KKR forecaster eyes shift toward impact of inflation on profits in the wake of higher rates
With the stock market fixated on recession and interest rate hikes, KKR & Co. Inc. economic forecast Henry McVey has come out with a bearish call on corporate profits.
Signaling that broad-based profit margin degradation has not yet been priced in, McVey said S&P 500 SPX, -3.25% earnings per share will go down by 5% in 2023. This prediction is more pessimistic than the broad consensus for earnings per share growth of 9% in 2023 for S&P 500 companies.
“The macroeconomic narrative is shifting from a singular focus on surging inflation expectations and central bank policy efforts to one where inflation and tightening financial conditions are adversely impacting corporate profits,” KKR KKR, -7.46% said on Thursday.
In more bad news, McVey said oil prices will remain about $24 higher than overall expectation in 2023 and about $19 more than most expect in 2024. KKR’s latest view is that oil will average about $115 a barrel in 2023 and ease back to $100 a barrel in 2024.
KKR expects elevated inflation rates for services, food and energy, while prices in the goods business are expected to ease back.
New investing regime
McVey, head of global macro and asset allocation for KKR who overseas the private equity firm’s market risk efforts, said, a “combination of excess stimulus, heightened geopolitical risks, sticky supply side constraints and a changing relationship between stocks and bonds, have created a new investing regime.”
Overall, KKR now favors credit over equities including municipal bonds, mortgages and collateralized loan obligation liabilities. It’s also overweight on infrastructure and selected real estate sectors.
It’s also overweight on “flexible, opportunistic pools of capital that can provide thoughtful solutions to good companies with levered capital structures.”
KKR is also owning oil, as well as aluminum, copper and lithium as bets on the energy transition.
It’s avoiding large cap tech stocks, and reducing exposure to price takers, especially in the consumer sector. Price takers are typically defined as companies that must accept prevailing prices in the market because they lack the market share to shape prices on their own.
KKR said it’s also cautious on investments in Turkey and Mexico.
Some key themes that investors should consider include market conditions that favor companies with pricing power and unit volume growth, amid higher input costs and supply chain constraints.
Demand among investors for collateral-based cash flows will drive interest in the infrastructure and select real estate sectors.
Healthcare, energy, communications and data businesses will become increasingly “strategic” from a national security perspective because of the fragmentation of global trade and supply chains, and geopolitical rivalries.
Energy transmission remains a growth opportunity, with projected expansion of $1.5 trillion to $2 trillion per year.
KKR reported assets under management of $479 billion as of March 31, up 30% year-over-year.