How should I be positioned? with Paula Campbell Roberts (KKR) and Jason Draho (UBS CIO)
The desk anticipates a cautious approach to U.S. macroeconomic positioning, reflecting an expected dovish pivot from the Federal Reserve as economic growth shows signs of slowing. Per the full note source, both Paula Campbell Roberts of KKR and Jason Draho of UBS underscore the potential for Fed rate cuts amid rising market volatility and equity valuation concerns. This discussion highlights a nuanced understanding of the interplay between macroeconomic indicators and investor sentiment, suggesting strategic allocations may need recalibration in response to evolving conditions.
What the desk is arguing
The desk believes that the U.S. economic environment will necessitate a more defensive positioning as forecasts indicate a potential slowdown. The expectation of Fed rate cuts introduces uncertainty into the market, which has implications for currency volatility and investor strategies. According to Paula Campbell Roberts and Jason Draho, this dovish outlook could reshape portfolio preferences significantly.
Support for this view comes from macro data trends indicating slowing growth, which could prompt the Fed to reconsider their current policy stance. Observations from the recent discussions hint at a cautious sentiment among investors driven by factors such as valuation pressures and equity momentum shifts. This signals to the FX market that we may not be out of the woods just yet, and adjustments may need to be made in response to these macro signals.
How other firms see it
Several firms appear aligned with this cautious outlook; for example, jpmorgan suggests a moderate approach with a target of 1.10 for USD/EUR by March 2026. In contrast, bofa takes a more bearish stance, arguing for a target of 1.04, suggesting a stronger dollar under certain conditions. This divergence highlights the uncertainty surrounding future Fed actions and the overall economic landscape.
Looking ahead, the outlook for USD/EUR could be heavily influenced by upcoming Federal Reserve meetings and macroeconomic releases. Observers should note how current shifts in Fed policy and U.S. economic indicators affect currency sentiment in the market.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Expectations of Fed rate cuts may lead to a defensive positioning in FX markets.
- 02Market volatility is rising, impacting equity valuations and portfolio strategies.
- 03Investor sentiment is shifting, necessitating reassessment of asset allocations.
- 04The interplay between macroeconomic data and Fed policy is critical for positioning.
Market implications
Traders should watch for significant USD/EUR levels near 1.075, as any movement could trigger further volatility based on the Fed's policy actions. Additionally, any economic data releases may influence positioning as markets gauge the implications of a dovish Fed.
Risks to this view
A stronger-than-expected economic recovery could invalidate this cautious outlook, forcing the Fed to maintain or even raise interest rates. Such an outcome would strengthen the dollar, leading to rapid repositioning in FX markets and increasing volatility.
Hi, everyone. Dan Cassidy here. Welcome back to How Should I Be Positioned on the UBS Market Moves podcast channel.
On this podcast, we do like to catch up with our industry colleagues and partners to talk about the market and macro environment along with thinking when it comes to asset allocation. Joining me here at our 1285 podcast studio in New York from the UBS Chief Investment Office, glad to welcome back Head of Asset Allocation for the Americas Jason Draho. We're also very excited to welcome back joining us in person from KKR, Paula Campbell-Roberts.
Paula serves as Chief Investment Strategist for Global Wealth, Global Client Solutions, Global Macro, and Asset Allocation. So a lot to cover with our listeners, our clients. So Jason, Paula, great to be with you both here at the table.
Thank you for joining us. Fantastic to be back with you. It's great to have you, Paula.
It's been a year or so. A year? I think so.
Nothing has happened, though, in a year or so. No, no. It's not much to talk about.
Not much to talk about. So why don't we dive in, beginning with the U.S. economy. I know that's top of mind for many at the moment.
And the economy, it has performed better than expected, though does remain a point of interest. So Paula, to begin, do you expect growth to get better over the next year, worse, or stay roughly the same? Well, thanks for the question, Daniel.
I find it interesting, first to examine your premise, that the U.S. economy has, growth has gotten better. It's difficult to even say that for sure when data is coming at us when the government has been shut down, right? So I first examined that a little bit.
I think the revisions to the quarters in 2025, I bet that they might be revised down in the future. That said, overall, I think growth is more solid. We're not worried about a hard landing.
So I'd say growth is more solid, but probably not as strong as the recent numbers suggest. Probably more in line with what the job market is telling us. So to answer your question directly, I'd expect improvement from here, but really because the economy is probably a little bit weaker than we think right now.
But then on the back of fiscal stimulus, continued monetary support, that things get better. Jason, your vantage point. Well, in terms of direction of travel, I think it gets better from here.
If we think of 2% as a trend growth rate, moving towards that, if not above that for next year, rather than sort of go lower. The key point is, what is the true state of the economy? And so, Paula, you mentioned the labor market.
And this is a bit of, let's call it one of the puzzles of late. And it's not just because the government has shut down and we don't have the data. I think private sector data over the past few weeks since October 1st would sort of suggest labor market was soft and has not changed.
That narrative probably hasn't changed. But given the data we do have, on the labor market, three months in a row, the average headline payroll growth was 29,000. You strip out healthcare workers and social assistance is more like minus 30,000.
Yet you have an economy, for what it's worth, GDP of 3.8% and Q2. We know that's inflated by some trade numbers. But the data through, at least kind of through August, suggests growth in the U.S. could be like 3% in the third quarter.
Whether it's three, three and a half, two, even if it's two, that still seems a little disconnected from this labor market that looks pre-recessionary. So how do you, so it sounds like when you put a little more weight on the labor market data as a true rate of economy. But suppose the numbers just are the numbers.
You get 2% plus growth in a cool labor market. How do you square that circle? What do you think is actually kind of going on that would allow us to have soft labor market, yet growth that seems to be holding up okay?
Well that's math, as you and I know. So to get that kind of growth when you have a soft labor market, there has to be some kind of productivity plug, right? So you have to have the capacity of workers improving somehow to get that type of growth.
So what I would offer, what I would imagine, is we're getting that kind of growth because the productivity of workers on the back of not just AI investment, but CapEx investment is improving. I probably wouldn't buy still that growth is as strong as the numbers are saying, but it is stronger than just what the labor market is indicating. And that's probably because productivity continues to improve in the U.S.
So then another argument that's been made, or at least the data would sort of suggest, at some point it should depend on how you want to pick the data, that the growth this year is primarily just because of AI, CapEx-related investment, more so than even kind of consumption growth. When I look at the data fully, I don't fully kind of buy that. But that could be an explanation for like it's really more just a massive AI investment surge.
Relative productivity or other factors, like how much weight would you put on that? On either? I'd say AI is playing a lot, a great deal of, doing a lot of work in driving the growth numbers.
When we strip, we recently met as a Federal Reserve Bank of New York economic advisory panel, and we tried to essentially just strip out the AI-related growth. And when you do that, growth in the U.S. is actually much more meager. So still positive, still sort of soft landing, but not as strong as what the numbers indicate, especially when you strip out AI.
So I'd put a great deal of weight there, and then some weight to productivity enhancements picking up. The reason why I would position it that way is while we're seeing massive investments in AI, to your point, Jason, that are outstripping consumption growth, we're not seeing it happen, we're not seeing the adoption happen in sort of a diffuse manner, right? And so because of that, I just question how much that AI investment is necessarily translating into growth.
I think the investment is happening, but I'm not quite sure how much of it is yet productive. I think that is coming. And so I put a lot of the growth numbers then on the AI side versus the productivity.
So I don't want the podcast to be like delving into the minutiae of economic and GDP data, but just, you know, this is one of the questions, like how much is the AI investment contributing? Literally, when you talk about the GDP numbers, because the way GDP accounting works is we import more to the US, net exports decline, that's a drag on growth. Where are the semiconductors produced that go into these data centers to produce, let's say, in Taiwan?
So actually importing more semis to go into data centers could actually be a negative for GDP growth or all is equal, especially if when they go into data centers and not, say, a cell phone or a laptop that you would buy as a consumer, it can have this weird effect. So I'm just curious, like when you had this Federal Reserve meeting, was there sort of trying to parse out the data in some level of detail to suggest it's probably not as bad as the GDP numbers would suggest? Maybe not as good as these headline numbers or the hyperscalers you're talking about, like hundreds of billions, it's somewhere in between.
Do you have a sense like what is sort of realness and what you've got to put emphasis on versus other data? Not to that sort of refined level, because to your point, it's almost an impossible task to strip out everything. And there are some movements that are in opposite directions, but that acknowledged, you would still question, and again, this is a theoretical exercise, like two-thirds, one-third, how much is AI versus productivity?
But because when you look at it, at least at a high level, I would still put a lot of weight there. That's why I end up with AI is driving more of the growth than productivity. But your point is well-taken that some of the AI investment actually could detract from growth.
So just kind of sticking, maybe one of the structural story of growth as opposed to the cyclical and where exactly we are, these are shades of gray to some extent. A thesis I've had for a while, it's kind of like a roaring 20s regime, economic regime of elevated growth, but also kind of elevated inflation, higher rates. You, KKR, have had a new regime kind of framework as well.
So one kind of refined our list is kind of what that is. But also then, given where that regime, kind of thoughts on the regime, say six months ago, a year ago, has anything sort of changed in that sort of overall framework of how you think about the regime as it were? Absolutely.
So the new regime, as you're pointing to, Jason, is we believed in this higher for longer thesis. And the higher for longer thesis we put forth was supported by what I've called tectonic shifts. So you've heard me talk about this quite a bit.
And there's sort of five different structural factors contributing to these tectonic shifts. There is what has been amplified, which is the geopolitical shift. So from geopolitical cooperation, so read times of Bretton Woods when countries of the West would sit around a table like this and subordinate individual interests for the benefit of the whole.
We're no longer in that space. We're more in a focus for both countries of the West, as well as countries more broadly, where there's more competition, right? The way that plays out is that, to your point about supply chains are shifting, more national or an attempt to focus on national manufacturing, the security of everything.
When you put all of that together, that's putting upward pressure on inflation and therefore on rates. That's just one factor. Add to that, and I won't go into as much detail, but the energy transition, this competition over rare earth minerals that now is front and center with the China negotiations.
You have demographics short of a shortage of labor made even worse by immigration taking a hit. You have AI, which we've just talked about, which requires a great deal of scaling using data centers, infrastructure, energy, labor, and then you have fiscal stimulus. All of those factors together are driving an upward pressure on prices, but not just price levels, but price volatility, which is therefore also supporting higher levels of interest rates.
So to your question on that framework, is it still relevant today? I'd say post-November 20th is even more relevant. So the rewriting of the world order as we know it really came through very strongly after Liberation Day.
Policy around immigration, very different than what it was historically. So I'd say it's an exclamation point on actually the new regime thesis versus anything else. So almost more adamant or doubling down, like this is more conviction, this is the right thesis.
That's right. Touched on the Fed, the meeting you attended. As we're recording this, we're a little over a week away from the Fed's next meeting.
When it's expected, we would expect the Fed will cut rates even without data. And let's assume at the moment they're not going to get a lot of data between now and at least not jobs data if the government is still shut down. Market is pricing very high probability of that, another cut in December.
Next year I think it becomes a much kind of wider path of how things play out. What do you think at this point in time, kind of do you expect from the Fed in terms of a rate cutting cycle for this year into next year? And other measures like Jay Powell last week in a speech talked about the balance sheet reduction, kind of QT could be coming to an end soon.
It's a lot of focus on who would be the next Fed chair. So maybe more broadly like Fed, but like monetary policy in general, how do you think it plays out given the regime environment you're talking about for like the next year? Our house view is that we have three cuts total.
So we've had one, two more this year in line with what you're thinking is. And the next year we continue with three more. So five more in total from here.
Exactly. And so what that belies is that there's more weakness than maybe we realize, which requires then more cutting. And that's consistent with, you know, at the Fed meeting we just had, that was consistent with that conversation, that there's this case shaped economy where lots of folks are doing fine, doing well, but beneath it, there are business models that are pressured.
There are, you know, consumers who are pressured, lower and middle income consumers. And we already see the labor market being challenged. If you put all that together, there's more weakness that would compel the Fed to continue to act.
The one thing I would caveat is I'm sympathetic to the view that the Fed pauses, though, at some point just to take stock of, you know, the string of, let's say, three cuts and to make sure that it isn't, you know, unleashing some radical increase in inflation to ensure that doesn't happen. But otherwise, I'm sympathetic to the view that the Fed would continue to cut and do so five more times. So the two more cuts, October and December, maybe a pause in January, March, then quarterly, kind of from there.
And we think about June. So June, at that point, new Fed chair, maybe the board has changed. Is part of the June-September, or how much of that kind of June-September additional cuts is just kind of the view of the economy being underwhelming, the labor market, versus a Fed that would be biased because of the shift in committee members to be like more dovish, all is equal than they are now.
I knew where you were going with that, Jason. I don't know what you're talking about. It's probably a mix of both, right?
I think the Fed would like to hold to the position that it is completely independent, which, you know, I think they are. But when you're shifting votes and one vote shifting to a more dovish camp, I think that does, especially the important vote, I think that does have implications or have impact. So I think both end up lead to the Fed cutting three times.
That's sort of June-September cut. So it's interesting, I was talking to an economist a couple of weeks ago who talks a lot of hedge fund investors, like macro hedge fund investors. And he said one of the questions that was coming up a lot was the possibility of the economy accelerating in the second half of 2026.
And then kind of implicitly, what does the Fed do? Because if you actually have an economy that is now accelerating, meaning grossing above 2%, and you have inflation still rolling over well above the 2% target, can the Fed cut in that situation? Does it pause?
Could it even hike in that kind of environment? And so if the Fed forecast you lay about has that plus the growth dynamic is this, then one, does the curve steepen dramatically? Does the 10-year go to 4%, 4.5%?
So it is kind of higher for longer. Or just because you believe growth is low enough that the acceleration goes from below 10 to kind of a trend level of growth. So rates aren't, the curve isn't, the back end isn't going like 4.5% or something like that.
That would be our point of view. We're not talking about the long end becoming unhinged, but that growth is actually more modest than we think. And so the stimulation won't lead to some hyper-growth, hyper-inflation scenario that drives the 10-year higher.
Okay. So then, from an economic perspective, like two things that I think investors over the past month have become a little more concerned with. One is the AI, kind of this circularity of financing.
You hear a company like NVIDIA make equity investments in OpenAI. AlpenAidon uses that money to buy the NVIDIA chips. And there's other examples like that.
It has echoes to the late 1990s of kind of this vendor financing. Another concern is like some high-profile kind of defaults, credit defaults, could be idiosyncratic. And there's reasons to think they're very specific, a kind of flawed basis, not broader view.
But just, you know, then kind of thinking about these concerns, how much do you think then, given this AI story we talked about, how much is driving growth? Do you have confidence, especially what you can see from kind of KKR, the investments that company's making, that, you know, this CapEx story has legs that actually the numbers will keep getting ramped up. The demand for AI is sufficient that once you try and get AI and physical AI, like robots and things of that sort, or agentic AI, it's actually inflecting higher rather than concerns that perhaps like, you know, we're financing stuff that's just not going to be the demand.
How do you kind of think about that AI trajectory from here? I'd back up and frame it a little bit. It's a great question and a complicated one.
But one, I'd contextualize that the amount of spending, even though it's outpacing the growth in consumer spending, is still under 1% of GDP. That's point one. The second point is, in order for us to grow in the future over the next five or 10 years, we need to use the more in 20s, we need a productivity boost.
And we're almost counting on AI to deliver it. And so if in the US, given the, you know, constraints to labor supply, that we're relying on productivity growth, and especially vis-a-vis AI, it makes sense for us to do a lot of investing and spending to get there, right? That said, I think you have to be eyes wide open, because not all of the investment is going to lead to a huge return or be, you know, there will be winners and losers, right?
And so one at KKR, the way we like to play it is really at the infrastructure end. So we, you know, energy, data, the connection to the grid, because regardless, we need more power, we need more, you know, sort of data centers to house the data in order to support AI. So without a doubt, that's going to be there.
But in terms of the businesses, and whether or not business A versus business B would survive, that can be a little bit of a red black bet. So you have to be very careful and know your managers very well to ensure that, you know, they're not, you know, leaning into an area where there's no demand or that manager, that, you know, CEO doesn't know a ton about the sector, that kind of thing you want to avoid. But AI overall is not going anywhere, we need it as a country, and we need the infrastructure to support it.
So that's where we lean in. And the question is really about what, what specific businesses are going to survive, which just like in the internet boom, there are tons of companies that aren't around today, but the internet's still here. So then, but then the idea of, I just got a big kind of bubble question, like what the markets are bubble and is this one example of it?
You seem like whether we get to bubble it out, there's going to be winners and losers, there's going to be probably some overinvestment or malinvestment. But it's not as if we are at a precipice and about to roll over. That's right.
Well, well summarized. Well, thank you. So the other kind of risk on private markets, private credit, you know, when I see explanations from credit analysts, it sort of makes sense, these are idiosyncratic.
When I look at the broad spectrum of, you know, kind of credit metrics for the economy overall still looks solid, doesn't seem, you know, like things are like, you know, cracking. If you want to tell a story that's negative, you could point to like subprime auto loans and things like that. Sure, that there's always data points to point to.
I'm also conscious that spreads, at least in the public markets, are incredibly tight. And so maybe you're not getting compensated for that risk. It's why in general, we're not recommending corporate credit.
We prefer like securitized credit at this point in time. Curious, do you have a similar view, again, sort of what you might see with, you know, from Kikio's vantage point, like are these, you know, a lot of headlines, but like there's some really unique aspects that you can draw kind of broad brush strokes. If there is concerns, like where would you maybe be concerned with, you know, kind of credit overall, maybe private credit specifically?
So just kind of... So pretty similar in broad brush, but I'll tell you where, you know, we are seeing weakness. I'd say overall, we agree that the events that have transpired are largely idiosyncratic.
We're not observing any broad-based weakness in the private credit market. That said, we're talking about at the top, you know, the beginning of this call, an economy that has been experiencing the delayed impacts of higher interest rates. It's not a surprise then that some business models are going to be, you know, wither or shake under that pressure.
And so we have seen default activity increase in pockets, but again, not in any broad-based way. And specifically where is very similar to where we started the conversation. It's skewed toward the lower end of the market.
So think core to lower middle market companies, sub 50 million in EBITDA or lower income, lower FICO borrowers. That's where we're seeing any defaults or increase in delinquencies on a more fundamental. But that is in line with what we just talked about at the starter call, where you would see weakness overall in the economy.
So nothing broad-based, pockets of weakness at the lower end, both in terms of scale of company and in terms of borrower. But overall, the fundamentals are still there. So for, let's say, a lot of that kind of credit, it's floating rates.
So if the Fed's cutting, that could help if they do the five cuts as you're outlining. That could help. Is it, will they come too late for a lot of companies or is it going to come enough that they can sort of, you know, like some will default no matter what, like there's always going to be distress.
But kind of, they're not, kind of question like whether the Fed's behind the curve or ahead of the curve in terms of, and like are these insurance cuts or they, you know, they got to actually ramp up the pace. Like it's got to not be every meeting or something like that. Given kind of what you've seen for that, those kinds of pockets of stress.
Again, I wouldn't paint with a broad brush for the smallest company. Perhaps there's a lot of, there's more stress today than, you know, we're seeing levels of defaults that are higher than at the higher end of the spectrum. So, you know, think 4% versus 0.5%, right?
And so for those companies, they would say, you know, we wish this had happened a year ago. But those are, again, we see as idiosyncratic. The other thing that you benefit from in private credit is that the lenders have much more patient capital, right?
So if you're lending to a company and you know that they're under stress, but you could foresee or you're forecasting three cuts and the business model can withstand that, you might, you know, to use a term that's now commonly used, amend and extend, right? If the fundamentals are there, if the demand drivers are there, you might be a little bit, you might be a little understanding. And that's why many companies are interested in private credit because you have much more patient capital and the ability to look, you know, not look through, but have an understanding of the business drivers so that you could qualify for, you know, a new agreement.
Well, I'll say it's more amend and extend and not extend and pretend. Right. We don't want that.
We don't want that one. So kind of sticking in this whole private credit space, but shifting to private equity, there's a lot of expectations at the start of the year that IPO activity will pick up, M&A activity will pick up, and then with liberation date, really things kind of ground to halt for many months. Markets don't like uncertainty.
They don't like uncertainty. And so the good news is, like, kind of by the summer when the markets became rightly or wrongly, almost like tariffs or yesterday's story, they kind of moved forward, the markets obviously rallied. We've seen the IPO market open up.
There's definitely been some very well-received offerings. M&A activity has also picked up. These are from low bases, so like, you kind of have some perspective.
Do you see this, I guess, from a private equity perspective, where there's, you know, the flywheel, so to speak, of like, you buy companies, you want to, like, exit. That's been the, you know, sort of there's been sort of, you know, sand in the gears. Is that starting to open up or is it still like a little too, you know, soon, just things just like, all right, now things are going to be running kind of properly?
Well, this is another area where I think framing and context is important, where I think it's great that the IPO market is opening up. That's good for the industry writ large, but this again is where you have to look at manager by manager, size of manager, experience of manager. For us, only 20% of our exits are reliant on the IPO market.
The other, you know, 60 or 80% are to, you know, from sales to a strategic or a sponsor. So the fact that we now have the IPO market gives us more optionality, but we're not reliant on it to generate our exits. And so that, we feel good that in general, you know, markets are opening up, but we would have been fine in either case.
Okay. Wanted to, well, so thinking about the markets in general, you know, this year, it's been a little bit different than the past couple years, where the U.S. is not the leader in equity market performance. You know, like, you know, Yam is up 25, 30%.
Developed markets, you know, even higher. S&P, you know, 14-ish percent, you know, given the day of the week right now. So very good, but less.
So we're seeing, I'm seeing with one of our advisors, our clients, who actually are looking to go abroad for maybe the first time in a while. And for context, the first week of January, I had like at least multiple calls with, you know, advisors asking, should we just kind of give up on the rest of what's in S&P? Yeah.
KKR, very kind of global. I know you will travel, the company looks abroad. Have you, that probably has not changed, I would assume, but interest in terms of opportunities, or even kind of, you know, investors into KKR funds, maybe a shift in like, oh, actually, we do want to see more opportunities abroad, and especially given pre and post-liberation day, like, how do you see that landscape of both opportunities, interest, and revolving issue, given all the kind of the geopolitical challenges and issues?
It's a great question. I have very real examples of, you know, a year ago, being out on the road, and someone in a, you know, questioning, so, are you sure about your exposure in this region or not? And really not wanting to invest or being hesitant about investing, because we were globally diversified.
And the same, you know, advisor, a year later, being so excited that they actually had invested in a vehicle that was globally diversified. So a very real experience of the whiplash. And I think it's smart, right?
What we have seen is the shift in relative value, where, as you and I know, you know, looking at markets over the past 10 years, the US exceptionalism story has held its ground, right? The dollar has outperformed, the US has outperformed from a stock market perspective, the technology hold, and the innovation in the US, productivity has all accreted to the US's benefit. This year, what we've seen is, one, more investment in Europe.
So think about Germany, for example, more fiscal stimulus coming through in Europe, more of a focus on regulation being a negative. And so trying to address that, fingers crossed that we actually get there. And then certainly in Asia, we've seen both fiscal and monetary stimulus at play.
So that relative value shift is leading, and then I would add on the US side, fiscal constraints, right? So real constraints here, as well as an increase in uncertainty. So that has led, I think, to the outperformance of markets abroad, and rightly so from an investor perspective, then, to look abroad and to have a balanced portfolio that is not only weighted to the US, but that is open to opportunities around the world.
Between, say, US investors and ex-US investors, you can see ex-US say, like, you know, maybe we've overloaded the US, we're not going to add as much, we may even take money out. US investors have been justifiably kind of hoarded into basically investing in the US. There's probably shifts in both, but do you see maybe a bigger shift from international or ex-US investors who are now, you know, we did too much in the US, we've got to diversify, given also our liabilities, where we're based, we have to think more globally, a little less, we got a little too US-focused, or do you actually see a bigger delta among US clients and investors who are like, we're just so much US, we're realizing, oh wait, there is other parts of the world we can invest in?
I would say it's more the former, that I think the biggest delta has been with international investors wanting to diversify out of the US more. I think even, you know, we don't often think of Canada as international per se, but you know, it's a separate country. It is a separate country.
Oh, I didn't mean it that way. No, but I remember meeting with the Consul General earlier this year, and there was an entire conversation we had where, historically, the US and Canada were sort of tied at the hip. We moved together in lockstep, different countries, but moved together in lockstep.
And the sentiment coming from the conversation was, going forward, we're certainly going to be partners, but no longer are we only going to rely on the US, right? And so I think that sentiment is one I've heard all around the world, of never going to be, you know, 100% relying on the US, regardless of what happens. In this administration, next administration, diversification is the way forward.
And I'd say in the US, I think investors are, you know, for whom investing internationally is new, it's more like dipping your toe in, right? Like starting to learn the markets, get exposure to the markets. So that's why I rank it that way.
Yeah, no, that's, I think it's a little bit of the, it's understandable if you're outside of the US, you'd probably think, oh, you know, we got to not be so kind of tied into the US economy, given it's already so influential. And that's what I would, hearing the clients for UBS that are both US-based and offshore, it was definitely more like those who are outside of the US, trying to make that, at the margin, that change. Look, the last kind of thing I want to just, you know, address is, I know most of the investments, these are like multi-year funds, multi-year investments.
So it's not so much tactical, but nonetheless, you know, for the next year or so, when you think about kind of where you think that on a relative basis, the best opportunities would lie with other inequities, you know, fixed income or other asset classes, like where you'd say diversified portfolio, yes, but we'd kind of lean more into certain areas versus others. Do you have some preferences? I do, of course, Jason.
And first, I'd summarize what we've just said on this call. We believe we're in an environment where rates are coming down. Growth should remain positive, potentially, you know, be a little bit better next year from here.
But in general, interest rates should skew higher, inflation volatility should skew higher, and interest rates should skew higher. So when you think about that backdrop, and then how to be positioned, you want to make sure that you're in asset class as one, if you consider credit, where you can lock in that fixed rate, right? So that could be, you know, in private credit, for example, asset-based finance makes a lot of sense, so that you're continuing to get to getting that, you know, that yield, even as rates come down.
So I like asset-based finance. I like infrastructure, because we're still, and you and I have been talking about this for a couple of years now, volatility is still going to be an issue when you're talking about hedging against that volatility in terms of downside protection, as well as hedging against inflation. Infrastructure is one of the best asset classes for that.
When I think of 2022, it's still, you know, that performance just for general infrastructure managers, and I'll just, you know, where stocks and bonds were down 20 to 25%, global private infrastructure was up 6 to 8%, you want more of that in your portfolio. And then I'd also say, we've been wary about equity in general for the past couple of years, real estate equity in particular, I think now's the time to start looking at it again, since we're clear that rates are coming down, that had been the real issue for real estate equity over the past few years. And then my, you know, perennial, and not just because I'm at KKR, the asset class where you can still get the highest return is private equity.
And I think now more than ever, where you see IPO markets thawing, and rates coming down, that's only going to be even more supportive for private equity. So on your first point about, like, looking at the asset back, you know, credit or fixed income, in general, you know, one of the messages we've just updated with our host few recently was, like, just put cash to work because rates are going lower. So it's like, I mean, it's been a nice to get five and a half percent on a three, like a money market fund.
But those days are probably, like, we're moving away from that. So one, you want to start to deploy the capital. You know, that's one area, but it could be other areas as well.
On the real estate, you mentioned, like, you know, kind of equity real estate. Do you see, you'll be in a KKR as private equity or private real estate, but relative, like, private real estate versus public real estate. Sometimes there's like, kind of like one can lead the other.
You know, where do you see, you know, like, at least on a relative basis, is it relatively more attractive one versus the other or the discount for one versus the other maybe looks less distinct? I find that the volatility in the public area is what often makes me a little bit nervous, especially, you know, given what we just saw with regional banks last week and then the impact that has on some of your public positions versus the private arena where, you know, you are market to market on a quarterly basis, but you're investing more for the long term. So you're just not as subject to sort of public sentiment.
And so value gets protected in that respect. So in that way, I prefer private. But you tend to see marks moving faster on the public side for that reason versus on the private side.
But the driver of the movement may not always be fundamental, which is why you get some of the value destruction. In real estate in general, like there's different categories, there's going to be residential, retail, office, you know, logistics, things like that. Do you, like the PMs in real estate, kind of leaning more into one of these areas more so than others?
Absolutely. So you see variance by subsector for sure. And if you look at just, you know, commercial property prices from last year to this year, it's across the board, you've seen general bottoming, which is what you look for for there's an inflection of prices are starting to increase.
But where you're seeing that happen most is in areas like lodging, apartments, and then in logistics. So those are areas I would lean into differentially. Well, it's been a really good conversation.
A lot of stuff obviously going on. Yes. So thank you for joining us today.
Thank you for having me. It's a pleasure always. Hopefully the, you know, the audience enjoy this podcast and we get more listeners than your son, who is apparently a budding podcaster.
I know it's a tough act to follow. My son, four-year-old son had his first podcast this past weekend and he, you know, went, he delivered to raving reviews. So hopefully we get half as much.
Yeah. If he, if he gets better numbers, is there something you have to do? Like, can you take him to Disney World or something?
I think so. I think so. Buy some more dinosaurs.
Fair trade. Paula, Jason, very generous with your time. And Paula, you'll be joining us in our new studio space for your next appearance.
I'm excited. Looking forward to that. Thank you again, everyone.
Hopefully the air conditioning won't be so cold. I know. Oh, here's hoping.
Thanks again. Take care. Visit UBS.com slash CIO to view the latest research.
UBS.com forward slash CIO dash disclaimer.
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