KKR Holds Most Cash Since 2011 as Risks in Stocks Increases

  • Private equity firm correctly predicted global stock rebound
  • Recommends clients hold 7 percent of their assets in cash

For the first time in five years holding cash could provide better returns than other assets as risks grow for global stocks, according to KKR & Co., the private equity firm that correctly predicted the global stock rebound last quarter.

KRR’s Global Macro & Asset Allocation team recommends its clients hold 7 percent of their assets in cash, up from 1 percent in September, according to its 2016 outlook report posted on its website. It also lowered holdings of global equities to 51 percent from 55 percent, marking the first underweight rating since 2011.

“Unfortunately, as we look ahead, we do not see 2016 as a less chaotic year,” the KKR team, led by Henry Mcvey, wrote in the report. “We want to create a cash buffer at the start of the year that we can deploy amidst any downdraft in risk assets.”

After nearly a decade of low interest rates that penalized savers and buoyed global stocks, volatility in financial markets is increasing as U.S. borrowing costs rise and China’s economic slowdown shows no signs of abating. The Standard & Poor’s 500 Index posted its worst-ever start to a year, sliding 6 percent last week.

Profits Peaked

Global economic growth may be “well below” investors’ consensus, companies’ operating margin has “essentially peaked” in the U.S., and credit quality will worsen, Mcvey wrote.

The yuan could decline between 5 percent and 10 percent this year as the world’s second-biggest economy slows, dragging other emerging-market currencies down, he said. KKR, which oversees $99 billion in assets as of September, expects the South Korean won and Singapore dollar will fall against the U.S. currency.

Mcvey, who previously worked as chief investment strategist at Morgan Stanley, raised U.S. equities to overweight on Sept. 8 to take advantage of a selloff sparked by a shock devaluation of the yuan. In fact, the S&P 500 rose about 5 percent by the end of the year.

He also told investors in May to stay away from most of the publicly traded emerging-market companies, another timely call.

Mcvey said the bear market in developing nations is not over as return-on-equity deteriorates, currencies remain weak and commodity prices won’t improve until later this year. The benchmark MSCI Emerging Market Index has dropped 40 percent since May 2011.

Here’s more advice from him: Private lending is becoming more appealing as borrowers seek alternative funding sources after tight financial regulations convinced banks to reduce loans and cut back market-making business. Credit markets are more attractive than equities after the recent selloff and China’s efforts to reduce debt will lead to “new and exciting opportunities” for distressed investors, he added.

Still, Mcvey said, there are fewer opportunities than before: “Our message is that we see less upside to many markets than we have in recent years.”

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