Henry McVey, the head of macro strategy at private equity leader KKR has released his new economic outlook.

McVey outlines his thoughts in his latest report titled Keep Calm and Carry On. He expects the economy to see a sharp downturn during the second quarter. McVey also expects more of a U-shaped recovery than a V-shaped one. He thinks that the economy may experience sustained demand issues as a result of the massive wave of unemployment in the United States and Europe. He does suggest that the increased unemployment benefits will offer full income replacement or many households allowing demand to at least maintains at a decent, but lower pace.

The firm’s High Yield implied default rate monitor suggests around a 12-14% percent default rate. While that is about twice the historical average, it is far lower than what occurred during the 2008-09 crisis.

Henry McVey And KKR on Credit, Equities

He and his team think that credit markets are a buy at current levels.

One year returns for high yield markets after periods of similar defaults have ranged from 22.4% on the low end to 64.1 % on the high end. There have been 18 similar default periods. All of them have shown positive total returns over the next 12 months.

In the equity markets, the KKR team thinks that we have had something akin to a crash already. Similar to prior recessions, they believe that equities have already priced in a severe recession. Because of the drop in earnings, Henry McVey and the team do not think that equities represent the same relative value that Credit does right now.

Mr. McVey thinks that on balance, risk assets are close to appropriately valued for the current outlook. Credit appeals to them more than what Equities seemingly offer at current levels. He suggests that investors avoid high levels of leverage at the present moment.

While they anticipate record-breaking declines in GDP in Europe and the United States, government stimulus and aid packages could help the global economy get back on track in the second half of the year.

You can read the full report here.