KKR Releases 2022 Mid-Year Global Macro Outlook: Walk, Don’t Run

Henry McVey: Investors Should Continue to Expect a Different Kind of Recovery

KKR, a leading global investment firm, today released KKR’s 2022 mid-year outlook by Henry McVey, CIO of KKR’s Balance Sheet and Head of Global Macro and Asset Allocation (GMAA). In “Walk, Don’t Run,” McVey outlines his team’s perspective on how the macroeconomic narrative is shifting from a singular focus on surging inflation expectations and central bank policy efforts to one where inflation and tightening financial conditions are adversely impacting corporate profits.

In the piece, McVey and his team make a number of out-of-consensus calls, which include:

• Broad-based margin degradation not yet priced in: McVey forecasts that S&P 500 earnings per share will contract five percent in 2023 versus a consensus expectation of nine percent growth.

• Oil prices higher for longer: At $115 and $100 per barrel for 2023 and 2024, the team is materially above consensus on oil ($24 and $19 per barrel, respectively).

• Inflation headwinds shifting from goods to services: The team forecasts goods deflation in the U.S. in 2023, but expects services, food, and energy inflation to remain elevated.

• Materially higher yields for the German bund in 2023: the team’s forecast for the German bund in 2023 is much higher than the market expects (2.0% versus 1.15%).

• Divergence between the economic and market recovery in China: China is in contraction according to the team’s proprietary cyclical indicator, with no ‘V-shaped’ recovery like in 2020. However, the market now seems to have largely discounted the tough economic environment that the team is forecasting.

McVey and his team continue to believe that a combination of excess stimulus, heightened geopolitical risks, sticky supply side constraints and a changing relationship between stocks and bonds, have created a new investing regime. As such, they urge investors to pay close attention to the following mega themes as they navigate this new environment:

• Pricing Power: Higher input costs and supply chain pressures have created an environment that strongly favors companies with pricing power and unit volume growth.

• Collateral-Based Cash Flows: Given the unusual backdrop of stickier-than-expected inflation, excess stimulus, and higher commodity prices, demand for collateral-based cash flows, including Infrastructure and Real Estate, is likely to accelerate more than many investors now think.

• The Security of Everything: Fragmentation of global trade and supply chains will likely add a new dimension to geopolitical rivalries as more industries and sectors, including healthcare, energy, communications, and data, become “strategic” from a national security perspective.

• Energy Transition: Energy transition is an approximately $1.5-2.0 trillion per year growth opportunity. It is a broad-based theme that is likely to impact every industry and require many companies to rethink and retool parts of their business models.

• Revenge of Services: U.S. goods-buying is still running above trend while services is running four percent below trend. In light of this, now may be the time to flip exposures to the underdog category, services.

• Efficiency: Automation/Digitalization/Testing: We expect to see a boom in key areas of innovation as well as a continued shift to decentralization across many sectors.

In light of these themes, McVey and his team highlight the following conclusions for asset allocation:

• In the liquid markets, favor Credit over Equities and particularly the short-end of the curve, including municipal bonds, mortgages and CLO liabilities.

• Stay overweight almost all investments linked to pricing power and collateral-based cash flows, including Infrastructure and select parts of Real Estate.

• Stay overweight flexible, opportunistic pools of capital that can provide thoughtful solutions to good companies with levered capital structures.

• Own select commodities, such as oil and those linked to the energy transition theme, including aluminum, copper and lithium.

• Reduce exposure to price takers, particularly in the consumer sectors.

• Avoid big cap technology stocks.

• Stay cautious on Turkey and Mexico.

Links to access this report in full as well as an archive of Henry McVey's previous publications follow:

• 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.

About Henry McVey

Henry H. McVey joined KKR in 2011 and is Head of the Global Macro, Balance Sheet and Risk team. Mr. McVey also serves as Chief Investment Officer for the Firm’s Balance Sheet, oversees Firmwide Market Risk at KKR, and co-heads KKR’s Strategic Partnership Initiative. As part of these roles, he sits on the Firm’s Investment Management & Distribution Committee and the Risk & Operations Committee. Prior to joining KKR, Mr. McVey was a Managing Director, Lead Portfolio Manager and Head of Global Macro and Asset Allocation at Morgan Stanley Investment Management (MSIM). Learn more about Mr. McVey here.

About KKR

KKR is a leading global investment firm that offers alternative asset management as well as capital markets and insurance solutions. KKR aims to generate attractive investment returns by following a patient and disciplined investment approach, employing world-class people, and supporting growth in its portfolio companies and communities. KKR sponsors investment funds that invest in private equity, credit and real assets and has strategic partners that manage hedge funds. KKR’s insurance subsidiaries offer retirement, life and reinsurance products under the management of Global Atlantic Financial Group. References to KKR’s investments may include the activities of its sponsored funds and insurance subsidiaries. For additional information about KKR & Co. Inc. (NYSE: KKR), please visit KKR’s website at www.kkr.com and on Twitter @KKR_Co.

The views expressed in the report and summarized herein are the personal views of Henry McVey of KKR and do not necessarily reflect the views of KKR or the strategies and products that KKR offers or invests. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. This release is prepared solely for information purposes and should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. This release contains projections or other forward-looking statements, which are based on beliefs, assumptions and expectations that may change as a result of many possible events or factors. If a change occurs, actual results may vary materially from those expressed in the forward-looking statements. All forward-looking statements speak only as of the date such statements are made, and neither KKR nor Mr. McVey assumes any duty to update such statements except as required by law.

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