Following are excerpts from the transcript of a CNBC interview in Davos by Julia Chatterley with David Solomon, co-head of investment banking at Goldman Sachs.
JC: Let's get some more wisdom on this. I'm joined by David Solomon, who's the Co-Head of the Investment Banking Division at Goldman Sachs. David, great to have you on. The CEO of Investec Asset Management just said to me, 'I don't care about the technicals, the calculations. We're in a bear market.' Do you agree?
DS: It's certainly been a volatile start to the year, and in the context, everybody's watching, trying to understand what's going on. I'd like to watch the market a little bit more, and kind of watch how things develop and unfold before making a stronger statement, but certainly there's a lot of volatility, and that's causing some angst, and it's affecting confidence, and certainly that has a bearing on how people will behave in the market.
JC: Do you think we'll see another leg lower here?
DS: You know, I don't predict whether we'll see another leg low or up, but I do think that we're going to continue to see some volatility in the markets, people are trying to gain their footing, gain confidence, have an understanding as to what's really causing this volatility, so I wouldn't be surprised if we saw some more volatility, but we'll have to watch day to day.
JC: What is the driver here?
DS: Well, there's no question that there's been a repricing, a correction, in a variety of markets, but one of the things, just in my conversations at Davos, that's interesting, is people are really-, as you talk to people about their businesses, their businesses are chugging along okay. People are concerned about growth, growth's been sluggish, and there's no question that maybe there's a sense that things are a little bit slower than they felt six months ago, but at the same point, there's still growth, and people are progressing in their businesses, so we'll have to watch and see how this all develops.
JC: So it's an overreaction?
DS: I wouldn't necessarily say it's an overreaction, markets are pretty smart, but at the same point, we've had a few weeks of volatility and I think you want to be cautious in terms of determining exactly what's causing that, but there's no question there's been a repricing risk, and people are a little bit more risk-off, and that's obviously affecting confidence and will have some impact on decisions over time if this continues this way.
JC: What hasn't changed is the Fed's take at this moment. I mean, you wouldn't expect them, I guess, to react to just a couple of weeks of volatility or a selloff in the market, but you know, we've still got the four hikes priced for this year, you expect to see them perhaps dial back the tone, even if things just stay as they are in terms of the growth outlook of the US?
DS: Well, you'll have to watch. There's clearly four hikes priced in, but you'll have to watch and see. Clearly if the markets continue to be very difficult, the markets continue to trade down, and ultimately that leads to a more evidenced slowdown in the economy then the Fed will have to react appropriately, but I think it's early to see, or to really know, how that will play.
JC: Your house view oil this morning was that, look, we're going to be in this period where we are volatile between $20 and $40 a barrel. Obviously that plays into what we're seeing in terms of the spread widening in the high yield market, we've seen the big banks increasing their provisions. How do you see that playing out in particular? Because this is also a key feature, I think, of the credit markets that people are watching here, and it's a concern-,
DS: Sure, so the, you know-,
JC: Particularly given inventory, or the lack of it, and liquidity.
DS: Yes, so there's no question that when have volatility like this, spreads widen, and it makes financing more challenging. You know, I would say when you look at the high yield market you can almost bifurcate it into two different portions of the market. Anything related to energy, minerals, natural resources, obviously spreads have widened very materially, there is a lot of stress in that part of the market, but when you look at the rest of the market, candidly indicative of what's going on in a good portion of the rest of the economy, while spreads are a little bit wider, you know, the market's still functioning quite well. There have been a handful of financings that have been done here early in the year, there's more deal financing to come in the coming weeks and it'll be interesting to watch those deals, but my expectation would be that a number of these transactions will get completed, probably at a slightly wider price that people had anticipated a couple of months ago, before the holidays.
JC: So I've got a question for you about the tech sector in particular, because if you look at the M&A activity that we've seen, it was the lowest it's been, I think, for six years, last year, the big names seemingly getting venture capital money more easily than, you know, needing the IPO market. Do you think that changes this year? Rates potentially higher, credit wider in terms of spreads? Do we see a change?
DS: Well, one of the things that's been very, very interesting for the growing cadre of companies that have been coming out of Silicon Valley is there has been an enormous amount of private capital available. So if you're a young company, you want to develop your business, you want to grow, taking that capital and doing it, you know, out of the public, you know, public visibility of being a public company is a terrific thing, and so it's allowed companies to put off access to the public markets much longer. There's no question, over the course of the last couple of months, that private capital is tightening. You can debate some of the valuations that have been available to these companies, but is that private capital-,
JC: Because this is the point. They're priced for perfection, in a sense, and the results are not backing that up.
DS: A number of them are priced for really strong execution over a reasonable period of time, and whether or not that happens, we'll see, but capital is definitely getting tighter, and that's going to force companies to turn to the public market sooner, so you probably will see an increase in IPOs, might force some companies to sell, it might force a number of companies to manage their business in terms of their expense burn rate much tighter if that capital is not as available as it's been.
JC: That's a great point. David, great to chat to you. David Solomon, Co-Head of Investment Banking at Goldman Sachs.
DS: Thank you.
JC: Nancy, back to you.