KKR is adding two percentage points to its U.S. equity position, bringing the firm's global macro asset allocation to 22%.
In a research note published Tuesday, Henry H. McVey, head of global macro and asset allocation, said the firm is reversing its January call to raise its cash allocation. “With prices down and volatility up, we now feel compelled to start to spend some of the 'rainy day' funds we husbanded back in January.”
Three tactical considerations were outlined. First, the firm's proprietary Equity Capitulation index, which has flashed buy signals in previous sovereign crises (1998 and 2011), suggests now is a time for long-term investors to buy U.S. equities.
Second, two-thirds of U.S. earnings will come from four sectors: consumer discretionary, financials, technology and health care. The firm said it generally feels good “about the sturdiness of these earnings streams” heading into 2016.
Lastly, KKR thinks the recent sell-off has produced attractive valuations. Notably, the fact that the S&P 500 was trading at 16.4 times trailing earnings at the end of August, vs. 17.3 times in January and a peak of 17.9 times in May.
