With geopolitical and macroeconomic concerns mounting of late, we have spent a considerable amount of time working with our deal teams and clients on three areas of intense focus: the impact of negative interest rates, the outlook for economic growth/capital markets in 2020, and the validity of risk-adjusted returns in private markets. In terms of negative interest rates, we believe that central bank intervention – coupled with slower nominal GDP growth – suggest that the prospects for interest rates increasing is now greatly diminished. Maybe more importantly, we believe that we are reaching somewhat of a tipping point, underscoring our view that lower interest rates may no longer help either credit creation or equity valuations. This view represents an important change in our thinking. Separately, on the growth front, our base view remains that we technically have entered a manufacturing recession, but we do not believe the services economy will ‘catch-down' fully to the goods economy. Our outlook defies traditional historical comparisons, so we think our framework for navigating the current slowdown warrants investor attention. Finally, our research on private market performance suggests that volatility is likely understated in certain instances. However, many traditional risk-based metrics that are used in the public markets do not necessarily act as perfect tools for valuing performance in the private markets. Our analysis also uncovers some important insights into persistency of performance as well as the understated value of the illiquidity premium in many instances, we believe. Overall, while we may not have all the answers to the three important topics we address in this Insights note, we feel confident that our collective curiosity – including that of both KKR and its clients to better understand these subject matters – will hopefully lead to greater investment wisdom in the future.
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