Many investors are hopeful that inflation will continue moving lower which will provide relief for fixed income and equities as the Fed could start loosening monetary policy. However, KKR does not believe it’s likely. Instead, they believe we are in the midst of a ‘regime change’ in terms of the macroeconomic landscape which will require investors to adopt new portfolio management strategies.
In essence, they see inflation being structurally higher due to factors such as entrenched fiscal deficits, labor shortages, energy transitions, and increased geopolitical risk. With these conditions, stocks and bonds are more correlated as evidenced by the last 2 years. The firm believes that investors need to increase their allocation to real assets with recurring yields as a source of diversification, given the increase in bond market volatility.
Rather than the traditional real assets such as REITs, TIPs, and precious metals, they find value in real assets that have collateral-based cash flows like private real estate to provide positive returns while dampening portfolio risk.
Even if their outlook on inflation proves to be incorrect, KKR believes that real assets should outperform given that they remain bullish on economic growth and see Q4 and 2024 GDP coming in above expectations.
Finsum: KKR is bullish on real assets including private real estate as it believes inflation is going to remain structurally high and that bonds are not providing sufficient diversification.