Glass Half Full: KKR’s Optimistic Outlook for 2025

KKR’s 2025 Investment and Economic Outlook serves as a measured yet optimistic guide for navigating the global economy’s shifting sands. Amid the challenges of geopolitical tensions, structural inflation, and a fragile recovery, KKR’s framework underscores the enduring opportunities for investors who can adapt to the new regime. As Henry McVey, KKR’s Head of Global Macro & Asset Allocation, emphasizes, “While the bar is undoubtedly higher, we remain positive on risk assets again in 2025 for several reasons.”

Status Quo: What’s Working

The global macroeconomic backdrop offers significant bright spots. U.S. productivity is surging, a trend KKR believes will elevate both earnings and economic growth into 2025. “Productivity gains serve as an important driver of the economy and earnings,” McVey notes. KKR forecasts GDP-per-employee to grow 1.3% in 2025, compared to the consensus of 1.0%, bolstered by accelerated adoption of AI and automation.

Additionally, financial conditions remain broadly supportive. Central banks, led by the ECB and Bank of Japan, are easing, while net issuance of risk assets has contracted significantly. The S&P 500, buoyed by robust buybacks, is expected to perform well despite more modest returns relative to 2023 and 2024. KKR’s proprietary Earnings Growth Leading Indicator (EGLI) signals an 11% growth in S&P 500 earnings per share, surpassing consensus estimates.

Rising Challenges: Structural Shifts and Fractures

Despite these positives, KKR highlights structural imbalances. The global economy faces a pronounced “have versus have-not” divide in wealth and equity ownership. In the U.S., for example, the top 1.5% of the population controls nearly 48% of global wealth. This bifurcation is mirrored in equity markets, where the S&P 500’s outperformance contrasts starkly with weaker returns in international equities.

Geopolitical tensions, particularly in Asia and Europe, further complicate the outlook. KKR warns that “currency markets remain an Achilles’ heel”, with potential volatility shocks arising from trade disputes and fiscal imbalances. Oil prices, meanwhile, are forecasted to decline in the short term, potentially creating undercurrents for energy markets tied closely to geopolitics.

Opportunities in the New Regime

KKR’s “Regime Change” thesis remains a cornerstone of its outlook. This framework reflects the ongoing transition to an era characterized by heightened deficits, geopolitical rivalries, an energy transition fraught with challenges, and sticky inflation. As McVey explains, this environment necessitates a new playbook for capital deployment, prioritizing:

1. Capital Efficiency: Companies are increasingly shifting to capital-light models, driving opportunities in private credit and asset-backed finance.
2. Private Sector Dominance: Rising deficits and reduced government intervention open doors for private investment in critical areas like digital infrastructure, retirement savings, and defense.
3. Intra-Asia Growth: Trade within Asia is accelerating, with India and Southeast Asia emerging as key growth engines.
4. Energy Security: AI’s growing energy demands are reshaping the landscape, intertwining energy infrastructure with national security.

Risks on the Horizon

While the outlook remains positive, KKR identifies three key risks:

1. Interest Rate Surprises: Faster-than-expected inflation or deficits could trigger rate hikes, disrupting sectors like private credit and real estate.
2. Disappointing Earnings: A slowdown in earnings growth for dominant U.S. tech firms could destabilize markets.
3. Currency Volatility: Competitive devaluations and geopolitical tensions could spark financial instability, particularly in emerging markets.

Key Takeaways for Investors

As KKR pivots into 2025, it advises a nuanced approach:

• Diversify Across Non-Correlated Assets: Seek investments with reduced correlation to traditional equity and bond markets, such as private credit and real assets.
• Leverage Productivity Gains: Favor sectors and companies benefiting from higher productivity and nominal GDP growth.
• Focus on Domestic Themes: Tilt portfolios toward assets tied to domestic consumption and resilient supply chains.

KKR’s call to action is clear: embrace the complexities of this new regime while staying anchored to enduring growth themes. “The glass is still half full,” McVey asserts, but navigating 2025 will require agility, foresight, and a keen understanding of the evolving landscape.

Copyright © AdvisorAnalyst.com, KKR