Q&A: Goldman Sachs Asset Management's Sheila Patel on her outlook for 2020

This article is part of Fortune‘s quarterly investment guide for Q1 2020.

In September, Sheila Patel was promoted to the role of chairman of Goldman Sachs Asset Management, the Wall Street giant’s $1.3 trillion investment management arm.

Patel started her career as a trader at Morgan Stanley and rose to head of trading strategy at the bank, before joining Goldman in 2003. Over the past 17 years, she’s held a number of major roles at Goldman, including head of U.S. derivatives sales and cohead of equities distribution in Asia; along the way, she was named a partner at the firm and has worked out of Goldman offices in New York and Singapore.

Now based in London, Patel—who sits on Goldman’s prestigious firmwide management committee—helps lead an investment strategy responsible for trillions of dollars in assets held by some of the world’s largest institutional investors. So when it comes to finding a banker with her finger on the pulse of the global financial markets these days, you’d be hard-pressed to find someone as plugged into the current state of affairs as Patel.

For Fortune’s first quarterly investor’s guide, Patel took some time to discuss her expectations for 2020, why millennials increasingly factor into Goldman’s investment philosophy, and what advice she’d give a young trader hoping to make it to the top on Wall Street.

This conversation has been edited and condensed for clarity.

From the ongoing trade dispute between the U.S. and China to rising tensions in the Middle East, there are a lot of headlines for investors to keep track of these days. What would you say is the biggest macro issue influencing your outlook for 2020?

I think you’re right—the last few years have been quite dramatic for investors as they try to contend with geopolitical risks. But when you get down to it, the question we get every year [from investors] is, “Is this the year this extended bull market ends?”

We expect economic activity to be moderately higher than it was last year. There will be slower growth in the U.S., China, and Japan, for sure—but when we look at the overall picture, we’re not seeing the negatives that have made people nervous about owning equities. We see a bit of pickup in sequential growth in the eurozone, which everyone has been waiting to see, and in emerging markets like Russia, India, and Brazil. But we don’t see anything derailing global growth in a [significant] way.

What I’ve witnessed in the last two years is tremendous concern from clients, where they came into January and said now is the time to sell—but it wasn’t. The risk of underweighting U.S. equities early tends to be much costlier to a portfolio than overweighting U.S. equities. We recognize that this is getting on as the longest bull phase we’ve seen, but not every one of these phases has to end in a debacle.

Then what, in your estimation, could conceivably end this bull run?

Our current forecast for the probability of a recession in 2020 is in the range of 20% to 25% in the U.S. and eurozone, which is low. The questions around the trade war are certainly a concern, and election years can always be unpredictable. But we’ve had a de-escalation in the U.S.-China situation, and we’ve also had the removal of a no-deal Brexit risk, though it remains to be seen how that evolves.

On the U.S.-China dynamic, do you see the recent progress made between the two sides on a trade deal as promising, or do you subscribe to the notion that this is a dispute that could roil on for years to come?

I think it’s a dynamic that’s here to stay. You have two extremely important economies to the global markets, and it’s a question of how well they work with each other—whether individual ecosystems start to form around each of them, or whether we have a level of globalization that allows [more] opportunities.

If you take a trade issue to its full conclusion—whether it’s tariffs, or other restrictions on technology and intellectual property that have the U.S. and China in conflict—then companies have to respond, and have to set themselves up so they can run in uncertain circumstances. You’re seeing them have to address their supply chains, and think about the implications of any prolonged [trade] issue. But it’s been relatively contained to this point, and our expectation is for that to continue.

One of the long-term concerns is about a bifurcated system; two [economic] ecosystems is a costly negative for both sides. Have we hit peak globalization? I think it’s a little early to tell, but you can see where the concern comes from.

Shifting to the equity markets, last year was characterized by significant outflows from investors who instead shifted capital into bonds and money-market funds. In 2020, where do you see opportunities for equity investors—particularly those who are finding the current environment in the U.S. too expensive and limited in upside?

Emerging markets are a place where we think, from an active management perspective, that there are opportunities and growth is starting to pick up again. When you look at some of the small- and midcap, off-benchmark companies in the emerging-markets space, there have been some interesting signs. Either they’re domestically focused in a place like India, where growing access to technology and a burgeoning middle class is leading to new opportunities for companies, or it’s something related to changing dynamics in the world, like Brazilian agriculture companies that have done well with increased access to China. We look at emerging markets as providing potentially attractive returns.

What about opportunities in the fixed-income space, which has been increasingly perceived as yield-challenged?

Generally, fixed-income [markets] face some of the same headwinds as far as global growth and fears of a recession, or the shock of a geopolitical issue. That said, the overriding issue that investors have had is a persistent low-yield environment.

As investors have adjusted, we’ve seen real changes in the fixed-income environment; they have to go down the credit spectrum, potentially, or people are pushing out their duration and moving into different areas of the market. There are opportunities in the high-yield space; in such a yield-starved environment, it’s definitely a wider range of investors looking at those areas. And when you hear “emerging markets,” there’s a presumption of more risk—but the fiscal status of various countries in the emerging-markets space leads them to be interesting sovereign debt positions to take on. People have had to be more creative in what they consider appropriate as an investment.

You recently described millennials as a “top driver of alpha” as far as Goldman’s investment philosophy is concerned. What about the millennial demographic, in particular, are you spotlighting and targeting when it comes to your investments?

Millennials are now the most powerful consumer force; there are 2.3 billion of them globally. They’re consuming more, and they’re doing it differently, and that’s a potential tailwind for different companies—whether it’s companies that are offering services online that have traditionally been more brick-and-mortar, or those offering experiences versus products and goods.

On the experiences versus physical goods question, it leads you [away from] luxury brands and the product side of things, but there are interesting things to look at in the travel sector. And there are things that are offered from a convenience perspective; if you look at some of the tech companies in Asia, many of them are creating entire ecosystems in an app—one where I can pay back the money that I owe you, order a taxi, and buy a gift for my sister, all in the same app. These are things we watch very closely.

You’ve also spoken about the increased prevalence of environmental, social, and governance (ESG) criteria, both in how Goldman crafts its investments and in the larger invest management ecosystem at large. How significant is this shift, as far as clients demanding more sustainable investment practices? Is it a genuine priority on their part, or mere lip service?

There’s a trend going on where people are integrating their concerns about various factors that fit within ESG into every facet of their lives. What I mean by that is, I look at my investment portfolio, I look at my pension, and I demand the people who are managing it to consider climate change. People are thinking, “What values do I uphold?” And that’s something that millennials are looking at, in particular.

At every kind of company, people are looking at where they work and asking those companies to have a sense of purpose. And companies themselves are now starting to look at “stakeholders” in a broader sense than just their shareholders, and have all these things to respond to. As we look at it, we’re heading into the next phase as investors where ESG is going to be revealed as something that can truly add alpha if we have the right data to judge it, quantify it, and find the right companies to perform. Europe is probably at the forefront of pushing companies to provide that [ESG-focused] data.

There’s been a lot of talk about the shift to passive investing via index funds and ETFs, and how the institutional investors who constitute your clientele have influenced that evolution. Are there other trends you’re witnessing that are informed by clients’ needs and demands?

As you look at the largest pools of capital globally—the pension funds, sovereign wealth funds, other institutional investors—the low-yield environment in fixed-income has affected all of them, and there’s been a change in the complexion of equity markets globally because companies are staying private longer. The need for yield, and the fact that innovative companies with growth potential are staying private longer, has led to an increase in allocation to alternatives.

That’s reflected in the types of products and asset managers you’re seeing; clients are looking more into private credit, and markets they haven’t looked at before. Private equity, private credit, infrastructure, and real estate have probably been the main beneficiaries of that. As an investor on the institutional side, those are the areas that have offered more attractive returns in this generally benign but low-yield environment.

That trend of companies staying private longer is notable, given some of the high-profile companies that experienced difficulties in their public-market debuts last year. Do you think those challenges will further dissuade private startups from going public? If so, how do you see investors responding?

As an investor, if you want exposure to the full swath of business activity in the U.S. and elsewhere, you want exposure to both the public and private markets. I see a lot of the institutions I work with grappling with these changes—but in the meantime, investors have to invest, pensions have to generate returns, and [the private market] is a space that can’t be ignored.

As I look at 2020, it’s a year where people will move on from looking at this as a binary question. There’s room for both public and private markets, and need for both. What the debate should hinge on is: When are companies ready to be in the public market, such that they have a business model and a structure that is suitable for public investment? It isn’t appropriate for all of them to be public.

What advice would you give young people starting out in finance who strive to make it to the top of such a competitive field?

I got a piece of feedback when I was just an analyst only a few years out of college; it was from one of the few women managing directors I was around at the time. I was working in investment banking at the time: staying up late, building models, working on a lot of convertibles and derivatives. She said in my review that my quantitative skills were great, but she thought I should move to the trading desk because I had a skill at interacting with people and explaining things, and that should be something I should leverage more.

I remember, as a young person, being insulted—I thought my quant skills were the most important thing. But no one should underestimate how important relationships are, and being able to explain things, take problems apart and put them back together in a way that people understand. In finance, we get so wrapped up in numbers, we forget that at the end of the day it’s about people and the problems we solve. There are plenty of people who can solve the math equation, but sometimes you need to be able to listen to someone’s problems and solve them.