Where to look for sustainable returns in a post-crisis world

At our recent Central Banks and Official Institutions Conference, Jim O’Neill, Goldman Sachs’ chief economist, discussed the increasing importance of the BRICs (Brazil, Russia, India and China) in the context of the broader global economy. One of the areas that Mr O’Neill highlighted was the move of economies such as China’s from being predominantly export-focused to more domestically-orientated and the resultant rise in the importance of the emerging market consumer. We believe that, as long-term investors, our clients should be looking to harness long-term trends such as this and reflect them in their investment portfolios. Our Goldman Sachs Sustain team is focused on identifying companies exposed to these sorts of broad themes. They have recently published a paper on Global Financials, a sector that, despite recent upheavals, still accounts for around 20 per cent of world equity markets and therefore remains a significant weight in most portfolios. They have reassessed the future direction of the sector and the companies within it, based on the following key trends, which they see developing. Emerging markets offer long-term growth Exposure to emerging markets, especially BRIC’s consumers and companies, remains a key opportunity for financial institutions given growth in wealth levels, rising populations and increasing consumer demand. Banking services, from deposits to mortgages, have the potential to grow significantly in these relatively less developed markets, amongst end customers who have significantly less debt, and better records of repayment, than many of their Western counterparts. Developed economies need to rebuild wealth Households in the West need to move from a pattern of borrowing and spending to one geared more towards saving, a significant turnaround following a long period of falling saving rates and expanding loans. Governments have increased their ownership on financial institutions Government ownership in financial institutions has risen, although probably not permanently as companies are already well on the way to raising capital to repay their governments. Where governments are significant stakeholders in financial institutions, we believe that management motivations may not be as well aligned to the interests of other investors. ESG issues are becoming increasingly important Faced with rising pressures from society and regulators, and an increased focus on risk controls, effective management of ESG (enviromental, social and governance) issues is very important. Such issues range from appropriate management structures through to attracting and retaining the best people. Looking ahead, financial institutions will face increasing pressure to be more transparent in their management of ESG issues, in our view. In summary, our Goldman Sachs Sustain team analysed 125 financial institutions and, of those, believe that 8 banks and 5 insurance companies are well positioned to be the long-term sustainable winners.