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1、Global Macro Trends May 202515.2InsightsThe Art of Learning Contents 3 Introduction 9 Most Asked Questions 9#1:Partial tariff relief has arrived faster than you were anticipating.What has changed in your thinking?10#2:Why are you not more bearish on earnings growth given the magnitude of the supply

2、shock?14#3:Could currency policy ultimately be a more effective vehicle for improving U.S.competitiveness,especially relative to reciprocal tariffs on goods?16#4:For investors who are considering selling down their overweights in U.S.financial assets,what should they know?22#5:Are strong,positive te

3、chnical influences in the markets helping to offset shaky economic trends?24 ConclusionHenry H.McVeyHead of Global Macro&Asset Allocation,CIO of KKRs Balance S David McNellis Aidan Corcoran Changchun Hua Kristopher Novell Brian Leung Rebecca Ramsey Rachel Li Ezra Max Bola Okunade Asim Ali Miguel Mon

4、toya Allen Liu Insights|Volume 15.2 3The Art of LearningWith a whirlwind of recent developments post-U.S.election tax debates,Liberation Day,and travels both abroad and at home in early Maywe think it makes sense to update what we have been learning,especially as it relates to our Regime Change thes

5、is.One learning involves the role of international bonds,including investors increased desire to own more non-U.S.fixed income,alongside more private market Alternatives,that can help to further diversify a portfolio.Another key area where we have increased our knowledge involves the U.S.dollars val

6、uation relative to history.With a weakening dollar,local currency liabilities have the potential to become a more severe drag on performance than we and many investors were expecting prior to April 2nd.Meanwhile,on tariffs,weve updated our post-bargaining plausible case by incorporating what weve le

7、arned from the recent China and U.K.negotiations.Our new baseline suggests a 15%effective tariff rate(down from 18%),which we see as the most likely steady state.This new steady state also improves our GDP growth outlooks for the United States,Europe and China.Finally,another area we are now watchin

8、g more closely as part of the tariffs conversation is the relative importance of goods vs.services to the U.S.economy.Our estimates actually suggest that the gross profitability of U.S.services exports currently surpasses the lost profits on goods that the U.S.imports instead of manufacturing domest

9、ically.This learning,coupled with the potential for further dollar weakness,has impacted the way we are thinking about the America First agenda.Learning is like sailing against the current;if you dont advance,you will be driven back.Chinese proverbInsights|Volume 15.2 4When Ken Mehlman and I wrote a

10、bout the outcome of the U.S.election last November(see 2024 Election:Focus on the Forest,Not the Trees),we noted that from a macro and asset allocation perspective the 2024 Red Sweep only added further fuel to KKRs Regime Change thesis,first laid out to investors as we exited COVID.To review,the the

11、sis underscores our view that this time is different,including the way investors need to think about asset allocation,including the role of bonds.Specifically,we think that government bonds will not be able to fulfill their role as portfolio shock absorbers this cycle.As a reminder,our top-down Regi

12、me Change thesis framework is driven by four factors:heightened geopolitical competition,bigger fiscal deficits(which is consistent with the latest U.S.debt downgrade by Moodys to Aa1 from Aaa on May 16th),a messy energy transition,and stickier inflation.Importantly,the world we are describing repre

13、sents a major shift from the low growth,low inflation,tight fiscal and loose monetary policy framework that dominated much of the last two decades,especially the 2010-2016 period.One can see this in Exhibit 2.Of the factors mentioned above,the geopolitical factor has been the most amplified of late.

14、As my colleagues General(Retired)David Petraeus and Vance Serchuk remind me often,we have moved from an era of benign globalization to one of great power competition.Increasingly in this world,politics is driving economics,and there is a blurring of capital markets policy and national security polic

15、y as cross border barriers to the flow of capital,data,technology,and people rise.Seen through this lens,key milestones such as Brexit and now Liberation Day represent just the latest textbook examples of the convergence that the KKR Global Institute has been suggesting for some time.However,there i

16、s a new variable affecting our Regime Change thesis that we believe warrants investor attention.It centers on the introduction of a potentially structurally weaker dollar,alongside our longstanding view that the correlation between stocks and bonds is moving from negative to positive this cycle.Inde

17、ed,as we saw upon the April 2nd Liberation Day announcement and then again when President Trump sparred with Federal Reserve head Jerome Powell later that month,the unsettling triumvirate of 1)the U.S.dollar depreciating;2)Equities selling off;and 3)bond prices declining all at the same time,wreaked

18、 havoc on markets,challenging two fundamental underpinnings of modern-day asset allocation theory.The picture is as follows:1.During risk off days,government bonds are no longer fulfilling their role as the shock-absorbers in a traditional portfolio.As such,there is now an ongoing clear and present

19、danger for global allocators who bought into the idea that when stocks sell off,bonds will always rally.Importantly,this significant break down in asset allocation theory is occurring not only in the U.S.but also across most other global developed markets.One can see this in Exhibit 1.2.While bonds

20、and stocks were selling off together,the U.S.dollar was also weakening.As a result,there has been a growing fear that,because of dollar weakness,local currency liabilities have the potential to become a more severe drag on performance than expected,especially during turbulent days in the market.CIOs

21、 and their boards are seeing their offensive assets such as stocks and defensive assets such as government bonds both decline in value at the same time that their local currency liabilities,which they traditionally have not hedged,increase in value too.This unsettling outcome is occurring at a time

22、when most global retirement plans are overweight U.S.assets relative to their benchmarks.During risk off days,government bonds are no longer fulfilling their role as the shock-absorbers in a traditional portfolio.As such,there is now an ongoing clear and present danger for global allocators who boug

23、ht into the idea that when stocks sell off,bonds will always rally.Insights|Volume 15.2 5Exhibit 1:With the U.S.Leading the Pack,Long-Term Correlation Levels Between Stocks and Bonds Have Increased Across Most Countries-1.00-0.80-0.60-0.40-0.200.000.200.400.600.801.0020032004200520062007200820092010

24、20112012201320142015201620172018201920202021202220232024Rolling 36-month Local Stock/Bond CorrelationUSDEURCADAUDSGDJPYCorrelation matrices are based on monthly returns.Local bond market performance for the U.S.,Europe,the U.K.,Canada,Singapore,and Japan is represented by unhedged local currency Blo

25、omberg Aggregate indices.Australian bond market performance is represented by Bloomberg AusBond Composite 0+Yr Index.Local stock market performance is represented by S&P 500 Index for the U.S.and unhedged MSCI Country Indices for the rest.Data as at December 31,2024.Source:Bloomberg,KKR Global Macro

26、&Asset Allocation analysis.Exhibit 2:Regime Change:We Continue to Argue That This Time Is DifferentInflationHighGrowthLowHighLow2021202420252010-20162017-20192022-2023Low and High Growth and Inflation RegimesData as at April 5,2025.Source:KKR Global Macro&Asset Allocation analysis.There is also the

27、consideration that the government is trying to narrow the goods segment of the trade deficit without first narrowing the fiscal deficit.The associated slowdown that we are also seeing in the large and notably more profitable services sector surplus,which we discuss below in more detail(Exhibit 14),i

28、s likely a contributing influence as well.Beyond the aforementioned portfolio construction questions that have come up in our discussions with global CIOs,boards,politicians,and investors,recent trips to the United Kingdom and to Los Angeles to participate in Michael Milkens annual conference,elicit

29、ed a slew of other questions from business executives and investors seeking guidance.Further,partial tariff relief has arrived faster than we anticipated post April 2nd in the form of preliminary China and U.K.trade deals.To this end,we are using this latest Insights note to not only flag some of th

30、e most topical questions but also to detail our views(given the points highlighted above)on the way we are approaching asset allocation in the current environment.See below for details,but our summary views on the most asked questions are as follows:1.While not a game changer,partial tariff relief h

31、as arrived a little faster than anticipated.What has changed in your thinking?Dave McNellis,Brian Leung,and Miguel Montoya have updated their post-bargain-ing plausible case for tariffs to incorporate learnings from the China and U.K.deals.Overall,we now think a 15%post-bargaining effective tariff r

32、ate(ETR),down from our previous assumption of 18%,seems the most likely steady state.A few key observations:The decline in China tariffs is certainly helpful,although perhaps not the needle mover for our base case as one might initially think.Keep in mind that President Trump had already carved out

33、exemptions for major categories like computers,electronics,and smartphones,so reducing the assumed tariff rate on other items doesnt have as much impact as it might seem.That said,the post-bar-gaining ETR for China now decreases to 30%,compared to our prior estimate of 37%.The U.K.deal also brought

34、some positive news,introducing the possibility of flexi-bility on 232 sector tariffs.We had previously assumed no exemptions to the 25%tariffs on autos and steel/aluminum aside from USMCA exemptions.Now we Insights|Volume 15.2 6assume that roughly 50%of auto import volumes and 10%of steel and alumin

35、um volumes might eventually be exempted down to the 10%base tariff rate.The low-ering of our post-bargaining ETR to 15%from 18%,com-bined with the earlier-than-anticipated arrival of partial tariff relief,both support an improved outlook for GDP.As a result,we are moving our U.S.Real GDP growth esti

36、mate for 2025 up to a 1-2%range from the previous 0.5-1.5%.Meanwhile,in Europe,we are awaiting the outcome of negotiations with the European Union.That said,Aidan Corcoran suggests that a positive outcome,similar to what happened with the U.K.and China,could impact growth slightly.As such,he is incr

37、easing his Eu-ropean GDP estimate to 0.7%from 0.6%in 2025.Finally,Changchun Hua suggests that if the situation holds,the impact on Chinas GDP falls from negative 240 basis points to just negative 90 basis points.The need for rate cuts and RMB depreciation also will be less urgent than we initially t

38、hought,and as such,our China Real GDP growth outlook for 2025 increases to 4.8%from 4.3%.2.Why are you not more bearish on earnings growth,given the magnitude of the supply shock?Unlike the downturn in 2007,which was driven by both bank and consumer deleveraging,surging oil prices,and sharply wider

39、credit spreads,this potential downturn is a policy-induced one,which does not share those same attributes.In fact,oil prices are going down,credit spreads are only modestly wider(and remember credit spreads have been the most coincident indicator in our long-standing Earnings Growth Leading Indicato

40、r or EGLI model).One can see this in Exhibit 8.Further,banks are flush with cash,and global policy rates are heading lower.So,as we detail below,we do think that corporate earnings growth will moderate sharply,but our EGLI(Exhibit 9)will not turn negative the way it did during other major periods of

41、 uncertainty,unless there is an unanticipated policy mistake around the deficit widening further and/or the independence of the Fed is becoming impaired.Thats the good news.The potentially bad news for investors is that the initial communication of the Liberation Day game plan as well as the recent

42、introduction of DeepSeek by Chinese entrepreneurs,has increased uncertainty uncertainty that will likely dent the premium valuation that U.S.Equities and U.S.credit spreads enjoyed prior to April 2nd,especially as we see 1)further blurring between economics and national security amongst governments

43、around the world;and 2)global allocators repositioning their portfolios to gain more diversification outside of the United States.Finally,as we show below,the desire to reduce Americas goods deficit actually may come at the expense of its sizeable and profitable services surplus.See Exhibit 14 for d

44、etails,but some insightful work done by my colleague Dave McNellis shows that services have a higher return on capital and are likely a better way to harness the U.S.s comparative advantage on a sustainable basis.Exhibit 3:Unlike in the Past,Consumers and Corporations Are Not Overleveraged1.04.42.00

45、.81.94.90.71.55.9ConsumersS&P 500GovernmentDebt-to-Income Ratio4Q074Q094Q24Income is defined as:For consumers total personal income(before tax or interest expense);for corporates it is EBITDA;for government it is total revenue.Debt is defined as:For consumers it is total debt;for corporates net debt

46、;for government it is total debt held by the public.Data as at December 31,2024.Source:BofA,KKR Global Macro&Asset Allocation analysis.We do think that corporate earnings growth will moderate sharply,but our EGLI will not turn negative the way it did during other major periods of uncertainty.Insight

47、s|Volume 15.2 7Exhibit 4:Since the Inauguration,Both Oil and the 10-Year Yield Have Declined,With Oil Providing Meaningful Tailwinds97827075808590951001051/20/252/12/253/7/253/30/254/22/255/15/25Treasury Yield and Oil Price Change,Indexed at100 to January 20,202410y UST YieldWTI Crude Oil PricesData

48、 as at May 13,2025.Source:Bloomberg.3.Could currency policy ultimately be a more effective vehicle for improving U.S.competitiveness,especially relative to reciprocal tariffs on goods?As history has shown,following the Plaza Accord in 1985 and the D bust in 2000,one of the most potent levers used to

49、 increase American competitiveness was allowing for a renormalization of the U.S.dollars trading level.According to our models,one of which we show in Exhibit 15,the USD is likely around+15%rich relative to its theoretical fair value,making it the third most expensive level since the 1980s.In this c

50、ontext,we think a change in the trading level of the U.S.dollar likely driven by a strategic asset allocation repositioning by global investors,or even by some foreign governments allowing gradual appreciation of their currencies as a tacit condition of tariff relief could actually bolster competiti

51、veness far more effectively than imposing heavy reciprocal tariffs on the U.S.s closest trading partners and military allies.Importantly,we are not arguing for an uncontrolled devaluation.Rather,we believe that if the dollar were just to relinquish some of the elevated valuation it has accrued since

52、 the onset of COVID in a mean reversion trade,it could stabilize at a level that would significantly enhance U.S.competitiveness in the global export arena.Bottom line:Over time we favor more market-based forces to create competitive export advantages relative to imposing fluctuating reciprocal tari

53、ffs which we think can dent capital investment/productivity by creating more uncertainty.4.For investors who are considering selling down their overweights in U.S.financial assets,what should they know?Many CIOs are considering moving assets out of the United States towards other parts of the world.

54、While the theory behind this shift is understandable,the practicality of the execution is difficult.The U.S.equity market,for example,is nearly twice the size of Europe,Japan,and India,combined.Moreover,many U.S.companies are large,liquid names that have low leverage and solid earnings growth.Their

55、returns on capital are often higher too.However,on the fixed income side,we do see some room for improvement through greater diversification.Key to our thinking is that,if our Regime Change thesis continues to play out the way we think it will,the traditional role of U.S.government bonds in many glo

56、bal portfolios will become more diminished.The reality is that the U.S.government is burdened with a large fiscal deficit and high leverage,and its bonds are likely over-owned by many global investors who have benefitted from both positive interest rate differentials and a strong U.S.dollar.Recall t

57、hat many portfolios have relied heavily on the 60/40 model,comprising 60%Equities and 40%bonds,with a significant portion allocated to U.S.Treasuries.See below for more detail,but we asked our colleague Rachel Li for an analysis that explored the impact of adding international bonds into the traditi

58、onal 60/40.Her findings indicated that local bonds could indeed provide the additional diversification that,these days,U.S.government bonds might struggle to deliver.Moreover,when combined with private assets such as Private Equity as well as Infrastructure and Asset-Based Finance,the potential bene

59、fits to returns and to risk management were substantial.One can see this in Exhibit 19.5.Are strong,positive market technical forces helping to offset shaky economic trends?Investing is more than just understanding the fundamentals.The technical picture matters too.Our punchline remains that tariffs

60、 represent a supply shock that has dampened demand,prompting us to consider more Insights|Volume 15.2 8limited growth prospects of 1-2%U.S.GDP growth in 2025 versus our quantitative models projection of 2.9%(ex-tariffs).Thats the bad news.The good news is that the technical backdrop is still quite c

61、ompelling,and becoming more optimistic.The S&P 500 is poised to buy back over$1 trillion of stock,money market balances are high,and net issuance,as we describe below,is near historic lows(Exhibits 28 and 29).Looking at the big picture,we think that todays market is one where we will need to make ou

62、r own luck.On the positive side of the ledger,we do believe that the fat left tail risk,which includes a falling dollar,rising interest rates,and a weakening equity market(i.e.,what investors experienced in the aftermath of Liberation Day)has been through trial and error mitigated.That said,as we me

63、ntioned above,the introduction of DeepSeek by Chinese innovators and the abrupt roll-out of Liberation Day,suggest that valuations are now likely capped relative to the prior period of U.S.exceptionalism.Moreover,as we signaled earlier(and we detail below),we think the role of U.S.bonds in many port

64、folios will come under question,especially in a world where the U.S.overtly pursues an America First agenda.Importantly,this transition towards more regional and country emphasis is happening at a time when current accounts are beginning to normalize faster than fiscal accounts are being shrunk,a ba

65、ckdrop which makes us want to think differently about“risk free”rates.From an asset allocation perspective,we like control positions in Private Equity,especially those with operational improvement stories.Meanwhile,in Credit,we favor focusing on market dispersions and securities higher up the capita

66、l structure,and we think Real Estate Credit and growth Infra in the Real Assets space are attractive.From a country perspective,we favor Japan,India,and Germany,alongside an equal-weighted approach to the S&P 500(versus the market capitalization weighted approach in the past).From a thematic perspec

67、tive,we remain bullish on our major investment themes,including the Security of Everything,Capital Light to Capital Heavy,Productivity/Worker Retraining,Collateral-Based Cash Flows,and Intra-Asia Trade.Exhibit 5:Non-Capital Intensive Companies Have Broken Out to the Upside.We Like Both the Equity Be

68、ing Converted Towards Capital Light As Well As the Financing of the Assets Being Sold05001000150020002500199019921994199619982000200220042006200820102012201420162018202020222024World Capital vs.Non-Capital Intensive,USD PriceReturn Indexed to 100 in January 1990Capital IntensiveNon Capital Intensive

69、Capital intensity based on:Assets/Employee,Asset/Net Income,and Capex/Net Income.Data as at March 31,2025.Source:Goldman Sachs.Exhibit 6:The U.S.Will Need to Maintain Its Productivity Edge to Avoid Some Form of Stagflation3.3%1.0%2.0%3.1%1.0%2.0%0.4%0.8%0.8%U.S.(1960s)U.S.(1970s)U.S.(1980s)U.S.(1990

70、s)U.S.(2010s)U.S.(Last 4Q)Euro Area(Last 4Q)Japan/Korea(Last 4Q)LatAm(Last 4Q)Labor Productivity Growth(%QoQ,SAAR)BoomSlump1960s refers to 1959-68;1990s-00s refers to 1995-05;1970s refers to 1973-79;2010s refers to 2010-19;1980s refers to 1980-88.U.S.based on real output/hours worked;rest of world b

71、ased on real output/employed persons;LatAm refers to a simple average of Mexico,Brazil,Chile,Colombia and Peru.Data as at December 31,2024.Source:Bloomberg,Haver Analytics,KKR Global Macro&Asset Allocation analysis.Insights|Volume 15.2 9Most Asked Questions QUESTION NO.1While not a game changer,part

72、ial tariff relief has arrived faster than you were anticipating.What has changed in your thinking?Dave McNellis,Brian Leung,and Miguel Montoya have updated their post-bargaining plausible case for tariffs to incorporate learnings from the China and the U.K.deals.Overall,we believe the most likely st

73、eady state for executives and investors to incorporate as their base case is a 15%post-bargaining effective tariff rate,down from our previous forecast assumptions of 18%and the Liberation Day roll-out of 26%.In terms of specific details to consider,the decline in China tariffs is certainly helpful,

74、although perhaps not as significant a game-changer for our base case as one might initially think.Keep in mind that President Trump had already carved out exemptions for major categories like computers,electronics,and smartphones.So,reducing the assumed tariff rate on other items doesnt have as much

75、 impact as it might seem.That said,the post-bargaining ETR for China does fall on the margin to 30%,compared to 37%in our old forecast.Meanwhile,the U.K.deal also brought some positive news,introducing the possibility of flexibility on 232 sector tariffs.We had previously assumed no exemptions to th

76、e 25%tariffs on autos and steel/aluminum,aside from USMCA exemptions.Now,were assuming some exemptionsroughly 50%of auto import volumes and 10%of steel and aluminum volumes might eventually be exempted.The lowering of our post-bargaining ETR to 15%from 18%,combined with the earlier-than-anticipated

77、arrival of partial tariff relief,both support an improved outlook for GDP.Against this backdrop,we are moving our U.S.Real GDP growth estimate for 2025 up to a 1-2%range from the previous 0.5-1.5%.In Europe,we are still awaiting the outcome of negotiations with the European Union.That said,Aidan Cor

78、coran suggests that a positive outcome,similar to what happened with the U.K.and China,could impact growth by a further 10 basis points in 2025,to 0.7%from 0.6%.Finally,Changchun Hua suggests that if the current situation holds,the impact on Chinas GDP will be significantly less than we previously e

79、stimated down from-240 basis points to just-90 basis points.The need for rate cuts and RMB depreciation will be less urgent than we initially thought,and as such,our China Real GDP growth outlook for 2025 increases from 4.3%to around 4.8%.As my colleagues General(Retired)David Petraeus and Vance Ser

80、chuk remind me of-ten,we have moved from an era of benign globalization to one of great power competi-tion.Increasingly in this world,politics is driving economics,and there is a blurring of capi-tal markets policy and national security policy.Seen through this lens,key milestones such as Brexit and

81、 now Libera-tion Day represent just the latest textbook examples of the convergence that the KKR Global Institute has been sug-gesting for some time.Insights|Volume 15.2 10Exhibit 7:We Are Modestly Revising Our Effective Tariff Rate to 15%,Down From 18%Previously.The Decline in China Tariffs Is Help

82、ful,Albeit Perhaps Not As Much of a Needle-Mover for Our Base Case As One Might ThinkCategory2024 Imports($bn)Prior Tariff Rate(pre-Election)ETR IncreaseFinal ETRLiberation DayOriginal Post-Bargaining Plausible Case*Current Case*Liberation DayOriginal Post-Bargaining Plausible Case*Current Case*IEEP

83、A/Reciprocal Tariffs(Excluding Critical Imports)EU3842%20%10%10%22%12%12%Mexico5062%19%10%10%21%12%12%China30014%54%37%30%68%51%44%Canada4132%20%10%10%23%13%12%Japan902%23%12%10%25%14%12%Rest of World8403%19%12%10%22%15%13%Total IEEPA ETR2,5323%25%15%13%29%19%17%Section 232 Tariffs(Critical Imports)

84、Autos2690%25%25%18%25%25%18%Energy(Oil&Gas)1760%0%0%0%0%0%0%Steel/Aluminum575%20%20%18%25%25%23%Other Critical Imports5312%10%10%10%12%12%12%Total 232 ETR1,0340%13%13%11%14%14%12%Total Imports3,2673%22%15%12.1%26%18%15%China43914%48%33%24%62%47%38%Rest of World2,8292%18%12%10.2%20%13%12%*Original Po

85、st-Bargaining Plausible Case:assumed 50%of announced reciprocal tariff rate,Canada/Mexico 50%/38%of imports are USMCA compliant which will be tariffed at a lower 12.5%rate.We assume carve outs for critical imports(no stacking);*Current Case reflects latest announcements including 30%China rate,we fu

86、rther assume that 50%of Section 232 auto tariffs are ultimately negotiated lower to 10%,10%of Steel tariffs get carved out;Critical Imports include autos,energy,copper,pharmaceuticals,semiconductors,lumber,batteries,semiconductors and electronics,food.Data as at May 12,2025.Source:KKR Global Macro&A

87、sset Allocation analysis.QUESTION NO.2Why are you not more bearish on earnings growth,given the magnitude of the supply shock?While we have reduced our tariff forecast to 15%from 18%,15%is still a huge jump from a 4%tariff rate pre-election;moreover,uncertainty breeds apathy when it comes to potenti

88、al investment spending and deal activity.Not surprisingly,we are being asked by multiple clients why we are still forecasting positive EPS growth.For starters,we think the current administration now better understands the threatening mix for the capital markets of a weaker dollar,falling equities,an

89、d rising bond yields.As such,we think policy considerations to prevent this left fat tail are now in place,which is positive for risk premiums and growth.Second,as we show in Exhibit 9,lower oil prices,lower interest rates,and a weakening dollar are all acting as important tailwinds to keep growth p

90、ositive,albeit down substantially from the 11%that our model predicted before DOGE and Liberation Day were implemented.Evidence is mounting that the soft spots may take longer to surface,so we may need to factor in more GDP durability in 2Q25 and possibly more cracks in 2H25.No doubt,stresses from C

91、hina tariffs are real,but we think it will take until back-to-school,and then especially the holiday season,to become truly acute.Food inflation,however,should remain well-contained,which is a partial offset,we believe.Insights|Volume 15.2 11Exhibit 8:Unlike 2007 and 2020,Our Earnings Growth Leading

92、 Indicator Is Not Yet Calling for Negative GrowthMay-09a-30.9%Dec-20a-14.6%Aug-248.5%Jan-10p-39%Dec-264.1%-40%-30%-20%-10%0%10%20%30%40%50%000306091215182124S&P 500 EPS Growth:12-Month Leading IndicatorActualPredicted(3mma)Our S&P 500 Earnings Growth Leading Indicator(EGLI)is a combination of seven

93、macro inputs that together we think have significant explanatory power regarding the S&P 500 EPS growth outlook.Data as at April 5,2025.Source:National Association of Realtors,ISM,Conference Board,Bloomberg,KKR Global Macro&Asset Allocation analysis.Exhibit 9:Because of the Benefits of Lower Low Oil

94、 Prices,a Weaker USD,and Moderating Global Rates5.3%4.1%2.5%1.5%0.4%0.0%-2.4%-3.2%0.0%2.0%4.0%6.0%8.0%10.0%12.0%BaselineModeratingGlobal RatesLower Oil PricesUSD WeakerHome PricesISM/ConsumerConf.WideningCredit SpreadsDec26eIndicationContributions to December-26e S&P 500EPS Growth IndicatorOur S&P 5

95、00 Earnings Growth Leading Indicator(EGLI)is a combination of seven macro inputs that together we think have significant explanatory power regarding the S&P 500 EPS growth outlook.Data as at April 5,2025.Source:National Association of Realtors,ISM,Conference Board,Bloomberg,KKR Global Macro&Asset Al

96、location analysis.There is also some reality that several parts of the economy were already at stall speed entering 2025,a time when markets were much more optimistic about growth.Consider that U.S.ISM has been in contraction territory for 28 of the past 30 months.Now,Production and Export Orders ha

97、ve recently fallen to their lowest levels since May 2020 because of the tariff uncertainty disruption across the manufacturing complex.Moreover,both inventories and residential real estate activity,which we view as important proxies for cyclical activity,have been subdued for quite some time.One can

98、 see this in Exhibit 10.My colleague Dave McNellis reminds me that inventory investment and construction capex typically account for more than 100%of the net declines in GDP during U.S.recessions,so cyclical risks are greatest when spending in these areas is running at above-trend levels.Today,the o

99、pposite is true:inventory investment and construction capex have been at below-trend levels from a cyclical perspective since 2022,due to headwinds from both Fed hikes and post-pandemic supply chain normalization.While our forecasts continue to embed malaise in cyclical capex(driven in part by slowe

100、r consumer spending and a very moderate pace of Fed cuts compared to market expectations of Fed easing),we think it is hard to get very bad outcomes from a starting point where inventories are not overbuilt,and housing starts have already fallen 20%from 2022 peak levels.Though the capex cycle has be

101、en massive,it has been led by the Tech sector.Importantly,though,unlike the dot-com bubble 20+years ago,the companies financing the spending this cycle have bullet proof balance sheets,lower costs of capital,and a more consolidated market.Another point to consider is that private sector leverage is

102、quite low relative to prior periods.One can see this in Exhibit 11.The good news is that across corporates and households,we generally do not see pockets of excess leverage,with the risk mostly being concentrated in governments.The good news is that across corporates and households,we generally do n

103、ot see pockets of excess leverage.Insights|Volume 15.2 12Exhibit 10:True Economic Hard Landings Are Usually Caused by Housing and Inventory Issues.This Cycle Has Not Been Marked by Excesses in Those AreasDec-19,100.0Dec-21114.6Mar-23,96.6Dec-24,102.160708090100110201120122013201420152016201720182019

104、20202021202220232024Real Construction+Inventory Investment,4Q19=100Data as at December 31,2024.Source:U.S.Bureau of Economic Analysis,Haver Analytics,KKR Global Macro&Asset Allocation analysis.Exhibit 11:Importantly,Business and Consumer Lever-age Levels Have Also Not Increased This Cycle,Which Help

105、s Buffer Against an Outsized Default Cycle40%50%60%70%80%90%100%1Q831Q851Q871Q891Q911Q931Q951Q971Q991Q011Q031Q051Q071Q091Q111Q131Q151Q171Q191Q211Q23U.S.Private Sector Leverage as a%of GDPNonfinancial Business DebtHousehold DebtGray shading denotes recessionary quarters.Data as at March 5,2025.Source

106、:U.S.Bureau of Economic Analysis,Haver Analytics,KKR Global Macro&Asset Allocation analysis.What will we be watching for in the coming months?There are two things to keep a close eye on,we believe.First is AI capex,which has been outsized this cycle.Were this too slow(not our base case),then we woul

107、d turn more cautious on growth.One can see the importance of AI spending by the Magnificent 7 in Exhibit 12.Importantly,S&P 500 Tech sector capex and R&D spending are not that elevated relative to cash flows.This is in sharp contrast to the pre-2000 era,when capex and R&D spending reached an unsusta

108、inable 140%of cash flows,compared to just approximately 65%in 2024.Exhibit 12:Magnificent Seven Capex+R&D Spending Is Now Running Near the Equivalent of Almost 29%of Total U.S.Tech-Related Equipment and Intellectual Property InvestmentMagnificent 7 Capex and R&D Spending,Y/y Mag.7 Capex +R&D($mn)%Ch

109、g.Y/yR&D($mn)Capex($mn)201134,43821,64712,792201248,79642%27,90920,887201358,61920%32,41726,202201476,90831%42,03734,871201589,15816%52,20536,9532016106,58920%61,05545,5342017132,61324%76,23756,3762018178,11734%94,79083,3272019194,6039%114,48480,1192020241,68024%133,564108,1162021310,81729%165,43414

110、5,3832022384,75724%212,745172,0122023406,5796%239,601166,9782024515,22427%262,308252,9162025e613,01519%286,474326,5412025e is Bloomberg consensus for Magnificent 7.Data as at February 7,2025.Source:Bloomberg,KKR Global Macro&Asset Allocation analysis.Importantly,S&P 500 Tech sector capex and R&D spe

111、nding are not that elevated relative to cash flows.Insights|Volume 15.2 13Exhibit 13:We Do Not Think the U.S.Can Sustain 5%+10-Year Yields in the Growth Environment We Envision-5-4-3-2-10123453/31/19973/31/19993/31/20013/31/20033/31/20053/31/20073/31/20093/31/20113/31/20133/31/20153/31/20173/31/2019

112、3/31/20213/31/20233/31/2025TIPS 10-Year Yield vs.Real GDP GrowthCurrent Yield+GMAA ForecastCurrent Yield+Consensus ForecastHistoricalData as at April 15,2025.Source:Bloomberg,KKR Global Macro&Asset analysis.Separately,we are watching longer-term real rates.Indeed,while near-term inflation expectatio

113、ns are high,longer-term inflation expectations have fallen from a peak of 2.47%in mid-February.As such,long-term real rates are becoming more restrictive(Exhibit 13),which is why we believe President Trump is so attentive to the level of interest rates.As mentioned,we had been forecasting fewer cuts

114、 than the market consensus in 2025(we assume two whereas the market was pricing in 3-4 cuts in recent weeks,before aligning with our view),but we do believe that Chair Powell and his team would be wise to consider reducing QT selling of Treasuries to zero from$5 billion per month,to foster more acco

115、mmodative financial conditions generally,including via helping to control long-end yields and promoting the gradual USD depreciation we espouse.Finally,another area we are watching closely as part of tariffs conversation is the goods vs.services trade.Importantly,work done by Dave McNellis suggests

116、that U.S.services net exports are actually more valuable than goods net imports.Indeed,Exhibit 14 below reflects KKRs estimates of the gross profits associated with major industries in the goods deficit and services surplus.Unsurprisingly,industries involved in the goods deficit tend to be low margi

117、n with low ROIC.In fact,when you subtract cost of goods sold from the total trade value,we estimate that the gross profitability of U.S.services exports is actually more valuable than the lost profits on goods that the U.S.imports rather than manufacturing.Our bottom line:Distinct from President Tru

118、mps assertion that the U.S.has been getting ripped off from global trade,we think the facts paint a more nuanced picture,in which U.S.businesses have outsourced the production of low-margin goods to help facilitate activity in relatively more profitable and productive areas.Importantly,businesses ha

119、ve created this profitability and efficiency uplift while still fostering the broad-based benefits of the full-employment economy that the U.S.enjoys today.Given the importance of the services sector to overall growth(something that we think many economists and politicians may be underestimating),we

120、 would become more concerned about earnings growth if negotiations on goods were to lead to a worse than expected contraction in the United States strong services sector.Separately,we are watching longer-term real rates.Indeed,while near-term inflation expectations are high,longer term inflation exp

121、ectations have fallen from a peak of 2.47%in mid-February.As such,long term real rates are becoming more restrictive,which is why we believe President Trump is so attentive to the level of interest rates.Insights|Volume 15.2 14Exhibit 14:Services Exports Are Actually More Valuable Than Goods Imports

122、 On a Gross Profit Basis U.S.Net Exports,$bnGained/(Missed)Gross Profits,$bnIndustry Gross Profit MarginIndustry ROICKey Trade Deficit Industries-Goods,2024Capital Goods-317-8728%9%Autos-306-4515%5%Electronics-417-287%7%Total-1,040-16015%7%Key Trade Surplus Industries-Services,2024Travel&Leisure3726

123、69%11%Financial Services1308465%14%Business Services1113733%10%Use of IP865463%17%Total36420055%13%Industry gross margin and ROIC proxies:Capital Goods:S&P 1500 Capital Goods;Autos:S&P 1500 Autos&Components;Electronics:S&P Global 1200 Electronics Manufacturing Services(no U.S.-specific index availab

124、le);Travel&Leisure:S&P 1500 Hotels,Resorts&Cruise Lines;Financial Services:S&P 1500 Diversified Financial Services;Business Services:S&P 1500 Commercial&Professional Services;Use of IP:S&P 1500 Software&Services.Data as at May 6,2025.Source:U.S.Census Bureau,S&P,Bloomberg,Haver Analytics,KKR Global

125、Macro&Asset Allocation analysis.QUESTION NO.3Could currency policy ultimately be a more effective vehicle for improving U.S.competitiveness,especially relative to reciprocal tariffs?While we expect the tariff negotiations to remain fluid,we now envision a steady state,with a foundational 10%base rat

126、e across many countries,as well as flexible reciprocal tariffs and select sector-specific levies across autos,steel,semiconductors,pharmaceuticals,and critical minerals.All told,these considerations take our average aggregate tariff assumption up to 15%(including a post-bargaining ETR for China of 3

127、0%vs.37%previously).Importantly,though,we do wonder whether tariffs on goods is the most effective way to improve American competitiveness and profitability.As we discussed above(Exhibit 14),we think more work needs to be done around extending Americas competitive advantage in higher-profitability,h

128、igher-return services sectors of the economy.We think leaning into the services economy is a boon not just for business but also for workers,as services account for fully 84%of U.S.private sector employment.Also crucial is that services jobs pay more per hour on average than manufacturing jobs do($3

129、6 per hour on average for services,vs.$35 for manufacturing),which belies the common perception that manufacturing jobs are a singular pathway to financial security.Finally,we note that the services sector provides steadier employment(during the GFC,private services employment fell just 5%,vs.a stag

130、gering 22%drop in goods production jobs)and is much faster growing(private services jobs are up+6%since 2019,vs.+3%for goods production).Exhibit 15:We Are Exiting a Period of U.S.Exceptionalism Dollar-WiseOct-78-13.0%Mar-8530.5%Jun-95-12.8%Feb-0215.7%Jul-11-16.7%May-2516.6%Avg+11+22-30%-20%-10%0%10%

131、20%30%40%707580859095000510152025Real Broad Trade-Weighted U.S.Dollar REER:%Over(Under)ValuedLatamCrisisCommodity Collapse,COVID-19 Pandemic,Russia-Ukraine WarASEAN Crisis,RussianDefault,TechCorrection?Data as at May 19,2025.Source:Bloomberg.We think more work needs to be done around extending Ameri

132、cas competitive advantage in services sectors.Insights|Volume 15.2 15Exhibit 16:Until Recently,Foreign Buyers Represented a Huge Support System for U.S.Assets-800-600-400-20002004006008001,0001,200Mar-22Jun-22Sep-22Dec-22Mar-23Jun-23Sep-23Dec-23Mar-24Jun-24Sep-24Dec-24Mar-25Cumulative Cross Border F

133、lows by Region,US$BillionsUnited StatesEuropeChinaData as at April 17,2025.Source:IMF,Bloomberg,Goldman Sachs.We also think more time should be spent on U.S.currency policy.As illustrated in Exhibit 15,our analysis indicates that the dollar is currently overvalued by approximately 15-20%,placing it

134、among the highest levels recorded in recent history.Indeed,since 1970,when Fed data begins,there have only been two periods when the trade-weighted U.S.dollar reached a 15%overvaluation on a trade-weighted basis:once in the mid-1980s and again in the early 2000s.The first time this happened in Septe

135、mber 1983,the dollar appreciated for a further 1.5 years before entering a roughly decade-long bear market sparked by the Plaza Accord.Meanwhile,in February 2002,the dollar peaked just above 15%,marking the start of another approximately 10-year bear market,with the dollar ultimately slipping to aro

136、und 13%below fair value.What makes the current period stand out is that the dollar hit the+15%overvaluation mark in early 2022 and has since been oscillating within a volatile range for nearly three years.Comparing and contrasting periods of overvaluation,one finds the following:y Mid-1980s:The doll

137、ar hit 15%overvaluation in September 1983.It continued to appreciate sharply for another 1.5 years,reaching 30%overvaluation before embarking on a roughly 10-year bear market,ultimately falling to around 12%below fair value.y Early 2000s:The dollar reached 15%overvaluation in January 2002,peaking ab

138、out a month later.This marked the start of another decade-long bear market,with the dollar eventually drifting to approximately 13%below fair value.y Present:The dollar crossed the 15%overvaluation threshold in early-2022 and has maintained this elevated range for nearly three years.History suggests

139、 that in the short term,capital inflows can keep supporting the dollarmuch like the 1980s.However,our view going forward aligns more with the early 2000s analogy.Specifically,we think we are now seeing the tail end of a period characterized by exceptional U.S.returns,large equity inflows,and U.S.ass

140、ets commanding outsized shares of global portfolios.Granted,there are notable differences in the backdrop today,including that oil is not in a bull market as it was in the 2000s,and Chinese growth is not as ascendant as it was in the 2000s.Those were important aggravating factors to the earlier USD

141、bear market.So,we do not expect the next downcycle to be as rapid or pronounced as it was 20-odd years ago,but ultimately,we do think history indicates that the dollar is likely to revert to trading at a discount on a real effective exchange rate basisor below par,one might sayover a decade-long hor

142、izon.To be sure,any decline of the U.S.dollar may diminish the buying power of those who hold it,but it also brings about several favorable outcomes.One notable impact is that it enhances the competitiveness of American manufacturing companies,potentially leading to job creation within the country.I

143、n addition,a slightly weaker dollar facilitates easier debt repayment for countries and businesses with dollar-denominated debts.Finally,stronger non-dollar currencies may help energize non-U.S.consumers via increased purchasing power.This should help relieve the mighty U.S.consumer from some of its

144、 longstanding burden of driving outsized shares of global growth.Finally,stronger non-dollar currencies may help energize non-U.S.consumers via increased purchasing power.Insights|Volume 15.2 16 QUESTION NO.4For investors who are consid-ering selling down their over-weight in U.S.financial assets,wh

145、at should they know?Undoubtedly,Liberation Day has been a catalyst for engaging in serious conversations with global investors and their boards about diversifying beyond the U.S.capital markets.Truth be told,many investors have probably enjoyed an unsustainable run of excess U.S.returns(e.g.,the SPX

146、 was up 20%+for two years in a row).However,it is not just a return to normalcy on the asset side for global investors who are overweight U.S.assets.Liberation Day also abruptly reminded CIOs and their boards that their liabilities are denominated in local currency.So,when the U.S.experienced the tr

147、ifecta of a weaker dollar,falling equities and rising rates,it set off risk alarm bells that forced everyone from sovereign wealth funds to family offices to not only de-risk but also to look for ways to reduce their overweighs to U.S.assets.As we showed earlier in Exhibit 1,what is clear to us is t

148、hat correlations,on both a short-and long-term basis,are changing towards a potentially more unfavorable mix for multi-asset class investors.This reality likely means that allocators will need to think differently about their asset allocation.In particular,we are very focused on the role of bonds.Wh

149、ile stocks and bonds are becoming more correlated,we also noticed that the correlation between non-U.S.and U.S.bond markets have declined sharply.We link todays lower correlations to some combination of asynchronous monetary policies,inflation and growth gaps,and U.S.fiscal uncertainties.Against thi

150、s backdrop,we think that for investors who want to add more downside protection to their portfolios,one possible solution is to move some portion of their 60/40 portfolio into global bonds at the expense of U.S.bonds.Exhibit 17 shows that U.S.bonds and global bonds are becoming less correlated.We th

151、ink the potential to periodically find international bonds that behave quite differently to U.S.Treasuries in investor portfolios is rising.Exhibit 17:U.S.and Global Bond Correlations Have Been Declining,As the U.S.Embraces More of an America First Policy 0.000.200.400.600.801.001.20Apr-03Apr-04Apr-

152、05Apr-06Apr-07Apr-08Apr-09Apr-10Apr-11Apr-12Apr-13Apr-14Apr-15Apr-16Apr-17Apr-18Apr-19Apr-20Apr-21Apr-22Apr-23Apr-24Apr-25Rolling 12-Month Correlation Between Global Ag Ex.U.S.and U.S.Ag Hedged to Home CurrencyRolling correlations are calculated on monthly returns.Non-U.S.bond market performance is

153、represented by hedged Bloomberg Global Aggregate ex-U.S.Indices.US bond market performance is represented by hedged Bloomberg U.S.Agg index.Source:Bloomberg,KKR Global Macro&Asset Allocation analysis.Exhibit 18:Most Local Bonds Have Modest Correlations to Each Other and to the U.S.Bond Market,Sugges

154、ting Diver-sification Benefits Could Be Achieved Over the Long TermGlobal Bond Correlations,MonthlyUS-AggEuroAggSterlingAggCanadaAggAusBondSingaporeAggJapanAggUS-Agg1.000.740.740.830.670.710.44EuroAgg0.741.000.740.720.680.580.45SterlingAgg0.740.741.000.720.650.580.43CanadaAgg0.830.720.721.000.680.61

155、0.45AusBond0.670.680.650.681.000.600.43SingaporeAgg0.710.580.580.610.601.000.38JapanAgg0.440.450.430.450.430.381.00Correlation matrices are based on monthly returns over the period from November 2002 to April 2025.Local bond market performance for U.S.,Europe,UK,Canada,Singapore,and Japan is represe

156、nted by unhedged local currency Bloomberg Aggregate indices.Australian bond market performance is represented by Bloomberg AusBond Composite 0+Yr Index.Source:Bloomberg,KKR Global Macro&Asset Allocation analysis.Insights|Volume 15.2 17Exhibit 19:Historically,We Note That Global Bond Markets Have Gen

157、erated Higher Risk-Adjusted Returns On a Hedged Basis Than Both Domestic and U.S.Bond Markets,Driven by Both Slightly Higher Return and Lower Volatility0.00.51.01.5USDEURGBPCADAUDSGDJPYRealized Annualized Return/Volatility Ratio U.S./Global Ag Hedged to Home CurrencyLocal Bond Market UnhedgedU.S.Ag

158、HedgedGlobal Ag HedgedRealized annualized returns and volatility are calculated from monthly returns over the period from February 2004 to April 2025.Local bond market performance for the U.S.,Europe,the U.K.,Canada,Singapore,and Japan is represented by unhedged local currency Bloomberg Aggregate in

159、dices.Australian bond market performance is represented by Bloomberg AusBond Composite 0+Yr Index.Source:Bloomberg,KKR Global Macro&Asset Allocation analysis.That said,for those looking to diversify outside of the U.S.,we are more inclined to swap out of bonds than stocks.To this end,we did want to

160、flag a few considerations,especially for large pools of capital.They are as follows:1.The U.S.Equity market is 2x the size of Japan,Europe,and India combined.So,the transaction/friction costs of moving assets globally should be considered carefully.2.The U.S.leveraged loan market is estimated to be

161、around$1.4 trillion,highlighting the vast liquidity within the American financial landscape.By comparison,the European market is less than one-fourth the size at$323 billion.3.The size of the High Yield market in the U.S.is$1.4 trillion,compared to approximately$358 billion in Europe.4.The size of t

162、he U.S.Corporate IG market is approximately$9 trillion,while Europe is one-third the size at around$3 trillion.5.The U.S.private debt market(which includes Direct Lending,Distressed,Junior Mezzanine,and Fund of Funds)is estimated to be approximately$1.7 trillion,illustrating the depth and breadth of

163、 Private Credit opportunities in the U.S.In contrast,Europes private debt market size is approximately$500 billion.Exhibit 20:While We are Now Forecasting Higher Expected Returns in Europe,The U.S.Market Still Has Greater Liquidity$0$2,000$4,000$6,000$8,000$10,000$12,000$14,000$16,000U.S.EuropeMarke

164、t Size,U.S.vs.Europe,US$BillionsCorporate IGPrivate DebtHigh YieldLeveraged LoansData as at April 30,2025.Source:Bloomberg.Correlations are changing towards a potentially more unfavorable mix for multi-asset class investors.Insights|Volume 15.2 18Exhibit 21:U.S.Tech Firms Are Large and Liquid.In Eur

165、ope,by Comparison,the Tech Sector is Smaller and Has Less of a Global Reach$17.0$0.87 Largest U.S.Tech Firms7 Largest EU Tech FirmsCumulative Market Cap,US$TrillionsData as at April 30,2025.Source:Bloomberg.Exhibit 22:European Bank Assets to GDP Are Around 3x the U.S.Level050100150200250300350400U.S

166、.JapanEuropeTotal Bank Assets to GDP,%Data as at April 30,2025.Source:Bloomberg.We feel that Infrastructure and Asset-Based Finance can play a valuable role in helping to diversify global portfolios.Exhibit 23:The U.S.Credit Market is Nearly 4x the Size of Europes02004006008001000120014001600Europea

167、nLeveragedLoansEuropean HY U.S.LeveragedLoansU.S.HYU.S.vs.Europe Leveraged Loan and HY BondMarkets,US$BillionsData as at April 30,2025.Source:Bloomberg.So,our bottom line in the liquid markets is that some fur-ther diversification away from U.S.Treasuries may make sense at this point in our Regime C

168、hange thesis.Maybe more importantly,though,is that regardless of where one comes down on diversification strategies for liquid secu-rities,we feel strongly that Private Alternativesparticu-larly Infrastructure and Asset-Based Financecan play a valuable role in helping to diversify global portfolios

169、these days,especially for investors seeking to enhance inflation protection and better align with inflation-linked liabilities.To review,since 2022,we have argued that Real Assets and collateral-based cash flows could help enhance the returns of the traditional 60/40 portfolio by providing more upfr

170、ont yield and enhanced inflation protection.Cen-tral to this thesis has been that liquid government bond portfolios,which in the past have traditionally served as shock absorbers or diversifiers,could no longer fulfill this purpose in the Regime Change we envisioned.It is not only the conduct of bon

171、ds post Liberation Day.This view has been reinforced by the behavior of the bond mar-ket in both 2022 and 2023,as examples,driven by sticky services inflation,Japan exiting Yield Curve Control,and Fitchs downgrade of U.S.debt.Most importantly,these asset classes have provided solid upfront yields al

172、ong with attractive returns during a period marked by the highest inflation and interest rate increases in the past 50 years.Insights|Volume 15.2 19Exhibit 24:The Private Equity Illiquidity Premium Actually Outperforms Public Markets in Less Robust Equity Markets9.9%7.3%6.0%4.1%1.2%0%2%4%6%8%10%12%1

173、5%U.S.Private Equity Excess ReturnS&P 500 3-Year Annualized Total ReturnAverage 3-Year Annualized Excess Total Return of U.S.Private Equity Relative to S&P 500 AcrossPublic Market Return RegimesWhere we have beenWhere we might be headedData reflects actual pooled horizon return,net of fees,expenses

174、and carried interest.For funds formed between 1986-2024.Data as at December 31,2024.Source:Cambridge Associates Benchmark Statistics,KKR Global Macro&Asset Allocation analysis.We also think Private Equity,especially deals linked to operational improvement stories,can drive not only performance but a

175、lso non-correlated inputs into a diversified portfolio.We have often cited the need for investors to own more assets where you control your own destiny.In a world where trade barriers are increasing,we favor more control situations,especially in the private markets,where operational improvements or

176、strategic consolidation can,at times,drive robust profit growth,especially in Private Equity.We think owning more control equity positions also works well under our Regime Change thesis.In particular,we favor corporate carve-outs,especially those that have a sizeable operational improvement angle.Ou

177、tside of the U.S.,we think that the potential for Private Equity to outperform Public Equities,especially in Europe and many markets in Asia,is considerable.Public valuations are generally attractive,while the potential to improve productivity at these companies remains outsized.Finally,we favor mor

178、e active management of capital,including companies that are using Private Equity as a vehicle to transition from capital heavy to capital light models.In our view,the difference between control and non-control positions will magnify materially in 2025,as demanding equity multiples require greater fo

179、cus on operational improvement and the ability to retool companies capital structures,even as borrowing markets thaw.How should one think about asset allocation if an investor wants to diversify outside of a traditional U.S.-dominated 60/40 portfolio?Given the number of times we have been asked this

180、 question since Liberation Day,we asked Rachel Li on our KKR Solutions team to run a few scenario analyses to underscore the benefits of both global bonds relative to U.S.Treasuries as well as the addition of Private Alternatives into portfolios.As one can see in Exhibit 26,there is an incremental b

181、enefit on a risk-adjusted return basis of replacing half of the U.S.bond allocation with international bonds.While this improvement may appear marginal on a historic basis,we believe its set to be more pronounced going forward due to the increasing correlation of stocks and bonds globally along with

182、 the mismatch of local liabilities.Regardless,we believe that we have entered an environment where CIOs and boards need to spend more time thinking about non-correlated diversifiers in their portfolios(Exhibit 25).Insights|Volume 15.2 20Exhibit 25:Non-Correlation Only Increases in Importance in the

183、Environment We EnvisionAsset Class Correlations,Quarterly From 2004-2024 Public Fixed IncomePublic EquitiesAsset Based FinanceDirect LendingJunior DebtPrivate Opportu-nistic CreditReal Estate CreditRE Value-Add&OppBuyoutGrowthVentureGlobal InfraReinsurance(Net Equity Proxy)Public Fixed Income-0.30.1

184、0.00.20.00.40.00.30.20.10.20.3Public Equities0.3-0.50.70.70.70.30.40.80.80.50.60.7Asset Based Finance0.10.5-0.70.70.70.20.60.70.50.40.50.5Direct Lending0.00.70.7-0.80.70.40.50.70.70.50.50.6Junior Debt0.20.70.70.8-0.80.30.70.90.80.60.80.6Private Opportunistic Credit0.00.70.70.70.8-0.30.60.80.70.40.60

185、.6Real Estate Credit0.40.30.20.40.30.3-0.20.30.40.20.20.4RE Value-Add&Opp0.00.40.60.50.70.60.2-0.70.60.50.70.1Buyout0.30.80.70.70.90.80.30.7-0.90.70.80.6Growth0.20.80.50.70.80.70.40.60.9-0.80.70.6Venture0.10.50.40.50.60.40.20.50.70.8-0.40.4Global Infra0.20.60.50.50.80.60.20.70.80.70.4-0.4Reinsurance

186、(Net Equity Proxy)0.30.70.50.60.60.60.40.10.60.60.40.4-Correlations are calculated with quarterly returns between September 30,2004 and June 30,2024.Each asset class is modeled as follows:Public Fixed Income(Bloomberg Global-Aggregate Total Return Index Value Unhedged USD),Public Equities(MSCI World

187、 Index),Asset Based Finance(KKR Private Credit ABF composite investments post January 1,2017 is shown for illustrative purposes only to depict the possible diversification benefits of non-traditional asset classes),Direct Lending(Cliffwater Direct Lending Index),Junior Debt(Burgiss Private Debt/Mezz

188、),Private Opportunistic Credit(Burgiss Private Debt/Generalist),Real Estate Credit(Gilberto-Levy Level I Index),Real Estate Value-Add&Opp(Burgiss Real Estate Index:Value-Add/Opportunistic),Global Infrastructure(Burgiss Infrastructure Index),Buyout(Cambridge Buyout),Growth(Cambridge Growth Equity),Ve

189、nture(Cambridge Venture Capital).Reinsurance(KKR proxy post 2016 is shown for illustrative purposes only to depict the possible diversification benefits of non-traditional asset classes).Source:Bloomberg,Cambridge,Burgiss,Gilberto-Levy,Cliffwater,KKR Global Macro&Asset Allocation analysis.Maybe more

190、 importantly,for investors with an appetite to take on illiquidity risk by investing in private markets,we suggest four options to better capture diversification benefits by enhancing a 60/40 portfolio,while also enhancing inflation protection,return and growth potential.As Exhibit 26 shows,there is

191、 a meaningful benefit to performance by adding Infrastructure and Asset-Based Finance(Portfolio C)as well as Infrastructure,Asset-Based Finance,and Private Equity to a portfolio(Portfolio D).Given the importance of non-correlation in a volatile world,we have also included portfolios that diversify f

192、urther into Real Estate Credit and Insurance as an asset class.One can see this in Portfolio E.There is an incremental benefit on a risk-adjusted return basis of replacing half of the U.S.bond allocation with international bonds.While this improvement may appear marginal on a historic basis,we belie

193、ve its set to be more pronounced going forward.Insights|Volume 15.2 21Exhibit 26:Our Work Shows That Alternatives May Offer Diversification Benefits in Global Portfolios While Potentially Enhancing Returns ABCDE3%4%5%6%7%8%9%10%11%0%2%4%6%8%10%12%14%16%20-Year Realized Annual Return20-Year Realized

194、Annual Volatility20-Year Annual Returns and Volatility of Various 60/40 Portfolios,%A:Traditional 60/40 in US Stocks/BondsB:60/40 with Non-US BondsC:Alts Enhanced with Inflation ProtectionD:Alts Enhanced with Inflation Protection&Higher Return PotentialE:Alts Enhanced with Inflation Protection&Diver

195、sified IncomeRealized annualized returns are calculated from quarterly returns and volatilities are calculated using annual total returns from 2004 to 2024 to partially correct for the downward bias for private market proxy volatility.Proxies are defined as follows:U.S.Stocks:S&P 500 Index;U.S.Bonds

196、:U.S.Aggregate;Global Bonds ex U.S.:Global Aggregated ex U.S.Hedged in USD;Infrastructure:Burgiss Infrastructure Index;Private Equity:Cambridge Buyout Index;Asset-Based Finance:KKR Private Credit ABF composite investments post January 1,2017,backfilled with Burgiss Private Credit Index.Real Estate C

197、redit:Gilberto-Levy Level I Index.Reinsurance:KKR proxy post 2016 is shown for illustrative purposes only to depict the possible diversification benefits of non-traditional asset classes.Source:Bloomberg,Burgiss,KKR Global Macro&Asset Allocation analysis.Exhibit 27:We Think the Addition of Private M

198、arkets to Asset Allocation Enhances Inflation Protection and ReturnPublic Equities,60%Public Equities,60%Public Equities,50%Public Equities,40%Public Equities,40%Private Equity,10%Reinsurance,10%Infrastructure,10%Infrastructure,10%Infrastructure,10%Asset-Based Finance,10%Asset-Based Finance,10%Asset

199、-Based Finance,10%Real Esate Credit,10%Global Bonds Ex.U.S.,20%Global Bonds Ex.U.S.,15%Global Bonds Ex.U.S.,15%Global Bonds Ex.U.S.,20%U.S.Bonds,40%U.S.Bonds,20%U.S.Bonds,15%U.S.Bonds,15%A:Traditional 60/40 inUS Stocks/BondsB:60/40 withNon-US BondsC:Alts Enhanced withInflation ProtectionD:Alts Enhan

200、ced withInflation Protection&Higher Return PotentialE:Alts Enhanced withInflation Protection&Diversified IncomeTraditional 60/40 and 60/40 with Alternatives PortfoliosData as at May 15,2025.Source:KKR Global Macro&Asset Allocation analysis.Insights|Volume 15.2 22Our bottom line is that we think we a

201、re at an inflection point for asset allocation,especially for international investors who have overweighted U.S.assets,including too much exposure to U.S.Treasuries and U.S.large cap growth stocks(the two most common refrains we have been hearing).As our analysis in Exhibit 26 shows,we believe there

202、 is a significant opportunity to enhance performance without taking on a lot more risk.Indeed,we think shifting ones allocation away from the traditional 60/40 of U.S.stocks and bonds could not only boost returns,but also lower overall portfolio risk in many instances if done properly.Offsets to con

203、sider include the aforementioned size of markets,liquidity,and duration considerations.QUESTION NO.5Are strong,positive technical influences in the markets helping to offset shaky economic trends?While our models and our conversations with CEOs both point towards slowing growth and uncertain capex s

204、pending on the fundamental side,our technical work shows an extremely favorable backdrop.Just consider the following:1.As we show in Exhibit 28,net issuance of IPOs,Levered Loans,and High Yield are at levels not seen since the recovery from the Great Financial Crisis.Importantly,this backdrop is occ

205、urring at a time when many CIOs,especially insurance companies,are starved of product.Moreover,lack of issuance is occurring at a time when U.S.companies are projected by Goldman Sachs to be buying back another one trillion dollars or more of their own stock.2.While less product is available,sizeabl

206、e Cash positions are also building.One can see this in Exhibit 29,which shows that cash balances now total around$7 trillion.With the rise in interest rates,Cash became an attractive alternative to bonds,particularly as it offered high rates of uncorrelated returns.With the expectation that the Fed

207、will resume its easing campaign over the near term,we believe that the opportunity cost of losing out on compounding of capital may far outweigh the decrease in volatility,particularly in a higher for longer inflationary environment.3.Sentiment is poor,which we view as a contra-indicator.One can see

208、 this in Exhibit 30.If as investors we are supposed to sell greed and buy fear,then the current set-up does appear quite interesting,we believe.Exhibit 28:Our Liquidity Indicator Is Still Recovering From Near-Trough LevelsApril-091.4%May-123.6%July-163.4%July-218.2%July-221.4%March-253.1%0%1%2%3%4%5

209、%6%7%8%9%200720082009201020112012201320142015201620172018201920202021202220232024Capital Markets Liquidity(TTM)as a%of GDP(IPO,HY Bond,Leveraged Loan Issuance)Data as at March 31,2025.Source:Preqin,Bank of America,Bloomberg,KKR Global Macro&Asset Allocation analysis.Net issuance of IPOs,Levered Loan

210、s,and High Yield are at levels not seen since the recovery from the Great Financial Crisis.Insights|Volume 15.2 23Exhibit 29:There Is Still a Wall of Cash.Money Funds in the U.S.Have Risen by Nearly$3.5 Trillion Over the Last DecadeJan-235.69Jan-204.77Apr-257.0101234567Jan-74Oct-76Jul-79Apr-82Jan-85

211、Oct-87Jul-90Apr-93Jan-96Oct-98Jul-01Apr-04Jan-07Oct-09Jul-12Apr-15Jan-18Oct-20Jul-23Total Financial Assets:U.S.Money Market Funds,US$TrillionData as at April 10,2025.Source:ICI,FRED.Exhibit 30:Investor Mood Is Still Decidedly Bearish7%56%37%Barrons Big Money Poll:Client Perspectiveson the S&P 500Bul

212、lishBearishNeutralData as at May 2,2025.Source:Barrons.Exhibit 31:Buybacks Have Increased Approximately 25%from 2023$538$919$950$823$982$1,031202020212022202320242025GS Forecasts for Agregate S&P 500 ShareBuybacks,US$Data as at May 5,2025.Source:Goldman Sachs Investment Research.As trade and capital

213、 flows become less fluid across geographies we likely will be living in a world where the fundamentals are only mediocre.However,the technical picture is actually quite compelling,which means that the opportunity set for investors,especially those with a long-term horizon,may be much better than the

214、 consensus currently thinks.We likely will be living in a world where the fundamentals are only mediocre as trade and capital flows become less fluid across geographies.However,the technical picture is actually quite compelling.Insights|Volume 15.2 24Conclusion The aftermath of Liberation Day has cr

215、eated new questions for investors,particularly in regard to learnings around portfolio construction and our Regime Change thesis.My travels in the U.S.,China,and Europe increasingly connect me to some of the most thoughtful allocators in our industry.Those discussions are typically centered on five

216、main areas:First,headwinds from tariffs decreased somewhat sooner than we originally anticipated.Work done by Dave McNellis,Brian Leung,and Miguel Montoya suggests a projected steady-state post-bargaining effective tariff rate of around 15%,down from 18%.While tariff reductions in China are benefici

217、al,their impact is limited due to existing exemptions on key categories,leading to an updated China ETR of 30%,from 37%.These developments support a more optimistic GDP outlook,with U.S.growth for 2025 now expected in the 1-2%range,up from 0.5-1.5%.In Eu-rope,we forecast a slightly more positive out

218、look for GDP growth in 2025,raising our estimate to 0.7%from 0.6%.For China,the GDP impact of tariffs is now less severe,improving from-240 to-90 basis points,reducing the ur-gency for rate cuts and RMB depreciation,and increasing Changchun Huas 2025 growth forecast to 4.8%from 4.3%.Headwinds from t

219、ariffs decreased somewhat sooner than we originally anticipated.Work done by Dave McNellis,Brian Leung,and Miguel Montoya suggests a projected steady-state post-bargaining effective tariff rate of around 15%,down from 18%.Exhibit 32:Our Current Tariff Base Case Declines to 15%From 18%20244%26%18%0%5

220、%10%15%20%25%30%35%1900191019201930194019501960197019801990200020102020U.S.Effective Tariff Rate,%Announced tariffs are anorder of magnitude abovethe Biden-era level of 4%Original Plausible LTRate Post-BargainingCurrent Base Case15%Forecasts reflect peak U.S.average tariff rate of 26%,which moderate

221、s to 15%based upon current negotiations.Data as at May 14,2025.Source:U.S.Bureau of Economic Analysis,Haver Analytics,KKR Global Macro&Asset Allocation analysis.Second,unlike the 2007 downturn,which was driven by bank and consumer deleveraging,surging oil prices,and sharply wider credit spreads,the

222、current potential downturn is policy-induced and lacks these attributes.Oil prices are decreasing,credit spreads are only modestly wider,banks are flush with cash,and global rates are trending lower.While we anticipate a sharp moderation in corporate earnings growth,our EGLI model suggests it wont t

223、urn negative as it did during past crises unless there is an unexpected policy mistake,such as further deficit widening or a Fed whose independence is compromised.This is the good news.However,the introduction of Liberation Day and of DeepSeek has no doubt heightened uncertainty,potentially reducing

224、 the premium valuation of U.S.equities and credit spreads enjoyed before April 2nd.This uncertainty is compounded by the increasing overlap between economics and national security amongst global governments and the shift by global allocators to diversify their portfolios beyond the United States.Ins

225、ights|Volume 15.2 25Third,we believe that the U.S.dollar could be a formidable tool in enhancing U.S.competitiveness.Historical precedents,such as the Plaza Accord in 1985 and the D bust in 2000,demonstrate that adjusting the U.S.dollars trading level has been a powerful method for boosting American

226、 competitive advantage.Our models suggest the USD is currently about 15%overvalued,marking its third highest level since the 1980s.As such,we believe that a strategic adjustment in the dollars trading level,driven byamongst other thingsglobal investors increased desire to diversify their holdings ou

227、tside of the U.S.,could enhance Americas competitiveness more effectively than imposing tariffs on key trading partners and allies.Moreover,coupled with our learnings about the relative profitability of services over goods(Exhibit 14),we think that maintaining a broad-based economic footprint may be

228、 a better formula for elevating total U.S.competitiveness versus the current agenda of imposing tariffs in areas where America does not need to build comparative advantage.Fourth,we think its crucial to understand the challenges of reallocating assets globally.The U.S.equity market is nearly twice t

229、he size of Europe,Japan,and India combined,with many large,liquid companies showing strong earnings growth.However,in fixed income,theres room for improvement.If our Regime Change thesis continues to unfold as expected,the traditional role of U.S.government bonds may diminish due to the countrys fis

230、cal deficit and high leverage.Many portfolios have relied on the 60/40 model,heavily weighted towards U.S.Treasuries.Our analysis suggests that incorporating international bonds into this model offers diversification benefits that U.S.government bonds may struggle to provide.Combining these changes

231、on the liquid side with private assets like Infrastructure,Private Equity,Asset-Based Finance,Real Estate Credit,and Insurance could enhance returns and risk management.Finally,while tariffs have created a supply shock,the technical backdrop remains compelling.The S&P 500 is set to buy back over$1 t

232、rillion in stock,money market balances are high,and net issuance is near historic lows.A similar dynamic is playing out on the share repurchase front in Europe,and the total is even higher if one includes public-to-private transactions.However,a recent poll shows that top money managers are more bea

233、rish than theyve been in nearly three decades,with only 26%seeing bright market prospects.Our bottom line:In todays market,we must make our own luck.The risks of a falling dollar,rising interest rates,and a weakening equity market have been mitigated,but new developments like Liberation Day and Deep

234、Seek suggest valuations may be capped compared to previous periods of U.S.exceptionalism.Against this backdrop,we favor control positions in Private Equity,particularly those with operational improvement stories,focus on market dispersions and higher capital structure securities in Credit,and find R

235、eal Estate Credit and growth Infrastructure in Real Assets attractive.We also think non-correlated,yielding asset classes such as Insurance can potentially be additive as well.By country,we prefer Japan,India,and Germany,alongside an equal-weighted approach to the S&P 500.We remain bullish on our in

236、vestment themes including the Security of Everything,Capital Light to Capital Heavy,Productivity/Worker Retraining,Collateral-Based Cash Flows,and Intra-Asia Trade.Against this backdrop,we favor control positions in Private Equity with operational improvement stories,focus on market dispersions and

237、higher capital structure securities in Credit,and find Real Estate Credit and growth Infrastructure in Real Assets attractive.We also think non-correlated,yielding asset classes such as Insurance can potentially be additive as well.Important InformationReferences to“we”,“us,”and“our”refer to Mr.McVe

238、y and/or KKRs Global Macro and Asset Allocation team,as context requires,and not of KKR.The views expressed reflect the current views of Mr.McVey as of the date hereof and neither Mr.McVey nor KKR undertakes to advise you of any changes in the views expressed herein.Opinions or statements regarding

239、financial market trends are based on current market conditions and are subject to change without notice.References to a target portfolio and allocations of such a portfolio refer to a hypothetical allocation of assets and not an actual portfolio.The views expressed herein and discussion of any targe

240、t portfolio or allocations may not be reflected in the strategies and products that KKR offers or invests,including strategies and products to which Mr.McVey provides investment advice to or on behalf of KKR.It should not be assumed that Mr.McVey has made or will make investment recommendations in t

241、he future that are consistent with the views expressed herein,or use any or all of the techniques or methods of analysis described herein in managing client or proprietary accounts.Further,Mr.McVey may make investment recommendations and KKR and its affiliates may have positions(long or short)or eng

242、age in securities transactions that are not consistent with the information and views expressed in this document.The views expressed in this publication are the personal views of Henry H.McVey of Kohlberg Kravis Roberts&Co.L.P.(together with its affiliates,“KKR”)and do not necessarily reflect the vi

243、ews of KKR itself or any investment professional at KKR.This document is not research and should not be treated as research.This document does not represent valuation judgments with respect to any financial instrument,issuer,security or sector that may be described or referenced herein and does not

244、represent a formal or official view of KKR.This document is not intended to,and does not,relate specifically to any investment strategy or product that KKR offers.It is being provided merely to provide a framework to assist in the implementation of an investors own analysis and an investors own view

245、s on the topic discussed herein.This publication has been prepared solely for informational purposes.The information contained herein is only as current as of the date indicated,and may be superseded by subsequent market events or for other reasons.Charts and graphs provided herein are for illustrat

246、ive purposes only.The information in this document has been developed internally and/or obtained from sources believed to be reliable;however,neither KKR nor Mr.McVey guarantees the accuracy,adequacy or completeness of such information.Nothing contained herein constitutes investment,legal,tax or oth

247、er advice nor is it to be relied on in making an investment or other decision.There can be no assurance that an investment strategy will be successful.Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may diff

248、er materially,and should not be relied upon as such.Target allocations contained herein are subject to change.There is no assurance that the target allocations will be achieved,and actual allocations may be significantly different than that shown here.This publication should not be viewed as a curre

249、nt or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy.The information in this publication may contain projections or other forward-looking statements regarding future events,targets,forecasts or expectations regarding the strategies

250、 described herein,and is only current as of the date indicated.There is no assurance that such events or targets will be achieved,and may be significantly different from that shown here.The information in this document,including statements concerning financial market trends,is based on current marke

251、t conditions,which will fluctuate and may be superseded by subsequent market events or for other reasons.Performance of all cited indices is calculated on a total return basis with dividends reinvested.The indices do not include any expenses,fees or charges and are unmanaged and should not be consid

252、ered investments.The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation.Please note that changes in the rate of exchange of a currency may affect the value,price or income of an investment adversel

253、y.Neither KKR nor Mr.McVey assumes any duty to,nor undertakes to update forward looking statements.No representation or warranty,express or implied,is made or given by or on behalf of KKR,Mr.McVey or any other person as to the accuracy and completeness or fairness of the information contained in thi

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255、s no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein.The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products.This report is not approved,reviewed or produced by MSCI.Kohlberg Kravis Roberts&Co.L.P.30 Hudson Yards New York,New York 10001+1(212)750.8300