the region sought to cut its use of Russian natural gas after Moscow invaded Ukraine. “That actually was a far more muted issue as we went through the winter than was expected,” Barrs says. “You're seeing the rebounding growth this year, which is very positive for domestic-facing European businesses.” Valuations also matter. While they've fallen compared to two years ago, U.S. equities still price higher than they have over much of the past 10 to 15 years. “European equities in contrast look very interestingly valued” relative to U.S. stocks, Barrs says. Japan's stock market hit a 33-year high. “We see a lot of underlying reasons for why Japan's market continues to do well,” Barrs says. There's still a Covid-reopening boost flowing through Japan as well as parts of Asia, including a growth impulse that should come from China's reopening. Japan may benefit from the natural trade and tourist linkages that it has with the world's second-largest economy. While some sectors have challenges, there are also some higher quality, higher growth companies involved in things like electric vehicles or automation technologies that could be an appealing opportunity, he adds. 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. --------------------------------------------------------------- Greece is close to regaining its investment-grade status “Greece is an exceptional economic story,” says Filippo Taddei, senior economist for Southern Europe at Goldman Sachs. The country is on the cusp of [regaining investment-grade statusÂ]( than 12 years after losing that important credit rating, marking a sharp reversal for an economy that was roiled during the euro area's sovereign debt crisis. [In a Q&A]( Taddei says Greece's GDP is poised to grow much more quickly than the rest of the euro area. The recovery started out slowly. Greece's economy lost more than a third of its GDP from its peak to trough in 2013, and the rebound was slow and uncertain, Taddei says. But economic activity has been surprisingly strong since the re-opening from the Covid pandemic. Tourism isn't the only thing boosting GDP. “Greece has built up its productive capacity, in terms of more plants, buildings and machinery,” Taddei says. “That's a critical economic driver and something we haven't seen much activity in in prior years.” Private investment bodes well for Greece's future. Greece has an unprecedented opportunity, as it is set to receive a long-lasting fiscal support package of more than 3% of its GDP per year, Taddei says. “That typically trickles down into private investment — and that's exactly what we're beginning to see now,” he adds. --------------------------------------------------------------- Investing in times of market stress Investors seeking to minimize declines by holding a conventional mix of stocks and bonds were left nursing losses last year amid surging inflation and rapid rate hikes. But a new set of market stresses has seen diversification benefits return, says Goldman Sachs Research's Christian Mueller-Glissmann, head of asset allocation research within portfolio strategy, on [Goldman Sachs Exchanges](. - While positive correlations between stocks and bonds meant those assets moved up and down together for much of last year, those correlations turned negative after the recent U.S. regional bank stresses. “That just means that the bond market has started to resume its role as a buffer in the portfolio,” he says, even though bonds might not work as well as in the last cycle. - Outside of stocks and bonds, investors are also adding gold, foreign exchange and international markets to reduce risk in an uncertain environment, he says. --------------------------------------------------------------- The Big Number: Tech stocks make a comeback 3,768,000,000 Global technology ETF and mutual funds had $3.768 billion worth of inflows last week, according to Goldman Sachs' Scott Rubner, a managing director from the Emerging Markets Ex-Asia Derivative Sales and Macro Execution team. This was the largest weekly inflow into global technology funds since Dec. 15, 2021, he says. “Investors continue to find a safe haven in the largest caps relative to small caps and more volatile stocks,” Rubner concludes.  In case you missed it: Listen to our Goldman Sachs Exchanges episode, [Is Big Tech Back?]( --------------------------------------------------------------- May QuickPoll: More investors expect rate cuts Investors increasingly think the Federal Reserve may embark on a series of small cuts over time, according to the May Marquee QuickPoll, which surveyed close to 1,000 institutional investors globally. That's a change from earlier in the year when they were expecting two possible scenarios: either the Fed would keep raising rates and then pause, or it would cut rates quickly and sharply in the face of a recession. “This is reminiscent of the mid-1990s and 1995 in particular when, after a brutal hiking cycle of 300 basis points in 12 months, the Fed cut rates by 75 basis points in the following 12 months,” says Oscar Ostlund, global head of Content Strategy, Market Analytics and Data Science for Marquee in Goldman Sachs' Global Banking & Markets business. “That set the stage for a long cycle of expansion until 2001.” --------------------------------------------------------------- US households added equity at the end of 2022 The equity of U.S. households — their market value versus their mortgage liabilities — grew towards the end of 2022, following more than a year of decline, according to Goldman Sachs Research. High interest rates, diminishing credit availability and uncertainty around housing value made it more difficult to secure mortgage equity withdrawals — lending against the value of properties — leaving greater untapped equity across U.S. households, analyst Vinay Viswanathan says. As the housing sector recovers through the start of 2024, Viswanathan anticipates this lending will pick up again. “While we expect interest rates will remain high, stronger housing market sentiment by year-end could give homeowners confidence to tap into the $9.3 trillion of home equity at their disposal,” he says. --------------------------------------------------------------- More than 75% of US small business owners are worried about access to credit, says Goldman Sachs survey More than three-quarters of small business owners say they are concerned about their ability to access capital as banking stress prompts smaller institutions to tighten credit, [according to our 10,000 Small Businesses Voices initiative]( which conducts regular surveys of small enterprises in the U.S. - Just a year ago, 77% of those surveyed said they were confident in their ability to access capital. Now the tables have turned, with the same percentage expressing concern. - Even those small business owners who aren't currently applying for new credit are being squeezed by higher borrowing costs. Nearly 60% say rising interest rates are impacting their ability to service existing business debt, [according to the survey.]( - Despite government reports showing inflation is moderating, nearly three-quarters say inflationary pressures have increased over the past three months, and nearly half complain of lower profits relative to pre-pandemic levels. - Only 17% say there are more than enough or about the right amount of high quality and affordable childcare programs in their community, and 80% support policymakers taking action to increase access to childcare. - Most of the survey respondents are looking to add workers. Only 10% say they have had to lay off employees over the past three months due to economic conditions. --------------------------------------------------------------- Briefings brainteaser: A ‘fat and flat' equity market Global equity markets have remained in a “fat and flat range” over the past year, meaning weaker returns and greater volatility. Which of these markets has had the highest year-to-date total equity return (as of May 18)? A) U.S. B) Japan C) Europe D) China [Check the answer here.Â]( --------------------------------------------------------------- Goldman Sachs in the news [CNBC]( May 17 [Goldman Sachs' David Kostin expects the market will remain flat amid debt ceiling talks (3:41)]( [CNBC]( May 17 [Labor market and unemployment trends will be crucial for markets: Goldman Sachs' Peter Oppenheimer]( (3:15) [Reuters]( May 16 [European investors keen to buy more social bonds - survey]( --------------------------------------------------------------- --------------------------------------------------------------- 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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