Global investment firm says short-term trading strategies are likely to disappoint
Investors should be wary of adopting short-term trading strategies or risk underperformance during the second half of 2023.
Global investment management firm KKR has published its mid-year global macro outlook and is urging investors to stay the course with their investment strategies.
The outlook from Henry McVey, CIO of KKR’s Balance Sheet and Head of Global Macro and Asset Allocation is titled ‘Still Keeping it Simple’ despite challenging macro conditions that may create a series of rolling recoveries and mild contractions across different sectors and economies.
That means finding compelling investing opportunities in credit, equities, and real assets.
McVey and his team recommend sticking with deployment strategies especially around energy transition, digitalization, and the security of everything.
Traditional inflation hedges such as TIPS and certain REITS may continue to disappoint in the low real rate environment the team is envisioning, while real assets such as infrastructure and asset-based finance may outperform and liquid and private credit may provide positive options.
Economic challenges
The outlook cites several reasons for keeping it simple including the global economic challenges with inflation across developed markets while China could see disinflation.
The team does not see a major global downturn this year thanks to lower unemployment, more fiscal impulses, and higher residual excess savings, relative to prior cycles, although they expect economic and earnings recovery in 2024 to be less significant than in previous cycles.
On artificial intelligence (AI), the KKR team highlight both inflationary and disinflationary impact with the boost to productivity and labour shortages offset by investment in infrastructure.
Specifically in the US, the outlook calls for consumer spending to remain strong although “wealthier consumers could face new challenges, given declines in net-worth and forecasted job losses in more affluent areas of the economy.”
Other takeaways
Among other key takeaways from the outlook are some calls that are out of the consensus:
- 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 labour 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. labour 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.
