Goldman Sachs CFO Denis Coleman said geopolitical uncertainty stemming in part from conflicts in the Middle East and Ukraine is clouding the macroeconomic outlook despite easing inflation and improvements in certain other market conditions.
Inflation appears to be coming under control globally, credit spreads are tightening and there’s a lot more consensus around interest rates, Coleman said in a wide-ranging talk Tuesday at the Goldman Sachs U.S. Financial Services Conference.
“The bands of variability around some of the macro indicators have been tightening,” Coleman said, noting that the bank’s clients are still seeing opportunities and adjusting their risk profiles. But “while I think it’s a cleaner picture than it was earlier in the year, there’s still pockets of nervousness across the client base.”
Among the bright spots he noted was that the cost of capital for certain transactions is now “something that’s sensible” so you can bring new issue debt transactions and price your acquisitions with a certain “level of certainty.” In the first half of the year transaction volumes plunged in the U.S. as buyers grew more discerning.
Hostilities in Ukraine and the Middle East along with the prospect of the U.S. elections looming next year and questions around the status of U.S.-China relations are part of what he called “residual uncertainty” that is overlaying improved conditions.
Confidence is building around the prospect for deals in 2024 but, in what appeared to be a reference to the Israel-Hamas war, he said the reopening of the equity markets and increased confidence about the prospects for more transactions finding levels that they would clear at ultimately “met with the conflicts in October,” and the momentum slowed, he said. “I think we’ll have a more clear runway in 2024,” he said.
Similarly, with regard to the bank’s outlook on the real estate exposure, Coleman said he felt it was nearing an inflection point. While the bank had been “very, very active” reducing its real estate across asset classes all year, he said it was “getting close to a place where you can sort of work on shedding some of the old exposures but maybe change your orientation with respect to deployment on the forward.”
On the company’s third quarter earnings call in October, Coleman said the bank marked or impaired its commercial real estate exposure in the office space and that it cut $5 billion from its $15 billion in CRE alternative investments over the year. “We're making very, very significant progress against those exposures,” he said.
Coleman’s comments on the CRE outlook Tuesday follow a warning from the Federal Reserve in October that the possibility of large losses in the $24 trillion U.S. commercial real estate market poses a top risk to financial stability, noting rising vacancy rates and slowing rent growth, CFO Dive previously reported.
Goldman Sachs is among many banks that have been grappling with losses related to their commercial real estate exposure this year, in part due to decreased demand for office space in the wake of the shift to hybrid work. In June, Wells Fargo CFO Michael P. Santomassimo said the bank might need to increase its reserves in connection with its commercial real estate exposure.
