KKR Says Investors Will Need to Take More Risk to See Returns

(Bloomberg) -- KKR & Co. warned that investing will require more risk given the market turmoil driven by Russia’s invasion of Ukraine.

There may be opportunities in beaten-down growth stocks, liquid credit and inflation-hedging proxies including real estate and infrastructure, KKR’s Henry McVey and Racim Allouani said in a March 9 report to clients. Tightened financial conditions are also creating the prospect of partnering with companies facing temporary business disruptions or that have weak capital structures, they said.

Low rates and government stimulus have boosted markets in recent years, with investors enjoying outsized returns even with relative safe portfolios. The war has created turmoil across asset classes from stocks and bonds to commodities and “tremendous volatility,” they noted.

“The current crisis makes forecasting risk parameters such as risk of loss, volatilities, and correlations only more challenging,” said McVey, KKR’s head of global macro, balance sheet and risk, and Allouani, a managing director. “This backdrop means that investors must take on more risk for the same expected return.” 

Among other highlights:

• The firm has no direct and limited indirect exposure to Russia and Ukraine
• While KKR has limited exposure to commodity costs, “of the base metals that we track and to which we have exposure, aluminum and nickel prices are expected to face the most upward pressure”
• KKR recommends upping value investments given inflationary challenges

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