global macro trends · 2. investors should continue to think about a european macro environment...

VOLUME 7.2 • MARCH 2017

Europe: Complexity Rules

INSIGHTSGLOBAL MACRO TRENDS

2 KKR INSIGHTS: GLOBAL MACRO TRENDS

Europe: Complexity RulesOur most recent macro deep-dive across Europe left us with several high conviction investment conclusions. First, we have boosted our European GDP forecast for 2017 to 1.7% from 1.4%, reflecting the reality that heightened political uncertainty has not yet derailed the region’s surprisingly strong economic recovery. Against this backdrop, we favor consumption stories, especially those linked to experiences. We also believe that European equities, financials in particular, are poised to perform well in 2017. Our work also suggests structurally overweighting innovation in Europe, including the region’s small but growing technology sector. However, there are plenty of thorny issues that must be considered. For example, the current monetary union is creating substantial structural strains not only across economies (e.g., Germany versus Italy) but also within economies (e.g., France). We also believe political concerns about immigration represent secular, not cyclical, headwinds that must be carefully considered. Our bottom line: Europe is likely to experience a notable “catch-up” trade in the near-term, but long-term structural headwinds continue to argue for moderate pacing, embracing complexity, and regional diversification.

KKR GLOBAL MACRO & ASSET ALLOCATION TEAM

HENRY H. MCVEY Head of Global Macro & Asset Allocation +1 (212) 519.1628 [email protected]

FRANCES B. LIM +61 (2) 8298.5553 [email protected]

DAVID R. MCNELLIS +1 (212) 519.1629 [email protected]

PAULA CAMPBELL ROBERTS +1 (646) 560.0299 [email protected]

AIDAN T. CORCORAN + (353) 151.1045.1 [email protected]

REBECCA J. RAMSEY +1 (212) 519.1631 [email protected]

BRIAN C. LEUNG +1 (212) 763.9079 [email protected]

MAIN OFFICEKohlberg Kravis Roberts & Co. L.P.9 West 57th StreetSuite 4200New York, New York 10019+ 1 (212) 750.8300

COMPANY LOCATIONSAMERICAS New York, San Francisco, Menlo Park, Houston, São Paulo, Calgary EUROPE London, Paris, Dublin, Madrid ASIA Hong Kong, Beijing, Singapore, Dubai, Riyadh, Tokyo, Mumbai, Seoul AUSTRALIA Sydney

© 2017 Kohlberg Kravis Roberts & Co. L.P. All Rights Reserved.

“ A man should not strive to eliminate his complexes but to get into accord with

them: they are legitimately what directs his conduct in the world.

”SIGMUND FREUD

AUSTRIAN NEUROLOGIST AND THE FOUNDER OF PSYCHOANALYSIS

3KKR INSIGHTS: GLOBAL MACRO TRENDS

My colleague Aidan Corcoran, who leads KKR’s macroeconomic analysis effort in Europe, and I recently joined many of our European KKR colleagues for a series of meetings with business executives, government officials, and central bank prognosticators across the region. Given the political uncertainty of late, there was certainly plenty to discuss, particularly as KKR remains quite active in assess-ing potential investment opportunities across private equity, private credit, liquid credit, infrastructure, and real estate in the region.

Our bottom line: We actually left feeling more encouraged about the prospects for risk assets in the near term, though some of our long-term concerns about the “Union” remain intact. See below for full details on our latest views, but our initial Thoughts from the Road are as follows:

1. Despite significant political uncertainty — and almost in spite of itself — European GDP continues to chug along at a steady clip. In fact, we are lifting our 2017 GDP forecast to 1.7% from 1.4% previously, driven by better than expected investment trends. Maybe more important, though, is that our quantitative GDP model is forecasting robust growth in Europe of 2.5% for 2017 (Exhibit 11). This forecast is driven largely by the powerful effects of the European Central Bank’s highly accommodative mon-etary policy regime, partially offset by stagnant housing market concerns. However, if mortgage lending growth does accelerate, implied growth by our model could be even stronger, though we fully acknowledge an overall political risk discount of 50-75 basis points to our quantitative growth model likely makes sense in the current environment.

2. Investors should continue to think about a European macro environment where consumption, particularly around experi-ences, remains compelling relative to overall trend growth. This viewpoint is consistent with an emphasis on sectors such as travel, health/beauty, and home improvement. By comparison, we remain cautious on global trade, and our research shows increas-ing examples of China insourcing manufacturing equipment that used to be built by leading European industrial enterprises (Ex-hibit 10). Our bigger picture conclusion is that globalization flows and production increasingly now appear to be moving towards more of a regional model, with a particular emphasis on Asia, Europe, and the Americas.

3. Europe continues to barrel down the path of a two-tiered economy, which is likely long-term unsustainable, in our view. Specifically, there is a large and growing dichotomy between Germany, with its strong growth, and the rest of Europe, Italy in particular. See below for details, but Italian GDP is now seven percent below its 2008 level in real terms; by comparison, Ger-many is a full eight percent above its 2008 level in real terms. During the next few quarters we believe that the ECB will allow Germany to run “hot,” leading to a further widening between Eu-rope’s largest and fourth largest economies. Somewhat ironically, the better Germany’s GDP performs, the more German bunds the ECB has to buy, while Italy’s economic underperformance cur-rently leads to less ECB purchases of Italian sovereign debt. We view these types of divergences as unsustainable, underscoring our belief that Europe will need to implement monetary and fiscal policies that better smooth economic growth and equality across

the region; otherwise, we fear it will lead to even more dire popu-list reactions, particularly if immigration issues are not reconciled.

4. We spent some extra time in Paris discussing the political outlook with a variety of players from the various parties. Our base case is that anti-European candidate Marine Le Pen does not advance beyond the second round. While we think that risk assets could play “catch-up” following a Le Pen defeat, the current populist backlash in Europe is not likely to dissipate. At its core, the monetary union that defines the EU makes it hard for countries to both be globally competitive and domestically responsive to stagnant wage growth. Also, the refugee/immigra-tion situation remains contentious, despite Europe’s urgent and long-term strong need to boost labor force growth — and hence GDP — via immigration.

5. Our discussions surrounding the banking sector from this trip lead us to remain constructive on both bank stocks and the assets banks are selling. According to Deloitte, sales by banks of European loans to third parties reached 172.7 billion euros during 2016, up a full 65.6% from 2015. We see more running room, as a steepening yield curve, higher stock prices, and solid GDP growth accelerate the healing of ongoing wounds in the European financial services sector. This outlook is also bullish for our substantial overweight in our asset allocation to both Private Direct Lending and Asset Based/Mezzanine Lending. Overall, our trip reinforces our 2017 outlook view (see Outlook for 2017: Paradigm Shift) that European financials will outperform during the next few quarters, a view we have not held in the past. That said, we do remain cautious on U.K. consumer-facing financial intermediaries. Key to our thinking is that we now see almost indiscriminate lending to consumers, despite deteriorating risk profiles in many instances. In our view, this trend is unsustain-able, particularly given our base case for more of a hard than soft Brexit. Details below.

6. We think that the underlying performance of European equities is potentially misunderstood by market participants. See below for full details, but our key conclusions are as follows. First, al-most seventy percent of the European underperformance versus the S&P 500 in recent years has been linked to the small size of the European tech sector, not the banking or commodity sectors. Said differently, Europe’s public equity underperformance is more compositional than it is structural. Second, whereas in past years we have argued that stocks with stable earnings looked expensive relative to stocks with cyclical earnings, the outlook today is now more balanced. However, that does not mean that there are no anomalies. See below for details, but our work shows that market capitalization — bigger being cheaper and smaller being expen-sive — is worthy of investor attention.


We left Europe with several investment conclusions. First, in terms of asset allocation, our view is that continental equities, which are finally experiencing positive earnings revisions for the first time in six years at the aggregate level, are quite a bit cheaper than bonds and real estate on a relative basis. To be sure, all financial assets have benefitted from quantitative easing, but interest rates and cap rates have fallen proportionately faster than the discount rate for stocks in recent years. Also, the embedded operating leverage in equities is higher than in real estate — and actually in most other equity regions — at this point in the cycle (Exhibit 35).

EXHIBIT 1

European Growth Has Remained Solid, Despite a Chaotic Political Backdrop

-5

-4

-3

-2

-1

0

1

2

Jan-

98De

c-98

Nov-

99O

ct-0

0Se

p-01

Aug-

02Ju

l-03

Jun-

04M

ay-0

5Ap

r-06

Mar

-07

Feb-

08Ja

n-09

Dec-

09No

v-10

Oct

-11

Sep-

12Au

g-13

Jul-1

4Ju

n-15

May

-16

050100150200250300350400450500

European Uncertainty Index and Business Climate

Uncertainty (RHS, Inverted) Business Climate (LHS)

Data as at February 28, 2017. Source: EU Data, Haver Analytics.

Second, we think that cyclical securities in Europe, financials in particular, will likely continue to rally. From what we can tell, the ECB now better appreciates that negative rates are problematic, and as such, it is steepening the yield curve to resuscitate the much maligned banking sector. Also, we continue to see multiple examples of banks selling assets off their balance sheets to create more flex-ibility with their capital base. However, we are not suggesting 100% of equity allocations go into cyclical stocks in Europe. In fact, as we

mentioned above (and detail below) our work shows that overweight-ing innovation, the technology sector in particular, across Europe is key to delivering in both absolute and relative performance, especially versus the S&P 500, over a longer period of time.

EXHIBIT 2

European GDP Growth Has Essentially Been on Par With the U.S. of Late

1.6%

0.9%

-1.5%

1.6%1.9%

2.9%

Real GDP Government Spending

Private Investment

2016 Growth, Spending and Investment Comparison, Y/y, %

U.S. Eurozone

Data as at February 6, 2017. Source: Bloomberg.

EXHIBIT 3

Leading Indicators of Credit Supply and Demand Look Supportive of Consumer Spending

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

Jun-

03Fe

b-04

Oct

-04

Jun-

05Fe

b-06

Oct

-06

Jun-

07Fe

b-08

Oct

-08

Jun-

09Fe

b-10

Oct

-10

Jun-

11Fe

b-12

Oct

-12

Jun-

13Fe

b-14

Oct

-14

Jun-

15Fe

b-16

Oct

-16

ECB Lending Survey, Consumer Credit Net Balance, %

Demand Supply

Weaker Demand /Tighter Credit

Stronger Demand /Easier Credit

Data as at December 31, 2016. Source: Eurostat, Haver Analytics.

“ We have boosted our 2017 European GDP forecast to

1.7% from 1.4%, reflecting the reality that heightened political uncertainty has not yet derailed the region’s surprisingly strong

economic recovery. “


EXHIBIT 4

A Major Accomplishment of the ECB Has Been to Narrow Bond Yields Across Europe, Which Has Been Bullish For Corporate and Consumer Confidence

1.6

2.1

2.6

3.1

3.6

4.1

4.6

5.1

5.6

6.1

6.6

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

MFI Interest Rates on Loans to Nonfinancial Corporates on Loans of Equal to or Less Than 1m

Germany France Italy Spain

Data as at January 31, 2017. Source: European Central Bank, Haver Analytics.

Finally, private infrastructure will continue to be an attractive investment opportunity in Europe, as public spending in this area is problematic, given high government debt loads and falling marginal productivity. As an example, France has built more roundabouts for its drivers than all of the rest of the EU combined. Not surprisingly, the multiplier effect on these types of projects has declined massively in recent years. As a result of capital misallocation by public entities, we see a large and growing pipeline of sizeable private infrastruc-ture plays — often with footprints that extend beyond the continent to include structures in the Americas and Asia. When coupled with the ability to deliver some operational improvement, we think that the upside potential for some of these stories could be meaningful.

Looking at the big picture, we are sticking with our original call from January that we have entered a Paradigm Shift, which includes four major changes in the global macroeconomic landscape. First, we think that fiscal policies are now likely to become more influential on the margin than monetary policy. This viewpoint is consistent with both central bank tapering as well as governments electing to increase deficits with pro-growth investment strategies in countries such as the United States, United Kingdom, and China.

Second, we see increased deregulation across many developed market industries, including banking and energy. Third, given slowing global trade and increased protectionist rhetoric, we think that more capital is likely to flow into domestic economies; in the past, by com-parison, foreign direct investment tended to flow undeterred towards low-cost production facilities. Finally, we expect QE-driven volatility to extend beyond the global currency markets to include the interest rate markets in 2017/2018.

EXHIBIT 5

Given Recent Return Differentials, We Now See Policies Shifting Towards Helping the Real Economy

-50%

0%

50%

100%

150%

200%

250%

Euro

pean

HY

S&P

500

US H

YSX

XPM

SCI W

orld

Topi

xM

SCI E

MUS

IGEu

rope

an IG

Germ

. Bon

dGo

ldJa

pan

Bond

US B

ond

US w

ages

Euro

pean

wag

esUS

CPI

Euro

pean

CPI

US H

ouse

Pric

eEA

Hou

se P

rice

Com

mod

ity

Total Return Performance in Local CurrencySince January 2009

Asset prices Real Economyprices

Data as at February 21, 2017. Source: Goldman Sachs Research Reflation Dislocations.

EXHIBIT 6

Cross-Asset Correlations Have Fallen Sharply, Which Is Consistent With Our Paradigm Shift Thesis

10%

15%

20%

25%

30%

35%

40%

45%

50%

Jan-03 Jan-06 Jan-09 Jan-12 Jan-15

Global Cross-Asset Correlations Index, Six Months

Close to 10-Year Lows

Data as at March 6, 2017. Source: Morgan Stanley Research, Bloomberg.

“ Our work also suggests structurally overweighting innovation in Europe,

including the region’s small but growing technology sector.

“


EXHIBIT 7

Post-Crisis Returns of 60/40 Stock and Bond Portfolios Have Been Quite Strong; We Look for More Modest Gains in the Future

Average

+1 St. Dev

-1 St. Dev

-5%

0%

5%

10%

15%

20%

25%

56 61 66 71 76 81 86 91 96 01 06 11 16

Long Term Five Year Trailing Returns ofTraditional 60/40 Portfolio

Data as at January 31, 2017. Source: Goldman Sachs Research.

EXHIBIT 8

We See Returns Headed Lower Across Most Asset Classes

4.6

12.611.1

2.3

12.2

1.3

4.5

10.2

4.46.4

U.S. 10 YearTreasury

Bond

S&P 500 PrivateEquity

HedgeFunds

Real Estate(unlevered)

CAGR Past 5 Years: 2010-2015, %CAGR Next 5 Years: 2015-2020, %

Data as at December 31, 2016. Source: Bloomberg, Cambridge Associates, NCREIF, HFRI Fund Weighted Composite Index (HFRIFWI Index), KKR Global Macro & Asset Allocation analysis.

Against this backdrop, we envision more modest overall returns for investors at this point in the cycle, and accordingly, we have posi-tioned our target portfolio this way (Exhibit 8). Specifically, we are substantially overweight Private Credit, which we believe can deliver high single-digit unlevered returns. Importantly, this trip reinforced the opportunity set in Europe, including both direct private lending to corporates as well as asset disposals from Europe’s banking sec-tor. By comparison, we are generally underweight sovereign debt, investment grade bonds, and liquid high yield. Meanwhile, we hold an overweight in Real Assets, including Infrastructure, Energy, and Real Estate. Within Real Assets, our preference remains for invest-ments that have both yield and growth. Finally, we believe that both Public and Private Equities should outperform Liquid Credit, though we recently boosted our Private Equity exposure to overweight. This viewpoint is consistent with our research, which shows Private Equity often outperforms many asset classes, Public Equities in par-ticular, in the later stages of a bull market.

Section II: Details

In the following section we provide a detailed analysis of key themes from our trip.

Both Our Fundamental and Quantitative Inputs in Europe Suggest Faster GDP Growth As we mentioned earlier, we have boosted our 2017 GDP forecast for Europe to 1.7% from 1.4%. We still look for solid consumption, but my colleague Aidan Corcoran now feels more com-fortable forecasting stronger investment. Beyond the more optimistic tone we encountered during almost all of our meetings, we also can’t ignore our GDP model, which has served us well in recent years. As one can see in Exhibit 9, our model continues to point towards stronger than expected growth. A key driver in the model remains the significant positive impact from the ECB’s heavy-handed dose of monetary stimulus. The importance of the ECB’s balance sheet certainly makes sense to us, as it now holds assets totaling 34% of the region’s GDP, compared to 24% for the United States’ Federal Reserve.

EXHIBIT 9

We Look for Trade to Make a Negative Growth Contribution vs. Trend in Mid-2017, But Investment, Consumption and Fiscal Are All Turning More Positive

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

01/1

503

/15

05/1

507

/15

09/1

511

/15

01/1

603

/16

05/1

607

/16

09/1

611

/16

01/1

703

/17

05/1

707

/17

09/1

711

/17

EZ Real GDP Forecast

Trend Consumption InvestmentGovernment Trade EZ Real GDP

Trend = 1.3%

C,I, G, aredriving growth...

... with just trade providinga drag vs. trend

Latesthard data

Data as at March 18, 2017. Source: Eurostat, European Commission, Statistical Office of the European Communities, ZEW Financial Market Survey, Haver Analytics.

“ Investors should continue to

think about a European macro environment where consumption, particularly around experiences, remains compelling relative to

overall trend growth. “


EXHIBIT 10

The Growth of China’s Own Industrial Expertise Has Come at the Expense of the Major Industrial Equipment Providers, Including European Manufacturers

-15%-10%-5%0%5%

10%15%20%25%30%35%40%

EU Japan Thailand S. Korea Taiwan U.S.

China Imports of Machinery and Equipment From Major Supplier Countries

January 2001-2006 5 yr CAGRAugust 2011-16 5Yr CAGR

Data as at October 31, 2017. Source: UBS Big Macro 08: The What, Why and So-What of Globalization - III. Asset Implications.

EXHIBIT 11

Our Quantitative Model Suggests Even Better Growth, Bolstered by Easier Credit, a Falling Euro, Lower Oil and Zero Interest Rate Policy

1.5%+0.3%

+0.1%

+0.9% +0.1%

-0.4%

2.5%

Base

line

Easi

er C

redi

tCo

nditi

ons

Falli

ng T

WEU

R

ECB

ZIRP

Falli

ng B

rent

(EU

R te

rms)

Stag

nant

Hou

sing

Mkt

Fore

cast

Elements of 4Q17e Eurozone GDP Forecast

Data as at December 31, 2016. Source: Eurostat, European Commission, Statistical Office of the European Communities, Haver Analytics.

EXHIBIT 12

The Trend Towards Greater Spending on Experiences Is Accelerating in Europe

95

97

99

101

103

105

107

109

111

113

2006 2008 2010 2012 2014 2016

Inde

x, 2

006=

100

Real Household Expenditure on Restaurants & Hotels andRecreation & Culture, as a % of Total

UK Germany Italy

Increased spending on experiences

UK as at 3Q16; Italy as at 4Q15; Germany as at 4Q16 Source: European Commission, Haver Analytics.

Maybe more important, though, is that one of the major drags on the model, namely, our “stagnant housing market” inputs, appears to be turning. One can see in Exhibit 13 that prices have rebounded nicely in recent quarters; however, we would be even more encouraged if credit availability towards housing improved more robustly (Exhibit 14).

“ Europe is likely to experience a notable ‘catch-up’ trade in the near-term, but long-term

structural headwinds continue to argue for moderate pacing, embracing complexity, and

regional diversification. “


EXHIBIT 13

Many Housing Indicators Are Improving...

Mar-13-2.6%

Sep-163.4%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%Se

p-98

Aug-

99Ju

l-00

Jun-

01M

ay-0

2Ap

r-03

Mar

-04

Feb-

05Ja

n-06

Dec-

06No

v-07

Oct

-08

Sep-

09Au

g-10

Jul-1

1Ju

n-12

May

-13

Apr-

14M

ar-1

5Fe

b-16

Eurozone Home Prices, Y/y

Data as at 3Q16. Source: ECB, Haver Analytics.

EXHIBIT 14

…However, Mortgage Lending Growth in the Eurozone Remains Very Slow — a Trend We Would Like to See Reverse

Dec-161.6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Sep-

98Se

p-99

Sep-

00Se

p-01

Sep-

02Se

p-03

Sep-

04Se

p-05

Sep-

06Se

p-07

Sep-

08Se

p-09

Sep-

10Se

p-11

Sep-

12Se

p-13

Sep-

14Se

p-15

Sep-

16

Eurozone Real Mortgage Lending, Y/y

Data as at 3Q16. Source: ECB, Haver Analytics.

To be clear, our model was also optimistic in 2016, and while it prevent-ed us from getting overly bearish at a time when European GDP actually beat U.S. GDP for growth, we also did not achieve the upside that the model was forecasting either (it predicted growth of around 2.25% in 2016). As such, we attribute the “miss” between predicted and actual economic results to be largely linked to political risks. Said differently, if we were asked to guess at the political “tax” on growth last year, our work would suggest it would have been around a 75-90 basis point drag.

EXHIBIT 15

We Believe Headline Inflation Has Peaked in Europe, But We Do Not See a Return of Deflation

2.1%

1.9% 1.6%

1.1%1.2% 1.3%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1/1/

2016

3/1/

2016

5/1/

2016

7/1/

2016

9/1/

2016

11/1

/201

6

1/1/

2017

3/1/

2017

5/1/

2017

7/1/

2017

9/1/

2017

11/1

/201

7

1/1/

2018

Eurozone Headline and Core Inflation 2016A to 2018E

Headline Core

Data as at December 31, 2016. Source: Eurostat, KKR Global Macro & Asset Allocation analysis.

EXHIBIT 16

Given Growth and Inflation in Europe, We Think That German Bunds Appear Mispriced

-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%

< 0% 0% to +0.5%

+0.5% to

+1.0%

+1.0% to

+1.5%

+1.5% to

+2.0%

> 2%

Spre

ad B

etw

een

U.S

. and

Ger

man

y 10

yr Y

ield

Spread Between U.S. and Germany CPI

Spread Between U.S. and Germany10 Year Yield and CPI

+/-One StDev Median Memo: 2017e

Very high bond yield spread relative to only moderate inflation differential

Data as at November 15, 2016. Source: Bloomberg, KKR Global Macro & Asset Allocation analysis.

“ We think that Eurozone government

contribution to growth has gone from an incredible 150 basis point drag on GDP at its most difficult point in 2012 to a 20 basis point

tailwind in 2017. “


So, what’s our bottom line? Barring a Marine Le Pen victory (which is not our base case), European growth may actually surprise on the upside again relative to expectations in 2017, particularly if mortgage lending accelerates. A potential growth offset to consider, however, is that we do expect accelerated tapering by the ECB in the com-ing months. If we are right, then 2018 could be bumpy if the ECB is forced to respond more quickly than the investment community currently thinks.

Within the economy, we again look for consumption to outpace trade (at least the global part of it), but we now believe that investment could be stronger than we originally forecasted in January. Also, af-ter years of acting as a material drag on growth, government spend-ing is now a tailwind. All told, we think that government contribution to growth has gone from an incredible 150 basis point drag on GDP at its most difficult point in 2012 to a 20 basis point tailwind in 2017. Moreover if President Trump does encourage more defense spending as part of his NATO agenda, then there could be even further upside to our updated estimate.

Economic Divergences Within Europe Are Growing Wider—Too Wide? While there is certainly a lot of near-term handwringing regarding the prospects around the French election or assessing the impact of Brexit, much of the longer-term anxiety was actually focused in another area. Specifically, many of the business leaders and macro folks with whom we spoke are growing increasingly concerned about the divergence between Germany and Italy.

Just consider the current economic dichotomy unfolding. On the one hand, Germany growth has surged of late, posting an impressive 1.9% real GDP growth in 2016. The strong backdrop drove a record budget surplus of €23.7bn in 2016, fueled by higher tax revenues and low debt costs. In fact, the 2016 budget surplus, which was the third consecutive positive one, actually reached its highest level since reunification in 1990. In terms of employment trends, the story is equally compelling. German unemployment is at a post reunifica-tion low of 5.9%, with the participation rate simultaneously at a post reunification high of 68%, with further upside on both metrics in the near term.

On the other hand, the Italian economy appears stuck. Overall unem-ployment is 12%, youth unemployment is 27%, and investment has fallen by 25% since 2008. As we mentioned earlier, in real terms, Italy’s growth has underperformed even Japan, which has actually delivered growth three percentage points above its 2008 level of GDP (see Exhibit 17).

Against this backdrop, it is not surprising that populism has taken a firm hold in Italy, particularly as the reform momentum ushered in by Prime Minister Matteo Renzi has stalled. Further austerity measures will have a tough time passing parliament, likely leading to ongoing skirmishes with Brussels, we believe.

Our bigger picture conclusion from this growing economic diver-gence, which we were increasingly asked about during our time in Europe, is that a macro divergence on this scale makes for a difficult backdrop against which to run a “Union” for at least two reasons. The first is monetary policy. Indeed, while the Italian economy con-tinues to sputter, German inflation is starting to break out, notably in

real estate, where record low mortgage rates are driving rapid ap-preciation (Exhibit 18). In the near term, our conversations with policy makers lead us to believe the ECB will continue to overweight the struggling periphery in their calculus, and in doing so, it will let Ger-man inflation heat up further. However, longer-term, this type of dif-ferential is becoming too substantial to ignore, and we may ultimately end up in a situation where the ECB needs to react with less policy stimulus, which could be quite damaging for an Italian economy that is already struggling to grow. It could also lead to a stronger euro, which would further dent Italian exports.

EXHIBIT 17

Italian GDP Has Underperformed German GDP by 19% Since 2000. Even Demographically Challenged Japan Has Grown Faster Than Italy of Late

100

105

110

115

120

Mar

-00

Jan-

01No

v-01

Sep-

02Ju

l-03

May

-04

Mar

-05

Jan-

06No

v-06

Sep-

07Ju

l-08

May

-09

Mar

-10

Jan-

11No

v-11

Sep-

12Ju

l-13

May

-14

Mar

-15

Jan-

16No

v-16

Real GDP Index, 1Q 2000=100

Italy Germany Japan

Data as at December 31, 2016. Source: Haver Analytics, KKR Global Macro & Asset Allocation analysis.

“ While there is certainly a lot of near-term handwringing

regarding the prospects around the French election or assessing the impact of Brexit, much of the longer-term anxiety expressed by macro folks and business leaders

during our trip was actually focused on the divergence

between Germany and Italy. “


EXHIBIT 18

German Inflation Is Accelerating, Notably in Housing, But We Think the ECB Will Let It Run

90

95

100

105

110

115

120

125

130

135

140

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Mar

-08

Aug-

08Ja

n-09

Jun-

09No

v-09

Apr-

10Se

p-10

Feb-

11Ju

l-11

Dec-

11M

ay-1

2O

ct-1

2M

ar-1

3Au

g-13

Jan-

14Ju

n-14

Nov-

14Ap

r-15

Sep-

15Fe

b-16

Jul-1

6De

c-16

German Mortgage Interest Rates vs. Housing Prices

Mortgage Interest Rate, % House Price Index (RHS)

Data as at December 31, 2016. Source: Haver Analytics, KKR Global Macro & Asset Allocation analysis.

One area to consider within monetary policy is the ECB’s bond-buy-ing program. At the moment, the ECB buys 50% more German bunds for every sovereign security it buys in Italy. In our humble opinion, some reallocation away from German bunds to Italy and its other weak peripheral peers must be considered. Otherwise, the ECB faces a situation where it is giving outsized stimulus to the countries that don’t need it at the same time it is providing less stimulus to the ones that do need it.

The other issue to consider is political. Specifically, we want to underscore that lack of flexibility around the exchange rate not only prevents Italy from being competitive with Germany but also from properly redistributing wealth and employment opportunities within Italy. Importantly, though, Italy is not alone; this tension across countries and perhaps more significantly, within countries is true in Spain, Netherlands, Greece, etc. As such, we think the potential for further populist discord during the next few years remains a no-table concern, particularly if tougher immigration regulations are not implemented. Just consider, for example, that the increase in Africa’s population is on track to reach 1.3 billion by 2050, or 2.5x the current population of the EU.

Our bottom line: If we are right about the growing number of cross-currents that have emerged within the European Union, then country risk premiums throughout many parts of the region may be too low. Indeed, despite the heavy debt loads we show in Exhibit 21, country risk premiums appear quite low in both absolute and relative terms.

EXHIBIT 19

European Country Risk Premiums Appear Quite Low in Both Absolute and Relative Terms

11.2%

7.9%

5.4%

2.2% 1.7% 1.2% 1.0%

Argentina Brazil EM Italy Spain U.K. France

Sovereign Credit Spreads

Credit risk Currency risk Total

Note: EM equals average of 16 countries including Mexico, Brazil, India, Indonesia, South Africa, Russia, Malaysia, Philippines, Vietnam, China, Nigeria, Turkey, Argentina, Colombia, Chile, and Peru. Data as at March 20, 2017. Source: Bloomberg.

France: the Road Ahead Given the upcoming election in France, Aidan and I spent a fair amount of the time drilling down on current trends in the country. While almost every French politician has a radically different approach to how he or she would deal with what ails the country, one major recurring issue remains the size of its govern-ment. Indeed, as we show in Exhibit 20, government expenditures as a percentage of GDP are north of 56%, essentially dwarfing more dy-namic economies like Ireland and Spain. In bad times, this economic structure does make it less vulnerable to sharp economic fall-offs, which is why France actually outperformed the Eurozone on peak-to-trough GDP during 2008-2009, with a 4.6% fall in real terms, vs. 6.7% for the Eurozone overall. On the other hand, there is little op-erating leverage in the model, which helps explain why debt-to-GDP continues to increase even as GDP growth has improved.

To our surprise, however, we actually left Paris — despite all the political uncertainty — feeling better, not worse, about the economic backdrop for several reasons. First, fiscal austerity has eased, which has reversed the harsh compression in public spending. Second, lower rates are helping the French consumer, which has served to

“ Importantly, this trip reinforced the opportunity set in Europe, including both direct private

lending to corporates as well as asset disposals from Europe’s

banking sector. “


offset some of the overhang associated with terrorism and an uncer-tain political environment.

EXHIBIT 20

France Leads Europe in Total Government Expenditure…

56.2

56.0

53.0

51.0

48.9

48.2

46.4

44.4

44.3

41.1

26.3

France

Finland

Belgium

Austria

Greece

Italy

Portugal

Netherlands

Germany

Spain

Ireland

General Government Total Expenditure,% of GDP (2017)

Data as at October 4, 2016. Source: International Monetary Fund, Haver Analytics.

EXHIBIT 21

...Financed Largely by a Heavy Government Debt Load

8691

98

108

0

20

40

60

80

100

120

European Union Euro Area France U.S.

2017 Gross Government Debt as a % of GDP

Data as at October 4, 2016. Source: International Monetary Fund, Haver Analytics.

While none of these reforms (e.g., Tax Credit for Competitiveness and Employment, the Responsibility and Solidarity Pact, and the Hiring Subsidy) in isolation is a game changer, collectively they represent a meaningful support to employment. Third, the outgoing government has pushed through a series of labor reforms aimed at reducing the taxes companies pay on their workers. At the same time, 2017 is likely to see higher wages for civil servants following the end of the wage freeze in 2016, and we look for this to bleed over into private sector wages too.

EXHIBIT 22

The French Economy Lags Behind Other Major Developed Market Economies When It Comes to the ‘Ease Of Doing Business’

60% 65% 70% 75% 80% 85%

Italy (50)

Belgium (42)

Spain (32)

Switzerland (31)

France (29)

Netherlands (28)

OECD (High Income)

Germany (17)

UK (7)

2016 Ease of Doing Business Ranking

Ranking 1 to 189 with 1 = Most Business Friendly

Data as at 2016. Source: World Bank.

EXHIBIT 23

Tax and Regulatory Issues Are the Factors Cited by CEOs as Hindering Businesses in France

World Economic Forum Executive Opinion Survey onFactors Obstructing Business

0% 5% 10% 15% 20% 25%

2015 2016

Corruption

Crime and Theft

Foreign Currency Regulations

Government Instability

Inadequate Supply of Infrastructure

Inflation

Policy Instability

Poor Worth Ethic

Access to Financing

Inadequately Educated Workforce

Insufficients Capacity to Innovate

Government Bureacracy

Tax Regulations

Tax Rates

Restrictive Labor Regulations

Data as at December 31, 2016. World Economic Forum.


During our visit we spent extra time drilling down with advisors linked to nominees Emmanuel Macron and Francois Fillon. Macron’s fresh approach has certainly captured the attention of many Pa-risians, but we do wonder whether he has enough support in the Assemblée to be effective if he does indeed win. Meanwhile, Fillon’s campaign team clearly thought through how to make France a more dynamic economy. Our worry, however, is that the desire to imme-diately implement a two percent increase in the VAT tax could dent growth a time when France is finally coming out of the doldrums.

EXHIBIT 24

France Has the Biggest Gap Between Young and Old When It Comes to How They View the EU

0%

10%

20%

30%

40%

50%

60%

70%

Fran

ce UK

Neth

er.

Germ

any

Gree

ce

Spai

n

Swed

en

Italy

Favorable View of the EU by Age Group, %

18-34 35-49 50+

Data as at February 2017. Source: Pew Research Center, Morgan Stanley Research.

EXHIBIT 25

Political Uncertainty Has Led to a Rapid Rise in France 10-Year Yields; We Expect a Short-Term Relief Rally After the Election

0.0

0.2

0.4

0.6

0.8

1.0

1.2

150

200

250

300

350

400

450

500

Sep-16 Oct-16 Nov-16 Dec-16 Jan-17

Economic Policy Uncertainty and 10Yr Yields

France Economic Policy Uncertainty Index,Long-Term Average (LHS)

France 10Yr Yield (RHS)

Data as at January 31, 2017. Source: Bloomberg.

Given the Trump and Brexit election outcomes, no one seems to be taking the Marine Le Pen effort lightly. We agree, though our view is that she will not win in the second round. Key to our thinking is that this election represents her third one; said differently, she is more of a known quantity relative to when then nominee Donald J. Trump surprised voters during his campaign. As such, we think it will be hard for her to bridge the gap from her current seven million support base to the 17 million votes that are needed to win, unless she is competing against a Socialist candidate (not our base case).

Our bigger picture take-away from a series of political meetings is that the French agenda feels more like a heavily amplified version of what we see unfolding in many of the countries that we visit these days, including more control of borders (i.e., immigration), increased competitiveness (i.e., lower taxes), income equality (i.e., redistribu-tion of wealth), and nuclear power (i.e., nationalism). Said differently, given the significance of the aforementioned discussion points now on the table, populist agendas are likely to dominate economic agen-das for the foreseeable future, in our view.

“ In terms of our overall outlook for public equities, our work shows that large capitalization stocks appear more attractive than

mid- to small-cap stocks. Key to our thinking is that the earnings potential of large capitalization

stocks appears to have significant upside. By comparison, small- to mid-cap stocks in Europe appear

to be over-earning on both an absolute and relative basis.

“


Public Equities in Europe Appear Attractive As we mentioned above, we think that European equities could enjoy a surprising catch-up rally in 2017, particularly after the French elections. In particular, we think that cyclical stocks, including financials, appear poised to outperform. In terms of financials, we are encouraged by these three trends: 1) a shift in ECB policy that encourages a steeper yield curve, despite negative short rates; 2) higher inflationary patterns are leading to an acceleration in nominal GDP; 3) some increase in risk taking, including M&A, debt trading, and certain securitizations. Also, as we show in Exhibits 26 and 27, both valuations appear attractive and earnings appear to be accelerating.

EXHIBIT 26

Financial Stocks in Europe Appear Attractive

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Fina

ncia

ls

Util

ities

Ener

gy

Tele

com

MSC

I Eur

ope

Mat

eria

ls

Cons

Dis

c

Indu

stria

ls

Info

Tec

h

Cons

Sta

ples

Hea

lth C

are

MSCI Europe Sector Price/BookMarkers Represent Current as of February 25, 2017

Bars Represent +/-1 Standard Deviation Range Since 2004

Data as at February 25, 2017. Source: Factset Aggregates, MSCI.

EXHIBIT 27

Cyclical EPS Are Likely to Drive Aggregate European EPS in 2017E

9%

-15%

12%

-45%

-1%

69%

2% 4% 5%

2015 2016E 2017E

Stoxx Europe 500 Earnings Forecasts

Financials Net Income GrowthCommodity Sectors Net Income GrowthNet Income Growth ex-Financials ex-Commodities

E = Goldman Sachs estimate. Data as at January 20, 2017. Source: Goldman Sachs.

EXHIBIT 28

The Gap Between U.S. and European Earnings Is Now Substantial; We Expect Some Mean Reversion

50

150

250

350

450

550

650

'88

'90

'92

'94

'96

'98

'00

'02

'04

'06

'08 '10 '12 '14 '16 '18

US And Europe: Trailing 12-month EPS In Local Currency

Europe (EUR) US (USD)

a 53% Gap!

Indexed to 100 in 12/31/1987. Data as at February 28, 2017. Source: BofA Merrill Lynch Global Investment Strategy, MSCI.

“ While almost every French politician has a radically

different approach to how he or she would deal with what ails

the country, one major recurring issue remains the size of its

government. “


EXHIBIT 29

European Loan Portfolio Sales Reached 172.7 Billion Euros in Transaction Volume During 2016, Up a Solid 65.6% From 2015; This Activity Is Constructive for the Performance of Financial Stocks

European Loan Portfolio Market, Activity by Year, € Billions

2016

2015

2014

Completed Ongoing

172.7

Data as at December 31, 2016. Source: Deloitte Uncovering Opportunities in 2017.

We also remain excited about the repositioning of balance sheets that we are seeing across the European banking sector. As activity has heated up in recent quarters, the bid/ask between buyers and sellers has narrowed. This improvement in pricing transparency has — not surprisingly — increased balance sheet repositions and asset dispos-als, trends we expect to continue. Also, unlike in 2011/2012, today in-vestors do have confidence in the ECB to do whatever it takes, which has helped narrow spreads in credits related to both residential and commercial mortgages.

In terms of our overall outlook for public equities, our work shows that large capitalization stocks appear more attractive than mid- to small-cap stocks. Key to our thinking is that the earnings potential of large capitalization stocks appears to have significant upside; one can see this in Exhibit 30. By comparison, small- to mid-cap stocks in Europe appear to be over-earning on both an absolute and relative basis.

EXHIBIT 30

Large Cap Earnings Are at 12-Year Lows While Small and Mid-Cap Earnings Are Close to All-time Highs...

75100125150175

200225250275300325350

'96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

MSCI Europe Trailing EPS

Large Caps Small and Mid-Caps

Data as at February 28, 2017. Source: MSCI, IBES, Morgan Stanley Research.

EXHIBIT 31

… As Small & Mid Cap Earnings Have Quadrupled Relative to Large Caps in the Last Three Years

40

60

80

100

120

140

160

180

200

220

'96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

MSCI Europe Relative Trailing EPS, Small & MidCaps vs. Large Caps

Data as at February 28, 2017. Source: MSCI, IBES, Morgan Stanley Research.

From a “style” perspective, our message is now more balanced, which represents an important change. To review, in the past two years, value stocks appeared extremely cheap relative to defensive/growth stocks. One can see the magnitude of the imbalance that was achieved in terms of relative outperformance in Exhibit 32. However, with the reflation trade gaining momentum since 2H16, many expensive growth stocks have faltered, while value stocks have rallied sharply. Importantly, we link this shift in style preference to the improving dynamics of the macro paradigm shift that we outlined earlier — a trend that we expect to continue in the coming quarters.

“ We want to underscore that lack of flexibility around the

exchange rate not only prevents Italy from being competitive with Germany but also from

properly redistributing wealth and employment opportunities

within Italy. “


EXHIBIT 32

Defensive Stocks in Europe Became Really Expensive by 2016…

-10

0

10

20

30

40

50

75 77 79 81 83 85 87 89 91 93 95 97 99 01 0305 07 09 11 13 15

European Defensives % Premium To MSCI Europe(Average Across PE, PBV and PD)

Defensives Premium vs MSCI EuropeMedian

Data as at June 30, 2016. Source: MSCI, IBES, Morgan Stanley Research.

EXHIBIT 33

…But Are Now Correcting as Cyclicals Are Rallying

Jun-16

90

95

100

105

110

115

120

125

13 14 15 16 17

FTSE U.S. Defensive / CyclicalIndex: Jan 2013=100

Defensivesoutperforming

Cyclicalsoutperforming


The other noteworthy conclusion within Public Equities is for inves-tors to be structurally overweight technology stocks. Importantly, the entire technology sector in Europe is only four percent of the index, compared to 21% in the U.S., despite both sectors essentially deliver-ing the same performance during the 2012-2016 period. As a result, Europe’s small weighting in the technology sector literally accounted for 70% of the 26 percentage point performance differential of the S&P 500 relative to Europe, a reality that we think is largely ignored by bearish European investors who have not spent the time analyzing the drivers of relative underperformance across the Eurozone.

EXHIBIT 34

The Huge Weighting in the U.S. Indices to the Technology Sector Explains Essentially All the Relative Outperformance vs. Europe

4.6%

22.9%

MSCI Europe Info Tech (106% return * 4.3% index weight)

MSCI U.S. Info Tech (108% return * 21% index weight)

Info Tech Contribution to 2012-2016MSCI Europe and U.S. Index Return

The US has outperformed Europe by 26 percentage points over the last four years, with the differential weighting in Tech accounting for over 70% of that outperformance

Data as at January 17 2017. Source: Bank of America Merrill Lynch.

EXHIBIT 35

Only Japan Has More Gearing to Global Growth Than Europe

1.8

2.9

3.6

1.2 1.1

U.S. Europe ex. UK

Japan Asia ex. Japan

Emerging Markets

Global Operating Leverage, Sensitivity to Changes in Sales Since 1996

Net Profit

Data as at December 31, 2016. Source: Datastream, Worldscope, Goldman Sachs Global Investment Research.

“ The current monetary union is creating substantial structural

strains not only across economies (e.g., Germany versus Italy) but also within economies

(e.g., France). “


Our bottom line: We think that European equities are likely to perform well in 2017. Earnings are finally accelerating after a seven-year recession, valuations are reasonable, and sentiment remains sub-dued. In the near term, we favor cyclicals over defensive and growth stocks. Longer term, however, our research suggests that investors who favor Europe either need to significantly overweight publicly traded technology stocks (or at least innovation) and/or look for alternative exposure through either private equity or growth-oriented capital if they are to maintain competitive performance with other more diversified benchmarks like the S&P 500.

Section III: Conclusion

Our most recent macro deep-dive across Europe left us with mixed emotions. On the one hand, we are likely more optimistic than the consensus on GDP growth in the near term. As we have indicated, our GDP model suggests even stronger growth than our recently revised GDP estimates, driven primarily by the huge tailwind that significant quantitative easing has provided. With moderate infla-tion and an accommodative central bank, we think that both credit and equities should continue to perform across Europe in 2017. In terms of high conviction ideas, we believe that banks are improving their balance sheets in Europe, which should help corporate lending; meanwhile, it finally appears that consumer credit growth rates on the Continent will achieve respectable levels, which is supportive of our consumption/experiences thesis.

On the other hand, our discussions also raised some perplexing questions where there does not appear to be an “easy” answer. On the political front, we have transitioned from a discussion about the “Left” versus the “Right” towards one about “Open” versus “Closed” economies. Importantly, these discussions are often being led by new political entrants, many of whom who are stronger on ideology than implementation. In France, for example, candidates from traditional parties are set to cede the presidency to an outsider for the first time since the founding of the Fifth Republic in 1958. Regardless of who takes control, immigration is a secular, not a cyclical, issue in Europe, we believe given surging population growth across both the Middle East and Africa.

Equally as important, we think that the monetary union is creating substantial structural strains not only across economies (e.g., Ger-many versus Italy) but also within economies (e.g., France). Without the Authorities paying some serious attention to this issue in the near term, we think that it could increasingly undermine members’ desire to withstand the bureaucracy of this size and complexity. In par-ticular, if the Eurozone does not rebalance its economy more during the current period of economic optimism, the downside risk during the next economic downturn could be more unsettling than the 2011 period, we believe.

Finally, if we are right that we are shifting from a monetary stimu-lus to fiscal one, Europe could be more challenged than some of its global peers. Its sovereign debt loads remain outsized, which means it will be harder to accelerate nominal GDP above nominal interest rates. This dilemma will be rather problematic if the ECB normalizes rates by the end of 2018, which is in line with our base view.

With these macro thoughts in mind, our overall asset allocation advice is largely unchanged. Specifically, we believe that there are a few key areas where investors should consider leaning in aggres-sively. For example, we would focus more on large capitalization op-portunities than small- to mid-capitalization ones in the public equity markets. We also believe that asset-based lending in the private credit markets remains an outsized opportunity, particularly if banks continue to shed assets at a healthy clip. Within private equity, we would focus on carve-outs, consumer substitution plays, and experi-ences over things.

On the other hand, we would avoid consumer credit-related “plays” in the United Kingdom (given our conviction surrounding a hard Brexit), and we would now caution selectivity in European small- to mid- cap equities. In our view, both earnings and valuation in this subset of the equity market appear somewhere between full and overvalued in many instances.

“ On the political front, we have transitioned from a discussion

about the ‘Left’ versus the ‘Right’ towards one about ‘Open’

versus ‘Closed’ economies. Importantly, these discussions

are often being led by new political entrants, many of whom

who are stronger on ideology than implementation.

“


EXHIBIT 36

Consumer Credit Trends in the U.K. Warrant Caution, We Believe

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

Nov-

06Ap

r-07

Sep-

07Fe

b-08

Jul-0

8De

c-08

May

-09

Oct

-09

Mar

-10

Aug-

10Ja

n-11

Jun-

11No

v-11

Apr-

12Se

p-12

Feb-

13Ju

l-13

Dec-

13M

ay-1

4O

ct-1

4M

ar-1

5Au

g-15

Jan-

16Ju

n-16

U.K. Consumer Credit, Monthly Net Change, £ Bn


EXHIBIT 37

It is Increasingly Difficult to Expect the Current Account Deficit, the Highest in Major Economies, to Fall Substantially Until Consumer Spending Declines

-7.00

-6.00

-5.00

-4.00

-3.00

-2.00

-1.00

0.00

Dec-

05

Nov-

06

Oct

-07

Sep-

08

Aug-

09

Jul-1

0

Jun-

11

May

-12

Apr-

13

Mar

-14

Feb-

15

Jan-

16

Dec-

16

U.K.: Balance on Current Account as % of GDP, SA, %

Data as at December 31, 2016. Source: Office for National Statistics, Haver Analytics.

Overall, though, we continue to favor moderate pacing across many asset classes in Europe. In our view, rates are artificially low for the growth rates we are forecasting, and we believe that more significant tapering is likely in 2018 and beyond. Moreover, given that there is no quick fix to the currency or immigration issues cited above, we think that a balanced approach to both deployment and asset alloca-tion makes sense at this point in the region’s macroeconomic and geopolitical cycles.

“ We believe that there are a few

key areas where investors should consider leaning in aggressively.

For example, we would focus more on large capitalization opportunities than small- to

mid-capitalization ones in the public equity markets. We also believe that asset-based lending

in the private credit markets remains an outsized opportunity,

particularly if banks continue to shed assets at a healthy clip. Within private equity,

we would focus on carve-outs, consumer substitution plays, and experiences over things.

“


Important Information

References to “we”, “us,” and “our” refer to Mr. McVey and/or KKR’s Global Macro and Asset Allocation team, as context requires, and not of KKR. The views expressed reflect the current views of Mr. McVey as of the date hereof and neither Mr. McVey nor KKR undertakes to advise you of any changes in the views expressed herein. Opinions or statements regarding financial market trends are based on current market conditions and are subject to change without notice. References to a target portfolio and allocations of such a portfolio refer to a hypothetical allocation of assets and not an actual portfolio. The views expressed herein and discussion of any target portfolio or allocations may not be reflected in the strategies and products that KKR offers or invests, including strategies and products to which Mr. McVey provides investment advice to or on behalf of KKR. It should not be assumed that Mr. McVey has made or will make investment recommendations in the future that are consistent with the views expressed herein, or use any or all of the techniques or methods of analysis described herein in managing client or proprietary accounts. Fur-ther, Mr. McVey may make investment recommendations and KKR and its affiliates may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this document.

The views expressed in this publication are the personal views of Henry McVey of Kohlberg Kravis Roberts & Co. L.P. (together with its affiliates, “KKR”) and do not nec-essarily reflect the views of KKR itself or any investment professional at KKR. This document is not research and should not be treated as research. This document does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not repre-

sent a formal or official view of KKR. This document is not intended to, and does not, relate specifically to any investment strategy or product that KKR offers. It is be-ing provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own views on the topic discussed herein.

This publication has been prepared solely for informa-tional purposes. The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this docu-ment has been developed internally and/or obtained from sources believed to be reliable; however, neither KKR nor Mr. McVey guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision.

There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future per-formance of any particular investment which may differ materially, and should not be relied upon as such. Target allocations contained herein are subject to change. There is no assurance that the target allocations will be achieved, and actual allocations may be significantly different than that shown here. This publication should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy.

The information in this publication may contain projec-tions or other forward‐looking statements regarding future events, targets, forecasts or expectations regard-ing the strategies described herein, and is only current

as of the date indicated. There is no assurance that such events or targets will be achieved, and may be signifi-cantly different from that shown here. The information in this document, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subse-quent market events or for other reasons. Performance of all cited indices is calculated on a total return basis with dividends reinvested. The indices do not include any expenses, fees or charges and are unmanaged and should not be considered investments.

The investment strategy and themes discussed herein may be unsuitable for investors depending on their spe-cific investment objectives and financial situation. Please note that changes in the rate of exchange of a currency may affect the value, price or income of an investment adversely.

Neither KKR nor Mr. McVey assumes any duty to, nor undertakes to update forward looking statements. No representation or warranty, express or implied, is made or given by or on behalf of KKR, Mr. McVey or any other person as to the accuracy and completeness or fairness of the information contained in this publication and no responsibility or liability is accepted for any such information. By accepting this document, the recipient acknowledges its understanding and acceptance of the foregoing statement.

The MSCI sourced information in this document is the exclusive property of MSCI Inc. (MSCI). MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.

www.kkr.com

global macro trends · 2. investors should continue to think about a european macro environment...

Documents