With Inflation Past Peak, KKR’s McVey Says It’s Time to Add Risk

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(Bloomberg) — Investors should judiciously add more risk in 2023 now that US inflation has peaked and recession fears are “less ominous,” according to KKR & Co.’s Henry McVey.

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Even though market volatility will persist for the next 12 to 18 months, money managers should begin investing more capital in areas including infrastructure and private credit, McVey, the chief investment officer of KKR’s balance sheet, said in an interview before Monday’s release of the firm’s 2023 macroeconomic outlook.

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After sharp declines in stocks and high-yield bonds this year, and with new debt issuance and initial public offerings at their lowest levels since 2009, now is the time to begin adding risk back into portfolios, said McVey, who’s also head of global macro for New York-based KKR.

The coming year “will probably be a very good vintage for investing in private markets,” said McVey, 53.

KKR cut its 2023 US inflation forecast to 3.9% from 4.8%, and expects nominal GDP growth to slow to about 4%, from 10% in 2022. It sees corporate earnings declining next year before rebounding in 2024, and a weaker US dollar.

Large-cap tech stocks are still over-owned by institutions and individual investors, and that part of the market is due for a correction, McVey said. Equities related to life sciences, data security and energy security are more attractive growth opportunities than social media and search, he said.

Slower growth and higher interest rates in 2023 will also test some companies that still have too much debt, posing refinancing risks, he said. Services inflation could remain elevated, driven by rental income and wage growth, and an unstable geopolitical climate, McVey said.