April 18, 2019
KKR released ‘The Uncomfortable Truth’ by Henry McVey, Head of Global Macro and Asset Allocation. The firm’s latest Insights report examines the intensifying yearn for yield by investors increasingly bumping up against “the uncomfortable truth” of declining interest rates amidst soaring fiscal deficits and bulging debt loads.
McVey says, “It is not business as usual in the capital markets. While we have high conviction that rates are likely to remain lower for longer, both debt issuance and deficits continue to soar across many areas of the private and public sectors. Such backdrop highlights the need to own more cash-flowing assets linked to nominal GDP, build more flexibility across mandates, and shorten duration where appropriate.”
McVey and his team outline the following conclusions for consideration in repositioning a portfolio to outperform without taking on undue risks in this new environment:
1. Beyond just central bank intervention creating downward pressure, aging demographics, excess capacity, and technological innovation are expected to continue to put a lid on interest rates with the overall global interest rate curve remaining low relative to historic levels.
2. Governments are trying to boost nominal GDP by holding down nominal interest rates. As such, investors should consider shortening portfolio duration and owning more collateralized assets linked to nominal GDP.
3. Holding nominal GDP above nominal interest rates also argues for investors to own some form of an overweight to longer duration Real Assets, especially those investments with upfront yield. Consistent with this view, Infrastructure remains one of KKR’s larger overweight positions in its target asset allocation.
4. We also favor Real Estate. Specifically, our call to arms is still to own Real Estate Equity via Opportunistic Real Estate for capital appreciation and B-piece Commercial Real Estate Credit to generate some outsized income. In general, Real Estate acts as a compelling diversifier in portfolios, as it not only provides cash flow but also has a distinct supply/demand cycle that is often separate from the broader economic environment.
5. We continue to advocate flexibility across mandates in the Fixed Income arena, Liquid Credit in particular. Given our view that the shift from monetary stimulus towards fiscal stimulus is likely to create periods of heightened uncertainty, we now heavily favor increasing flexibility across all the mandates that we oversee, including Actively Managed Opportunistic Credit.
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For comments, questions or concerns, please contact Dennis Kaiser