KKR & Co, the New York-based alternative assets management firm has released a new outlook piece by Henry McVey, head of global macro asset allocation at the firm, outlining key global trends that are expected to impact the asset allocations in 2015.
McVey, who joined KKR from Morgan Stanley in mid-2011 to help KKR and its clients assess global economic issues across the firm’s businesses, has come out with a five-point assessment.
"While the general backdrop for risk assets remains favourable, we are no longer advising folks to "Stay the Course" as we did in our January 2014 Outlook piece," McVey writes.
“Rather, given where we are in the cycle and the magnitude of gains in recent years, we have begun the inevitable process of “Getting Closer to Home” in terms of our asset allocation targets. In particular, we do advise folks to raise some cash and to tilt the invested part of the portfolio to become more opportunistic in 2015,” McVey said.
In the outlook piece, McVey has talked about the major themes that make compelling arbitrages in the global macro landscape that CIOs and portfolio managers should pursue this year.
Here are the key points:
* China's slowing is not an aberration. As such, its role in the global economy is materially shifting and McVey expects to see sizeable restructuring and recapitalisation opportunities in sectors that previously over-earned and/or overstretched their footprints.
* Many corporations still have inefficient capital structures, including too much cash and too little debt, in his view. As such, investors can still benefit from corporate and/or shareholder actions to lower companies' cost of capital and/or improve growth, including buybacks, dividends, capital expenditures and acquisitions.
* Despite a slew of liquidity in the system, many companies across both emerging and developed economies still can't get proper access to credit. Hence, McVey still sees a compelling illiquidity premium that is worth pursuing, particularly in today's low rate environment.
* McVey suggests harnessing volatility in the liquid commodity markets. He continues to favour private real asset investments with upfront yield, growth and long-term inflation hedging relative to traditional liquid commodity notes and swaps.
* Government deleveraging in the developed markets is disinflationary, which drives McVey's thinking about the direction of long-term interest rates as well as the relative value of risk assets against the risk-free rates.
Referring to the falling commodity prices McVey said oil prices are bottoming out while metals could go down further. “Against this backdrop, we think that the commodity-dependent countries like India and Japan stand to benefit mightily. Importantly, India is starting to enjoy not only lower inflation but also a smaller current account deficit (compliments of lower prices of imported oil and higher interest rates), which is important for its currency,” he said.
Within the emerging markets pack, McVey said, he is willing to pay up for high quality consumption stories that are linked to improving GDP per capita dynamics versus just GDP growth.
“Our favourites for 2015 again include both India and Mexico. In India, we are more bullish than the consensus expectations for lower inflation, which we think is constructive for trading multiples. We also believe that earnings growth could be stronger than many folks think as improving confidence encourages both consumers and businesses to spend more,” he noted.
Outside of the United States, he is overweight on Asia, underweight on Latin America and equal weight Europe.
“In Asia, we see equity markets in India, Japan and China all doing well. Key to our thinking is that, as a region, we believe Asia benefits mightily from lower oil prices,” he pointed out.
Within the emerging market currencies arena, he likes the Indian rupee against the Japanese yen.
“While both countries benefit from weaker oil prices, the Indian rupee has a higher carry of five percent versus the yen. India is also benefiting from lower inflation, which is positive for the rupee, while Japan is trying to increase inflation, which is negative for the yen. Finally, while reforms in India work to unleash its demographic dividend in order to raise real growth to seven percent from five percent, reforms in Japan are fighting against its demographic decline in order to lift Japan towards a nominal growth rate of just three percent,” he said.
McVey also noted that India has already made great strides in achieving lower inflation, a lower fiscal deficit, and a lower current account deficit, while Japan is still struggling to raise inflation and growth, narrow its fiscal deficit and lower its debt burden.