Henry McVey on Global Markets: Peak Tariffs, Productivity Boom, and Investing in Asia

Regime Change in the Global Economy

• 💡 The global economy is undergoing a regime change characterized by larger deficits, increased geopolitics, a complex energy transition, and a higher resting heart rate for inflation.
• 🎯 This necessitates a shift in investment strategy, focusing on assets linked to nominal GDP.

Investment Strategies for Inflationary Environments

• 📈 In the private markets, this means prioritizing infrastructure and hard assets that perform well during periods of inflation.
• 💰 For lending, owning hard assets that benefit from inflation is recommended.

Opportunities in Underowned Markets

• 🌏 Asia, particularly markets like India and Japan, is identified as significantly underowned despite positive earnings trends.
• 🇪🇺 In Europe, the periphery, such as Spain, offers attractive investment opportunities compared to core European markets.
• 📉 The current market environment allows for moving up in credit quality without significant cost, and the S&P 500's quality index is trading cheaper.

The Productivity Boom and Global Shifts

• 🚀 A global productivity boom is underway, with the US experiencing 5% productivity growth.
• 🇰🇷🇹🇼🇯🇵 Cheaper ways to play this productivity trend may lie in markets like Korea, Taiwan, and Japan, which trade at less than book value.
• 🇺🇸 The dominance of the MAG7 in the US market is expected to shift, with healthcare, financials, and Asia poised for stronger performance.

KKR's Evolving Playbook

• 🏢 KKR is focusing on corporate carve-outs, infrastructure, and asset-based finance, particularly in credit markets.
• 🇯🇵 Japan is highlighted as an epicenter for investment due to its transition from deflation to inflation and commitment to corporate reform, leading to rising return on equities.
• 🏦 The Japanese bond market needs to normalize, creating a tension that investors can navigate by borrowing cheaply in a higher nominal GDP environment.