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The head of global macro and asset allocation at U.S. private equity firm KKR has issued a note to investors warning that the current volatility in global markets could destroy less experienced investors.
KKR's Henry McVey cautioned investors on the year ahead, although he noted there were still "pockets" of investment opportunities.
"In laymen's terms, today's market conditions are somewhat akin to swimming at the beach when there is a strong undertow that could pull a less experienced swimmer out to sea. It might not happen, but the probability is certainly higher than under normal circumstances," McVey said in the note published on Tuesday.
"As such, we think that the mantra "Adult Swim Only" seems to be a prescient catch phrase for the current macro investing environment," McVey added
McVey's warning comes as global markets kicked off 2016 with volatility in China marring sentiment internationally. Concerns over plunging oil prices, a slowdown in China and market volatility in the world's second largest economy have had a knock-on effect.
On Tuesday, however, there was a reprieve following the stabilization of the Chinese yuan and U.S. stocks closed higher, recovering slightly from a sharply lower start to the year.
Despite the uncertainty surrounding the trading environment, KKR's McVey signaled that there were areas of opportunity for investors.
"The current macro backdrop does not mean that there are no good investment opportunities. Rather, one just needs to think through how to embrace current market volatility to one's advantage," he said.
He listed five key areas he believed to be "key investment opportunities for 2016:
1. "Private credit appears to be a huge opportunity in 2016. Recent gyrations in the financing markets are providing non-bank lenders a significant opportunity to leverage the market's illiquidity premium to earn compelling risk-adjusted returns. In particular, private financing opportunities linked to real estate, infrastructure, corporate take-overs, and equipment currently appear to be the best risk-adjusted opportunity in the market today," he said.
2. "Liquid markets favors credit. Within liquid markets, we currently favor credit over equities, and within credit, we see strong relative value across credit particularly in high quality levered loans," McVey noted.
3. "Global consumer. The outlook for certain segments influenced by the global consumer is positive," KKR believed. "A high priority, we believe, would be to find opportunities around key trends like improving household formation, increasing Internet penetration, and an intensifying focus on health care/beauty/wellness," McVey said.
4. "Debt-driven restructurings. China's ongoing slowdown in fixed investment could lead to new and exciting opportunities for distressed/special situations investors. We are also bullish on the dislocated credit opportunities that we see in Europe (largely financial institutions)," McVey said.
Lastly, he recommended infrastructure and real estate as another investment opportunity. "Within real assets, the current environment favors investments that can provide yield and growth versus owning outright commodity positions," he said.