Goldman Sachs Presentation

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  • Having been asked to share how we think about research, I have three topics I would like to discuss with you this morning. I would like to start by providing some background and context on investment research, discuss changes in the investment environment for research, and talk more extensively about evidence-based approaches in investment research. The evidence-based approach is taking on greater importance in how we develop and evaluate our analytical practices.
  • 04/30/10 10:32
  • Sources: Investopedia (Issuer, Underwriter) http://en.wikipedia.org/wiki/Bourse http://en.wikipedia.org/wiki/Credit_rating http://en.wikipedia.org/wiki/Financial_regulation
  • 04/30/10 10:32 An index helps capital market participants track the performance of a market over time Dow Jones Industrial Average: This index tracks the stock prices of 30 of the largest companies in the U.S. The index was created in 1896 and only one of the component companies has remained on the index the entire time – General Electric. S&P 500: Created by Standard & Poors, the S&P 500 is a weighted average (based on company size) of the 500 largest companies in the U.S. International Indices: The performance of equity markets in other countries are tracked by other indices. The FTSE 100, Nikkei, and DAX track the performance of equity markets in the U.K., Japan, and Germany respectively.
  • For purposes of our discussion tonight when referring to the global capital markets, I am including equity securities, corporate debt securities, government debt securities and bank deposits. The total value of the world’s capital markets was estimated to be close to $120 trillion at 2004 year end. Considering that a decade ago we were at the $50-$60 trillion level, this is phenomenal growth. And by decade end, a number of commentators have suggested total value in excess of $200 trillion.
  • While there is a clear correlation between capital markets growth and the extraordinary economic growth that the world has seen through much of the 1990s, you will note that the global capital markets have significantly outpaced world economic growth. Consider that global GDP has grown roughly 3.5x 1980-2003 from $10 trillion to $36 trillion. In the same period the global capital markets have grown nearly 10x from $12 trillion to $118 trillion. This differential we refer to as the depth of markets, essentially the value of the markets divided by the value of GDP. Such depth generally indicates a more efficient, innovative and institutionalized market with higher levels of intermediation and better allocation of risks. One example of such innovation would be the growth of the mortgage backed securities market or the secondary mortgage market in the U.S. By allowing banks and thrifts to repackage assets that meet the risk requirements of new classes of investors such as insurance companies looking for investment grade instruments, the primary mortgage market has been enhanced. In a few moments, I will highlight some of the challenges associated with this growth.
  • Although we refer to global capital markets – 4 markets account for more than 80% of value: The Eurozone, Japan, the U.K. and the U.S. The regions vary dramatically in the asset classes in which they consist. The Asian markets in particular differ fundamentally from one another: Japan is dominated by government securities, only its expansion has fueled growth. China’s market – although less than 1/3 the size of Japan – has amassed a significant portion of world bank deposits - and therein lies the urgency and significance of the NPL issue in China as well as pressures on the social welfare system. In Europe, the bank market has traditionally been most important but clearly the corporate debt market is growing. While the U.S., which accounts for over 1/3 of the world market, is dominated by the private equity and debt markets. As you will note there are also very different growth rates over the last decade with the emerging markets of Eastern Europe, India, and China at the high end and Japan at the low end. Given the scale and growth potential of India and China, they need to be considered strongly in our policy making and private market considerations.
  • In examining the global capital markets, it is critical to assess the asset classes underlying such growth. The equities markets have grown over the period in percentage terms largely in line with the overall market. However, in absolute terms, there is significantly more equity in the market. Equity, as an overall percentage of the market, grew from 14% in 1993 to 32% in 2003 largely as a result of privatizations and a robust public offering calendar in the latter part of the 90s, which was accompanied by expanding PEs (which have since then contracted considerably). Corporate debt was the fastest growing asset class during this period at a growth rate of 13.7% - far in excess of the overall rate of 8.4%. This has principally been a U.S. and U.K. phenomenon, fueled by securitization and favorable interest rate environment -- which has some debating whether a credit bubble has been created. Government debt has grown at a slightly slower rate than the overall market, with Japan being the primary driver. While bank deposits continue to be a critical part of the global capital markets, the growth rate has slowed down and bank deposits represent 35% of total assets in 2003, down from 45% in 1980.
  • First, change and innovation in financial markets have been our friend. New asset classes, new products and new clients are key drivers of our growth. One example in recent years has been the growth of private pools of capital in the form of hedge funds and financial sponsors. This growth has benefited Goldman Sachs as we are a leading prime broker to hedge funds. We are also a leader in working with financial sponsors. In the last three years, we have advised on more M&A and equity assignments for this client segment than any other firm. In our Securities businesses, we have benefited from the rising importance of Commodities as an asset class. More clients than ever want to manage exposure to commodities, and Goldman Sachs has a strong franchise in this area. In addition, credit derivatives are an example of the rapid growth of a new set of products, which today contribute significantly to our Credit complex within FICC. I believe that as these trends continue, and new ones emerge, Goldman Sachs, with our franchise and global presence, will continue to be well-positioned to take advantage of them.
  • Goldman Sachs Presentation

    1. 1. Overview of the Development of Capital Markets
    2. 2. Topics to Address <ul><ul><li>Purpose </li></ul></ul><ul><ul><li>Players </li></ul></ul><ul><ul><li>Instruments </li></ul></ul><ul><ul><li>Trends in Capital Market Development </li></ul></ul>
    3. 3. Purpose of Capital Markets <ul><ul><li>Efficient Allocation of Savings </li></ul></ul><ul><ul><li>Diversification of Risk </li></ul></ul><ul><ul><li>Catalyst for Productive Economic Growth </li></ul></ul>
    4. 4. Key Players in a Capital Markets Transactions Issuer (MFI) Underwriter Exchange Investor Regulator Rating Agency
    5. 5. Intermediaries Facilitate Capital Flows Institutions Seeking Capital Intermediaries Facilitating the Flow of Capital Financing & Advisory (Investment Banking) Investors with Capital Debt Capital Markets Equity Capital Markets Investment Research Principal Investing (Merchant Banking) Investment Management Private Companies & Funds <ul><li>Pension Funds </li></ul><ul><li>Mutual Funds </li></ul><ul><li>Endowments & Foundations </li></ul><ul><li>Insurance Companies </li></ul><ul><li>Private Equity Funds </li></ul><ul><li>Hedge Funds </li></ul>Institutional Investors Sales & Trading Public Companies Governments & Agencies <ul><li>High Net Worth </li></ul><ul><li>Small Ticket Retail </li></ul>Retail Investors Governments & Agencies
    6. 6. Key Players in Capital Markets Transactions Underwriter Rating Agency Exchange Investors Issuer Regulator Banks, Mutual Funds, Pension Funds, Insurance Companies, Asset Managers, Governments, and Individual Investors A regulator provides supervision which subjects financial institutions and issuers to certain requirements, restrictions and guidelines that aim to maintain the integrity of the financial system An exchange organization which provides facilities for brokers to trade company stocks and other securities Exchanges also provide facilities for the issue and redemption of securities, as well as other financial instruments and capital events including the payment of income and dividends A company that assesses the credit-worthiness of corporations and countries and assigns credit ratings. This company also provides a transaction rating of the finance structure The credit rating is a financial indicator to potential investors of debt securities such as bonds A company or other entity (investment bank, commercial bank or other financial institution) that administers the issuance and distribution of securities from a corporation or other issuer An underwriter works closely with the issuer to determine the offering price of the securities, buys them from the issuer, and sells them to investors via the underwriter's distribution network A legal entity that develops, registers and sells securities for the purpose of financing its operations Issuers are legally responsible for the obligations of the issue and for reporting financial conditions, material developments and any other operational activities as required by the regulations of their jurisdictions The most common types of securities issued are bonds (notes, debentures, bills) and common and preferred stocks
    7. 7. Capital Markets Instruments Defined Shares in a portfolio that buys stakes in privately held companies Private Equity Funds Short-term debt issued by corporations or governments Money Markets Debt issued by U.S. government U.S. Treasuries (UST) Debt issued by corporations Corporate Debt Debt created by an underlying pool of assets, such as mortgages Asset Backed Debt issued by state and city governments Municipal Securities Shares in a portfolio that actively buys and sells stocks, bonds, and other investments Hedge Funds Shares in a portfolio of stocks and/or bonds and other securities Mutual Funds Contract whose value depends on the fluctuations in price by another asset, such as stocks, currencies, commodities, or interest rates Derivatives Shares in a company that invests in real estate REITs (Real Estate Investment Trusts) Shares of ownership in a company Stocks Definitions Vehicles Debt
    8. 8. Stocks Ownership and Market Size: <ul><li>Definition: </li></ul><ul><li>Shares of ownership in a company </li></ul><ul><li>Purpose: </li></ul><ul><li>Capital growth </li></ul><ul><li>Major U.S. Markets: </li></ul><ul><li>New York Stock Exchange </li></ul><ul><li>NASDAQ </li></ul><ul><li>American Stock Exchange </li></ul><ul><li>Major International Markets: </li></ul><ul><li>London Stock Exchange </li></ul><ul><li>Tokyo Stock Exchange </li></ul><ul><li>Euronext </li></ul>$18.2 Trillion Indices and Returns (1996-2005): 16.2% Dow Jones Industrial Average 15.6% S&P 500
    9. 9. Bonds: Money Market Ownership and Market Size: <ul><li>Definition: </li></ul><ul><li>Short-term debt issued by corporations or governments </li></ul><ul><li>Purpose: </li></ul><ul><li>Income from short-term liquid investment </li></ul><ul><li>Major U.S. Markets: </li></ul><ul><li>Over the counter </li></ul><ul><li>Major International Markets: </li></ul><ul><li>Over the counter </li></ul>$2.0 Trillion Indices and Returns (1996-2005): 3.3% Lipper Money Market Fund Index
    10. 10. Bonds: U.S. Treasuries Ownership and Market Size: <ul><li>Definition: </li></ul><ul><li>Debt issued by the U.S. government </li></ul><ul><li>Purpose: </li></ul><ul><li>Income from interest; highest credit quality; not subject to state taxes </li></ul><ul><li>Major U.S. Markets: </li></ul><ul><li>Over the counter </li></ul>$4.7 Trillion Indices and Returns (1996-2005): 5.5% Lehman Brothers Intermediate Term Government Index
    11. 11. Bonds: Corporate Debt Ownership and Market Size: <ul><li>Definition: </li></ul><ul><li>Debt issued by corporations </li></ul><ul><li>Purpose: </li></ul><ul><li>Higher income from interest given credit quality less than U.S. Treasuries </li></ul><ul><li>Major U.S. Markets: </li></ul><ul><li>Over the counter </li></ul><ul><li>Major International Markets </li></ul><ul><li>Over the counter </li></ul><ul><li>London Stock Exchange </li></ul>$8.3 Trillion Indices and Returns (1996-2005): 6.2% Lehman Brothers Aggregate Bond Index
    12. 12. Bonds: Asset Backed Ownership and Market Size: <ul><li>Definition: </li></ul><ul><li>Bonds created by an underlying pool of assets such as mortgages </li></ul><ul><li>Purpose: </li></ul><ul><li>Higher income from interest given credit quality less than U.S. Treasuries </li></ul><ul><li>Major U.S. Markets: </li></ul><ul><li>Over the counter </li></ul><ul><li>Major International Markets </li></ul><ul><li>Over the counter </li></ul>$6.3 Trillion Indices and Returns (1996-2005): 6.2% Lehman Brothers Aggregate Bond Index
    13. 13. Bonds: Municipal Securities Ownership and Market Size: <ul><li>Definition: </li></ul><ul><li>Debt issued by state and local governments </li></ul><ul><li>Purpose: </li></ul><ul><li>Higher income from interest given lower credit quality; interest payments untaxed </li></ul><ul><li>Major U.S. Markets: </li></ul><ul><li>Over the counter </li></ul><ul><li>Major International Markets </li></ul><ul><li>Over the counter </li></ul>$2.2 Trillion Indices and Returns (1996-2005): 5.7% Lehman Brothers Municipal Bond Index
    14. 14. REITs (Real Estate Investment Trusts) <ul><li>Definition: </li></ul><ul><li>Shares in a company that invests in real estate </li></ul><ul><li>Purpose: </li></ul><ul><li>Liquid vehicle to invest in real estate </li></ul><ul><li>Major U.S. Markets: </li></ul><ul><li>American Stock Exchange </li></ul><ul><li>NASDAQ </li></ul><ul><li>New York Stock Exchange </li></ul><ul><li>Major International Markets </li></ul><ul><li>London Stock Exchange </li></ul><ul><li>Tokyo Stock Exchange </li></ul>$581 Billion Indices and Returns (1996-2005): <ul><li>Ownership and Market Size: </li></ul><ul><li>Individuals </li></ul><ul><li>Mutual Funds </li></ul><ul><li>Pension Funds </li></ul>6.5% NAREIT U.S. Real Estate Index
    15. 15. Derivatives <ul><li>Definition: </li></ul><ul><li>Contract whose value depends on the fluctuations in price by another asset, such as stocks, currencies, commodities, or interest rates </li></ul><ul><li>Purpose: </li></ul><ul><li>Manage risk from price fluctuations in stocks, currencies, commodities, or interest rates </li></ul><ul><li>Major U.S. Markets: </li></ul><ul><li>Chicago Board of Exchange </li></ul><ul><li>Chicago Mercantile Exchange </li></ul><ul><li>Over the counter </li></ul><ul><li>Major International Markets </li></ul><ul><li>Euronext </li></ul><ul><li>International Securities Exchange </li></ul>Indices and Returns (1996-2005): <ul><li>Ownership and Market Size: </li></ul><ul><li>Individuals </li></ul><ul><li>Hedge Funds </li></ul><ul><li>Commercial Banks </li></ul><ul><li>Investment Banks </li></ul><ul><li>Insurance Companies </li></ul>NA
    16. 16. Funds: Mutual Funds Ownership and Market Size: Definition: Shares in a portfolio of stocks and/or bonds and other securities Purpose: Professional management and diversification $6.0 Trillion Indices and Returns (1996-2005): NA
    17. 17. Funds: Private Equity Definition: Shares in a portfolio that buys stakes in privately held companies Purpose: Capital growth driven by fund managers ability to influence strategy and operational improvements Indices and Returns (1996-2005): <ul><li>Ownership and Market Size: </li></ul><ul><li>Endowment Funds </li></ul><ul><li>High Net Worth Individuals </li></ul><ul><li>Pension Funds </li></ul>$330 Billion* *Estimate - total amount invested, 1996-2005, from PricewaterhouseCoopers/National Venture Capital Association Moneytree Report 12.3% Thomson Venture Economics Private Equity Performance Index
    18. 18. Funds: Hedge Funds Definition: Shares in a portfolio that actively buys and sells stocks, bonds, and other investments Purpose: Returns that are not correlated with the performance of the stock market Indices and Returns (1996-2005): Ownership and Market Size: $1.2 Trillion 20.8% CSFB Tremont Hedge Fund Index
    19. 19. Scale of Global Capital Markets Source: McKinsey Global Institute
    20. 20. Relative Value of Global Capital Markets to Global GDP Source: McKinsey Global Institute 109% 218% 292% 316% 338%
    21. 21. Indices of Global Stock Performance Source: Haver Analytics
    22. 22. Global Capital Markets by Region Source: McKinsey Global Institute; Reflects data as of 2004. Numbers may not add to 100% due to rounding. 100% = 48% 32% 8% 1% 20% 6% 1% 4.1x 8.8% US 1.8x 3.1x 4.2x 1.1x 3.5x 3.5x GCM Relative to GDP 13.2% 14.2% 4.7% 20.7% 10.9% 10.4% CAGR (1993-2004) India China Japan Eastern Europe UK Eurozone Asia Europe
    23. 23. Global Capital Markets Growth by Asset Class Source: McKinsey Global Institute 27% 29% 38% 27% 29% 30% 22% 23% 21% 26% 25% 27% 20% 19% 15% 17% 17% 16% 32% 29% 26% 30% 29% 27% 53 69 96 118 136 228 8.0% CAGR 1993 - 2004 7.5% 10.3% 9.8% GCM 9.0%
    24. 24. Number of Domestic Listed Companies Source: World Bank Future Directions: Emergence of New Financial Market Centers
    25. 25. Future Directions: Greater Cross-Border Investment Source: Federal Reserve Flow of Funds via Haver Analytics
    26. 26. Future Directions: Drivers of Innovation – Search for Excess Return Hedge Fund Assets ($bn) Financial Sponsor Capital ($bn) GS Commodities Index Credit Derivatives Outstanding ($bn) 1989 1995 2005 $13 $20 $315 Sources: Hedge Fund Research, ISDA, public market data.

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