Henry McVey, Chief Macro Strategist at KKR & Co., believes that investors are not adequately positioned for stronger than anticipated U.S. economic growth and relatively tamer inflation this year. McVey suggests that investors should seize the volatility emerging from recent U.S. bank failures and public debt market slowdowns, encouraging a move towards riskier assets. Assets offering steady cash flows with collateral protection, such as debt backed by mortgages or aircraft leases, are particularly appealing. McVey also recommends high-quality liquid credit, real estate credit, and preferred and convertible securities, while advising investors to enhance their cash holdings to swiftly capitalize on emerging opportunities.
“The macro headlines right now are as daunting as any time I’ve seen in the past 31 years doing this business,” McVey said. He cites concerns over geopolitics, inflation, and recession risks, but optimistically notes that there are still intriguing opportunities that allow investors to earn attractive returns without assuming significant risks.
KKR, with $510 billion of assets under management as of March 31, has a broad window into the state of the economy, thanks to its diverse operations. It owned stakes in 127 businesses at year-end, including health care, real estate, payments and pipelines, as well as a mail-order contact lens company and TikTok owner ByteDance. According to McVey, the global economy will undergo an “asynchronous recovery,” with each region facing slightly different economic challenges, requiring investors to differentiate strategies.
As for future projections, McVey predicts that U.S. real GDP will grow 1.8% in 2023, compared to the 1.1% average forecast of economists in a May survey, and inflation will be 4%, versus the average consensus of 4.1%. However, KKR anticipates that inflation will remain higher in 2024, driven by services and persistent labor shortages. McVey also wrote that the S&P 500 has bottomed out for the current economic cycle. Market indicators such as homebuilder sentiment and M&A volume suggest the U.S. economy is in a mild contraction, but this downturn will be mild and short-lived due to tight labor conditions and robust fiscal policy.
