It may be time for investors to throw out the old playbook, according to KKR’s Henry McVey.
KKR on Thursday published its mid-year update, in which the private equity firm’s head of global macro and asset allocation shared his views on markets, politics, and regulations. As McVey described it, the political and social atmosphere of 2018 would have seemed implausible to even Tom Wolfe, the late author of Bonfire of the Vanities and Electric Kool-Aid Acid Test.
“We think we may be on the cusp of a secular shift where a new playbook for investing may be required,” McVey wrote.
Some of the major market changes McVey highlighted included the move from monetary policy to fiscal policy, a shift from a global to a nationalist agenda, and an increased consumer interest in experiences over material objects.
The first, an emphasis on more fiscal policy accommodation, is being led by the United States, according to McVey. “This change in policy leads us to favor investments with greater linkages to the real economy — versus purely financial assets — than in the past,” he wrote.
According to McVey, this will be detrimental not only to fixed income assets but also to certain equity multiples, which the firm already expects to decrease.
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Similarly, a global shift toward nationalist policies, particularly when it comes to trade, will move markets. “Without question, President Trump in the United States is ushering in a different era as it relates to global trade,” McVey wrote.
According to McVey, a large portion of the United States’ trade deficit exists in three categories: transportation, which incurs a debt to Mexico, and apparel and technology, both of which incur debt to China. The KKR executive said investors should scrutinize these investment areas more deeply than others, particularly because there will be more volatility in the currency markets as a result.
The third trend of consumers valuing experiences over objects is a thesis that KKR has previously outlined. However, the firm’s viewpoint on this trend has grown: McVey wrote that consumer behavior is changing at a more rapid clip than previously.
“Specifically, we think that there are several structural forces at work, including technology, demographics, and education, that are radically changing how, when, and where consumers are spending their time and money against a backdrop of stagnant real wages in many economies,” he added.
To cope with the changing markets, McVey wrote that KKR is placing more value on upfront yield. The firm is also advocating for owning shorter duration assets and locking in low-cost liabilities.
