KKR's Henry McVey - Regime Change is Here: Think Differently About Asset Allocation | #592

What It Covers

KKR's Henry McVey explains why investors face a macro regime change driven by larger deficits, sticky inflation, messy energy transitions, and heightened geopolitics, requiring different asset allocation approaches than the post-2008 era.

Key Questions Answered

• •Regime Change Drivers: Four factors distinguish current markets from post-GFC era: bigger government deficits (developed market debt up 10% of GDP since COVID), sticky inflation (Fed missing mandate seven years), messy energy transition, and heightened geopolitics requiring portfolio repositioning.
• •US Productivity Boom: America experiences productivity growth twice the level of major developed economies, driven by digitalization and automation from 2020-2025, with AI representing the next phase. This productivity allows higher wages while protecting margins, supporting elevated equity valuations despite concentration concerns.
• •Dollar Structural Weakness: The dollar ranks as third most expensive in fifty-five years, coinciding with US losing top credit rating from one agency since 1917. Direction points lower structurally, though productivity gains prevent dramatic overnight collapse, creating gradual weakening trend.
• •Japan Corporate Reform: Japanese market offers significant opportunity through corporate carve-outs, with 40% of exchange companies holding 500-plus subsidiaries. KKR increased Japan allocation from 5% to 30% of Asia funds, capitalizing on government-driven reforms, cross-holding reductions, and inefficient capital structures.