Are bond investors too complacent?

How India is — and isn't — like China. # # --------------------------------------------------------------- The key takeaways today: - The case for owning investment-grade corporate bonds - How India's growth is similar to China's trajectory 20 years ago - Why prospective US and European rate cuts seem out of step - In a survey, investors say AI is more than hype - Briefings Brainteaser: Which sector will contribute most to the growth in power demand in the US? Was this newsletter forwarded to you? [Sign up now](. --------------------------------------------------------------- Are bond investors too complacent? Credit spreads have fallen to nearly their lowest levels in the past decade. But even as the extra yield offered by investment-grade corporate debt relative to similar-maturity Treasury bonds declines, that tighter spread isn't a sign of investor complacency, [according to Gurpreet Garewal]( of Goldman Sachs Asset Management. “Investors aren't demanding much compensation for credit risk – and we think there are valid reasons for this,” Garewal says. She points out that the global economy and corporate earnings are showing impressive strength, and that corporate balance sheets are strong. “Relative to 2019, US companies are better able to service their debt, have more cash on hand, and are generating more profits,” Garewal says. And while the credit spread on high-quality corporate bonds may be low, the absolute yields are high because of the overall rise in rates. “We still think there are good reasons to own investment-grade corporate bonds,” Garewal concludes. “But active bond selection is essential.” --------------------------------------------------------------- India resembles China 20 years ago — but with key differences More than 900 million Indians voted in their country's multi-phase general election, which ended on June 1. Prime Minister Narendra Modi delivered economic reforms and growth, but India's power on the global stage does not yet match its status as the world's most populous country. Jared Cohen, president of global affairs and co-head of the Goldman Sachs Institute, spoke to Sam Morgan, global head of FICC sales and co-head of One Goldman Sachs, about India's economic story. Cohen: Is India's economic story today what China's was 20 years ago? Morgan: India's growth is similar to China's 20 years ago in some regards, including demographics (the current median age in India is around 28, similar to China's in the late 1990s), sectoral distribution of labor force (agricultural sector accounts for more than 40% of India's labor force, similar to China then), rate of decline in agricultural labor force (around 1.25%), urbanization (around 35% in India in 2023 comparable to China in early 2000s), and challenges of air quality. However, there are key differences in terms of domestic political processes, investment as a share of GDP (much lower in India), external environment (the world was globalizing in the 1990s versus protectionist developments of recent years), labor force participation, including female labor force participation (lower in India) and services / manufacturing split (China is more manufacturing-oriented than India). Cohen: What policies could India use to drive economic growth? Morgan: India should focus on increasing labor force participation, especially female participation. Goldman Sachs Research has shown how, despite India's favorable demographics, the contribution to growth from changes in the labor force has been declining over the last 20 years. Increasing the labor force participation rate back to previous levels of 61% can increase potential growth meaningfully (approximately 100 basis points on Goldman Sachs Research's estimate). Investment is the other key area of focus. Our research team estimates that if India can gradually increase its investment rate to around 40% (the previous peak) over the next decade, it can increase potential growth rate by 50 basis points to average 6.5% over the next ten years. Morgan: With wars in Ukraine and the Middle East, and greater competition in the Indo-Pacific with China, what role do you see India playing? Cohen: India's role in all domains will depend on its economic growth. According to the World Bank, in 1980, India's GDP was 60% of China's. But by 2000, it had fallen to 39%, and by 2022, it was just 19%. With China's economy slowing down, the gap may narrow, especially as Goldman Sachs Research predicts that India's economy will grow by more than 6% through 2028, which is still lower than China's [growth rate] was in the 2010s. The balance of power in the Indo-Pacific would be very different today if the Indian economy had kept pace with China's. In case you missed it: Read [our previous article]( about the growth of India's affluent population to 100 million by 2030. --------------------------------------------------------------- Central bank divergence: Why it's happening and why it matters Developed market central banks typically move in synchronized fashion with the Federal Reserve leading the way. But in a rare move, the European Central Bank has cut its policy rate before the Fed, which has implications for markets and economies. The markets are currently pricing in fewer cuts for the Fed than the ECB, which seems reasonable given the differences in growth between the US and the euro area, Peter Praet, who served as chief economist of the ECB from 2011 to 2019, says on [Goldman Sachs Exchanges](. But Goldman Sachs' Chief Economist and Head of Goldman Sachs Research Jan Hatzius expects the divergence to remain limited. “The US economy is still stronger than other G10 economies, but at the margin that is a little bit less true now than it was three months ago,” he says. “So it all seems to me that there's some room for divergence in terms of what the domestic economies need, but not a massive amount necessarily.” For now, the divergence in policy rates is likely to keep the dollar stronger for longer. “To the extent that the European and UK cuts we've been talking about are already priced in by the market, they're not going to have a big effect when they happen unless they're bigger cuts than we expect now, or there are more cuts than we expect now,” says Maurice Obstfeld, who served as chief economist of the IMF from 2015 to 2018. “But there's also the possibility that the market view of when the Fed will cut gets pushed into the future compared to where it is now. That would contribute to a stronger dollar as well." --------------------------------------------------------------- Survey: Still betting on US stocks, and AI isn't just hype European investors overwhelmingly expect the best returns to come from the US, even after the region's world-leading stock market rally so far this year, according to a poll conducted by Goldman Sachs Asset Management. In the survey, conducted at the EMEA Investment Forum in London, investors said they expect large cap stocks to deliver the strongest performance. The faith in US stocks aligns with the comparative year-to-date returns of various indices around the world. Senior executives from European insurance companies, pension funds, and wealth platforms participated in the live survey during a panel discussion titled “Wisdom of the Crowd.” A large majority hold either a bullish or a neutral outlook on stocks over the remainder of the year, with only 8.3% saying they were bearish in their outlook. In terms of risks, their overriding concern was geopolitical fallout — a category that included escalating conflicts and the outcomes of elections around the world. --------------------------------------------------------------- Briefings Brainteaser: Powering up In the US, Goldman Sachs Research expects a 2.4% compound annual growth rate in power demand between 2022 and 2030. Which of these sectors is expected to contribute more than a third of that increase in demand? A) Data centers B) Transportation C) Industries D) Residences [Check the answer here](. --------------------------------------------------------------- Goldman Sachs in the news By clicking on these links, you will be redirected to external websites that Goldman Sachs does not own or operate. Goldman Sachs is not responsible for the products, services, or content provided on those sites. Please refer to each external website's terms, privacy and security policies for details. [Bloomberg]( May 30 Rising yields to weigh on all asset classes: Goldman Sachs' Peter Oppenheimer (1:59) [CNBC]( May 31 Goldman Sachs Alternatives discusses "massive opportunities" in infrastructure investment (4:32) [CNBC]( May 31 Goldman Sachs: Oil demand will "plateau," not decline after peaking (1:58) --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The opinions and views expressed in this newsletter may not necessarily reflect the institutional views of Goldman Sachs or its affiliates. The information provided in this newsletter is for informational purposes only and does not constitute a recommendation from any Goldman Sachs entity to the recipient. Goldman Sachs is not providing any financial, economic, legal, investment, accounting, or tax advice through this newsletter or to its recipient. 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