We read reports from the sell-side (brokers like Goldman Sachs, Deutsche Bank, JP Morgan), the buy-side (asset managers like Coronation, Investec, Sanlam, Old Mutual), consultants (asset consultants like Towers Watson, economists like Cees Bruggemans, index providers like Vanguard), and others.
Every year the competition to “theme” one’s report with a storyline and accompanying visual images intensifies. This year’s winner is KKR, a global investment firm that manages investments across multiple asset classes, including private equity, energy, infrastructure, real estate, credit strategies and hedge funds.
“Adult swim only” brings together:
- old market analogy that when the tide goes out, you will be able to see who has been swimming without a costume i.e. when supportive market conditions disappear, those who have been taking too much risk, will be exposed and embarrassed
- increased volatility is expected, given uncertainty around China and US to continue to drive global growth, and the overextended asset prices (in terms of valuation, margins, leverage, etc). Volatility is likened to choppy seas, where cross currents can be dangerous
- investors need to be skilful to avoid capital loss, as risks have increased from last year.
The executive summary of their view is:
We approach early 2016 with caution. In our view, valuations
are not cheap at a time when central bank policy in the U.S. is
changing, global trade is stalling, and corporate margins are
Also, ongoing Chinese yuan depreciation is significant; it literally means that every other country now must think through whether it needs to further devalue to remain competitive.
Not surprisingly, we are below consensus in terms of both GDP growth and inflation forecasts for most regions. With these thoughts in mind, we are electing to tilt our portfolio defensively in 2016.
See below for details, but we are raising substantial Cash, initiating our first underweight position in Public Equities of this cycle, and seeking out more idiosyncratic opportunities across Fixed Income and Alternatives.”
Important: KKR are one of the inputs into our process, not the only one! They are more bearish i.e. negative about investment returns than most of the firms we follow, but NOT the most bearish.