KKR Releases “Wisdom In Curiosity” By Henry McVey
New macro report delves into the impact of negative interest rates, the outlook for economic growth, and the validity of risk-adjusted returns in private markets
“During our recent travels, Frances and I met with some of our most thoughtful clients across the pension, endowment, insurance and high net worth markets, and what we heard was a consistent drumbeat of questions focused on several key issues. What is clear is that we are living in uncertain times that require both deep fundamental top-down and bottoms-up analysis to gain an investment edge,”
In the piece, McVey and Lim explore the following key areas of concern:
- How should we think about negative interest rates? We believe too much attention has been placed on the absolute size of
$16.8 trillionin negative yielding securities and too little on the true impact these rates are having on the economy and savers (both individual and institutional). Importantly, we may be reaching a point where lower rates neither inspire a material improvement in credit creation nor improve valuations in the equity markets. Longer-term, negative interest rates appear to dent CEO confidence to spend, and at the same time, they force individuals to save more, which has implications for consumption.
- Given the ongoing collapse in global PMI’s, are you still sticking to your mild recession call for second half of 2019/first half of 2020? Regardless, what does all the economic handwringing mean for the Federal Reserve and asset allocation strategies in the second half of 2019 and beyond? Our base view for the U.S. economy during the next 12 months is that – under a worst case scenario – we are stuck somewhere between a 2001-like formal recession and a 2011/2012 slowdown. We see consumption – both consumer and government – performing modestly, but we expect near recessionary conditions in exports, inventory, and fixed investment. Against this backdrop, we are now forecasting three cuts by the Federal Reserve for 2019 (up from two previously). In 2020, by comparison, we leave our forecast at two cuts, given our view that the current slowdown will still bleed well into next year. These anticipated bumps ahead drive our overweight positions in our target asset allocation.
- How should we think about returns relative to risks in the private markets? Our research on private market performance suggests that volatility is likely understated in certain instances. However, many traditional risk-based metrics that are used in the public markets do not necessarily act as perfect tools for valuing performance in the private markets. We believe our analysis also undercovers some important insights into persistency of performance as well as the understated value of the illiquidity premium to many instances.
Overall, the GMAA team remains confident in its view that this market is not one to be tactically traded. Rather, they continue to focus on key investment themes they view as manifestations of the intellectual ‘curiosity’ required to outperform in this market, including:
- Remaining bullish on deconglomeratization, particularly corporate carve-outs.
- An intensifying ‘Yearn for Yield’ underscoring the structural reinvestment risk that has emerged for income-oriented investors.
- Leaning into periodic dislocations and growing dispersions.
- Owning some secular growth stories that are ‘Cash Flow Compounders’ amidst slowing nominal GDP.
Links to access this report as well as an archive of
- To read the latest Insights, click here.
- To download a PDF version, click here.
- For an archive of previous publications please visit www.KKRinsights.com.
KKR is a leading global investment firm that manages multiple alternative asset classes, including private equity, energy, infrastructure, real estate and credit, with strategic partners that manage hedge funds. KKR aims to generate attractive investment returns for its fund investors by following a patient and disciplined investment approach, employing world-class people, and driving growth and value creation with KKR portfolio companies. KKR invests its own capital alongside the capital it manages for fund investors and provides financing solutions and investment opportunities through its capital markets business. References to KKR's investments may include the activities of its sponsored funds. For additional information about
The views expressed in the report and summarized herein are the personal views of
Kristi Huller or Cara Major