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Donald Trump's election represented not just a big moment in politics but also a "paradigm shift" in investing, according to private equity giant KKR.
The influential firm with $120 billion under management told clients that events from 2016, including Trump's victory and Britons voting to exit the European Union, represent landmarks for a changing global environment. Years of focusing on boosting financial assets like stocks and bonds will give way to growth-oriented policies, more focus on domestic agendas and increasing volatility.
"Inspired by the aforementioned catalysts, we have entered into ... a 'political bull market,'" Henry McVey, head of global macro and asset allocation at KKR, said in a report for clients. "From 2008-2015, this 'political bull market' took the form of more regulation, higher taxes and heightened industry scrutiny. Many governments also promoted fiscal austerity, multilateral trade and aggressive monetary stimulus. However, last year's U.K. Brexit vote and U.S. election of President Donald Trump likely presage a new chapter in this bull market story."
For investors, the change means focusing on real assets including master limited partnerships, real estate and infrastructure. The firm's recommendations, however, do not include gold, which it is actively betting against in 2017 with short positions.
KKR also has moved away from its 2016 preference for credit over equity though it is a fan of private credit, or the growing market of nonbank lending. The dollar also is forecast to continue higher, and KKR has gone to a 3 percent cash position, which is 1 percentage point higher than normal.
Taken together, KKR expects its investing thesis to provide "mid-to-high single-digit returns ... though we are more optimistic that — almost irrespective of the environment — the ongoing rotation away from simplicity towards attractively priced complex assets could add another 300-500 basis points of alpha in 2017."
The investing choices are geared toward a new climate where the focus switches from boosting financial markets to boosting income and economic growth, which has been well below trend throughout the post-Great Recession period.
"Not surprisingly, working citizens around the globe, particularly in the developed markets, are now tired of paying for a financial crisis that they feel they did not create and of the effects of extreme monetary policy (i.e., it is harder to increase savings with low/negative rates)," McVey said. "They want less fiscal austerity and less traditional political rhetoric. They also want growth in real incomes and benefits for their families, including education, health care and retirement savings."
As for risks, he said such transitions often have bumps along the way.
Trump's plan for fiscal stimulus could have less impact with an economy running near full employment, and "swinging wildly" away from globalization could be dangerous as well, McVey said.
"Said differently, a lot of cyclical stimulus would be required to overcome some of the headwinds that have defined the secular stagnation that the global economy has witnessed in recent years," he said.