KKR Expects Lower Returns and Economic Growth

December 2, 2019 | Investments, News, Private Equity
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Henry McVey Released the Firm’s Quarterly Outlook in Late October

The KKR economic outlook arrived in late October. Following a holiday week, let’s take a look at the report. Henry McVey, the Head of Global Macro and Asset Allocation, has a few important things to say about the road ahead.

KKR Economic Outlook

Titled “Wisdom in Curiosity,” the piece examines the global big picture. It also attempts to provide some guidance on where the opportunity for outsized returns lies right now.

Like me, the firm sees forward returns declining from the levels over the past few years.

McVey and his team also think we are at or near a tipping point where low rates no longer drive higher equity valuations. The firm also thinks the media talks too much about negative interest rates. He notes that the media doesn’t mention GDP growth rates are declining in countries with negative rates. He says that the financial stocks saw falling valuations in those nations.

While KKR sees lowered returns and economic growth, the firm is not suggesting another crisis.

“As we have been saying, we are definitely forecasting a slowdown, but we want to be clear: We remain steadfast that the potential for a 2008-type event is highly unlikely under almost every scenario,” McVey writes. “Banks are not over-leveraged, central banks are already in easing mode, and consumers in the U.S. are in decent shape. Finally, given such low rates and a 2020 presidential election, we also see the potential for more fiscal spending, despite bulging deficits.”

KKR on Free Cash Flow

Going forward KKR’s Macro team is positioning towards assets that throw off free cash flow. It also likes companies that produce and make effective use of free cash flows.

Mr. McVey concludes: “To review, we have migrated more of the portfolio towards cash flowing assets with collateral as a backstop, and we continue to lean into complexity and dislocation. In addition, we have increased our allocation to secular growth stories, particularly those with high free cash flow conversion capabilities. To date, our top-down approach has served us well, and as such, we continue to ‘stick to the plan’ we laid out in our mid-year report.”

You can read the full report here.

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