Britain’s decision to leave the European Union may not pull down the global economy into a recession but financial assets will have limited upside potential and will face greater volatility, a top executive at alternative assets management firm KKR & Co said.
“We see the UK’s recent decision to exit the European Union as a significant and durable challenge to democracies around the world, but not something that will ultimately prevent investors from deploying capital in the region over time,” Henry H. McVey, head of global macro and asset allocation at KKR, said in the mid-year report on global macro-economic trends.
McVey said the world remains in an “adult swim only” environment and that he sees asynchronous growth ahead. He had previously outlined the choppy markets and the uncertain global markets in his January report.
He said that there is a more limited upside to financial asset appreciation than in previous years and that volatility will be higher in the near future. “Markets have cut a wide swath so far this year, enticing investors to buy and/or sell often at what was—in hindsight—likely the time to do the exact opposite of what one’s emotional core was suggesting,” said McVey.
McVey reinforced his stand on private credit as a good investment opportunity and suggested realigning the asset allocation in certain categories. He said that, given the shift toward negative interest rates, KKR sees a major uptake in opportunities in the mezzanine and asset-based lending areas of the global economy, especially in regions such as Europe.
The KKR executive doesn’t expect the US Federal Reserve to raise interest rates this year. The Fed, he said, is now more focused on the trajectory of currencies, the US dollar in particular. He added that the dollar, when undeterred in an upward movement, can at times be more effective in restricting adverse financial conditions even more than an actual increase in interest rates.
McVey also said that his modest forecast for equity and capital market returns are incumbent upon China’s ability to hold its currency, the yuan, stable against the dollar. “In our view, an unsettled China macro backdrop would be destabilizing across both global equity and credit markets,” he said.
McVey favoured real assets that can deliver yield and growth and that private equity is likely to outperform public equity at this point. On commodities, he said several items have already fallen to levels below previous bear markets and that he favours oil and copper over iron ore in the current scenario.
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