KKR released its 2021 mid-year outlook piece by Henry McVey, CIO of KKR’s balance sheet and head of global macro and asset allocation. In his latest insights piece, McVey delves into a key question on investors’ minds: Will the post-pandemic economy be the same as it ever was?
“While we are optimistic about the future, we believe the ‘once in a lifetime’ event that defined 2020 indicates it is not the time to adopt a ‘same as it ever was’ mentality. We enter the second half of 2021 increasingly confident that the portfolio that drives excess returns in the next decade will look much different than the past. To us, this means opportunity to invest today in what we think is the portfolio of tomorrow,” McVey said.
Key to McVey’s thinking, as outlined in the report, is that policy shifts across the globe – particularly a reliance on more government support across a number of issues – have shifted the skew from disinflation towards reflation. Against this backdrop, McVey’s message to investors is to get long pricing power and collateral-based cash flows.
Specifically, McVey and his team outline the following structural inputs that they believe will make this recovery much different than those experienced during the last four decades:
- There is a more accommodative approach to monetary policy, including Average Inflation Targeting (AIT) in the United States.
- Austerity is out and sustained global fiscal stimulus is in, with more of it going directly to consumers.
- More input cost pressures are being seen in already fragile supply chains, particularly as the Producer Price Index (PPI) rises above the Consumer Price Index (CPI). Labor shortages are also a part of this emerging conundrum.
- Lower real rates mean easier financial conditions for longer.
- The current global energy transition towards a cleaner environment is actually inflationary.
- There is now a record amount of savings to be spent earlier in the cycle.
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