GLOBAL MACRO TRENDS · 2019-06-20 · Brian C. Leung +1 (212) 763.9079 [email protected] Rebecca...

VOLUME 9.4 • JUNE 2019

Stick to the Plan

INSIGHTSGLOBAL MACRO TRENDS

2 KKR INSIGHTS: GLOBAL MACRO TRENDS

KKR GLOBAL MACRO & ASSET ALLOCATION TEAM

Henry H. McVey Head of Global Macro & Asset Allocation +1 (212) 519.1628 [email protected]

Frances B. Lim +61 (2) 8298.5553 [email protected]

David R. McNellis +1 (212) 519.1629 [email protected]

Aidan T. Corcoran +1 (353) 151.1045.1 [email protected]

Brian C. Leung +1 (212) 763.9079 [email protected]

Rebecca J. Ramsey +1 (212) 519.1631 [email protected]

Special thanks to Ken Mehlman, General (Ret) David Petraeus, Travers Garvin, Phil Kim, Kristopher Novell, Neil Brown, Paula Roberts, and Nishant Kachawa.

MAIN OFFICE

Kohlberg Kravis Roberts & Co. L.P.9 West 57th StreetSuite 4200New York, New York 10019+ 1 (212) 750.8300

COMPANY LOCATIONS

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© 2019 Kohlberg Kravis Roberts & Co. L.P. All Rights Reserved.

TABLE OF CONTENTS

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

SECTION I: MACRO BASICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11Economic Outlook, Including Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11United States Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15Europe Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17China Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18Mexico Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20Interest Rate Outlook. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22Equities: EPS/Valuation/Total Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25Where We Are in the Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30

SECTION II: KEY THEMES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33Corporate Carve-Outs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33Yearn for Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35Own Some Cash Flow Compounders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Buy Dislocation/Dispersions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40Experiences Over Things . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42

SECTION III: INVESTMENT CONSIDERATIONS/RISKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44Reliance on Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44Complex Geopolitical Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45Corporate Margins at Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

SECTION IV: CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48

3KKR INSIGHTS: GLOBAL MACRO TRENDS

Stick to the PlanWith all the geopolitical ‘noise’ swirling around these days, there is a growing propensity in the investment community to react quickly to near-term news flows, or even head to the sidelines until there is greater visibility. Our advice: stick to the plan. No doubt, overall portfolio risks are higher these days, but our work is telling us that there is still an attractive path forward for thoughtful investors who are willing to invest heavily behind big, large tail macro themes. Specifically, we want to own more cash-flowing assets linked to nominal GDP as part of our goal of frontloading as much yield as possible in the portfolio. This approach should help mitigate both concerns about late cycle behavior as well as aggressive central bank policies. We also favor owning more Opportunistic Credit and Special Situations, both strategies that have the flexibility to lean into dislocations. Finally, we feel compelled to embrace Complexity through a variety of investment disciplines, including Energy, Private Equity, Real Estate, and Infrastructure. If we are right about our worldview, then our existing asset allocation framework, which includes an investment process that we have developed over nearly two decades, should continue to serve us well amidst the recent spike in uncertainty. Said differently, if “it ain’t broke, don’t fix it.”

“ If it ain’t broke, don’t fix it.

”THOMAS BERT LANCE

DIRECTOR OF THE OFFICE OF MANAGEMENT AND BUDGET, 1977


Introduction

While I am not one hundred percent sure if Thomas Bert Lance, President Jimmy Carter’s Director of the Office of Management and Budget was the original creator of the quip “if it ain’t broke, don’t fix it”, I do find his 1977 public statement about government interven-tion to be the most relevant – and somewhat ironic – source of this iconic phrase. Almost eerily given present circumstances, Lance went on to explain, “That’s the trouble with government: Fixing things that aren’t broken and not fixing things that are broken.” Well, with public deficits ballooning, corporate debt levels surging, and geopo-litical tensions rising, one does have to wonder whether the United States – and for that matter, many of its peers – are doing enough to ‘fix’ those issues that now are plaguing both global GDP growth and capital markets stability.

EXHIBIT 1

The Combination of the Tax Cuts and the Recent Budget Deal Could Drive a Record Divergence Between the U.S. Budget Balance and the U.S. Unemployment Rate

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%0%

2%

4%

6%

8%

10%

12%'48 '58 '68 '78 '88 '98 '08 '18

Divergence Between Unemployment and the Budget Deficit

Unemployment Rate (LHS, inverted)Budget Balance % GDP (RHS)Budget Bal % GDP, Apr18 CBO Baseline (RHS)Budget Bal % GDP, Consensus (RHS)

Korean WarVietnam War

Data as at April 4, 2019. Source: Bloomberg.

EXHIBIT 2

As a Percentage of GDP, Budget Deficits Increase by 4.1%, on Average, During U.S. Recessions

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Dec-

69

Nov-

73

Jan-

80

Jul-8

1

Jul-9

0

Mar

-01

Dec-

07

Start of Recession

Change in Budget Deficit During Recessions

Average = 4.1%

Data as at December 31, 2018. Source: Monticello Associates, CBO, Haver Analytics.

Cutting through all the headline noise, we are of the mindset that globalization, or the notion that there is merit to the growing interde-pendence of the world’s economies, cultures, and populations, is under serious review – and potentially under attack. To many individuals with whom we speak, globalization just has not delivered the prosper-ity and harmony that they were told it would. Nominal GDP has decelerated, not accelerated, and with it, wealth concentration has intensified, not dissipated. As a result (and as we detail below), the reversal of globalization is now manifesting itself both in terms of shrinking cross border flows (Exhibit 4) and softening global trade as a percentage of GDP (Exhibit 106). Consistent with these trends, we are also seeing a fraying of traditional political structures, which is leading to more extreme representation by both the left and the right. These emerging headwinds are significant, as they potentially represent a structural break in the traditional world order that histo-rians will use to define the last 30 years. If we are right about where we are headed, then investors should brace for a period of lower absolute returns with both higher volatility and increasing disper-sions. Hence, the value of sound portfolio construction within each individual fund as well as across entire investment plans, including endowments, pensions, and family offices, has never been more important, we believe.

“ We are of the mindset that

globalization, or the notion that there is merit to the growing

interdependence of the world’s economies, cultures, and

populations, is under serious review—and potentially under

attack. ”


EXHIBIT 3

National Security Issues Are Now Being Bundled with Rule of Law and Trade Negotiations

TraditionalTrade

Ruleof Law

NationalSecurity

Data as at May 29, 2019. Source: KKR Global Macro & Asset Allocation analysis.

EXHIBIT 4

Cross-Border Capital Flow Trends, a Traditional Proxy for Globalization, Are Reversing as Protectionism Ramps Upwards

20%

25%

30%

35%

40%

45%

96 98 00 02 04 06 08 10 12 14 16 18 20

Global Cross Border Bank Lending as a % of GDP

-44% decline

Data as at May 31, 2019. Source: BofA Merrill Lynch, Bloomberg.

Meanwhile, from a purely tactical perspective, Lance’s phrase also resonates well with how KKR’s Global Macro, Balance Sheet, and Risk Analytics team (GBR) is feeling about its current asset allocation framework. Specifically, whereas we had increased risk exposure in early January and then dialed some of that very same exposure back in February after a roaring surge in risk assets, we now don’t feel compelled to dial back up our risks. As we detail below, we are structurally more cautious on the ‘trade war’ that is unfolding – and what that means for the traditional global world order – than some of the investors with whom we speak. Mexican trade issues appear headed in the right direction; however, when it comes to China, our

view is that emerging issues surrounding rule of law and national secu-rity have now become intertwined with more conventional trade issues.

In our humble opinion, this development is not a positive one, and as such, we are now using a target multiple that is lower than the historical median on the S&P 500 to compensate for some additional risk premium that we think is now required (see Section I). To be sure, central banks are now more dovish than what we thought in 2018, and we now have the Federal Reserve easing twice in our base case for 2019. As we show in Exhibit 52, an accommodative Federal Reserve is almost always a good thing for risk assets. However, this time may be slightly different, as current headwinds feel more structural in nature, including heightened potential for sustained dis-inflation as well as more permanence around trade-related tensions. Moreover, while this recovery has been long in duration, it has been short on synchronized momentum.

So, if we had to speculate today on tomorrow about this cycle, the majority of our team would posit that this one clearly will be remem-bered – depending on what region one evaluates – as a series of mini-economic, idiosyncratic cycles that are neither strong enough to drive up inflation and curtail investment excesses, nor weak enough to induce a more traditional recession on a global basis. That said, given the fundamental interlinkage of global supply chains that are now being challenged, there is a growing contingency on the team who are increasingly worried about a more synchronized downturn occurring in 2020. Regardless of exactly how things play out, our team is fully confident that a backdrop of uneven growth, coupled with periodic bouts of volatility, favors a global investment approach that can transition across capital structures to gauge relative value. It also benefits allocators with longer duration sources of funding that allows investors to avoid any forced selling at disadvantaged levels when they should actually be adding to risk assets.

We also want to underscore our existing macro view that we could be entering a period where the growth rate of nominal GDP and global profits are more aligned. There is even the potential that prof-its lag GDP growth in an economic downturn. In the past decade, by comparison, global profits have reached uncharted territory, driven by unprecedented central bank resolve, lower corporate taxes in the

“ The trend towards large corporate multinationals divesting non-core subsidiaries remains strongly in force. The complexity associated

with these transactions is substantial, but carve-outs often

have the potential to unlock significant value, particularly as it

relates to cash flow generation. ”


United States, robust buybacks, and vigorous cost take-outs. More-over, with U.S. margins now at record levels, we think that the profit gap that has existed between the U.S. and the rest of the world could also converge (Exhibit 6).

EXHIBIT 5

U.S. Corporate Profit Growth and Nominal GDP Are Becoming More Aligned…

3Q871.4

3Q900.3

3Q972.4

4Q01-0.2

3Q063.1

4Q08-0.5

4Q134.5

4Q180.6

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1Q55

4Q58

3Q62

2Q66

1Q70

4Q73

3Q77

2Q81

1Q85

4Q88

3Q92

2Q96

1Q00

4Q03

3Q07

2Q11

1Q15

Ratio of U.S. Corporate Profits Growthto U.S. Nominal GDP Growth (5-Year CAGRs, Rolling)

Data as at December 31, 2018. Source: U.S. Bureau of Economic Analysis, Haver Analytics.

EXHIBIT 6

...As the Profit Gap Between the U.S. and the Rest of the World Begins to Finally Converge

72.7%

-28.1%

17.6%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Change in Trailing 12-Month EPS Since 2007 Peak

MSCI US MSCI EuropeMSCI Asia Pacific xJ

Data as at March 31, 2019. Source: KKR Global Macro & Asset Allocation analysis.

So, what is our call to arms for the second half of 2019 and beyond? See below for full details, but our key messages are as follows:

We remain bullish on deconglomeratization, or carve-outs. In addi-tion to what we see occurring in the United States, recent trips to To-kyo and London lead us to believe that the trend towards large corpo-rate multinationals divesting non-core subsidiaries remains strongly in force. Recent divestiture announcements out of Hitachi, Nestle, General Electric, Bayer, and Walt Disney only add to our optimism. From what we can tell, a combination of sagging returns on capital, increased shareholder activism, and intensifying local competition all suggest that more activity is in store, which we view positively for Private Equity managers. Key to our thinking is that the complex-ity associated with these transactions is substantial, but carve-outs often have the potential to unlock significant value, particularly as it relates to cash flow generation. In addition to the sizeable opportu-nity we are seeing in Private Equity for global corporate carve-outs, we are also observing similar compelling trends across Energy Real Assets and Infrastructure, particularly in the area of optical fiber. Importantly, we like the opportunity set for this theme not only on the equity side but also on the debt side.

The ‘Yearn for Yield’ underscores the structural reinvestment risk that we think has emerged for income-oriented investors. From our perch at KKR, we see reinvestment risk as one of the greatest chal-lenges that CIOs now face. Importantly, this risk is coming during a period that we have identified as The Uncomfortable Truth, which we define as record low interest rates amidst bulging deficits and soar-ing debt loads. Our advice is to own more cash-flowing assets linked to nominal GDP, build more flexibility across mandates, and shorten duration where appropriate. Importantly, despite our view that infla-tion will remain low in the medium term, we respect that the ‘Au-thorities’ are trying to shrink existing debt loads by holding nominal interest rates below nominal GDP. As such, we believe strongly that an overweight to modestly leveraged Infrastructure and certain Real Estate investments with yield is prudent to add some ballast to one’s portfolio. We are also quite constructive on Asset-Based Finance, which continues to provide us with lots of shorter duration opportu-nities with good cash flowing characteristics and sound collateral.

Lean into periodic dislocations and growing dispersions. As we show later in Exhibit 92, our implied default indicator has spiked to recessionary levels multiple times in recent years, despite the reality that we have not technically had a recession. We view these false readings as compelling because it confirms our thesis that the capital markets are giving investors multiple opportunities to lean into dislo-cation to buy mispriced assets. Given inadequate dealer inventories, rising geopolitical tensions, and slowing liquidity growth, we believe that the frequency of these occurrences is likely to increase, not decrease, in the coming quarters. Meanwhile, as we detail below (Ex-hibits 96 and 97) our research shows that dispersions across many equity and debt markets are starting to increase again – a backdrop that we believe allows investors to buy attractive cash-flowing assets at reasonable valuations at this late point in the capital markets cycle. At the moment, we are playing this macro theme through our Oppor-tunistic Credit and Distressed/Special Situations allocations, but we do believe it is constructive for Equity Hedge Fund managers as well.

https://www.kkr.com/global-perspectives/publications/uncomfortable-truth


Own some secular growth stories that are ‘Cash Flow Compound-ers’ amidst slowing nominal GDP. With China’s nominal GDP falling from 36.0% year-over-year growth in 1994 to a low of 6.7% in 2016, overall global nominal GDP growth has suffered mightily. This decline makes sense to us, as China typically accounts for one third of total global growth these days. As we look ahead, we are still not expect-ing any rebound soon, as the OECD projects that China’s nominal growth will fall further towards just 5.9% by 2030.

Meanwhile, though GDP and corporate profits are not 100% correlat-ed, they are linked, and the GDP slowdown is having an impact on the ability for companies to grow. All told, the percentage of companies in the MSCI All Country World that are poised to grow eight percent or more has fallen sharply to 23% in 2018 from more than 40% dur-ing the 2000 – 2001 period. Beyond just China, we also link some of the slowdown to the massive impact disruptive technology has had in almost every industry. In fact, according to investment bank Goldman Sachs, global earnings excluding technology have not grown in abso-lute terms since the Global Financial Crisis (GFC). In terms of where to invest behind our favorable outlook on secular growth stories, we currently favor several regional themes over global ones, including U.S. business services, European logistics, Asian travel, and U.S. au-tomation. Importantly, we feel strongly that the Public Equity markets are actually trading well below the Private Growth markets in many parts of the world, especially in China. Regardless of whether they are in the Public or Private Markets, we tilt heavily in favor of compa-nies that have established cash flowing business models where there are identified economies of scale that result in significant improvement in cash flow yields. By comparison, we are quite cautious on companies that cannot generate positive cash flow, and we look for their cost of capital to rise meaningfully into 2020.

In terms of what this all means for our asset allocation positions, we note the following:

We are lowering our U.S. Short Duration Government Bond bet to five percent from seven percent. We still like this investment idea, but two-year U.S. yields have fallen from a high of 2.61% in January to 1.93% currently1. So, some of the easy money has been made. Overall, though, we still retain an outsized position because, when we look around the world, U.S. two-year Treasuries offer a current coupon that – apart from China two-year bonds – dwarfs almost any other sovereign debt that we can find (regardless of duration).

Our Opportunistic Credit bet increases by another 100 basis points to eight hundred basis points, compared to a benchmark of zero. This bet remains an outsized one for us, but we are convinced that more – not less – flexibility is required to be effective in the Liquid Credit market these days. In particular, we want to have the ability to toggle amongst Levered Loans, High Yield, and Structured Products. We are currently tilted more towards Levered Loans in our Opportunistic Credit portfolio. However, we might actually increase this exposure further, given that Levered Loans have lagged High Yield of late. Also, as we detail below, we are seeing dispersions start to widen across sectors and between securities within a sector, both trends which could provide tailwinds to Opportunistic Credit managers.

1 Data as at June 13, 2019. Source: Bloomberg.

We are raising our Cash allocation to three percent from two percent. We had added one percent to Cash when we took the money off the table in Public Equities in February 2019 (see Insights: Another Swing at the Plate). However, given the unsettled backdrop of late, we think that having even a little more extra dry powder makes sense these days. Where might we use it in a dislocation in the second half of the year? We likely would add to Special Situations/Distressed, a position we have been building incrementally over the last 12-18 months. We might also start to put some money back into Private Growth investments, an area where we currently hold a substantial underweight. The reality is that valuations in the Private Growth area got stretched, but they are finally starting to adjust meaningfully, an emerging opportunity for investors who have been patient in this area.

We reiterate our Overweight positions in Traditional Private Equity (300 basis points overweight), Distressed/Special Situations (400 basis points overweight), Asset-Based Finance (600 basis points), and Energy/Infra-structure (500 basis points overweight). As these positions indicate, we think that the value of the illiquidity premium is higher later in the cycle. One can see this in Exhibits 7 and 8. We also want to signal that we are adopting more of a later cycle playbook by targeting overweight positions in Distressed/Special Situations as well as strategies linked to collateral and nominal GDP like Asset-Based Finance and Energy/Infrastructure.

EXHIBIT 7

Private Equity Typically Outperforms Over the Cycle Relative to Public Equities. However, the Majority of the Alpha Comes When Capital Markets Conditions Are Not So Ebullient

10.211.6

6.3

-7.5

< 0% 0-10% 10-20% > 20%

S&P 500 Total Return

U.S. Private Equity Average Relative Returns inVarious Market Environments, %

Note: Private Equity returns as per Cambridge Associates. Data based on annual returns from 1989-2016. Source: Cambridge Associates, Bloomberg, KKR Global Macro & Asset Allocation analysis.

https://www.kkr.com/global-perspectives/publications/another-swing-at-the-plate



EXHIBIT 8

The Illiquidity Premium in Private Credit Has Actually Grown in Importance Since 2016 Relative to Publicly Traded Levered Loans and High Yield

55.3%

12.0%

1.5%

58.1%

46.9%

93.3%

78.5%79.9%

60.1%58.8%

94.1%101.2%

34.9%

6.2% 6.5%

86.2%

67.2%60.0%

52.9%

68.1%

53.5%

44.7%

56.9%59.5%

0%

20%

40%

60%

80%

100%

120%

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Illiquidity Premium as a Proportion of Yield, %

Traded High Yield Traded Leverage Loans

Data as at December 31, 2018. Source: Ares Capital, Bloomberg.

We reiterate our Underweight positions in Long Duration Global Sover-eign debt (2000 basis points), High Grade Debt (500 basis points), and Latin American Public Equities (200 basis points). As our allocation preferences indicate, we think that there is better value in the short-end of the U.S. Treasury curve (e.g. 2-Year notes) relative to the long end of the curve. Also, given that we hold approximately 30-40% of our total allocation in some form of private securities that hopefully capture the value of an illiquidity premium, we think our ‘barbell’ ap-proach, which includes both overweight positions in Cash and shorter duration U.S. government bonds, makes a lot of sense. Meanwhile, within global Public Equities, we still tilt away from Argentina and Mexico relative to Asian Equities. Brazil is certainly improving off a low base (and has done better than its regional peers on a 12-month basis), but we see its recovery this year as more cyclical than secu-lar. Corruption headwinds, complex taxation, and high unemployment are all still issues that make us somewhat guarded about the country.

EXHIBIT 9

KKR GMAA Target Asset Allocation

ASSET CLASS

KKR GMAA JUN-19

TARGET (%)

STRATEGY BENCHMARK

(%)

KKR GMAA FEB-19

TARGET (%)

Public Equities 53 53 53

U.S. 20 20 20

Europe 15 15 15

Turkey -1 0 -1

All Asia ex-Japan 10 7 10

Japan 5 5 5

Latin America 4 6 4

Total Fixed Income 23 30 24

Long Duration Gov’t 0 20 0

U.S. Short Duration 5 0 7

Asset-Based Finance 6 0 6

High Yield 0 5 0

Levered Loans 0 0 0

High Grade 0 5 0

Emerging Market Debt 0 0 0

Opportunistic Credit 8 0 7

Global Direct Lending 0 0 0

Real Estate Cr (B-piece) 2 0 2

Stabilized Credit 2 0 2

Real Assets 9 5 9

Opportunistic Real Estate 2 2 2

Energy / Infrastructure 7 2 7

Gold 0 1 0

Grains (Corn) 0 0 0

Other Alternatives 12 10 12

Traditional PE 8 5 8

Distressed / Special Sit 4 0 4

Growth Capital / VC 0 5 0

Cash 3 2 2


Looking at the big picture, our view is that we may be “stuck” in a trading range. On the one hand, interest rates remain low, particu-larly relative to cash flows, and this arbitrage should prevent any long sustained, 2007-like downturn in risk assets (Exhibit 11).

“ We also want to underscore our

existing macro view that we could be entering a period where the

growth rate of nominal GDP and global profits are more aligned.

”


EXHIBIT 10

The Earnings Yield Arbitrage Relative to the Risk-Free Rate Is Still Positive in the U.S., But It Has Narrowed Meaningfully in Recent Years

3.3%

Avg: 4.0%

-3%

-1%

1%

3%

5%

7%

9%

'98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20

Differential: 12-Month Earnings Yield Less Fed Funds Rate

Data as at May 20, 2019. Source: Bloomberg.

EXHIBIT 11

Our Equity Risk Premium Model Indicates That We Are Headed Towards a Lower Return Environment for U.S. Equities

-30%

-20%

-10%

0%

10%

20%

30%

40%

Jan-

95

Oct-

96

Jul-9

8

Apr-

00

Jan-

02

Oct-

03

Jul-0

5

Apr-

07

Jan-

09

Oct-

10

Jul-1

2

Apr-

14

Jan-

16

Oct-

17

S&P 500 Expected Returns

Expected Excess Returns Over CashForward Two Year Realized Excess Returns Over Cash

Correlation: 60%


On the other hand, corporate margins are high, valuations are gener-ally full, and earnings power is slowing. Importantly, these headwinds are intensifying at a time when global trade tensions now definitely require a higher risk premium, we believe. As we describe in greater detail below, we are more focused on the long-term impact of trade on capital expenditures – not just the direct hit to the consumer segment of the economy. Indeed, many of the sell-side and media reports we have read are likely underestimating the magnitude of the capex hit to GDP. Our quick math is that a 10% reduction in capex linked to CEO reticence is on par or greater than all direct tariff drags combined (Exhibit 26).

Against this macroeconomic backdrop, we generally like our posi-tioning, and as such, we still feel inclined to stick with many of the themes we laid out in January. Said differently, “If it ain’t broke, don’t fix it.” Simply stated, we feel confident in our long-term macro themes, and as such, we think the potential for continued outperfor-mance in our portfolio during the second half of 2019 remains signifi-cant. Key to our thinking is that we want to allocate capital towards ideas being awarded a significant complexity discount, particularly relative to underlying cash flows. Our deconglomeratization thesis is clearly a play on this mindset, but as we detail below, we think that that there are other significant opportunities where cash flow is at-tractively priced – and with some downside protection – in the debt markets too. In particular, we strongly favor Asset-Based Finance, B-piece Real Estate Credit and Infrastructure assets linked to nominal GDP, particularly those with yield. Without question, at this point in the cycle we want to own assets with collateral that are long fiscal initiatives over monetary ones. Finally, given our view that we are now in a structurally slower nominal GDP environment (Exhibit 46), we think that owning some early stage secular winners in the Public Equity markets also makes sense.

If we are wrong in our outlook, we think that it will be because growth trends become worse than the more modest slowdown that we are forecasting. However, as we detail below, we think that a strong consumer savings pool and an accommodative Fed should bolster our base case relative to something more extreme. There is also the risk that economic growth could rebound faster than expected if President Trump does ultimately secure an attractive trade deal, despite the Fed having already eased meaningfully. In this scenario central bankers would have to move more quickly than the consensus is now forecasting. However, given our view that infla-tion remains challenged and the government’s stimulus will start to dissipate in the second half of the year, we think the potential for an upside surprise in growth during the next six to 12 months is much more unlikely.


KEY CALLS IN OUR MID-YEAR 2019 UPDATE

• We now expect the Fed to cut rates by 50 basis points in the second half of 2019, starting in July or September. Previ-ously, we had no cuts in our Fed outlook for 2019

• If our ‘mild recession’ base case comes to pass in 2020, we would expect another 100-150 basis points of cuts next year, leaving rates hovering just above zero

• Importantly, however, our dovish Fed outlook does not translate into sharply lower expectations for the long-end of the curve. Specifically, our fair value model points to 10-Year yields trading in a 2.0-2.5% range in the second half of 2019 (year-end target = 2.25%), which implies no significant change relative to current levels

• We use a 16.3x multiple for the S&P 500 heading into 2020, compared to a historical median of 17.0x for today’s low real rate environment. We think that peaking corporate margins and heightened trade tensions largely keeps the market “stuck” in a trading range through year-end 2020 (with the S&P 500 returning four to 11% during this period.) The good news for alpha generation is that dispersions are widening, as the massive tailwind from Quantitative Easing (QE) dissipates

• We are bullish on our five key macro themes: Deconglomera-tization, Yearn for Yield, Lean Into Complexity/Dislocation, Own Some Cash Flowing Secular Growth, and Experiences over Things

• As we detail below, the underlying dependence on Technol-ogy for the global economy/capital markets is likely underap-preciated. All told, nearly 100% of global profits this cycle are – to date - linked to the Technology sector

Finally, as we describe below in Section III (Investment Consider-ations/Risks), overall activity in the Technology sector is becoming somewhat outsized, we believe. All told, Technology is now driving 100% of global earnings growth, and it is accounting for nearly 40% of lease up in certain areas of the Real Estate market. Meanwhile, new issuance in the Credit markets is skewing heavily towards le-vered transactions in the Software arena. So if the Technology sector were to stumble for any reason (including increased regulation), the knock-on effect on the global economy could be profound. At the mo-ment, we do not expect a major crack in the digital economy, but we do believe that the recent underperformance of several high profile technology IPOs underscores our point that private investors have already begun to overpay for cash flows – many of which we think may not materialize as robustly as the consensus now thinks.

EXHIBIT 12

We Favor Upfront Yield, Collateral and Mandate Flexibility as We Enter a New Phase of This Cycle

-25-20-15-10-505

10

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Hig

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Real

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Stab

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Publ

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KKR GMAA Target Asset Allocation, % Over / Under Weight


“ At a much broader and higher level, we think that a structural

divide between the U.S. and China is likely to continue. As part of this new reality, China’s government is going to move to internalize its economy as fast as

it possibly can. ”


SECTION I: Macro Basics

Economic Outlook, Including Trade

“I want 5G, and even 6G, technology in the United States as soon as possible. It is far more powerful, faster, and smarter than the current standard. American companies must step up their efforts, or get left be-hind. There is no reason that we should be lagging behind on...something that is so obviously the future. I want the United States to win through competition, not by blocking out currently more advanced technologies. We must always be the leader in everything we do, especially when it comes to the very exciting world of technology!” Donald J. Trump, February 21, 2019

EXHIBIT 13

EM Countries Are Expected to Account for More than Three-Quarters of Total Global Growth in 2019

+1.2

+1.4

+0.4+0.4 +3.3

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

China OtherEmergingMarkets

US Other World

2019 Real Global GDP Growth, %

Other Emerging Markets make up another 42% of growth in 2019

U.S. makes up 11%

China alone makes up 36% of growth in 2019

Data as at April 9, 2019. Source: IMFWEO, Haver Analytics.

EXHIBIT 14

We Are Generally More Cautious on Global Growth and Inflation in 2019

2019 GROWTH & INFLATION BASE CASE ESTIMATES

GMAA Target Real GDP Growth

Bloomberg Consensus Real GDP Growth

KKR GMAA Target Inflation

Bloomberg Consensus Inflation

U.S. 2.4% 2.6% 1.8% 1.9%

Euro Area 1.2% 1.2% 1.5% 1.3%

China 6.2% 6.3% 2.3% 2.2%

Mexico 1.2% 1.4% 4.0% 3.9%

GDP = Gross Domestic Product. Bloomberg consensus estimates as at June 6, 2019. Source: KKR Global Macro & Asset Allocation analysis.

In the following section we update our global GDP forecast by region, including the United States, Europe, China, and Mexico. One can see a snapshot of our overall conclusions in Exhibit 14. While we are upgrading our U.S. forecast slightly at the headline level, the quality of the GDP growth has deteriorated. Moreover, U.S. growth is clearly decelerating. Meanwhile, we remain cautious on growth in Europe and Mexico, both regions that continue to struggle with tough political crosscurrents as well as uneven fixed asset investment. Finally, we retain our below consensus forecast for GDP for China.

While we still feel confident in our economic frameworks, we do want to highlight that trade tensions make forecasting visibility more clouded than usual. We think that President Trump maintains his re-cent decision to raise the tariff rate to 25% from 10% on the existing U.S. $200 billion of goods through the end of at least 2019, and we now think that there is a greater than 50% chance that he imposes the additional $325 billion in tariffs. This step-up in the $325 billion in tariffs represents a change in our thinking since February. As we show in Exhibits 15 and 16, respectively, implementing the final set of tariffs would affect not only key consumer goods like smart phones, but it would also tariff goods where there are fewer options to switch production outside of China. Over time, this ‘new’ reality will surely accelerate the shift of supply chains in many areas to other lower cost Asian producers like Vietnam, Thailand, and Malaysia.

EXHIBIT 15

Successive Rounds of U.S. Tariffs on China Will Increasingly Hit Goods with Fewer Sourcing Alternatives

22%

51%

68%

1st Round (25%Tariffs on $50

Billion of Goods)

2nd Round (10%Tariffs on $200Billion of Goods)

Items Not YetTariffed (~$325Billion of Goods)

Average % of U.S Imports Sourced from China

Data as at May 31, 2019. Source: U.S. International Trade Commission Dataweb, Haver Analytics, KKR Global Macro & Asset Allocation analysis.


EXHIBIT 16

The Final $325 Billion Includes Some Very Important Consumer Products

BRIEF DESCRIPTION 2017 U.S. TRADE IMPORTS FROM CHINA, US$ BILLION)

Mobile phones 45

Laptop computers 37

Toys (other than bicycles, puzzles, models) 12

Video game consoles and machines 5

Computer monitors 4

Solid state HDDs 4

Flat Panel TVs over 34.29 cm 4

Multifunction office machines 2

Knitted cotton apparel 2

National Flags 2

Data as at July 11, 2018. Source: U.S. International Trade Commission Dataweb, Haver Analytics. KKR Global Macro & Asset Allocation analysis.

EXHIBIT 17

U.S. Firms Generate a Significant Amount of Revenues by Selling Into China. We Feel Strongly This Reality Has Been Underappreciated

Goodsthroughtrade*

Goodsthrough

subsidiaries

Servicesimports

Servicesthrough

subsidiaries

US SurplusWith China

2017: U.S. Surplus (Deficit) with China, US$ Billions(China Sold to U.S. Less U.S. Sold to China)

President Trump's only focus

Key risk if China goes after U.S. businesses in China

-284

207

3859

20

*China goods sold to U.S. from China net of goods sold from non-Chinese affiliates operating in China. Likewise, U.S. goods sold to China is net of goods sold to China by other countries’ affiliates operating in the U.S. Data as at June 11, 2018. Source: Deutsche Bank, China Macro: U.S. Economic Balances With Partners.

EXHIBIT 18

Europe Is Likely the Most Exposed to Global Trade Tensions, Given Its High Percentage of Exports

39%33%

12%

46%

20%

12%

EU China U.S.

Gross Exports as a % of GDP

2008 2018

Data as at April 26, 2019. Source: Eurostat; Bureau of Economic Analysis; State Administration of Foreign Exchange (China) and China National Bureau of Statistics.

At a much broader and higher level, we think that a structural divide between the U.S. and China is likely to continue. As part of this new reality, China’s government is going to move to internalize its economy as fast as it possibly can. Already, exports as a percentage of GDP have been shrunk to 18% of GDP, compared to 36% in 2007 (Exhibit 19). For perspective, U.S. exports as a percentage of GDP are 12% and Europe’s are 46%. Indeed, after 24 years of traveling to China, my conclusion after my most recent trip is some structural damage has been done to the U.S.-China relationship. As such, it is caveat emptor on both sides of the world.

There are several layers of disappointment and/or concern amongst both parties to consider. First, many U.S. CEOs in China are disap-pointed that President Xi’s original economic reform plan from 2013 has actually not progressed as much as they might have hoped for. In fact, the percentage of U.S. CEOs in China who were optimistic about business conditions recently dropped to 38% from 45%, accord-ing to the 2018 U.S. China Business Council Survey we track. Not surprisingly, this sentiment is adversely affecting their commitment to maintain such a large presence in China, despite the total address-able market (TAM) being huge in most areas.

Second, Chinese CEOs view the ZTE and Huawei incidents as game changers. Somewhat perversely, these two crackdowns in the West have created an accelerated rush in China to become less dependent on foreign manufacturers, particularly those in the U.S., as the Chi-nese move even more quickly to internalize as much of their supply chain as possible. While this internalization may create greater self-reliance, this shift could actually lead to higher inflation, less cross-border flows, and potentially lower profits over time, we believe.

Third, as the Chinese government creates more favorable operating environments for local champions to gain market share, U.S. com-panies in China are being forced to invest more in capex to remain competitive. For those U.S. firms operating in China that redeploy


even more into capital expenditures and research and development in order to maintain their lead over local players, the outlook for their business and profits could diminish quite quickly, in our view.

EXHIBIT 19

Importantly, Trade Is Becoming a Smaller Part of China’s Economy

Feb-07, 35.6

Jun-1818.0

Sep-0629.2

Jun-1815.112

16

20

24

28

32

36

40

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

China: LTM Trade as a % of GDP

LTM Exports % GDP LTM Imports % GDP

Global trade is a smallerpart of China's economy

Data as at June 30, 2018. Source: China Customs, Haver Analytics.

EXHIBIT 20

China Continues to Rebalance Its Economy Towards Higher Value Added Goods and Services. Ultimately, We View This Migration as Deflationary

May-1957.5

May-1931.2

30

35

40

45

50

55

60

02 04 06 08 10 12 14 16 18

China % of Total Exports, 12mma

Ordinary Trade (Higher Value Add)

Reexports (Lower Value Add)

Re-exports are now less thana third of exports

Data as at May 31, 2019. Source: China Customs, Haver Analytics.

EXHIBIT 21

China’s Share of Global Mobile Phone Manufacturing Is Rising …

Samsung

Apple

ChineseBrands

Nokia

Other

0

200

400

600

800

1000

1200

1400

1600

07 08 09 10 11 12 13 14 15 16 17 18

Global Smartphone Shipments, Units, Millions

Blackberry

China makes and sells moresmartphones than Apple andSamsung combined

Data as at March 19, 2019. Chinese brands include Xiaomi, Huawei, ZTE, OPPO, Vivo, Lenovo (HK-based), Coolpad, Gionee, Hisense and K-Touch. Source: Morgan Stanley Global Smartphone Model.

EXHIBIT 22

…However, It Is Still Not the Owner of Critical Upstream Technology. Looking Ahead, However, We Expect This to Change

USA, 45%

Korea, 24%

Japan, 9%

Europe, 9%

Taiwan,6%

China, 5% Others, 2%

Global Semiconductor Industry:Market Share By Production, 2018

Data as at May 21, 2019. Source: 2019 Semiconductor Industry Association Factbook, WSTS, IHS Global, PwC.

“ Against this macroeconomic

backdrop, we generally like our positioning, and are largely

inclined to stick with many of the themes we laid out in January.

”


Our bottom line: Investors should make no mistake about where we are headed, given how intertwined the two countries are. Simply stated, we think that a modern day ‘cold war’ of sorts has emerged between China and the United States. Consistent with this view, we think that we are at an inflection point for global supply chains, particularly those that rely on proprietary technology. Just consider that out of $70 billion Huawei spent buying components in 2018, some $11 billion in Huawei allocations went to U.S. firms including Qualcomm, Flextronics, and Broadcom. One can see some of this de-pendence in Exhibit 23. Without question, these relationships are now all in play in a world where it appears U.S. national security concerns have trumped more traditional trade priorities.

Beyond the aforementioned trade issues surrounding technology, we would not be surprised to see Taiwan become a tension point again. The U.S. election in 2020 – and all the hype that will lead up to it – also remains a wild card. Finally, the hope of any accelerated SOE reform or privatization now appears more challenging, as by controlling its SOEs, the government is in charge of the lion’s share of employment opportunities across China.

EXHIBIT 23

Huawei’s Supply Chain Is Quite Global, Including a Heavy Dependence on the U.S.

9.0

4.33.9 3.6 3.5

3.4 3.4 3.0 2.8 2.711%13%

8%

23%

11%

5% 5% 6% 5%

22%

0%

5%

10%

15%

20%

25%

0

2

4

6

8

10

FoxconnIndustrialInternet(China)

BYD(China)

TSMC(Taiwan)

Q-Film(China)

FIH Mobile(China)

Flex(U.S.)

SK Hyrix(S. Korea)

Broadcom(U.S.)

Qualcomm(U.S.)

Sunny Optical(China)

Huawei Top Suppliers

Huawei Top Suppliers by Revenue, Yuan Billions Revenue Exposure Huawei, %

Data as at March 31, 2019. Source: Goldman Sachs, The Economist.

EXHIBIT 24

China and the U.S. Are Benchmarking Themselves Across Many Key Growth Areas of the Global Economy

0.45

40

U.S. China

Mobile Payments Volume,2018, US$ Trillions

31

39

U.S. China

Orbital RocketLaunches, 2018

377

1447

U.S. China

Science & EngineeringGraduates, 2014, Thousands

607

1382

U.S. China

Patent Applications, 2017,Thousands

Data as at latest available. Source: PBoC China Payment System Development Report, Forrester, Federal Aviation Administration (FAA), Blue Book of China Aerospace Science and Technology (CAST), First University Degrees from the National Science Board: Chapter 2 Higher Education in Science and Engineering, World Intellectual Property Organization database.


United States

We must stop being so passive. For ten years now, U.S. policymakers have done very little as China pursued policies that have resulted in an enormous trade imbalance. This approach has not worked, and it is past time for the U.S. government to become more aggressive.

Robert E. Lighthizer, Testimony before the U.S. China Eco-nomic and Security Review Commission: Evaluating China’s Role in the World Trade Organization Over the Past Decade, June 9, 2010.

As we indicated in our January outlook piece, we are still forecast-ing a deceleration in GDP in 2019, albeit it is likely now more modest in aggregate after the upside surprise to first quarter 2019 GDP. To this end, my colleague David McNellis is raising his U.S. 2019 GDP estimate to 2.4% from 2.25% previously. Importantly, though, on a bottom‐up basis, note that our 2019 GDP upgrade is rather ‘low qual-ity’ in nature, as inventories drive most of the upside.

Maybe more importantly, though, than focusing on a point estimate of GDP, is the progression of GDP trends. To this end, we have tried to create an easy to understand ‘roadmap’ that investors can follow. One can see this in Exhibit 25, which we think is a compel-ling ‘dashboard’ that can be used to outline how we suggest thinking about the potential U.S. economic effects from the tariffs, including China Rounds 1-4, as well as the potential auto tariffs. Bottom line is that all the measures in total are a GDP drag of approximately 80 basis points in 2020 (hence why we are not pushing out our poten-

tial 2020 recession call; see Where Are We in the Cycle starting on page 30 for further details), while we think another 40 basis points could manifest in 2019.

Importantly, if President Trump does add on the next $325 billion in tariffs as we now expect, we think that it could have a quite meaning-ful impact not only on growth (i.e., a 40-50 basis point hit in 2020) but also inflation (the inflation drag would increase to 80 basis points annually). The delta between the 0.5% hit to GDP and 0.8% pres-sure on CPI is due to CPI’s focus on consumer items, which is where ‘Round 4’ of tariffs hits hardest.

While the consumer impact is not to be underestimated, we actually are spending more time on what trade headlines mean for CEO con-fidence and ultimately growth. Simply stated, the capex impact from tariffs is the biggest ‘X-factor’ out there, we believe – something we think is being notably understated and not fully appreciated in sell-side forecasts. Specifically, Wall Street estimates generally do not assume any headwind to corporate capex from tariff-related uncer-tainty (e.g., exectives are now unsure whether to invest incremental capital into the U.S., Mexico, China, Vietnam, etc., so better to wait until we have more clarity). Exhibit 26 underscores our point that the risk to a capex slowdown could be substantial. To date, the evidence so far is that capex has moderated a bit due to tariffs, but not col-lapsed (Exhibit 27). As such, we will all need to watch that capex momentum does not erode more meaningfully in 2020 than the 2.2% year-over- year growth we are forecasting for 2019.

EXHIBIT 25

To Date, Proposed Tariff Measures Represent an Aggregate Potential U.S. GDP Headwind of 1.25%, of Which We Think Approximately 0.4% Could Manifest in 2019. In 2020, However, the Drag From Tariffs Could Reach 80 Basis Points

IMPLEMENTED, ANNOUNCED, OR THREATENED AS OF MAY 2019?

TOTAL DIRECT POTENTIAL GDP EFFECT

2019E POTENTIAL IMPACT

2020E POTENTIAL IMPACT COMMENT

China Round 1: $50 billion Tariffs @ 25% Implemented -0.10% -0.07% 0.00% Partial impact already

felt in 2018

China Round 2: $200 billion Tariffs @ 10% Implemented -0.10% -0.09% 0.00% Partial impact already

felt in 2018

China Round 3: Prior $200 billion to 25% Implemented -0.20% -0.09% -0.13% Impacts from mid-May

onwards

China Round 4: $325 billion Tariffs @ 25% Announced -0.50% -0.11% -0.44%

Assumes 2H19 imple-mentation, and some partial offset from pre-buying

Autos: 25% Auto & Auto Part Tariffs on Europe and Japan

Threatened -0.25% -0.03% -0.23%

On May 15th, President Trump announced a 6mo delay to his decision

TOTAL -1.25% -0.38% -0.79%

Data as at June 7, 2019. Source: KKR Global Macro & Asset Allocation estimates, Bureau of Economic Analysis, Census Bureau, Office of the U.S. Trade Representative, Haver Analytics.


EXHIBIT 26

Capex Deferrals Due to Tariff Uncertainty Remain the Most Important ‘X-Factor’ in Our Outlook

1.0%

1.4%

+0.1%+0.1%

+0.2%

+0.5%

+0.25% +1.25%

Round 1: $50bnChina Tariffs @

25% Rate

Round 2: Additional$200bn @ 10%

Rate

Round 3: Prior$200bn raised to

25% Rate

Round 4: Additional$325bn @ 25%

Rate

Ttl China Tariff,Potential

ConsumptionImpact

Potential Tariff onAuto & Parts fromEurope and Japan

@ 25% Rate

Ttl PotentialChina+Auto Tariff

ConsumptionImpact

10% Deferral ofU.S. Business

InvestmentSpending

Approximate Cumulative Potential Tariff Impacts as a % of U.S. GDP

Deferral of business investment due totariff-related uncertainty could present agreater obstacle to growth than the combinedeffects of all the proposed direct tariffs

Measures Already Taken

Data as at May 16, 2019. Source: KKR Global Macro & Allocation estimates, Bureau of Economic Analysis, Census Bureau, Office of the U.S. Trade Representative, Haver Analytics.

Looking at the bigger picture (and again consistent with our view that President Trump will implement the next $325 billion in tar-iffs), we remain on the hawkish side of the trade debate. To be sure, there may ultimately be some opening up of Chinese markets to buy more goods such as soybeans, but rule of law issues are likely to remain problematic between the two countries. Moreover, Trump has allowed national security issues to bleed into the current trade nego-tiations, a political move that we think has longer-term implications than many investors currently appreciate. Said differently, even if the current impasse on trade is resolved, there will not be an easy fix on the race for global technological dominance.

Hence, we view this latest salvo in the U.S.-China trade war as one that has – over time – serious implications for global supply chains and capital allocation. Our view is that China will escalate the already rapid pace of development and acquisition of high value added indus-tries, particularly as the latest moves by President Trump could likely foster distrust in regard to global supply chains, especially around the reliance of foreign markets for needed technology. Businesses, particularly those in technology related industries, will be looking to develop supply chains in other locales such as Vietnam, the Philip-pines and Thailand to circumvent U.S.-China trade concerns. If we are right, then we should expect lower global growth than in the past and likely a structural peak in corporate profitability.

EXHIBIT 27

To Date, the Evidence Suggests Tariff Uncertainty Has Slowed – But Not Collapsed – U.S. Investment Trends

6.3%

3.4%

1.7%

4.8%5.3%

2.2%

2014 2015 2016 2017 2018 2019e

Growth in U.S. Real Fixed Investment Spending, %

Data as at June 7, 2019. Source: Bureau of Economic Analysis, Haver Analytics, KKR Global Macro & Asset Allocation estimates.

“ Simply stated, the capex impact

from tariffs is the biggest ‘X-factor’ out there, we believe.

”


EXHIBIT 28

Growth in Personal Consumption Expenditures Remains, to Date, Quite Steady

2.9%

3.7%

2.7%2.5% 2.6%

2.3%

2014 2015 2016 2017 2018 2019e

Growth in U.S. Real PCE, %

Data as at June 7, 2019. Source: Bureau of Economic Analysis, Haver Analytics, KKR Global Macro & Asset Allocation estimates.

Europe

My colleague Aidan Corcoran continues to hold steady his 2019 Eurozone Real GDP forecast of 1.2%, unchanged from his February update in Another Swing at the Plate. One can see this in Exhibit 29. Importantly, the key driver of the model remains an outsized positive influence from central bank intervention. In fact, it generates greater than two thirds of the positive uplift in the quantitative model that Aidan has been using for quite some time.

EXHIBIT 29

We Are Maintaining Our 2019 Eurozone Real GDP Growth Forecast of 1.2%

-6%

-4%

-2%

0%

2%

4%

6%

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Eurozone Real GDP, Y/y % Change

Actual Forecast

Adjusted R-squared = 90.4%

Data as at May 31, 2019. Source: Bloomberg, Eurostat, European Central Bank, European Commission and KKR Global Macro & Asset Allocation analysis.

EXHIBIT 30

Easy Central Bank Policy in Europe Is Only Partially Being Offset by Tight Credit Conditions

0.1

0.30.1 -0.1

-0.2 0.1 1.2

Intercept ECBZIRP

Housing LaggedEUR Brent

TW EUR CreditConditions

OutputGap

2019Forecast

Elements of 2019 Eurozone GDP, ppt

0.8

Intercept is the sum of Intercept Coefficient and the lagged dependent variable. Data as at May 31, 2019. Source: Bloomberg, Eurostat, European Central Bank, European Commission and KKR Global Macro & Asset Allocation analysis.

Somewhat ironically, Europe is more susceptible to the vagaries of trade than almost any other region where we do business. Remem-ber that our thesis is that global trade peaked in 2008, and the ten-sions of late have only accelerated this slowdown. Given that gross exports account for 46% of Eurozone GDP versus 19% for China and 12% for the U.S., this downward pressure is significant. Moreover in Germany, which is often considered the engine of Eurozone growth, the trade balance with China can add 60 basis points of growth in a good year and minus 30 basis points in a bad year.

EXHIBIT 31

Our Forecast Is for Eurozone Inflation to Reach 1.5% in the 2019-2020 Period

0%

1%

2%

3%

4%

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Eurozone CPI, Y.y % Change

Adjusted R-Square: 91.7%

ActualForecast




EXHIBIT 32

Disposable Income Is Supporting European Inflation, While the Region’s Consumer Remains in Decent Shape

1.0

0.40.2 0.0 -0.1 1.5

0.00.20.40.60.81.01.21.41.61.8

Intercept Disp.Income

ImportPrice

PPI: FoodProducts

REER vs.40

2019Forecast

Elements of 2019 Eurozone Inflation Forecast, ppt

Intercept is the sum of Intercept Coefficient and Momentum. Data as at May 31, 2019. Source: Bloomberg, Eurostat, European Central Bank, European Commission and KKR Global Macro & Asset Allocation analysis.

EXHIBIT 33

Exports Now Represent a Sizable 50% of Gross GDP in Germany

25%

35%

45%

55%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Real German GDP, % and Exports as a % of Real GDP

German Exports, % of German GDPGerman GDP, % of EZ GDP


This shift in the structural outlook for trade influences our thinking on Europe’s business model for recovery. Specifically, unlike after the 2011 crisis, Europe cannot grow its way out of the current slowdown by just increasing competitiveness and weakening its currency. Rather, it now needs some consumption, which requires Germany to reduce its current account surplus. It also requires some fiscal spending, which France is clearly attempting. Meanwhile, Spain and Italy are now contributing to Eurozone growth via higher wages, but their sovereign debt loads continue to limit the upside, we believe.

On the inflation front, Aidan still forecasts inflation to miss the ECB’s two percent target. Specifically, we look for annual inflation to come in just shy of 1.5% in 2019. One can see this in Exhibit 32, which

underscores the reality that there is very little cyclical inflation in the Eurozone economy these days (i.e., all the inflation build-up is linked to the historical intercept).

China

Despite strong real GDP growth of 6.4% year-over-year in 1Q19, my colleague Frances Lim is retaining her below consensus 2019 real GDP growth target of 6.2%. Trade tensions (Exhibit 34), a weak auto sector, and a maturing consumer are all weighing on growth trends. Maybe more important, though, than a point estimate in time is that our 2019 forecast still continues to represent a notable decelera-tion from 6.6% growth last year and 14.2% growth as recently as in 2007.

Similar to the U.S., though, we think that direct tariff impacts un-derstate the longer-term – and potentially more important – effect trade wars are having on CEO sentiment, particularly as it relates to capital expenditures. Based on our high-level conversations in China with executives across a variety of industries, we think the potential for a second half slowdown is now more likely than the consensus forecast embeds.

As one might guess, further escalation in the trade arena will likely be met with fiscal and monetary stimulus including more reserve required ratio cuts, liquidity injections, pledged supplementary lend-ing, and other short-term liquidity tools. Moreover, as the Fed begins to lower rates, we expect China to follow with interest rate cuts to manage the rate differential, while maintaining tight capital controls, to limit currency depreciation. On the fiscal side, we expect even more targeted stimulus focused on infrastructure, the consumer, and the auto sector.

“ This shift in the structural outlook for trade influences our thinking on Europe’s business model for

recovery. Specifically, unlike after the 2011 crisis, Europe cannot grow its way out of the current slowdown by just increasing

competitiveness and weakening its currency. Rather, it now needs

some consumption, which requires Germany to reduce its current

account surplus. It also requires some fiscal spending.

”


EXHIBIT 34

China Continues to Add More Stimulus to Support Growth as the Trade War Escalates. Despite This Impressive Effort by the Government, We Wonder If Slowing Growth in Capital Expenditures Will Require Even More Stimulus

+0.1% +0.1%+0.2%

+0.6%

+0.8%

-1.8%

0.3%

Round 1:$50bn China

Tariffs @25% Rate

Round 2:Additional$200bn @10% Rate

Round 3:Prior $200bn

Raised to25% Rate

Round 4:Additional$325bn @25% Rate

Total Tariff,Potential

ConsumptionImpact

5-10% TotalImpactDeferral of

BusinessInvestmentSpending

FiscalStimulus

May 2019TargetedReserveRequiredRatio Cut

RecentStimulus

Approximate Cumulative Potential Tariff Impacts as a % of China GDP Approximate Recent Stimulusas a % of China GDP

1.9%2.0%

+1.0%

Fiscal stimulus includes value added tax cuts, personal income tax cuts, personal income special deductions, social insurance reduction, infrastructure spending, and other various tax cuts implemented since May 2018. The targeted reserve required ratio cut refers to the May 2019 policy response to the latest escalation in tariffs. Data as at May 31, 2019. Source: KKR Global Macro & Asset Allocation analysis.

Year-to-date, core inflation has been soft falling to 1.6% year-over-year on weak domestic demand. At the same time, however, head-line inflation actually increased to 2.7% in May 2019 from just 1.5% year-over-year in February 2019 on the back of higher commodity prices (Exhibit 37). A key driver has been bad weather, which has led to a 13-18% year-over-year increase in vegetable prices. In addition, the outbreak of swine flu has brought the supply of pigs to the lowest level in over a decade. As a result, pork prices are already up 18% year-over-year, and will remain elevated for a few more months, as it takes at least six months for piglets to reach full size. As such, given that pork has an estimated 2.5% weighting for the country’s CPI bas-ket, pork prices could add up to 50 basis points to headline inflation, we believe. If there is good news on the headline inflation front, we believe that the recent VAT tax cut, which became effective April 1, 2019, should help offset the 10 basis point price increase from tariffs that we had been previously forecasting. All told, we believe average CPI for 2019 will be around 2.3% year-over-year, which is below the three percent threshold and leaves the PBoC with ample room to ease monetary policy.

EXHIBIT 35

Real GDP Growth in China Is Expected to Continue to Decline Meaningfully in the Years Ahead

200714.2

201010.6

20166.7

20205.5

20303.2 2040

1.920501.4

20601.4

0

2

4

6

8

10

12

14

16

80 85 90 95 00 05 10 15 20 25 30 35 40 45 50 55 60

China: Real GDP Growth Y/y, %

Real GDP Y/yOECD Long Term Projections

China has already had a hard landing

Data as at March 31, 2019. Source: China National Bureau of Statistics, OECD, Haver Analytics.

“ We think the potential for a

second half slowdown in China is now more likely than the consensus forecast embeds.

”


EXHIBIT 36

Despite the Slowdown in Its GDP, China Continues to Innovate in Key Strategic Areas, Including Robotics

0

50

100

150

200

250

300

350

94 96 98 00 02 04 06 08 10 12 14 16 18

Annual Supply of Industrial Robots, Thousands

Asia / Australia

EuropeAmerica

Of which: China

Data as at 2018. Source: IFR World Robotics 2018.

EXHIBIT 37

China Headline Inflation Is Currently Higher on Food Prices…

May-192.7

-1.5-1.0-0.50.00.51.01.52.02.53.0

Jan-

16

Apr

-16

Jul-

16

Oct

-16

Jan-

17

Apr

-17

Jul-

17

Oct

-17

Jan-

18

Apr

-18

Jul-

18

Oct

-18

Jan-

19

Apr

-19

China: CPI, Y/y , %

3.5

Ex Food & Energy Food Energy Headline CPI

Food inflation causing CPI to rise

Data as at May 31, 2019. Source: China National Bureau of Statistics, Haver Analytics.

EXHIBIT 38

…While PPI Is Softer on Weak Profitability/Pricing Power, Slower Overcapacity Reduction, and Softening Global Demand

72

73

74

75

76

77

78

79

-10-8-6-4-202468

1012

05 07 09 11 13 15 17 19

China: Headline PPI Y/y (L)

China: Industrial Capacity Utilization (R)

Data as at March 31, 2019. Source: China National Bureau of Statistics, Haver Analytics.

Mexico

We are using this mid-year update to downgrade our 2019 GDP growth estimate for Mexico to 1.2%, which is below both consensus expectations of 1.4% and our prior forecast of 1.6%. Even though the threat of U.S. tariffs is averted for now, significant growth headwinds remain and we believe there is a non-trivial chance that the U.S. could again threaten Mexico with protectionist measures leading up to the 2020 elections.

What’s ailing the Mexican economy? Well, a recent trip to the nation’s capital confirmed that the combination of rising U.S.-China trade ten-sions, roadblocks in USMCA2 approval, construction delays in Mexico City, recent credit rating downgrades, and Pemex’s long-term fiscal sustainability concerns will all likely keep a lid on private investment (Exhibit 40). Meanwhile, on the public expenditure front, Andrés Man-uel López Obrador (AMLO) has actually shown himself to be fiscally prudent thus far. Somewhat ironically, though, this discipline is re-sulting in cuts to current expenditure in many areas of the economy. Finally, while consumer confidence is actually hovering near record highs, it has not led to a boom in consumer spending. In fact, actual private consumption data continues to underperform expectations, as many in Mexico’s population worry about increasing violence, slowing growth, and potential conflicts with the United States.

2 United States, Mexico, Canada Agreement.

“ While consumer confidence in

Mexico is actually hovering near record highs, it has not led to a boom in consumer spending.

”


EXHIBIT 39

We Expect Mexico Real GDP to Grow Just 1.2% in 2019, Dragged Down by Both Tight Monetary Conditions and Lackluster Investment Appetite

1.2%

1.1%

-0.3%

-0.7%-0.1%

1.2%

Baseline US GDPGrowth

CreditCondition

Manu.Confid.

MexEquities

2019egrowth

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Components of Mexico Real GDP Growth Model

Data as at June 7, 2019. Source: Bloomberg, Banxico, Haver Analytics, KKR Global Macro & Asset Allocation analysis.

EXHIBIT 40

Investment Has Been Non-Existent in Mexico of Late, Weighed Down by the Energy Downturn, Policy Uncertainty, Rising Trade Tensions, and Fiscal Sustainability Concerns

90

100

110

120

130

140

'13 '14 '15 '16 '17 '18 '19

Mexico GDP Components (1Q13 =100)

Real GDP ConsumptionInvestment Exports

Investment is Low

Data as at June 7, 2019. Source: Bloomberg, Banxico, Haver Analytics, KKR Global Macro & Asset Allocation analysis.

EXHIBIT 41

MXN Is Already Trading More Than One Standard Deviation Below Its Long Term Average in Real Effective Exchange Rate Terms

+1stdev

-1stdev Base

Bear

Bull

-45%

-35%

-25%

-15%

-5%

5%

15%

25%

35%

'87 '90 '93 '96 '99 '02 '05 '08 '11 '14 '17 '20 '23

MXN weakness

MXN strength

Mexico: Real Effective Exchange Rate (CPI-based)% Deviation from Long Term Average

Data as at May 31, 2019. Source: Bloomberg, Banxico, Haver Analytics, KKR Global Macro & Asset Allocation analysis.

EXHIBIT 42

We Forecast That Inflation Differentials Between the U.S. and Mexico Remain Outsized Through 2023

4.9%

4.0% 3.7%

3.3% 3.2% 3.5%

2.2%

1.8%

1.0%1.5%

1.8%2.0%

2018a 2019e 2020e 2021e 2022e 2023e

Annual Average CPI Estimates, Y/y % Change

Mexico (GMAA forecast) U.S. (GMAA forecast)

0%

1%

2%

3%

4%

5%

6%

Data as at May 31, 2019. Source: Bloomberg, Banxico, Haver Analytics, KKR Global Macro & Asset Allocation analysis.

Separately, we expect headline inflation to average four percent in 2019, which is up from our previous estimate of 3.8%. As such, it is now in line with Banxico’s estimate and just above consensus expec-tations of 3.9%. In light of persistently elevated inflation expectations and risk premia, we believe the central bank of Mexico will maintain a cautious monetary stance. Keeping financial conditions tight and real rates high at or greater than 4.2% will be needed to combat stub-bornly elevated domestic prices and anchor the peso, we believe. As


such, we do not expect any rate cuts this year.

Finally, on the currency front, we expect the Mexican peso to de-preciate by approximately two percent per annum over the next five years, which is actually better than the 4.8% implied by forward curves. Key to our thinking is that the peso is a high carry currency (i.e., its nominal short-term rates are 8.25%, compared to 2.40% in the U.S.) as well as the fact that it screens quite undervalued in our models after depreciating 39% over the past five years.

Interest Rate Outlook

As we noted in our most recent Insights essay, The Uncomfortable Truth, dated April 2019, our macro framework continues to suggest that long-term rates will be stuck at low levels for the foreseeable future. Importantly, we are making this call despite rising deficits in many of the markets in which we invest. There are several key un-derpinnings to our thesis. First, we think that technology is creating structural downward pressure on inflation. One can see this in Ex-hibits 43 and 44, respectively, which show the consistent downward pressure that technological transparency/advancement are having on both consumer and producer prices.

EXHIBIT 43

Moore’s Law Is a Drag on Inflation, Particularly in the Early Years of Innovation

-2%

-1%

0%

1%

2%

3%

4%

70

80

90

100

110

120

130

140

150

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Annu

al In

flatio

n Ra

te D

iff

stsoC noitcudorP rof sexednI

Moore's Law Is a Drag on Inflation

Technology drag on inflation (RHS)Production cost including technology (LHS)Production cost excluding technology (LHS)

Avg = 0.4pp

Note: In the BEA’s input-output data (I-O), we identified technology-related inputs as follows: computer and electronic products; broadcasting and telecommunications; data processing, internet publishing, and other information services; and computer systems design and related services. We identified as closely as possible Producer Price Index (PPI) series for each industry in the I-O, including all four technology inputs. The weightings were multiplied by technology’s PPI to arrive at the contribution to each industry’s PPI. For each industry’s PPI minus technology, we subtracted the tech contribution from PPI and divided it by one minus technology’s weight. Data as at 2005 through 2018. Source: KKR Global Macro & Asset Allocation calculations, Haver Analytics, BEA, BLS, Vanguard.

EXHIBIT 44

Technology’s Effect on Producer Prices by Industry Has Been Significant in Recent Years

-44bp

-83bp

-82bp

-68bp

-37bp

-11bp

-9bp-1bp

0%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%5.5%

Over

all

Info

Tec

h

Prof

Svs

Man

ufac

ture

Fina

nce

Hea

lthca

re

Reta

il Tr

ade

Agric

ultu

re

Technology's Effects on PPI by Industry(Annualized % Change in PPI, 2005-2018)

PPI excluding technology PPI including technology

Note: Healthcare is proxied by hospitals, retail trade by general merchandise trade, finance by securities/investment. Data as at 2005 through 2018. Source: Haver Analytics, BEA input-output tables, Vanguard, KKR Global Macro & Asset Allocation analysis.

Second, our research shows that the direction of interest rates generally correlates with growth in nominal GDP. One can see this in Exhibit 45. This viewpoint is significant because nominal GDP in both the United States and China, two of the major drivers of global GDP, has slowed materially in recent years. Third, we think that demo-graphic forces are increasingly driving more demand for income-related products. In fact, by 2030, all baby boomers will be older than age 65. As a result of this new demographic reality, one in every five U.S. residents will be above retirement age.

“ As we noted in our most

recent Insights essay, ‘The Uncomfortable Truth,’ our macro framework continues to suggest that long-term rates will be stuck at low levels for the foreseeable

future. Importantly, we are making this call, despite rising deficits in many of the markets

in which we invest. ”




EXHIBIT 45

Global Interest Rates, Particularly in the U.S., Are Highly Correlated with Nominal GDP Growth

0%

2%

4%

6%

8%

10%

12%

14%

16%

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

Nom 10yr YldNom GDP y/y (3yr Avg.)

Correl = 77%

Data as at May 19, 2018. Source: Bloomberg, Haver Analytics, MSCI, IBES, KKR Global Macro & Asset Allocation analysis.

EXHIBIT 46

With China Slowing, Global Nominal GDP Growth Continues to Trend Downward

0%

5%

10%

15%

20%

25%

30%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019

Global and China Nominal GDP (USD), 3yr Rolling CAGR

Global, LHS China, RHS

Data as at April 9, 2019. Source: IMF, Haver Analytics.

Finally, we believe the technical tailwinds in the bond market are still quite compelling, despite the increase in issuance that we have seen in recent years. Indeed, as my KKR colleague Chris Sheldon who runs our Liquid Credit franchise reminds me, outright supply is actually shrinking in key markets such as High Yield. Moreover, while quantitative easing has turned towards quantitative tightening, the pace of it is now much more gradual. In Europe, for example, the introduction of another central bank-driven lending program to its banks has pushed back meaningfully the slope of sovereign debt exo-dus (Exhibit 47). This shift in policy is important not only in Europe but also in major markets like the United States, as the 10-year U.S. Treasury bond has never really traded more than 250 basis points above the 10-year German bund in the 30 years of data that we have been tracking (Exhibit 48).

EXHIBIT 47

The ECB Remains Focused on Ensuring There Is Adequate Liquidity in the System

0500

100015002000250030003500400045005000

2017

2018

2019

2020

2021

2022

2023

2024

ECB Balance Sheet, EUR Billions

TLTRO-III andFuture LTROs TLTRO-II

Public SectorPurchaseProgram

OtherAssets

TLTRO-III eases the liquidity glide path in the EZ

Forecasts

TLTRO is Targeted Long Term Refinancing Operation. Data as at May 31, 2019. Source: KKR Global Macro & Asset Allocation analysis, European Central Bank.

“ Pulling all the pieces together,

we come away expecting the Fed to cut rates by 50 basis points in the second half of 2019, starting

in July or September. If our ‘mild recession’ base case comes to pass in 2020, we would expect another 100-150 basis points of cuts next year, leaving rates hovering just

above zero. ”


EXHIBIT 48

We Believe That U.S. Rates Can’t Break Out to the Upside as Long as the Yield on German Bunds Remains So Low

Apr-892.16 May-99

1.51Sep-05

1.18

May-192.33

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19

U.S.-Germany 10-Year Rate Spread, %


EXHIBIT 49

U.S. Savers Have Stepped in to Account for a Larger Percentage of U.S. Treasury Ownership

19.5%

48.3%

32.2%

U.S. Treasury Security Ownership, %

U.S. Federal ReserveForeign Central Banks & SaversU.S. Savers

2014 2Q'2018

14.1%

37.2%

48.8%

Data as at June 30, 2018. Russell Napier, CBO, Treasury, TIC Data, Federal Reserve.

Turning to the short end of the yield curve, we now expect the Fed to start cutting rates later this year. Economic momentum is slow-ing amidst trade-related uncertainty, and Core PCE inflation is again below the Fed’s two percent target (Exhibit 51). Maybe even more important, interest rates markets embed a strong expectation of cuts, which means that the Fed would implicitly tighten financial conditions if it failed to act—something we do not think it wants to do. History offers a useful guide to the current environment: U.S. two-year yields have fallen to more than 50 basis points below the fed funds rate, reflecting a market expectation for cuts. This backdrop is something that has happened only four other times since the 1980s (Exhibit 52).

EXHIBIT 50

As China’s Current Account Surplus Shrinks, Its Desire to Own as Many U.S. Treasuries Will Wane Too, We Believe

Regime Change

0

2

4

6

8

10

12

14

16

18

-6

-4

-2

0

2

4

6

8

10

12

00 02 04 06 08 10 12 14 16 18 20

China: Current Account % GDP (L)

China: Holdings of US Treasury Securities US$T (R)

Data as at December 31, 2018. Source: U.S. Department of Treasury, State Administration of Foreign Exchange, Haver Analytics.

In every one of those occasions, the Fed ended up cutting over the next 12 months, by a median of fully 100 basis points. In three out of those four occasions, the economy ended up falling into recession within 1.5 years, with 1998 being the only exception. What’s really interest-ing, though, is that equity market performance was generally quite strong following these short-end curve inversions. Specifically, equity markets rose over the next 12 months in three out of the four past instances – and by a median of fully 13%. It seems that while short-end curve inversions do signal coming economic trouble, the equity market’s first reaction is usually to rally in celebration of lower rates.

“ Maybe even more important, interest rate markets embed a strong expectation of cuts,

which means that the Fed would implicitly tighten financial

conditions if it failed to act—something we do not think it

wants to do. ”


EXHIBIT 51

After a Decade, the Fed Is Still Badly Missing Its Target of Two Percent Inflation

Apr-191.6%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Jan-

05

Mar

-06

May

-07

Jul-0

8

Sep-

09

Nov-

10

Jan-

12

Mar

-13

May

-14

Jul-1

5

Sep-

16

Nov-

17

Jan-

19

U.S. Core PCE, Y/y %

Core PCE Y/y FOMC 2% Target

Data as at June 7, 2019. Source: BEA, Haver Analytics, KKR Global Macro & Asset Allocation analysis.

EXHIBIT 52

Prior Times U.S. 2-Year Yields Dipped 50 or More Basis Points Below the Fed Funds Target

2-Year Yield - Fed

Funds Target (Basis Points)

12-Month Forward

Change in Fed Funds Target (Ba-sis Points)

12-Month Forward Change in U.S. 10-Year

Yield (Basis Points) 10-Year

12-Month Forward S&P 500

Total Return

Months Until Offi-cial Onset of Next

Recession

Apr-89 -53 -150 2 11% 16

Aug-98 -59 -25 93 40% 32

Sep-00 -52 -350 -120 -27% 7

Sep-06 -54 -50 -5 16% 16

Jun-19 -53 ??? ??? ??? ???

Median -54 -100 -2 13% 16

Dates represent the first month in a cycle in which two-year yields were more than 50 basis points below the fed funds rate. Data as at June 7, 2019. Source: BEA, Haver Analytics, KKR Global Macro & Asset Allocation analysis.

Pulling all the pieces together, we now come away expecting the Fed to cut rates by 50 basis points in the second half of 2019, starting in July or September. If our ‘mild recession’ base case comes to pass in 2020, we would expect another 100-150 basis points of cuts next year, leaving rates hovering just above zero. Importantly, however, our dovish Fed outlook does not translate into sharply lower long-end expectations. Our fair value model points to 10-year yields trad-ing in a 2.0-2.5% range in the second half of 2019 (year-end target = 2.25%), which implies no significant change relative to current levels. If we do fall into recession next year, we think 10-year yields could flirt with closer to one percent, but we would still target a year-end 2020 rate of 1.5%. These relatively moderate 10-year ex-pectations are consistent with the pattern we have observed in prior cycles. Specifically, as we show in Exhibit 52, while the Fed cuts short rates by a median of 100 basis points, 10-year yields fall by a median of just two basis points. We think this dichotomy is because the Fed cuts themselves help to stoke hopes of reflation, which in turn help prop up the long end as inflation expectations rise.

Equities: EPS/Valuation/Total Return

As we turn towards the back half of 2019, we thought it might make sense to review what has changed in our thinking since January. As a refresher, in January we made the following assumptions in our forecast:

• In terms of forward P/E, we thought SPX would trade in the 15.5x to 16.5x range. Throughout the year, the multiple has ranged from a low of 14.2x on January 3rd to a high of 17.2x on April 30th (Exhibit 56).

• In terms of 2019e EPS, we thought it would come in at $167-$168 per share (2.5% growth), now essentially in line with cur-rent expectations of $168-169 (which have fallen from north of $175 at the beginning of the year).

• We estimated 6-14% upside in U.S. Equities (inclusive of divi-dends). As of May 31, the S&P 500 had returned roughly 11%.

As we look ahead, we take comfort that the consensus forecast for 2019 earnings per share now appears much more reasonable to us. One can see this in Exhibit 55. This new, more conservative forecast of 2.7% is down significantly from an unrealistic 10% in October 2018, and it is now essentially in line with our own forecast of 2.5%. Maybe more important, though, in our view is that the earnings revi-sions downgrade cycle is ending, and it is actually turning upward. Indeed, earnings revisions in the U.S. have quietly improved for the third straight month to 1.02 (positives relative to negatives) in May 2019 from a trough reading of 0.54 in February 2019.


EXHIBIT 53

Our Preliminary Model for S&P 500 EPS Growth Indicates Some Modest Acceleration in 2H20

May-09a-30.9%

Jan-10p-36.9%

Dec-19p2.2%

Dec-20p6.3%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

2018

S&P 500 EPS Growth: 12-Month Leading Indicator

ACTUAL PREDICTED (3mo MA)

Data as at May 31, 2019. Source: Bloomberg, Haver Analytics, S&P, IBES.

EXHIBIT 54

Importantly, This Improved Outlook Is Contingent on Credit Conditions and PMIs Remaining Steady Around Current Levels

2019 CON-TRIBUTION

2020 CON-TRIBUTION

DELTA

Credit Spreads -1.7% 1.3% 3.1%

ISM PMI -0.9% 0.9% 1.7%

Oil Prices -3.1% -2.6% 0.5%

Trade-Weighted USD -0.4% -0.1% 0.3%

G7 ex US Monetary Policy -0.3% 0.0% 0.3%

Baseline Growth 5.3% 5.3% 0.0%

Consumer Confidence 0.4% 0.1% -0.2%

Real Home Price Apprec. 2.9% 1.4% -1.5%

TOTAL 2.2% 6.3% 4.1%

Data as at May 31, 2019. Source: Federal Reserve, Bureau of Labor Statistics, Nat’l Association of Realtors, ISM, Conference Board, Bloomberg, KKR Global Macro & Asset Allocation analysis.

Looking out to the second half of 2020, our Earnings Growth Leading Indicator (EGLI) is actually pointing to some acceleration – albeit modest – in earnings growth. One can see this in Exhibit 53. We cau-tion that trade tensions could certainly derail the modest rebound, but right now our preliminary 2020 forecast calls for 6.3% year-over-year growth in 2020 (which is roughly half of the 12.2% currently anticipated by consensus). So, similar to last year, we do again ex-pect downward pressure on forward estimates, which supports our view that markets are not likely to run away to the upside.

EXHIBIT 55

Consensus Now Expects 2.7% EPS Growth in 2019, Down From 10% at the Start of the Year

Oct-1810.0%

Dec-186.5%

2.7%

1.9%

GMAA forecast2.5%

1%2%3%4%5%6%7%8%9%

10%11%

Feb-18 Jul-18 Dec-18 May-19

Consensus 2019 S&P 500 EPS Growth Estimate

Data as May 31, 2019 Source: Bloomberg, Haver Analytics, S&P, IBES, KKR Global Macro & Asset Allocation analysis.

EXHIBIT: 56

We Are Using a 16.3x Multiple for 2020, Compared to a Median of 17.0x, to Reflect a More Conservative Outlook

Min11.5x

Dec-1814.9x

MedianToday16.1x 17.0x

Apr-19 Peak17.2x

Max18.7x

0x

10x

12x

14x

16x

18x

20x

Distribution of Fwd P/E When Real 10y UST Yield is in 0.2-0.6% Range (1990 - Present)

Data at May 31, 2019. Source: Bloomberg, S&P.


EXHIBIT 57

Our Earnings Growth Leading Indicator (EGLI) Is Pointing to Some Modest Acceleration in Earnings Growth in 2020. However, the Model Does Not Capture the Impact of Tariffs on Expected Growth

5.3%

1.4%

1.3%1.0%

-0.1%

-2.6%6.3%

Base

line

Hom

e Pr

ice

Cred

it Sp

read

Confi

denc

e

Stro

nger

USD

Oil H

eadw

ind

Fore

cast

0%1%2%3%4%5%6%7%8%9%

10%

S&P 500 Earnings Growth Lead IndicatorComponents of December 2020 Forecast

Our Earnings Growth Leading Indicator is a combination of seven macro inputs that in combination we think have significant explanatory power regarding the S&P 500 EPS growth outlook. Data as at May 31, 2019. Source: Bloomberg, Haver Analytics, S&P, IBES, KKR Global Macro & Asset Allocation analysis.

EXHIBIT 58

If Our EGLI Is Right, Then the Consensus EPS Estimates for 2H19 and 2020 Are Too High

25% 26% 27%

14%

1% -1%2%

9%

12%12%14%

11%

S&P 500 Quarterly Earnings Growth, Y/y % Change

Consensus 2019 -2020 Expectations

-2%

3%

8%

13%

18%

23%

28%

Mar18

Jun18

Sep18

Dec18

Mar19

Jun19

Sep19

Dec19

Mar20

Jun20

Sep20

Dec20

Data as at May 31, 2019. Source: Bloomberg, Haver Analytics, S&P, IBES, KKR Global Macro & Asset Allocation analysis.

While we will not officially publish a formal 2020 forecast until early next year, we did want to lay out a preview of how we are thinking about how things could play out. To this end, we note the following ‘rough’ assumptions:

• EPS Growth: We are currently using 6.3% year-over-year growth for 2020, which is implied by our Earnings Growth Leading Indi-cator (EGLI). That would suggest around $178.20 in EPS for the S&P 500 in 2020.

• Forward P/E: Amidst escalating trade tensions in 2019, the mul-tiple on the S&P 500 recently de-rated by 6.3%, falling to around 16.0x before rebounding during June. Importantly, though, we have also shifted into a lower real rate environment. Specifically, since January real rates have fallen to 0.3% from 0.8%, which means that a higher implicit multiple should be used – all else being equal. All else is not equal, however, given heightened trade concerns and peaking margins. As such, we are using a 16.3x multiple for 2020, compared to a historical median of 17.0x.

• Total return: So, when we pull it all together, our base case, including a two percent dividend yield, calls for a four to 11% percent return through year-end 2020, assuming the S&P 500 trades at approximately 15.8x to 16.8x our 2020 EPS estimate of $178.20 per share next year. One can see this in Exhibits 59 and 60.

EXHIBIT 59

Our Work Suggests That U.S. Equities Can Deliver Only Modest Upside Through 2020

S&P 500 Preliminary 2020e Price TargetS&P Total Return at Various P/E and EPS Y/y Levels

P/E EPS 14.8X 15.3X 15.8X 16.3X 16.8X 17.3X 17.8X

$166 2,451 2,534 2,617 2,700 2,784 2,867 2,950

$169 2,495 2,580 2,665 2,749 2,834 2,918 3,003

$172 2,540 2,626 2,712 2,798 2,884 2,970 3,056

$175 2,584 2,672 2,759 2,847 2,934 3,022 3,109

$178 2,628 2,717 2,806 2,895 2,985 3,074 3,163

$181 2,672 2,763 2,854 2,944 3,035 3,125 3,216

$184 2,717 2,809 2,901 2,993 3,085 3,177 3,269

$187 2,761 2,855 2,948 3,042 3,135 3,229 3,322

$190 2,805 2,900 2,995 3,090 3,186 3,281 3,376

Data as at May 31, 2019. Source: Bloomberg, S&P, KKR Global Macro & Asset Allocation analysis.


EXHIBIT 60

In Percentage Terms, We Now See 4%-11% Upside in U.S. Equities (Inclusive of Dividends) Over the Next 18 Months

S&P 500 Preliminary 2020e Total Return Target(Assuming SPX ends 2019 at May 31st levels)

S&P Total Return at Various P/E and EPS Y/y Levels

P/E EPS 14.8X 15.3X 15.8X 16.3X 16.8X 17.3X 17.8X

-0.9% -9.1% -6.1% -3.0% 0.1% 3.2% 6.3% 9.3%

0.9% -7.5% -4.4% -1.2% 1.9% 5.0% 8.2% 11.3%

2.7% -5.9% -2.7% 0.5% 3.7% 6.9% 10.1% 13.3%

4.5% -4.2% -1.0% 2.3% 5.5% 8.8% 12.0% 15.3%

6.3% -2.6% 0.7% 4.0% 7.3% 10.6% 13.9% 17.2%

8.1% -0.9% 2.4% 5.8% 9.1% 12.5% 15.9% 19.2%

9.9% 0.7% 4.1% 7.5% 10.9% 14.4% 17.8% 21.2%

11.7% 2.3% 5.8% 9.3% 12.8% 16.2% 19.7% 23.2%

13.5% 4.0% 7.5% 11.0% 14.6% 18.1% 21.6% 25.1%

Data as at May 31, 2019. Source: Bloomberg, S&P, KKR Global Macro & Asset Allocation analysis.

Beyond the more traditional valuation metrics described above, we also try to understand how stock market valuations look when compared to GDP growth and the intersection of corporate profits and interest rates. As Exhibit 61 shows, global equities generally look somewhere between fairly valued to downright expensive on a mar-ket capitalization-to-GDP perspective. However, when we adjust for interest rates, they appear to be at attractive levels. Our bottom line:

When we consider the two conflicting signals together (i.e., low rates versus full valuations), we feel comfortable with our mostly modest upside forecasts through year-end 2020. Said differently, although low rates should help support equity prices, we think the chance that U.S. Equities materially outperform their long-term historical average through the end of 2020 is quite low, given recent strong perfor-mance, geopolitical tensions, and current corporate profitability. This viewpoint is consistent with our original January comments that eq-uities may be “stuck” in a trading range throughout the medium term.

So, given our more modest return for Global Equities during the next 12-18 months, we think that the key to alpha generation will be differentiation. So, where should an investor lean in and out? Our two cents is that Europe is cheap, but we expect the public equity markets in Europe to stay low-priced amidst low rates. Interestingly, again in 2020, the consensus is forecasting a material boost in EPS from the Financials sector (Exhibit 62); we remain more cautious because of the negative impact that low rates have on Europe’s financial institutions, insurance companies in particular. As discussed earlier, we also believe that Europe could be more adversely impact-ed by trade tensions than the consensus currently believes.

EXHIBIT 61

Our Global Cycle Dashboard Suggests That U.S. Equities Are Moderately Overvalued on the Whole. However, the Rates-Adjusted Equity Valuation Metric Suggests There May Be Further Room to Run

Equity Valuation Metrics Economic and Credit-Related Metrics

Avg. Across

All Metrics

Avg. Across Eq-uity Metrics

EV/ EBITDA Fwd P/E

Market Cap % of GDP

Embedded EPS Grwth (Rate-Adj.

Equity Valuation) Shiller P/E

Avg. Across

Credit and Cycle-Related Metrics

Unemp. Rate (in-verse)

Credit Spreads (inverse)

Trailing 5yr Equity Mkt

Return

U.S. 0.7 0.7 1.5 0.5 1.4 -0.7 0.8 0.8 1.5 0.7 0.1

Europe 0.2 -0.1 0.1 0.0 0.6 -1.4 0.1 0.8 2.0 0.7 -0.3

EM 0.1 -0.1 0.9 -0.1 0.0 -0.5 -0.6 0.3 0.6 0.6 -0.4

Japan -0.3 -0.7 -1.2 -1.0 1.0 -1.3 -1.0 0.4 1.2 -0.8 0.9

Data as at May 22, 2019. Note: Readings show number of standard deviations Rich/(Cheap) vs. History. Source: MSCI, IBES, Bloomberg, KKR Global Macro & Asset Allocation analysis.

“ When we consider the two

conflicting signals together (i.e., low rates versus full valuations),

we feel comfortable with our mostly modest upside forecasts

through year-end 2020. ”


EXHIBIT 62

Europe: Consensus Expects 4.8% Earnings Growth in 2019, Driven by Financials, Industrials and Consumer

26.1% 18.6%

17.7% 16.0%

8.6% 6.7%

4.9% 2.2% 2.0%

1.0% (3.7%)

4.8%

-10% 0% 10% 20% 30%

FinancialsIndustrials

StaplesCons Disc

TechUtilitiesEnergy

HealthcareTelcosREITs

Materials

Europe

Growthcontribution

MSCI Europe 2019e Earnings Growth Contribution

Data as at May 31, 2019. Source: Bloomberg, Factset, IBES Consensus, MSCI.

EXHIBIT 63

Emerging Markets: Consensus Expects 1.3% Earnings Growth in 2019, Driven Largely By Financials

MSCI EM ex-Tech 2019e Earnings Growth Contribution

36.4%18.5%

16.5% 9.5%

6.8% 5.8%

5.1% 3.2%

2.4% (4.3%)

9.2% 1.3%

FinancialsCons DiscMaterials

REITsStaplesUtilities

IndustrialsTelcos

HealthcareEnergy

EM ex-TechMSCI EM

-10% 0% 10% 20% 30% 40%

Growthcontribution

* Note that EM tech earnings are expected to decline by 35% Y/y. We’ve excluded it from the chart as it would show a -460% contribution to overall EM earnings. Data as at May 31, 2019. Source: Bloomberg, Factset, IBES Consensus, MSCI.

Meanwhile, we also do not believe that Japan is poised to outper-form meaningfully, given its heavy dependence on global trade. And beyond the issues that Japan may face from a slowdown in global trade, we also expect domestic headline noise around the upcoming consumption tax increase. If we had to speculate today on tomorrow, our base case now is that there is greater than a 50% chance it is pushed to 2020 as part of a potentially larger reform package. In the interim, however, there could be significant bouts of uncertainty and volatility, we believe.

In terms of Emerging Markets as an Equity asset class, we think that the long-held bear market is in the process of bottoming. As a result, we continue to support our January 2019 call to lean into areas of

EM such as non-Japan Asia, which we underscore with our 300 basis point overweight to this region in our target asset allocation. This viewpoint is also consistent with what our EM/DM model is suggesting (Exhibit 65). Our bet is that, similar to what we saw in the 1999-2001 timeframe, a double bottom is in the process of occurring. As such, we would buy into attractive long-term markets, particularly those that could benefit from the rethinking of global supply chains, including Vietnam, Indonesia, and the Philippines. On the other hand, we remain short Turkey, given its excesses, and we remain under-weight Latin America. Brazil continues to bump along the bottom, with no apparent sustainable catalyst. In Mexico, we think lack of investment as well as ongoing tensions with the United States will likely keep the country risk premium wide for some time.

EXHIBIT 64

EM May Have Put in a ‘Double Bottom’ Relative to DM, Similar to What Happened in 1999-2001

Sep-94288%

Sep-0117%

Sep-10305%

Jan-16113%

May-19119%

0%

50%

100%

150%

200%

250%

300%

350%

87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19

Relative Total Return, MSCI EM/DM(Dec-'87 = 0%)

81months

84months

108months

40months

64months

"Double-Bottom" in 99-01 Again in 16-18?

Data as at May 31, 2019. Source: MSCI, Bloomberg, Factset, KKR Global Macro & Asset Allocation analysis.

“ Global equities generally look

somewhere between fairly valued to downright expensive on a market capitalization-to-GDP

perspective. However, when we adjust for interest rates, they

appear to be at attractive levels. ”


EXHIBIT 65

Our EM Model’s Indicators Still Tilt Slightly More Positive

‘Rule of the Road’

May ’15

Jan ’16

Aug ’16

May ’17

Sep ’17

Jun ’18

DEC ’18

1Buy When

ROE Is Stable or Rising

↔ ↔ ↔ ä ä ä ä

2Valuation: It’s Not Different

This Time↔ ä ä ä ↔ ↔ ↔

3EM FX Fol-

lows EM Equities

æ æ ↔ ↔ ä ↔ ä

4Commodities Correlation in EM Is High

↔ ↔ ↔ ↔ ↔ ä ↔

5Momentum

Matters in EM Equities

æ æ ä ↔ ä ↔ æ

Overall We recommend selective engagement with EM investing in 2019. Momentum is tenuous but many equity indexes and FXs look fairly washed out. Falling commodity prices are a concern, but earnings fundamentals have been impressively resilient across most countries and sectors.

Data as at December 20, 2018. Source: KKR Global Macro & Asset Allocation analysis.

Where Are We in the Cycle?

Predicting recessions correctly is likely the toughest part of forecast-ing. However, we are of the mindset that it is worth doing because it forces everyone on our team to deeply assess and discuss the direction of a variety of global macroeconomic variables during our formal investment committee meetings. Similar to what we laid out in January, we are still forecasting something akin to a modest reces-sion – defined by weak capital spending and exports, partially offset by modest consumption trends – between now and the end of 2020. For our nickel, we believe that there is a lot of late cycle behavior occurring that will likely be corrected amidst heightened geopolitical tensions during the next few quarters.

As part of this view, our overarching thesis remains that financial assets will not outperform real economy assets at the same pace that they did in the past. All our data continues to suggest that central bankers used quantitative easing (QE) to pull returns forward, and in so doing, they accelerated an inequality trend that was already in place for nearly two decades. Not surprisingly, politicians are now focused on ‘righting’ this wrong, and in doing so, we expect them to focus more on nominal GDP growth, which leads to higher wages, than the trickle-down effect of boosting financial asset prices.

EXHIBIT 66

We Are Quite Long in the Tooth in Terms of Pure Cycle Duration at 120 Months

2133

1912

4410

2227

2150

8037

4539

24106

3658

1292

12073

120

December 1900 - September 1902August 1904 - May 1907

June 1908 - January 1910January 1912 - January 1913

December 1914 - August 1918March 1919 - January 1920

July 1921 - May 1923July 1924 - October 1926

November 1927 - August 1929March 1933 - May 1937

June 1938 - February 1945October 1945 - November 1948

October 1949 - July 1953May 1954 - August 1957

April 1958 - April 1960February 1961 - December 1969

November 1970 - November 1973March 1975 - January 1980

July 1980 - July 1981November 1982 - July 1990

March 1991 - March 2001November 2001 - December 2007

June 2009 Current (Jun-19)

Duration of US Economic Expansions (Months)

Median = 37

Data as at June 15, 2019. Source: NBER, KKR Global Macro & Asset Allocation analysis.

“ We are forecasting something akin to a modest recession–

defined by weak capital spending and exports, partially offset by modest consumption

trends–between now and the end of 2020. For our nickel, we believe that that there is a lot of of late cycle behavior occurring that will likely be corrected amidst

heightened geopolitical tensions during the next few quarters.

”


EXHIBIT 67

Market Performances Following Long Stretches of Consecutive Performance Are Usually Choppy

# OF CONSEC-UTIVE YEARS OF POSITIVE

RETURNS START ENDCUMULATIVE

RETURN CAGR

3 1954 1956 113% 28.7%

3 1963 1965 61% 17.1%

3 1970 1972 41% 12.2%

3 1978 1980 67% 18.7%

4 1942 1945 146% 25.2%

4 1958 1961 104% 19.5%

5 2003 2007 83% 12.8%

6 1947 1952 154% 16.8%

8 1982 1989 299% 18.9%

9 1991 1999 450% 20.9%

9 2009 2017 259% 15.3%

Avg. CAGR

18.7%

Data as at December 31, 2017. Source://www.econ.yale.edu/~shiller/, Bloomberg.

EXHIBIT 68

Our Work Shows That Cyclical Areas of the Economy Such as Autos Are Past Their Peak This Cycle

197714972.8

198110363.3

198516050.5

199012314.2

200416948.3

200810402.5

201617149.5

2019e14500

2022e16000

8000

10000

12000

14000

16000

18000

1971

1975

1979

1983

1987

1991

1995

1999

2003

2007

2011

2015

2019

e

2022

e

KKR GMAA U.S. Light Vehicle SAAR Model (000s)

Trend Light Vehicle Sales (Based on 2000-2017 Trend)Actual + Estimated Light Vehicle Sales

Data as at May 31, 2019. Source: Bloomberg, Haver Analytics, KKR Global Macro & Asset Allocation analysis.

EXHIBIT 69

S&P 500 Margins Have Approached Peak Levels at a Time When Wages and Input Costs Are Rising. By Sector, Technology Is at the High End, While Healthcare Is at the Low End

0

5

10

15

20

25

30

S&P

500

Tech

Cons

Dis

c

Indu

stria

ls

Mat

eria

ls

Utili

ties

Telc

os

Hea

lthca

re

Ener

gy

25y Max/Min Range Latest

S&P 500 Sector Operating Margins Relative to History

Data as at June 7, 2019. Source: Bloomberg, S&P.

So, what data are we looking at to gauge the lengthiness of the cy-cle? Well, as we show in Exhibits 66 and 67, both the duration of the economic cycle as well as the consistency of asset appreciation has been notable. In addition, as we show in Exhibits 70 and 71, it would be hard to look at any historical employment data set and not say that we are late cycle. A similar story holds true in certain cyclical areas of the economy such as autos. One can see this in Exhibit 68.

EXHIBIT 70

The Late-Cycle Acceleration in Goods Employment Is Showing Clear Signs of Fatigue

-300

-250

-200

-150

-100

-50

0

50

100

0% 12% 25% 37% 50% 62% 75% 87% 100%

U.S. Payroll Employment: Goods, 3-Month Moving Average

Cyclical trough Recession

CurrentCycle

Average ofpast 7 cycles

Where We Are in Business Cycle (% Cycle Completed)

Data as at June 7, 2019. Source: Bureau of Labor Statistics, Haver Analytics.


EXHIBIT 71

While We Expect Services to Outperform Goods, We Do Expect Payrolls in the Services Sector to Keep Moderating As Well

U.S. Payroll Employment: Services, 3-Month Moving Average

-200

-150

-100

-50

0

50

100

150

200

250

0% 12% 25% 37% 50% 62% 75% 87% 100%

Cyclical trough Recession

CurrentCycle

Average ofpast 7 cycles

Where We Are in Business Cycle (% Cycle Completed)

Data as at June 7, 2019. Source: Bureau of Labor Statistics, Haver Analytics.

Yet, in areas such as housing, we still think that we are only mid-cycle at best. Supporting our constructive view is the reality that residential construction as a percentage of GDP is now just 18.9%, compared to 22.5% as of the end of 2005. In addition, housing stock has grown old, which fuels our bullish stance on areas such as home improvement. One can see this in Exhibit 73. We continue also to forecast solid household formation statistics. All told, we expect U.S. net new household formation of around 1.3-1.4 million annually over the next five years, which would represent a 30-40% acceleration from the 1.0 million average that prevailed over the past five years. Generational trends are also suportive: Millennials are starting to age into the key household-enlarging demographic of 35-44 year-olds. Meanwhile, the senior population is living at home longer into old age, which is another demographic support for housing demand.

EXHIBIT 72

Housing-Related Expenditures Are Not Yet in Full Recovery Mode

17%

18%

19%

20%

21%

22%

23%

Mar

-80

Dec-

82Se

p-85

Jun-

88M

ar-9

1De

c-93

Sep-

96Ju

n-99

Mar

-02

Dec-

04Se

p-07

Jun-

10M

ar-1

3De

c-15

Sep-

18

Housing-Related % of GDP

Housing Related includes New Construction and Improvements, Rent and Owners’ Equivalent Rent, and Household Utility Spending Furnishings, Household Equipment, and Routine Household Maintenance. Data as at March 31, 2019. Source: Bureau of Economic Analysis.

EXHIBIT 73

Average Age of the Housing Stock Has Moved Up Considerably Since the GFC. We View This Bullishly

25

26

27

28

29

30

31

32

33

34

35

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

2012

2016

Average Age of Housing Stock, Years

Data as at December 31, 2017. Source: Bureau of Economic Analysis, Haver Analytics.

“ Yet, in areas such as housing, we still think that we are only mid-cycle at best. Supporting our

constructive view is the reality that residential construction as a percentage of GDP is now just 18.9%, compared to 22.5% as of

the end of 2005. ”


EXHIBIT 74

The Key to Any Potential Recession in 2019/2020 Is How the Consumer Performs

Other, 7% Other, 8% Other, 5% Other, -2%CorpIntCov, -10%

CorpIntCov, 10% CorpIntCov, 17%

Factor A, -7%

Factor A, 5%

Factor A, 11%NewOrders, 5%

NewOrders, 4%

Factor B, 5% Factor B, 10%

Factor B, 7%

Factor B, 11%

Factor C, 5%

Factor C, 13%Factor C, 11%

Factor C, 18%Factor D, 5%

Factor D, 5%ConsSpending, 5%ConsSpending, 7% ConsSpending, 6%

Factor E, 5%Factor E, 4%Inventory, 5%

Factor F, 5% Factor F, 4%LEI, 7%

Factor G, 7%Factor G, 13%

Factor , 19%

Factor , 5%Factor , 11%

CoreCPI, 8%

Factor H, 10%

Factor H, 11%

HomeBuilds, 11% CI Loans, 26%

ConsDelinquencies, -36% ConsDelinquencies, -38%

S&P 500, 9%

HYSpreads, 13%

ConsCreditCards, 14%ConsCreditCards, 14%

-50%

-30%

-10%

10%

30%

50%

70%

90%

Asia Crisis (Dec 1997) Tech Bubble (Dec 1999) Financial Crisis (Dec 2006) Dec 2017 May 2019

24 Month U.S. Recession Probability Breakdown


So, what are the key variables that we are watching to see whether a recession could occur earlier or later than 2020? On the earlier side, a spike in trade tensions surrounding Huawei and/or a more rapid deterioration in corporate margins are the key areas on which we are focused. Not surprisingly, banks are growing apprehensive, and as a result, they are tightening lending standards, which is creating minor shock waves in our recession model. One can see this in Exhibit 74.

In terms of what could go right and extend the cycle, global central banks could turn even more dovish and the cloud of uncertainty that has defined the trade talks could lift. Already, in Asia we see that Australia, New Zealand, India, and Malaysia have cut rates, while in the United States the Federal Reserve has done a total about face since Chairman Powell muttered that the bank’s balance sheet was on “autopilot” in late December 2018. Moreover, if President Trump shifts his focus towards more domestic issues ahead of the Novem-ber 2020 election, he could not only back away from trade but also focus on domestic catalysts such as a highway spending reauthoriza-tion and/or improved drug pricing.

Our bottom line, though, is that the economy is likely to muddle through, with quarterly GDP bouncing unevenly between 0.5% and 2.5% before sputtering a bit more consistently in early 2020. Against that bumpy backdrop, there is a greater probability this cycle of ongo-ing rolling regional and/or sectoral recessions (e.g., Europe in 2011, U.S. Retail in 2013, U.S. Energy in 2016, etc.) versus a 2007-like broad-based, global catastrophe. Maybe more importantly, though, is our strong belief that corporate profits are no longer likely to grow faster than nominal GDP. If we are right, then it would represent a major change to the macroeconomic backdrop that we all enjoyed during the prior decade.

SECTION II: Themes

#1: Corporate Carve-Outs Recent trips to Europe and Japan give us increased confidence that our ‘deconglomeratization’ thesis still has legs to run much further into this cycle. Several factors influence our thinking. First, many big conglomerates are underperforming in certain regions of the world. General Electric certainly has raised awareness about the pitfalls of trying to be all things to all people in the United States. However, our research suggests this problem runs much deeper and broader. Said differently, we think that the uptick in ‘deconglomeratization’ is a global phenomenon. Indeed, just consider the significant decline in return profiles that we are seeing in Asia, as illustrated in Exhibit 76, which shows how dramatically the returns of conglomerates have fallen to below average from above average since the Global Financial Crisis.

“ Not surprisingly, banks are

growing apprehensive, and as a result, they are tightening lending standards, which is

creating minor shock waves in our recession model.

”


EXHIBIT 75

The Number of European Union Spin-off Announcements So Far This Year Is at Record Levels

0

2

4

6

8

10

12

14

16

18

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Number of Spin Off Announcements in Western Europe Every Year Since 2000

Note: 2018 data is annualized. Data as at February 22, 2019. Source: Morgan Stanley.

EXHIBIT 76

Conglomerates Are Losing Their Advantage In Emerging Asia, and As Such, More Corporate Repositioning Stories Are Likely

360

-110

2003-2012 2007-2016

10-Year Shareholder Returns of Conglomerates (India and SEA)Minus Total Shareholder Returns of Pure Plays, Basis Points

Data as at September 14, 2019. Source: Dealogic, Bain & Company, Asia Conglomerates: End of the Road.

Consistent with this trend, the pace of carve-outs has been surging, particularly in Europe. One can see this in Exhibit 75. A recent report by Ernst & Young on corporate behavior highlighted that this trend is gaining momentum, as fully 75% of European respondents indicated a carve-out was their preferred method of divestment, up sharply from 48% last year. Seventy-nine percent of these same individuals reported that streamlining their operating model will factor into their divestment plans over the next 12 months.

As we show in Exhibit 77, we believe that this opportunity for more corporate carve-outs is a structural, not a cyclical, one. The real-ity is that return on capital for many large global conglomerates has been in secular decline for some time. Intensifying local competition in many sectors, which we show in Exhibit 78, is certainly a major factor, but untimely acquisitions, shifts in regulatory regimes, and poor leadership are also significant contributors to what has emerged as one of the most favorable value creation opportunities for global private equity firms and thoughtful strategic buyers, we believe.

EXHIBIT 77

Rate of Returns for FDI Declining in Many Areas of the Global Economy

0%

2%

4%

6%

8%

10%

12%

14%

16%

85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

US UK Germany Netherlands

Rate of Return on Outward Foreign Direct Investment, %

Data as at December 31, 2016 or latest available year. Source: National Statistics, OECD.

“ Against a bumpy backdrop,

there is a greater probability this cycle of ongoing rolling regional and/or sectoral recessions (e.g., Europe in 2011, U.S. Retail in

2013, U.S. Energy in 2016, etc.) versus a 2007-like broad-based,

global catastrophe. Maybe more importantly, though, is our strong belief that corporate profits are no longer likely to grow faster than

nominal GDP. ”


EXHIBIT 78

Local and Regional Competitors Are Increasingly Challenging the Returns of Multinational Firms

Top 500 Global Companies Return on Equity, LTM as at 2016, %

-5% 0% 5% 10% 15% 20% 25%

Energy

Media & Communciations

Basic Materials

Diversified

Financial

All Sectors

Utilities

Cyclical Consumer

Industrial

Other Consumer

Technology

Multinational Firms Local Firms

Data as at January 31, 2017. Source: National Statistics, OECD, The Economist.

#2: ‘Yearn for Yield’ Without question, we think that reinvestment risk remains one of the biggest concerns in the market today, and as such, we are constantly looking for creative strategies to satisfy the ongoing ‘Yearn for Yield’ that we continue to forecast. At the moment, the two areas of the investment management business most under “attack” by low rates are pension plans and insurance companies, we believe. The much hoped for rebound in interest rates after the end of Quantitative Easing never occurred, and barring a collapse in the dollar, we do not see global rates moving materially higher during the next few years. Not surprisingly, given this backdrop, many yield-ori-ented allocators of capital have been consistently moving into Private Credit and Real Estate Credit. One can see this in Exhibit 80.

EXHIBIT 79

The Gap Between Target Returns and Traditional Fixed Income Instruments Likely Means a Greater Move into Alternative Products...

0%

1%

2%

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6%

7%

8%

9%

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

Median Pension Plan Assumed Returnvs. 30-Year Treasury Rates

Assumed Rate of Return UST 30-Year Yield

Data as at December 31, 2018. Source: The Pew Charitable Trust.

EXHIBIT 80

...Insurers Have Added Substantially to Private Credit and Real Estate Credit in Recent Years

0

2

4

6

8

10

P&C RealEstate Credit

Life and AnnuityReal Estate

Credit

P&C PrivateCredit

Life and AnnuityPrivate Credit

Change in Asset Allocation Between 2014 and 2017, % of Total

2014 2017

Data as December 31, 2018. Source: KKR Insurance Survey

“ The much hoped for rebound in interest rates after the end of QE never occurred, and barring a

collapse in the dollar, we do not see global rates moving materially higher during the next few years.

Not surprisingly, given this backdrop, many yield-oriented allocators of capital have been

consistently moving into Private Credit and Real Estate Credit.

”


So, what is driving rates so low? Beyond a strong technical backdrop from the central banks, there are several factors to consider, we believe, on why rates may stay lower for longer. First, we think that there are demographic and socioeconomic influences that are lead-ing to lower rates. We note a strong ‘Yearn for Yield’ evident among U.S. consumers, who continue to sock away savings at a heady rate relative to the current advanced state of the economic cycle. We can quantify this trend in several of the emerging markets where we invest, but our data in the U.S. is fairly compelling. One can see this in Exhibit 82.

For our nickel, we think multiple long-tailed factors are driving the high U.S. savings rate, including lingering consumer caution in the post-GFC era and the structural savings needs of an aging society, particularly relative to incomes (Exhibit 84). Indeed, our research shows that the savings rate for individuals aged 55 years and older is now a chunky 13%, which is significant given that this demographic controls much of the current wealth in the United States. One can see this in Exhibit 82. There also has been a sizeable uptick in global reserves (Exhibit 83). These increases are important because central banks are looking for safe homes for their assets, particularly if they feel comfortable with the local currency.

EXHIBIT 81

In an Unusual Break from Recent History, Savings Rates Have Not Declined This Cycle

Mar-957.6

Dec-004.4

Jun-026.2

Dec-073.4

Jun-097.2 Dec-18

6.8

0

2

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Recessions US Personal Savings Rate (%)

Data as at April 1, 2019. Source: Bureau of Economic Analysis, NBER, KKR Global Macro & Asset Allocation analysis.

EXHIBIT 82

Wealthy Baby Boomers Are Leading the Surge in Savings We Are Seeing Across the U.S.

-2%

3%

6%

13%

Under 35 35-44 45-54 55 and Over

U.S. Savings Rate by Age of Head of Household

Data as at 2013. Source: Moody’s Analytics analysis of 2013 Federal Reserve data.

EXHIBIT 83

The War Chest of Foreign Currency Reserves Is Increasingly Finding Its Way Into Fixed Income Securities, Which Is Further Depressing Yields

10.9

9.6

14.3

13.8

22.7

21.7

24.3

27.1

22.5

39.9

6.8

6.2

4.8

6.4

4.8

10.0

5.5

22.6

13.3

16.8

Indonesia

Turkey

Mexico

India

Russia

Philippines

Korea

Malaysia

China

Thailand

FX Reserves as a % of GDP

Jun-97 Current

Data as at January 31, 2019. Source: Respective national statistical agencies, Haver Analytics.

Exhibit 75

Exhibit 77

Exhibit 78


EXHIBIT 84

U.S. Households Are Not Spending Relative to Their Net Worth This Cycle

2%

4%

6%

8%

10%

12%

14%

450%

500%

550%

600%

650%

700%

'81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11 '14 '17 '20

US Household Net Worth as % of Disposable Income

Personal Savings Rate (%, RHS)


Importantly, though, we think selectivity is warranted when looking for yielding assets in today’s low rate environment. For our nickel, we would try to own yielding assets linked to nominal GDP. For example, in both Europe and the United States we are finding compelling op-portunities in the Asset Based Finance arena to provide attractive short-term housing loans to qualified buyers in good growth markets. In our view, these types of investments provide not only collateral in what is likely a late cycle environment but also produce upfront cash flows with plenty of equity cushion. Finally, assets linked to nominal GDP also provide inflation protection and macro ballast in an environment where we know that the ‘Authorities’ are running poli-cies that are quite aggressive. Specifically, as we show in Exhibit 85, holding nominal interest rates below nominal GDP is an effort to not only inspire growth but also to defease the substantial debt liabilities that have been accumulated during the last decade since the GFC.

EXHIBIT 85

The Government Has Focused on Stimulating Nominal GDP Through Monetary Policy

1978-5.6%

19825.7%

2005-4.1%

20090.8%

2012-3.7%

2019e-2.6%

-6%

-4%

-2%

0%

2%

4%

6%

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

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2011

2014

2017

U.S. Fed Funds Rate, % Points Above/(Below) U.S.Nominal GDP Growth

3yr Moving Avg.

Tigh

t Mon

etar

y Po

licy

Loos

e M

onet

ary

Polic

y

Data as at May 18, 2018. Source: Bloomberg, KKR Global Macro & Asset Allocation analysis.

EXHIBIT 86

Easy Monetary Policy Drove a Wide Dispersion Between Financial Real Asset and Real Economy Prices

-50%

0%

50%

100%

150%

200%

250%

Financial and Real Economy Prices Total ReturnPerformance in Local Currency Since January 2009, %

Real Economy PricesAsset prices

S&P

500

Euro

pean

HY

US H

YM

SCI W

orld

SXXP

MSC

I EM

Topi

xUS

IGGe

rm. B

ond

Euro

pean

IGGo

ldUS

Bon

dJa

pan

Bond

US N

omin

al G

DPEU

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inal

GDP

US H

ouse

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esEu

rope

an w

ages

US C

PIEu

rope

an C

PIEA

Hou

se P

rice

Com

mod

ity

Data as at December 31, 2017. Source: Goldman Sachs.

“ We note a strong ‘Yearn for Yield’ evident among U.S. consumers,

who continue to sock away savings at a heady rate relative to the current advanced state of the

economic cycle. ”


#3: Own Some Secular Growth Winners That Are Cash Flow Com-pounders Amidst Slowing Nominal GDP As we mentioned earlier, there has been a notable deceleration in China’s nominal growth rate (Exhibit 46). In addition, we also think that disruptive forces, particu-larly in the Technology, Healthcare, and Financial Services Technol-ogy sectors, are creating something akin to an industrial revolution that we have not seen since the 1870s. Against this backdrop of a slowing China and increasing disruption, we have seen the percent-age of companies with top line growth of eight percent or more decline to 23% of the MSCI All Country World, compared to 45% in 2000/2001 (Exhibit 87). In our humble opinion, many of these struc-tural growers now enjoy not only a cheaper cost of capital but are increasingly benefiting from a network effect that allows them to gain greater operating leverage than their peers. In many instances we are witnessing fast-moving corporate ‘winners’ taking market share while maintaining pricing, and as such, the outlook is quite bright, we believe. Key markets like cybersecurity and value-added payment systems are obvious examples of this new world order playing out, but we also believe that this ‘winner take all approach’ is also occur-ring in logistics, defense electronics, and even food and healthcare delivery platforms that we see in Asia. Importantly, though, we prob-ably would avoid or own smaller positions in some of the high profile growth companies in areas where anti-monopoly or anti-competitive behavior is being charged by elected officials in Europe and the United States.

EXHIBIT 87

Few Companies Generate Top-Line Growth These Days

20%

30%

40%

50%

98 00 02 04 06 08 10 12 14 16 18

% of MSCI World Companies With Expected Sales Growth of Greater Than Eight Percent

23%

Data as at December 31, 2018. Source Bloomberg, S&P.

EXHIBIT 88

We Are Looking for Companies With True Economies of Scale in Key Secular Growth Areas Such as Data

298584

1,426

4,909

2010 2015 2020 2025

Data Interactions per Connected Person per Day

IDC estimates that every connected person in the world will have one digital interaction every 18 seconds by 2025. Today more than five billion consumers interact with data every day; by 2025 that number will be six billion or 75% of the world's population

Data as at November 2018. Source: IDC. https://www.seagate.com/files/www-content/our-story/trends/files/idc-seagate-dataage-whitepaper.pdf

At the moment, we actually are seeing better value in the public markets, particularly relative to many private markets, in countries such as China and the United States. Implicit in what we are saying is that we believe that some private company valuations have run too far, too fast to be supported through initial public offerings the way some of the Venture Capital and Growth communities may hope. Hence, we maintain our more cautious stance on Private Growth and other early stage financings in our target asset allocation.

“ Against this backdrop of a slowing China and increasing disruption, we have seen the percentage of companies with top line growth of eight percent or more decline to 23% of the MSCI All Country

World, compared to 45% in 2000/2001. In our humble opinion, many of these structural growers

now enjoy not only a cheaper cost of capital but are increasingly

benefiting from a network effect that allows them to gain greater operating leverage than their

peers. ”


EXHIBIT 89

Private Investments in Six of the 10 Best-Funded U.S. Tech Startups to Go Public Since 2015 Have Fallen from the Peak Levels They Hit in Funding Rounds Before the Companies’ Stock Debuts

The Top 10 Best Funded U.S. Tech Companies to Go Public Since 2015

Data as at May 25, 2019. Sources: Pitchbook (Total raised), company SEC filings (private share prices, amount raised at peak price), Wall Street Journal.

Ultimately, we believe that the poor performance of several recent IPOs in the Growth arena support our view that cash flow matters. One can see this in Exhibit 89. To be sure, we are not back to 1999, but we do believe that several recent investment rounds in the Pri-vate Growth markets have been at speculative levels. In our humble opinion, investors should avoid where possible business models that are predicated on low marginal revenue economics amidst contin-ued high fixed costs. We also believe that estimates around the total addressable market have been exaggerated in certain instances. Im-portantly, though, we view recent disappointment in performance as a long-term opportunity, and accordingly, we do expect to shift our significant underweight in Private Growth back to an equal weight or overweight as leading investors in the sector are forced to acknowl-edge that some of their valuation metrics have gotten too robust.

EXHIBIT 90

Demand for European Logistics Has Exceeded Supply Every Year Since 2009

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

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30

2009

2010

2011

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2014

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2018

European Logistics Thousands of Square Meters, %

CompletionsTake UpVacancy

Data as at 2018. Source: CBRE, Euromonitor.

EXHIBIT 91

We Are Bullish on Data and Analytics Across a Variety of Sectors

Industry Datasphere CAGR, 2018-2025, %

27%

36%

30%

26%25%

Global Healthcare Manufacturing Financial Services

Media and Entertainment

Healthcare is poised to grow given the advancements in healthcare analytics, increasing frequency and resolution of MRIs, and other image and video-related data being captured in today’s advanced modes of medical care

Data as at November 2018. Source: IDC. https://www.seagate.com/files/www-content/our-story/trends/files/idc-seagate-dataage-whitepaper.pdf

“ In an odd time characterized

by low interest rates and sluggish global GDP growth, we expect above average periodic dislocations across the capital

markets. ”


#4: Buy Dislocation/Dispersions As we described in our April 2019 Insights note The Uncomfortable Truth, we are living in an odd time characterized by low interest rates and sluggish global GDP growth. Against this backdrop we expect above average periodic disloca-tions across the capital markets. Indeed, as we show in Exhibit 92, our implied default model has hit recessionary levels several times since 2009, despite the reality that we have not yet had a technical recession in the United States. We view this backdrop as an opportu-nity because it confirms our strong view that assets are consistently being mispriced.

EXHIBIT 92

Our Implied Default Rate Has Hit Recessionary Levels Several Times, Despite the Reality That We Have Not Yet Had a Technical Recession in the United States

Oct-02

14.7%

Jun-070.8%

Oct-1111.2%

Feb -16

11.0%

Jun -19

4.0%

0%

2%

4%

6%

8%

10%

12%

14%

1990 1994 1998 2002 2006 2010 2014 2018

U.S. High Yield Implied Default Rate, %

Implied Default Rate Avg (6.2%)

Data as at June 6, 2019. Source: Bloomberg.

EXHIBIT 93

Periodic Dislocations Mean That Investors Need to be More Nimble Than in the Past

% of Loans Above Par

0%

10%

20%

30%

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80%

90%

Dec-

17

Feb-18

Apr-

18

Jun-

18

Aug-

18

Oct-

18

Dec-

18

Feb-19

Apr-

19

Data as May 31, 2019. Source: LSTA.

However, this phenomenon is not just a story in Credit. Rather, it pervades all asset classes, including Public Equities. To understand this, we need not look any further than China, where technology/growth stocks corrected materially in the fourth quarter of 2018 (Exhibit 94). At the same time, stocks in Europe with similar growth attributes barely budged during the same period (Exhibit 95).

EXHIBIT 94

China Equities, Technology Growth Stocks in Particular, Have Experienced a Massive Correction…

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2011

2013

2015

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2019

MSCI China Price-to-Sales

Info Tech Average Since 1995

Data as at May 31, 2019. Source: MSCI, Factset.

“ In our humble opinion, investors

should avoid where possible business models that are

predicated on low marginal revenue economics amidst continued high fixed costs.

”



EXHIBIT 95

…While in Europe, Growth Stocks Are Still Expensive

0%

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30%

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60%

70%

80%

90%

100%

96 98 00 02 04 06 08 10 12 14 16 18

Eurostoxx 600 High vs. Low Sales Growth PE Premium

Note: High sales growth is greater than eight percent while low sales growth is less than four percent. Data as at May 31, 2019. Source: IBES, Datastream, Goldman Sachs Global Investment Research.

Maybe of more significance, though, is that we are finally seeing dispersions widen out. This shift in the macroeconomic backdrop as liquidity exits the system likely means that stock picking and security selection are going to become more important again. Indeed, both Exhibits 96 and 97 speak to this new reality where the micro might begin to trump the macro again. If we are right (and we think that we are), some asset allocators could be exiting certain hedge funds and long only managers at a time when their performance is likely to improve.

EXHIBIT 96

As the Tailwind from Quantitative Easing Slows, the Macro Environment for Security Selection Should Improve

0%

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1986

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2012

2014

2016

2018

Average Pair-wise Correlations of All S&P 500 Stock Combinations (Daily Returns 2Q86-April 30, 2019)

Clustered / macro market

Differentiated /stock picker's market

Data as at April 30, 2019. Source: BofA Merrill Lynch U.S. Equity & Quantitative Strategy.

EXHIBIT 97

Dispersions Are Now Just Starting to Widen. This Shift Is Bullish for Security Selection

0.2

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Average Intersector Correlations vs. Pairwise Correlations Within Sectors

Stocks more differentiatedthan sectors

Sectors more differentiated than stocks

Data as at December 31, 2018. Source: BofA Merrill Lynch U.S. Equity & Quantitative Strategy.

“ Meanwhile, in the Emerging

Markets, as countries move up the GDP-per-capita curve, we

continue to see demand for basic healthcare offerings, including

private insurance and specialized surgery care, especially in fast-growing consumer markets such as Brazil, China, Indonesia, and

India. ”


#5: Experiences Over Things As a firm, KKR has been investing behind this theme for the lion’s share of our team’s nearly eight years at the firm. Interestingly, when we re-underwrote this theme from a macro perspective again this summer, we actually came away more bullish, not less. Key to our thinking is that the pace of implementa-tion appears to have accelerated in recent quarters. Importantly, we do not think the trend towards experiences is just the ‘Amazon’ effect. Rather, we believe that key influences such as increased healthcare spending, heightened rental costs, and rising telecommu-nications budgets (e.g., iPhones) are leaving less and less discre-tionary income for traditional items, particularly mainstream retail. Recent trips to continental Europe as well as Asia have lent support to our view that this trend towards experiences is global in nature and cuts across a variety of demographics. For example, in Japan and Germany, aging demographics are boosting the use of later stage healthcare offerings, while younger individuals in the U.S. are embracing more health, wellness and beautification.

EXHIBIT 98

Healthcare, Consumer Services, Recreation and Travel Now Outpace Spending on Traditional Things

18%

19%

20%

21%

22%

23%

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19%

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Mar

-04

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04M

ar-0

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ar-1

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p-17

Mar

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Sep-

18M

ar-1

9

Wallet Share: Goods vs. Services

Retail Goods (RA)Healthcare (LA)Consumer Services,Recreation &Travel (LA)

Data as at March 31, 2019. Source: Evercore ISI.

EXHIBIT 99

Healthcare Has Been the Only Consistent Growth Area in U.S. Personal Consumption Since 1967

68%

54%

50%

55%

60%

65%

70%

75%

1967

1972

1977

1982

1987

1992

1997

2002

2007

2012

2017

U.S. Personal Consumption Expenditures, % of GDP

Consumer Spending ex-Healthcareremains at average levels

PCE % GDPAvg.1968-2018 = 63.0%

PCE (ex Healthcare) % GDPAvg. 1968-2015 = 54.0%

Data as at April 29, 2019. Source: KKR Global Macro & Asset Allocation analysis, Haver Analytics, BLS, IDC.

Meanwhile, in the Emerging Markets, as countries move up the GDP-per-capita curve, we continue to see demand for basic healthcare offerings, including private insurance and specialized surgery care, especially in fast-growing consumer markets such as Brazil, China, Indonesia, and India. Importantly, the trend towards services extends well beyond just the Healthcare sector. Recreation, travel, and leisure all appear to be market share gainers versus basic ‘things’ that con-sumers traditionally bought with their disposable income. Moreover, consumers are more willing to use the Internet to price shop, making them more fickle in some instances.

As one might guess, there are times when our team does macro analysis on a particular topic while working with a deal team on an investment. An on-the-ground visit to a certain country and/or company can help to confirm that the micro and the macro are totally in sync, which is what we are usually searching for when we deploy capital on behalf of our limited partners. Our recent trip to China was one of those times, as Frances Lim and I had several corporate meet-ings that confirmed her bullish thesis about the massive opportunity set linked to the burgeoning Chinese millennial population. By way of background, of the total 828 million millennials in Asia, Frances estimates that fully 40%, or 330 million, are today in China. To put the 330 million in perspective, we would note that there are ‘just’ 66 million millennials in the U.S. One can see this in Exhibit 100. Said differently, China’s millennial population alone is now roughly the same size as the entire population of the United States. Also, as we show below, millennials are now a sizeable proportion of the overall Chinese population. Given this heft and growth, they will unequivo-cally dominate the labor force and consumer markets over the next two decades.

“ We are finally seeing dispersions

widen out. This shift in the macroeconomic backdrop as

liquidity exits the system likely means that stock picking and security selection are going to become more important again.

”


Against this current backdrop, we have come to appreciate that Chi-nese millennials have developed distinct consumption preferences in recent years. As we show in Exhibit 101, they spend about one-third more on leisure. They value fresher and healthier food and product alternatives than their parents, and they price comparison shop much more than their elders and many of their global peers. We link many of these traits to their tech-savvy ways – and it is not just goods purchased. Just consider that it only took Didi, China’s ride hailing leader, three years to reach 50% penetration, while Uber has yet to reach 50% penetration after seven years in the U.S. Meanwhile, Ali-Pay has only taken four years to hit a penetration rate of 50%, while ApplePay has yet to reach the 50% milestone in the United States. To be sure, some of this accelerated migration in China is linked to the country’s desire to use technology to accommodate its population of 1.4 billion as well as to create national champions, but it also speaks to the rapid adoption of technology throughout the country. Favorable logistics also help greatly in a country where courier costs are low and population density is high.

EXHIBIT 100

With More than 6x as Many Millennials in Asia than in the U.S. and Europe Combined, the Asian Millennial Will Reshape the Global Consumer Market

60 66

328 330

828

Euro Area U.S. India China Asia

2017: Number of MillennialsBorn 1980-1994 (Millions)

5.0x the number of millennials in Chinaand 12.5x the total number in Asiarelative to the U.S

Asia includes China, India, Japan, Hong Kong, Korea, and ASEAN (Indonesia, Malaysia, Philippines, Thailand, Singapore, Vietnam). Data as at June 24, 2017. Source: United Nations World Population Prospects, Haver Analytics.

EXHIBIT 101

Chinese Millennials Save Less and Allocate Three Times More of Their Income to Leisure

49%37%

28%

16%

14%

16%

9%

30%

0%10%20%30%40%50%60%70%80%90%

100%

China Overall Chinese Millennials

Spending Breakdown China Overall vs. Chinese Millennials

Housing, Transport, Utilities Shopping, Food

Shopping, Non-Food Leisure

Data as at December 31, 2016. Source: Goldman Sachs Global Investment Research.

EXHIBIT 102

We Believe That Potential Spending of High Earners Will Be Oriented Towards Upgrades and Experiential Spending

47

130

222

2018 2028 2038

Millions of Chinese Living in High Income Households

Data as at 2018. Source: Global Demographics estimates, HSBC.

“ Against this current backdrop, we have come to appreciate

that Chinese millennials have developed distinct consumption

preferences in recent years. ”


EXHIBIT 103

Millennials Have Different Attitudes and Buying Habits Than Older Generations

69% 72%78%

83%

Millennials Attitudes, Buying Habits and AttitudesAccording to a 2018 Harris Poll

View Live Experiences as

Helping Connection With

Friends, Community or People Around

the World

Plan to Increase Spending on

Experiences in the Coming Year

Prefer SpendingMoney

on an Experience or Event Over

Buying Something Desirable

Have Participat-ed in a Live

Event in the Last 12 Months

Data as at 2018. Source: Harris Poll of Millennials.

SECTION III: Investment Considerations/Risks

#1: Reliance on Technology While maybe not as extreme as 2000, this cycle has clearly been heavily technology dependent. How dependent? As Exhibit 104 shows, essentially all the earnings growth this cycle has come from the Technology sector. However, it is not just corporate profits that are being driven by technology. Indeed, we recently heard one major CEO in the real estate sector acknowledge that fully 35% of commercial lease ups during the past 12 months were directly linked to the Technology sector.

EXHIBIT 104

Technology Has Been the Key to EPS Growth This Cycle

0

50

100

150

200

250

300

85 88 91 94 97 00 03 06 09 12 15 18

LTM Earnings, January 2009 = 100

World TechnologyWorld ex TechEurope

Data as at June 6, 2019. Source: Worldscope, Datastream, and Goldman Sachs Global Investment Research.

EXHIBIT 105

Technology Remains an Area of Outsized Growth in the Credit Markets These Days

29.9

17.010.7

0.411.2 13.3

20.7

-3.1

38.5

21.5

11.6

11.5

7.7 4.0

3.9

1.3

TMT

Cons

umer

Hea

lthca

re

Indu

stria

ls

Basi

cs

Financials

Ener

gy

Utili

ties

Growth in Par Outstanding by Sector, 2009-2018

Leveraged Loans High Yield

Technology, Media and Telco Has Driven Nearly 40% of Growth in the Loan Market This Cycle

Data as at December 31, 2018. Source: LCD, Morgan Stanley.

“ However, it is not just corporate profits that are being driven by technology. Indeed, we recently heard one major CEO in the real estate sector acknowledge that

fully 35% of commercial lease ups during the past 12 months were

directly linked to the Technology sector.

”


On the debt side, a similar concentrated bet is being made. As we show in Exhibit 105, Technology, Media, and Telecommunications now accounts for around 40% of total issuance for Levered Loans, and it is certainly sizeable in the High Yield market as well.

At the moment, we find it hard to avoid allocating capital to Technol-ogy deals because of all the technological change we see transpiring around the world. However, in the asset allocation accounts where we do portfolio construction, we are becoming increasingly valua-tion sensitive, and as such, we are watching our pace of deployment closely in the Technology arena. We also are shying away from Tech-nology deals where the embedded value creation in the deal depends on huge cost savings and high leverage levels. So, our bottom line is certainly not to avoid investing in parts of the Technology sector. Rather, we are acknowledging that the sector’s outlook has gotten in-creasingly frothy, and as such, we are proponents of aggressive use of many of the sophisticated asset allocation tools that we have been advocating for some time (see October 2018 Insights note Rethinking Asset Allocation for further details).

#2: An Increasingly Complex Geopolitical Environment The populist and geopolitical disruptions that my colleagues Ken Mehlman and Travers Garvin predicted in each of the past three years have again manifested themselves in 2019. These trends are disrupting global trade, paralyzing the largest democracies in Europe, and sidelining policymaking in the U.S. While the U.S. and China may ultimately muddle through on tariff matters in the near-term, the broader geo-political struggle between these two nations has now been exposed – on trade, on technology, on rule of law and national security -- and it is not likely to abate.

Importantly, there is political instability across all regions these days. For example, in Europe the recent elections for the European Parlia-ment confirmed that the balance of power is shifting away from the traditional center parties (Christian-Democrat and Social-Democrat), which – for the first time since 1979 (first European Parliament elec-tions) – have lost their combined majority. The old, post-World War II political parties, built around class and economic structures and party loyalty have eroded with the increased prominence of identity, migra-tion and climate change as core voting issues. At the same time, radical populist parties, while gaining seats, remain below the 25% threshold and are strongly internally divided on core issues, such as migration and Russia. In this context, Liberals (economically to the right and socially on the left) and Greens (who have now become an established political force in Northwestern Europe) will have a strong voice in the upcoming appointments of key personnel (presidency of EU Commission, EU Council, EU parliament and European Central Bank) and legislative initiatives over next five years. Both parties have a strong pro EU agenda.

EXHIBIT 106

Trade as a Percentage of Global GDP Peaked More Than 10 Years Ago

Sep-0826.4

Feb-1922.3

12

16

20

24

28

80 85 90 95 00 05 10 15 20

Global Merchandise Exports as a % of Global GDP

Data as at May 9, 2019. Source: IMFWEO, Haver Analytics.

EXHIBIT 107

Geopolitical, Societal, and Technological Changes Are Now Having a Substantial Impact on Both Economies and Markets

GEOPOLITICAL SOCIETAL TECHNOLOGICAL

Failure of governance (global, national,

regional)

Failure of urban plan-ning

Adverse consequenc-es of technological

advances

Interstate conflict Food crisesBreakdown of critical

infrastructure and networks

Large-scale terrorist attacks

Large-scale involun-tary migration

Large-scale cyberat-tacks

State collapse or crisis Profound societal instability Data fraud/thefts

Weapons of mass destruction Infectious diseases

Water crises

Source: The Global Risks Report, World Economic Forum.

https://www.kkr.com/global-perspectives/publications/rethinking-asset-allocation

https://www.kkr.com/global-perspectives/publications/rethinking-asset-allocation


Meanwhile, French President Macron has maneuvered himself into the midst of the EU decision-making machinery. He is not only build-ing a coalition with the liberals but also leveraging that position to seek a strengthening of the institutional structures of the European Union, a stronger European backbone on the international scene, including on trade, and a further injection of French influence into the EU decision-making machinery. In the United Kingdom, polariza-tion linked to Brexit is only further intensifying, and it is putting the Conservative Government, the Labour Party, the two-party politics system (Conservatives-Labour) and the Four Nations Union (Eng-land, Scotland, Wales, Northern Ireland) under severe, even existen-tial, pressure.

EXHIBIT 108

Regulatory Issues and Investment, Not Tariffs, Were of Paramount Concern in a Recent U.S.-China Business Council Survey

2%

4%

6%

6%

6%

8%

11%

13%

15%

28%

Lost Sales Due to Tariffs That HaveBeen Implemented by the U.S.

Increased Sales or Opportunities

Lost Sales Due to Concerns About DoingBusiness with American Companies

Uncertainty Due to Trade Tensions

Other

Increased Scrutiny FromRegulators in the U.S.

Lost Sales Due to CustomerUncertainty of Continued Supply

Lost Sales Due to Tariffs That HaveBeen Implemented by China

Delay or Cancellation of Investmentin the U.S. or China Due to Uncertainty

Increased Scrutiny FromRegulators in China

Impact of U.S. - China Trade Tensions on Business

Data as at 2018. Source: U.S. China Business Council Survey.

The U.S. certainly remains a hot spot of political uncertainty as well. Already, policymakers have begun to pivot to the 2020 elections, with a record 23 Democrats seeking to oppose President Trump. Such a large field, combined with Democratic base voters’ dislike of President Trump, is likely to pull Democratic policy to the left. President Trump welcomes confrontation and will likely look for nearly daily opportunities to stoke this fight, hoping to frame 2020 as a choice, not a referendum on his leadership. A critical question is how this drama impacts U.S./China trade, EU/U.S. trade, Japan/U.S. trade, NAFTA/USMCA – particularly as President Trump uses tariffs or the threat of trade barriers to reinforce his disruptive bona fides and focus attention on topics he favors (see Mexican tariffs and im-migration).

Also, in this populist environment, the Technology and Healthcare sectors can expect bipartisan examination, and potentially pro consumer legislation (for example: drug prices and surprise medi-cal billing) and regulatory actions (Google antitrust). Beyond these industries, expect continued scrutiny on gun sales, consumer loan products, bankruptcies, treatment of workers, and outsourcing. So needless to say, our call for corporate and investment leaders to remain acutely focused on establishing and demonstrating the social value of their businesses remains in full force.

EXHIBIT 109

The Wave of Discontent Across Europe Taps into Concerns About Globalization, Immigration, a Dilution of National Identity, and the EU Itself3

9%-16% 17%-24%25+%

1%-8%

% of Votes Won By Nationalist Party in Most Recent European Election

Data as at April 2019. Source: BBC.

3 https://www.bbc.com/news/world-europe-36130006

“ So needless to say, our call for

corporate and investment leaders to remain acutely focused on

establishing and demonstrating the social value of their businesses

remains in full force. ”


Given all the above, our view is that investors should make sure to maintain some additional liquidity or shock absorbers in their portfolios. Hence, we have made the decision at mid-year to add a little more Cash to our portfolio. However, there is a bigger shift in approach that should be implemented, we believe. Specifically, as Ken and Travers have been advocating through their work at KKR, investors need to spend more time on the “soft stuff,” including reputational risks. To this end, we believe that all allocators of capital should carefully assess whether companies and industries act like monopolists, can appropriately mitigate the negative externalities of their business models, and thoughtfully consider business practices that are “allowed but not proud” – and look to invest with companies who credibly maintain their social “license to operate.” This approach certainly applies not only to new technology platforms, but really to all business behavior. Finally, we also believe that short-term greed will lead to long-term decline in value; said differently, long-term thinking about corporate positioning, culture, and community engage-ment has never been more important.

#3: Corporate Margins Are at Risk One of the benefits of working in the KKR Global Macro & Asset Allocation team is that it provides a wonderful window into the key questions that potential investors and/or companies are wrestling. Right now our backlog for deal-re-lated work is highest in the area of corporate profitability. Specifical-ly, a lot of the ‘swing factor’ we see around profitability for both new investments and existing portfolio companies centers around margin sustainability. In particular, will downward pressure on operating leverage – most often driven by higher wages amidst limited pricing power – dent EBITDA margins more than budgets suggest at this point in the cycle? As we show in Exhibits 110 and 111, we think that the answer is yes more often than not at at this point in the economic cycle, though productivity growth has emerged as a key buffer.

EXHIBIT 110

We Believe That Slowing Growth Amidst Higher Wages Will Become a Headwind to Margins in 2019…

S&P 500 Revenue Less Wage Growth Scenarios, %

4Q18e5.3%

4Q19e1.0%

-20%

-15%

-10%

-5%

0%

5%

10%

'96 '99 '02 '05 '08 '11 '14 '17 '20

Revenue Growth less Wage GrowthBaseBearBull

Data as at April 30, 2019. Source: Bloomberg, Haver Analytics, KKR Global Macro & Asset Allocation analysis.

EXHIBIT 111

…Though Better Productivity Growth Has Been an Important Offset to Rising Wages, Keeping Unit Labor Costs Stable

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

'85 '90 '95 '00 '05 '10 '15 '20

U.S. Unit Labor Cost* (8-quarter average)

Lesswage

pressure

Morewage

pressure

* Unit Labor Cost Growth = Wage Growth - Productivity Growth. Data as at March 31, 2019. Source: Bloomberg, Haver Analytics, Bureau of Economic Analysis.

Coming into 2019, we had more conservative operating margins assumptions than the consensus, expecting margins to compress by 20 basis points or so rather than expand for a third straight year. Consensus has since converged towards our view, and the analyst community now expects margins to fall to 11.3% this year from 11.5% in 2018. As we look ahead into 2020, though, we still continue to think that operating margins will come under additional pressure again. As we show in Exhibit 110, our proprietary model for tracking the revenue-wage differential falls towards just one percent by the fourth quarter of 2019. In our base case, we assume hourly earnings of 3.2% and revenue growth of 4.3%. In our bear case, the revenue-wage differential turns negative by the end of this year, a backdrop that last occurred in 2007.

“ Coming into 2019, we had more conservative operating margins assumptions than the consensus,

expecting margins to compress by 20 basis points or so rather than expand for a third straight year. Consensus has since converged

towards our view. ”


EXHIBIT 112

Productivity Growth Climbed to 1.7% Year-over-Year in the First Quarter, the Fastest Pace Since 2010

-1%

0%

1%

2%

3%

4%

5%

6%

'90 '95 '00 '05 '10 '15 '20

U.S. Productivity Growth(Output / Hours Worked)

1Q191.7%

Data as at March 31, 2019. Source: Bureau of Labor Statistics, Haver Analytics.

EXHIBIT 113

Is The Trade War Really Having an Impact on Sourcing Costs and Logistics? Yes, It Absolutely Is

-20-15-10-505

101520253035

Jan-

14

Jun-

14

Nov-

14

Apr-

15

Sep-

15

Feb-16

Jul-1

6

Dec-

16

May

-17

Oct-

17

Mar

-18

Aug-

18

Jan-

19

U.S. Goods Imports, 3-Month Average, Y/y %

Vietnam Taiwan Korea China

China -14%

Taiwan +22%

Korea +16%

Vietnam +37%

Data as at June 3, 2019. Source: EvercoreISI.

That said, we note that the recent upturn in productivity has been an important mitigant. Indeed, as we show in Exhibit 112, productivity actually jumped 1.7% year-over-year in the first quarter of this year, which is the fastest pace since September 2010. Rising productiv-ity could be a material offset to the negative operating margins we have seen in prior cycles, as it helps to keep unit labor costs stable (Exhibits 110 and 111). However, if trade tensions continue to ratchet up rather than down (which is our base view), CEOs may once again pull back on capital expenditure – which is key to productivity – at exactly the time spending needs to increase (to boost productivity).

SECTION IV: Conclusion

This is the top to, uh, you know, what we use on stage, but it’s very, very special because, if you can see, the numbers all go to eleven. Look…, right across the board. Eleven, eleven, eleven and then…

Nigel Tuffnel, Spinal Tap

We have been doing macroeconomic analysis for nearly two decades, and it certainly feels to us right now that – after the most recent tar-iff confrontation with China, Mexico, and India – the current environ-ment has gone to eleven on a scale of one to 10. This reality humbles us because it means that the risk of a blunder for macro investors and asset allocators is extremely high – even for those who have been navigating global markets for quite some time. The stakes are also higher, as we are now likely living in a world of lower returns with above average dispersions.

Against this backdrop, we are relying more than ever on the propri-etary macro frameworks that we have built over the last two decades to guide our thinking. At the moment, our work is telling us to own more assets linked to nominal GDP as part of our goal of frontloading as much yield as possible in the portfolio. It is also telling us to hold a little more Cash to be able to lean into periodic dislocations. Beyond Cash, it likely means owning more Opportunistic Credit and Special Situations. Finally, we also feel compelled to embrace Complexity through corporate carve-outs in our Energy, Private Equity, Real Estate, and Infrastructure allocations.

There are clearly risks to consider. Tariffs are undoubtedly overhangs to both growth and confidence, and as we indicated earlier, we view the U.S.-China tensions as much more concerning than the U.S.-Mexico ones (and we do not mean to belittle them either). Beyond heightened geopolitical tensions, we think both corporate margins and excesses in the Technology sector warrant investor attention.

Overall, though, we think the most likely outcome is more of a muddle through one – one that is defined by isolated downturns that create short-term dislocations. Ultimately, though, low rates, de-levered financial institutions, and accommodative central banks should help to prevent a 2007 repeat. So, stick to the plan. If we are right, then we think our existing asset allocation framework should continue to serve us well. Said differently, if ‘it ain’t broke, don’t fix it.”

“ At the moment, our work is telling

us to own more assets linked to nominal GDP as part of our goal

of frontloading as much yield as possible on the portfolio. It is also telling us to hold a little

more Cash to be able to lean into periodic dislocations.

”


Important Information

References to “we”, “us,” and “our” refer to Mr. McVey and/or KKR’s 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 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 target 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 the 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. Fur-ther, Mr. McVey may make investment recommendations and KKR and its affiliates may have positions (long or short) or engage 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 McVey of Kohlberg Kravis Roberts & Co. L.P. (together with its affiliates, “KKR”) and do not nec-essarily reflect the views 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 repre-sent 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 be-ing provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own views on the topic discussed herein.

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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 per-formance of any particular investment which may differ 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 current 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 projec-tions or other forward‐looking statements regarding future events, targets, forecasts or expectations regard-ing the strategies 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 signifi-cantly different from that shown here. The information in this document, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subse-quent 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 considered investments.

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GLOBAL MACRO TRENDS · 2019-06-20 · Brian C. Leung +1 (212) 763.9079 [email protected] Rebecca...

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Transcript of GLOBAL MACRO TRENDS · 2019-06-20 · Brian C. Leung +1 (212) 763.9079 [email protected] Rebecca...