KKR Releases 2023 Mid-Year Global Macro Outlook: Still Keeping it Simple

Henry McVey: Today’s asynchronous global economic recovery is providing attractive opportunities for investors who are willing to focus on long-term thematic trends

KKR, a leading global investment firm, today released its 2023 mid-year global macro outlook by Henry McVey, CIO of KKR’s Balance Sheet and Head of Global Macro and Asset Allocation (GMAA).

In “Still Keeping it Simple,” McVey and his team outline why now is still a good time to look for compelling investing opportunities across Credit, Equities, and Real Assets, despite challenging macro conditions that may create a series of rolling recoveries and mild contractions across different sectors and economies. Against this complex backdrop, short-term trading strategies are likely to underperform, and as such, they urge investors to stay the course on deployment this year, especially when it comes to investing behind key secular trends such as the energy transition, the security of everything, and digitalization. Importantly, McVey and his team note that recent dislocations, particularly in the banking sector, have created compelling opportunities for investors in Liquid and Private Credit as well as in Asset-Based Finance. The team also remains constructive on the long-term outlook for Private Equity, Small Capitalization Stocks, International Equities, and Real Assets. The following key points underpin the team’s latest thinking:

• The global economy is experiencing an asynchronous recovery, as China flirts with disinflation, while the developed markets will still need to endure sticky services inflation linked to structural supply forces.
• The team feels even more convicted that the global economy will avoid a major economic downturn this year, given lower unemployment, more fiscal impulses, and higher residual excess savings, relative to prior cycles.
• However, any economic and earnings snapback in 2024 will likely be more muted than prior cycles, McVey believes.
• The rise of artificial intelligence has both inflationary and deflationary characteristics. On one hand, it has the potential to boost productivity and help address ongoing labor shortages in developed markets. On the other hand, the technology requires significant investment in energy infrastructure and cooling technologies, which could drive inflation higher.
• The U.S. consumer will continue to spend, though wealthier consumers could face new challenges, given declines in net-worth and forecasted job losses in more affluent areas of the economy.
• Traditional inflation hedges such as TIPS and certain REITS may continue to disappoint in the low real rate environment the team is envisioning. By comparison, Real Assets such as Infrastructure and Asset-Based Finance may outperform.

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

• Stronger GDP growth in 2023, especially in the U.S., where the team is forecasting real GDP growth of 1.8% versus consensus of 1.1%.
• Below consensus estimates for inflation in 2023 and above consensus for 2024 in every region.
• Inflation will remain higher this cycle as the key disinflationary forces of the past decade (globalization, lower energy prices and labor surplus) now move in reverse.
• EPS will decline more than consensus in 2023 as profit margins start to contract more meaningfully despite positive topline growth. We also believe growth will slow more in 2024 and that we will see a more muted rebound than expected.
• The U.S. labor shortage will continue as lower workforce participation rates collide with souring demographics and reduced immigration.
• Capital discipline by U.S. oil producers could push long-term pricing averages closer to $80 from the pre-pandemic range of $50-$60.
• Housing is unlikely to collapse to pre-pandemic levels, with home price appreciation reflecting strong fundamentals such as accelerating household formation and a legacy of underbuilding post-GFC.
• Higher long-term yields in the U.S. and Germany due to ECB balance sheet contraction and long-term energy transition capex in Europe and markets not fully pricing in the uncertainty around the pace of Fed rate cuts in the U.S.

In addition to the aforementioned insights, the report details the GMAA team’s updated views on growth, interest rates, commodities, currencies, and asset allocation.

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.
• 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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