Modi 2.0 gives us confidence both as allocator of capital & investor: David Solomon, Goldman Sachs

Untitled Carousel 69626167 A last-minute technical snag kept the Goldman Sachs CEO from visiting India, in what would have been his first since taking over as the boss of the one of the world’s largest investment bank. But he took time out for a freewheeling interview over video conference to discuss a wide ranging topics about growth in India, trade wars, the fintech disruption, Breaking up Big Tech and the backlash against Wall Street bankers. Edited excerpts:We’ve just seen an election and the return of Prime Minister Modi with an increased majority. Consequently, there is now an expectation for a stable government that will implement radical reforms of the sort that international investors would like to see. What are your thoughts on that?Ans: Under a second term for Prime Minister Modi, we are hopeful that the reform program will continue and accelerate to provide a great deal of upside for the Indian economy and Indian people. If that continues, it will be exciting for our business platform in India as well. The results of the election give us increased confidence in the investments we have made, as well as the investments we will continue to make in our Indian businesses, in both Bengaluru and Mumbai, but also with our clients, both as an investor and as an allocator of capital. Our base case on GDP growth is 7.5%, but if you look at our research, it indicates that if the reform program accelerates there can be considerable upside in the GDP growth on a forward basis. We are thrilled and watching closely. Is there anything specific you would like him to do in his second term?Ans: Continue the pace of reform. To the degree the reform process can continue to accelerate, I think it can lead to higher rates of economic growth, which obviously is tied to our franchise and investment businesses. What will be the key pillars of growth for Goldman Sachs over the next 5 years in India? How do you see the India franchise business play out over the next few years?Ans: If you think about the continuing digitization of the economy in India, obviously that’s going to create many opportunities. As the talent and technology in the country becomes more and more integrated, it is going to need significant amounts of capital. As a proven investor, who has already helped grow Indian companies, there will be significant opportunities for us across a number of our businesses to add value. Additionally, as a market intermediary and a market investor, our firm will bring more foreign investors and facilitate direct investment to India. Our growth will closely match that of the growth of the Indian economy.What has been your India experience been so far? Great potential, but always a missed opportunity?Ans: We have always been very clear-eyed about the long-term opportunity in India and are now very hopeful that the pace of reforms will accelerate in a way that continues to promote higher rates of economic growth, which will present more opportunities for our business. To date, we’ve deployed a significant amount of capital as an investor in India, more than $3.6 billion over the last decade. We’ve built great client relationships, where we serve as an advisor and a facilitator for them.Based on that clarity and understanding of the Indian economy, our business here have met our expectations, but it’s also always been a place where we’ve had hope for greater growth and opportunity. The re-election of Prime Minister Modi gives us more confidence in our investments as we continue to take a long-term view that will pay off for our businesses and our shareholders.What are the risk factors that are still attached to India?Ans: I would look at it slightly differently. I am looking at it over 10 year increments and think there has been a general direction of progress over the last 10, 20 and 30 years that will continue. India is still a place where the regulatory impact on business slows economic growth and while there is now progress being made to unleash some of that, I am hopeful that that progress will continue and accelerate.Is the progress too slow? Our bankruptcy law is still grappling with teething problems. So a lot of investors are running out of patience, too tired of waiting.Ans: It’s par for the course when you are driving change in a major economy. While I am sure there are investors who are frustrated and want things to go quicker, we take a very long-term view and the context to that is that our firm continues to be very optimistic looking at the coming decades in India and the long-term opportunity for us to serve our clients in India.What does this new office in Bangalore mean?Ans: We are very excited about the new Bengaluru campus. The investment that we’re making is reflective of the fact that it’s a very important place where high-quality work is done from India for the worldwide Goldman Sachs network. It is also a further reflection of our global platform and that we think Bengaluru offers a great opportunity to bring high-quality people into our firm. We’ve had a big focus on engineering in that office as it has been a global innovation center for the firm. That will obviously continue given the availability of talent in India broadly and in Bengaluru. This new office represents a great global opportunity for us as technology and finance continue to converge.At times foreigners appear to be more bullish on India than Indian businessmen. Any thoughts on why that might be the case?Ans: I don’t have a good answer for that, but look, I am focused on the next 10, 20, 30 years. I understand why you are trying to focus on shorter-term trends, but when Goldman Sachs makes a big business commitment to a place like this, when we open a huge office like Bengaluru and when we hire thousands of people, we’ve made a long-term bet. It would take a very significant dislocation to change that trajectory or direction.Tech companies have been under a lot of political pressure in the US especially when it comes to on-shoring of jobs. Why have US banks like Goldman not had to do the same?Ans: We run a global business. If you look at our business and the revenues of Goldman Sachs, only about 55% of it is in North America, and the rest of it is spread around the world. While there are pressures, particularly around manufacturing businesses, we try to strike the right balance as we are ultimately in the business of talent, technology and capital, which is spread around the world. Our footprint needs to match that. It is very important to our clients, who want us positioned globally. THE GLOBAL BEATIf the US-China tariff wars are not resolved soon, what kind of an impact do you see that having on the world economy?Ans: It is unclear whether or not we’ll get some sort of a trade deal in the coming months. A month or two ago, it felt more likely than it feels today - obviously, very hard to gauge. I would highlight though what’s at stake here is a fundamental rebalancing of the economic arrangement between the US and China. While we might have a trade deal, it’s only one small part of that rebalancing that is going to require a compromise over the long-term from both sides. I actually think that it’s going to be a difficult bumpy road and not as simple as whether or not we get a short-term trade deal. The degree that that relationship is bumpy over the coming decade versus when it is not, will have an impact on global growth given the size of both economies.Most MNCs will be or are tweaking their global supply chains even if there were to be an agreement sometime this year. Do you see India as benefiting from that? Ans: There is clearly a movement of people rethinking supply chains all over the world. In that context, anybody that is not China will benefit from the movement of these global supply chains - so sure at the margin there has to be some benefit. On the other hand, as I am talking to CEOs that are rethinking those supply chains, India is not the place that is immediately coming up the most in terms of such repurposing. Some are looking at repurposing back to North America, which is also benefiting. Vietnam and Indonesia are two that come up in conversations with CEOs.In Davos earlier this year you talked about a 50% chance of a recession in 2020. Now with the trade tensions, what’s the chance today?Ans: I will start by saying the same thing that I said while being interviewed in Davos: I am not a good predictor of economic recessions. The general consensus at Goldman Sachs however is not different. The chance of a recession in 2020 is probably no higher or lower than 50-50. Certainly the time that I made the comment, we were talking about the chance of a recession being 50-50 at the back half of the year.While there’s no question that trade is leading to a slowdown and affecting the growth trajectory, it still feels like the chance of recession in the next 12 months is low. Maybe it’s slightly higher than it was in Davos, but if you are asking me: Do I think there will be a recession in 2020? I’ll tell you it’s a toss-up and can give you a distribution of outcome scenarios where there is and there isn’t – so we will have to watch it more closely. You also had talked about the Fed switching over from being too hawkish to doveish in just a matter of 6 months. Where do you now stand on rates? Have they peaked in this cycle?Ans: Part of it depends on the cycle, obviously. If we enter a recession in the next 6-12 months, rates will probably peak. The consensus sentiment now is that we won’t see a rate increase for well into late 2020 at the earliest. That was a big move and change from where we were last fall. If economic activity continues at trend, which is kind of where it sits at the moment, I would be surprised if that perspective is the same 6-12 months out. All these things you are asking tie back. What does the earnings momentum look like? Why is the bond market predicting more of a slowdown? All those things will have an impact as to whether or not there will be further interest rate increases before the cycle ends, but at the moment the consensus is that we certainly won’t see anything until at least late 2020. That’s a big shift from where we were at the beginning of the year.Is that the reason why you pushed back your strategy review to 2020? You find the environment difficult to predict, tougher than what was anticipated earlier?Ans: The rates environment has absolutely nothing to do with the timing on when we’ll continue to communicate to the market about our plans. We have a lot of things that we are working through as we finish up and look at front to back reviews in our business and think about our continued push to increase transparency and disclosure in the firm. We are very, very focused on increased transparency and we are continuing to work through that.It is ultimately a process that has to be worked through and has nothing to do with the environment of the macro conditions at all.How are you preparing Goldman Sachs, yourself and your shareholders around the risk involved with 1 IMDB?Ans: We are working and cooperating with officials to get 1 IMDB behind us. It is not existential for Goldman Sachs, but we certainly want to resolve it and move forward.Bankers in the US have faced relentless bashing since the Great Recession. Do you think that has peaked or is it still more of the same?Ans: There is always going to be political rhetoric that challenges lots of different businesses at different points in time. Banks have had rhetoric that challenges them and in the US election cycle and there will be certain candidates that will continue to use that rhetoric.Today, technology companies have a great deal of political rhetoric challenging them around a whole variety of topics. In the last election cycle, big manufacturing businesses with jobs and supply chains offshore saw a significant amount of political rhetoric. My guess is in this election cycle we’ll see some more. It ebbs and flows.From our perspective, we continue to be focused on how as an organization we help our clients by putting together talent, technology and capital. How do we help them grow? How do we give them the right kind of advice so they continue to make investments that benefit their shareholders and stakeholders? We feel very good about our client franchise and their ability to do that. While there may be political noise directed at businesses, including large financial institutions, it doesn’t stop us from focusing on serving our clients.Technology companies clearly seem to have become the new villains. What are your thoughts on this talk of breaking up companies like Facebook?Ans: Facebook is a very big business. It has grown very, very quickly. It’s has a big impact on society broadly, but it’s also a very young company. Facebook was founded in 2004, so it’s a 15 year old company that has grown to be one of the largest companies in the world with a huge customer base.Breaking up a company is a very, very difficult complicated thing to do. Like any other business that becomes big and influential, Facebook will have to make adjustments and I am sure there will be pressure on them to continue to adjust. They have just become a big business and will continue to be a big business. With that they will go through that evolution, as any other growing, highly-successful company does.So you are obviously not in favor of drastic action? Would you allow them some more time to self-regulate? Is that what you are saying?Ans: I’m not a regulator. In this case I’m an observer, an observer of the government’s regulatory process. As a student of our own market in the United States, I will make the following observations.The prospect of the government breaking up a big company is something that happens very rarely here. It is a very, very complicated process. So my inclination is the chance of that happening is small.The chance of government regulation putting more rules, guard rails and parameters in place for the operation in some of these big businesses over some period of time is higher, especially around issues like privacy as we have seen in other parts of the world at an increasing pace.What I think is likely to happen because these are big influential businesses, just like financial services and they will have to deal with an evolutionary regulatory and government process.OF INDIAN REGULATIONS, DEAL FLOWS, CHINDIA & MOREComing back to India, do you think India is really welcoming to foreign capital as it were a few years ago? In the last 1 year, we’ve seen major policy interventions or changes related to things like commerce or fintech and payments which has upset many global companies. You advise many such players like Amazon, Walmart etc. Aren’t they upset with the goalpost shifting all the time?The review is over too short a period of time. The goal posts in any economy can keep shifting, including the US. We take a long term-view as we think about serving our clients and it’s not the way we think about things to be commenting on short-term gyrations in any given year. There are times when progress is slower than we like it to be and then there are times where it accelerates, but ultimately there is enormous opportunity in India.We saw India Inc. being one of the most aggressive acquirers of assets around the world a few years back. Now most of them are saddled with a broken balance sheets. So will the deal continue to remain more inbound?We are going to see more foreign direct investment and more inbound capital, especially if Prime Minister Modi in his second term continues his reform trajectory. Conglomerates using leverage and adding assets around the world, I think we will see less of in the short term. There is no question that the digitization of the economy is attracting foreign capital and that will continue. Are you looking to double down on your PE portfolio?There is no number. We look for opportunities to deploy our capital for our clients. Goldman Sachs is one of the largest alternative investors in the world for clients around the globe and of our own balance sheet, so it’s not surprising given that footprint and the global nature of our business, that we’d be one of the largest foreign investors in India.We’ve seen Goldman do very interesting collaborations with companies people like Apple. Since you talk about digitization of the financial services sector, is there a possibility of Goldman partnering with an Indian company in the fintech or payments space?Ans: We’re just building our consumer businesses in in the United States. The expertise is more geared towards that market. In the future there may be opportunity and we are certainly open to it, but for now we focused on executing in our home market.So this pivot towards building out a consumer finance business in various parts of the world, will not have an India bearing?Ans: In the context of our building our deposit platforms around the world, we may indeed come to India, but that is not in our immediate plans. How do you see the whole fintech startups disrupt big banks and global banking?Ans: Banking is no different than any other industry. The combination of talent and technology is disrupting the way business is done. Personal financial services is a business where there is still a great deal of room for disruption. Are there some fintech platforms that will have a meaningful impact on the disruption? Absolutely. Are there incumbent players that will have a meaningful impact on the disruption and continue to be very strong in their incumbency? Absolutely.Then there are also those like Goldman Sachs, who haven’t traditionally played in some of those markets, but are actually are very good at building technology platforms, have global reach, have balance sheet, have funding and have risk management capabilities which are deeply rooted that make us also very good disruptors. There is lots of room for people to disrupt and compete.I like our position in that and we are going to try to be successful in delivering products, particularly in the US, where we are consumer-focused to give them a much better experience than the current products that they have. We are optimistic that we can make a contribution in a small way and run a good business.It is often said, India is not a deep market, especially in investment banking. So GS’s strategy of hunting with the elephants locally can be challenged. Your comments?In all major markets around the globe, we aim to work with the largest companies. As our franchises in local markets get stronger, in certain places we then expand to cover more of the market. Looking solely at investment banking, as an international firm in India, we are thinking of and engaging Indian businesses related to global capital flows and technology led disruptions. Given the strength of our network, capital and talent, the Goldman Sachs platform is going to be better suited in its ability to assist companies with needs for capital and strategic global partners. As an investor I think we’ve been much broader in terms of the companies we have allocated capital to and that will continue.You have obviously observed India and China over a long period of time. If you look at China it was a completely communist country till 1978. Yet 40 years later we find that China has giant private companies like Alibaba, Tencent, Baidu. There could be a dispute about how private they are but nonetheless they are bigger than the biggest Indian private companies. Why do you think that has happened? What has India done wrong? And how can that change?It is not a matter for right or wrong. While the Chinese have managed their economy, they have allowed for technology to become very significant and dominant in the way they have networked into that economy. When you look at individual economic capital, China is currently ahead with a significant portion of the population that can tie into, transact, and consume from these platforms. India has similar companies. It also has a much more open market system and that allows for more competition and many players competing for that footprint. Most importantly, it also has the same opportunity.

from Economic Times http://bit.ly/2wxHcij