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Wall Street exec: It's an 'adult swim' market now

Brexit represents ‘durable challenge’ as populism snags reform efforts, KKR’s McVey says.

Credit could offer better and more stable returns compared to stocks in a market increasingly beset by volatility, according to an executive at one of the largest private equity firms.

"We remain in an 'adult swim only' environment," Henry McVey, private equity and investment management firm KKR's head of global and macro asset allocation, wrote Thursday in a report, later adding, "we still prefer credit to equities."

Michael Phelps competes in a semi-final heat of the Men's 200 Meter Butterfly during Day 3 of the 2016 U.S. Olympic Team Swimming Trials on June 28, 2016 in Omaha, Nebraska.
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Michael Phelps competes in a semi-final heat of the Men's 200 Meter Butterfly during Day 3 of the 2016 U.S. Olympic Team Swimming Trials on June 28, 2016 in Omaha, Nebraska.

There are a number of factors weighing into McVey's expectations, including China's economic slowdown, the idea that the ongoing U.S. market run has gotten a bit long in the tooth and volatility stemming from the Brexit vote last week.

The Brexit by itself isn't enough to plunge markets into recession, McVey said in KKR's mid-year update, but investors are by no means out of the woods, either. The ongoing market and economic fallout tied to the U.K.'s shock vote will generate "interesting opportunities" for investments, he said.

"The European Union has strong incentive to play tough with the U.K., meaning this situation may get worse before improving," McVey wrote, adding that fallout will likely be felt for years to come.

What KKR does like right now are investments in areas including private credit for small- and medium-sized businesses, because lending terms have shifted to favor lenders more than borrowers as of late. But it's also an opportunity for firms like KKR (which also runs a lending business aside from its private equity operations) because big banks are less likely to make as many loans now as they were before the global financial crisis.

The trends come at a time when there is growth in negative-yielding credit elsewhere, which is tied to central banks driving yields to new lows. Even KKR is downshifting its expectations for interest rate hikes in the U.S.; McVey wrote that the firm is cutting 2016 hike expectations from two to zero, and from four to three in 2017.

Nevertheless, it looks like McVey is ready for more rate hikes.

"In our humble opinion, we may have reached an inflection point where central banks have gone too far with their unconventional policy tools," he wrote.