Insights From KKR’s Global Wealth Investment Council

In late February of 2024, we held the inaugural meeting of KKR’s Global Wealth Investment Council (GWIC). The council comprises ten experts from leading wealth and asset management firms from across the U.S., Europe, and Asia. Our mission is for the GWIC to serve as a forum for constructive dialogue and knowledge exchange on the topics of macroeconomics, capital markets, asset allocation, and the role of private markets in individual portfolios. As the chair of GWIC, I am especially proud of the caliber of individuals who’ve joined us in this endeavor as well as the diverse global perspectives they represent. I am also personally grateful for the trust and partnership in committing to regular roundtables. As iron sharpens iron, we each profit from the other’s expertise, hopefully enabling us to deliver better guidance and solutions to individuals seeking to benefit from the growth of private markets in investor portfolios, which we think creates outcomes for our clients. At KKR, this is just one example of the commitment that we have to the global wealth channel. Key discussion points from our first session included risks to the exceptional US outlook, opportunities in Japan, Artificial Intelligence (AI), and repositioning portfolios for the new investing regime.

To mark the Council’s launch, we also surveyed members for their views on the current environment and trends they are seeing among high-net-worth individuals. Key takeaways included: 

#1: Economic outlook: Concerns about sticky inflation, and the potential slowdown in consumer spending and job growth are top of mind for GWIC members. As you may have read in our recent report, at KKR we believe that tectonic shifts – from the energy transition to geopolitical tensions, demographics, and massive investments in AI, will drive a higher inflation bias, higher interest rates, and slower real economic growth in the medium term. This new macroeconomic regime requires a re-examination of asset allocation given shifts in asset class correlations as well as return expectations. 

#2: Regional overview: The majority of the GWIC members believe that of the major global economies, North America is best positioned for economic growth in 2024. While most members anticipate a ‘soft landing’ for the U.S. economy, opinions were varied regarding the timing of potential rate cuts and the outlook for the dollar.  

At KKR, we believe economies around the world are experiencing an asynchronous cycle with Europe and China encountering slower growth while the U.S. and Japan reflect above-average nominal growth. Despite the Federal Reserve’s aggressive tightening cycle, the U.S. has exhibited exceptional growth though long and variable lags of monetary policy alongside concerns over the sustainability of the national deficit present risks to the ‘soft landing’ thesis. 

We expect inflation to continue falling in the U.S and Europe, but the path will be volatile. On the other hand, Japan is transitioning from a long period of deflation to one of inflation, led by labor market shifts and higher wages on the back of shunto wage negotiations. Jean Chia, the Global Chief Investment Officer at the Bank of Singapore, and Tomochika Kitaoka, the Chief Strategist at Nomura, shared that Japan is well positioned for growth today, especially considering corporate reforms focused on improving returns on equity and capital markets that benefit from increased domestic retail investor participation.

In terms of monetary policy, outside of Japan, we see global policy rates starting to fall this year. In the U.S., we expect front end rates to come down as the Fed cuts rates, likely twice this year, while we expect the ten year to end 2024 near the current levels of 4.25%. Next year, we believe the curve will steepen as we expect term premia to remain wide given inflation volatility and supply-demand dynamics in the Treasury market.  

Council members were split on the path of the U.S. dollar. Driven by the rapid pace of Fed tightening over last 24 months, as higher yields attracted global investors, the USD has surged. At KKR, we see the dollar as more range-bound in the near term, as we see fewer Fed cuts than the consensus. Thereafter, despite secular headwinds, we expect only a gradual depreciation of the U.S. dollar as growth, inflation, and rates continue to be higher for longer. 

#3: Emphasis on technology themes: Members believe that AI and transformative technologies are the most crucial themes to get right in 2024. Lisa Shalett, the Chief Investment Officer of Morgan Stanley Wealth Management argues, investors can get exposure to this trend not only by betting on “AI enablers,” i.e., companies scaling AI infrastructure, but also on “AI adopters” that will be the real long-term productivity gainers. There are a lot of unknowns when it comes to the impact of AI on global growth, but the potential is massive. Jason Draho, the Head of Asset Allocation Americas at UBS Global Wealth Management, has written that AI is one of the megatrends that can drive productivity improvements, which could lead to greater supply growth across industries and uphold the new Roaring ‘20s regime. 

 #4: Asset allocation: GWIC members believe that high-net-worth individuals are overweight in Cash and underweight in Alternatives this year. For context, PwC and McKinsey suggest that in 2022, only 1.4% of the $192 trillion in the global wealth sector was allocated to Alternative assets while institutional investors allocated between 10% and 55% of total portfolios (dependent on the type of institution). Moreover, the Council expects stock and bond correlations to remain high, emphasizing the need to seek diversification elsewhere in investment portfolios. This sentiment is shared by CIOs of family offices who participated in this year’s KKR survey. Most CIOs told us that they plan to increase exposure to Alternatives in 2024. Their rationale: They understand the role the illiquidity premium can play in compounding capital in a tax efficient manner to build wealth for future generations. 

 #5: Investor goals: Per GWIC members, generating income remains a top priority for high-net-worth investors in 2024.  

In sum, there are many challenges facing the global economy, including rising geopolitical and macroeconomic headwinds. However, these challenges are also creating significant opportunities for allocators of capital. Identifying and stress testing investment solutions to combat these headwinds is at the core of GWIC discussions.