The desk underscores a cautious yet strategic outlook on portfolio management heading into 2026, as highlighted by KKR and UBS's recent discussions on 'high grading' investment strategies. Per the full note from UBS, both firms emphasize the need for investors to upgrade their portfolios in a context where macroeconomic growth expectations have escalated to 16% for the S&P, above the historical average of 11%. This cautious optimism arises as notable risks loom, particularly with anticipated increases in credit defaults amid a backdrop of rising interest rates. As we chart our strategy for this environment, it’s crucial to monitor how these evolving dynamics could shift risk sentiment in FX markets moving forward.
What the desk is arguing
The desk believes that investor sentiment towards growth needs to be tempered with caution, particularly regarding credit risks. According to KKR's Henry McVeigh, while the growth outlook appears robust, the current embedded growth rate is significantly above historical norms, raising potential concerns about sustainability. This narrative of cautious optimism is further supported by UBS’s insights into portfolio management strategies, emphasizing the significance of 'high grading' in the face of changing economic conditions.
Supporting this view is the drastic shift in the credit landscape, where expectations of defaults are rising from previously low levels. As investors navigate the potential for higher defaults alongside a robust S&P growth projection, the desk frames these insights as critical for fostering resilience within FX strategies, especially against a backdrop of fluctuating interest rates.
Where it sits in our coverage
While we are not providing specific per-firm forecasts, our consensus target reflects a thoughtful adjustment to the current macroeconomic landscape as articulated in the UBS and KKR commentary. Despite a lack of divergence in expectations from institutions, the broader sentiment leans towards a balanced approach between equity growth and credit risk assessment.
How other firms see it
Many firms echo a similar cautious stance with respect to growth and credit risk, emphasizing the necessity for balance in high-grade portfolio allocations. On the contrary, some firms highlight a more aggressive growth perspective amid lower default rates, suggesting a divergence in approach within the investment community.
In this context, FX traders should keep an eye on USD/JPY and EUR/USD, as these currency pairs reflect shifts in market sentiment tied to macroeconomic indicators and central bank policies.
01Growth expectations are elevated, with the S&P's embedded growth rate at 16%, above historical averages.
02Rising credit default expectations pose risks to portfolio valuations and market stability.
03'High grading' strategies will be key for investors looking to navigate the changing landscape of public and private markets.
Market implications
Traders should monitor the S&P's performance as a leading indicator of risk sentiment, particularly if credit defaults increase. Additionally, fluctuations in USD/JPY could provide insight into market reactions to central bank decisions as economic conditions evolve.
Risks to this view
A sudden shift in macroeconomic indicators, such as a surprising decrease in default rates or a resilient economic performance that defies current growth projections, could invalidate the desk’s cautious stance and require a reassessment of portfolio positioning.
ubs
Hello, everyone. So nice to be with you today. Thank you for joining us for our fourth annual Markets Conversation with KKR's Henry McVeigh and Salita Marcelli.
I'm Anthony Pastore. Thanks for joining us and in the studio here today. I wanted to, first of all, welcome both of you.
It's nice to have you. This is our fourth in this series that we've been doing. It's really cool to have you both back.
Henry, nice to see you. Salita, also good to see you as well. Henry, I want to get right to your outlook for 2026.
KKR and you put out a report titled High Grading. I want to get into what that means for you. It's suggesting to investors to upgrade what they have in their portfolio, not just get out and do other things or get out completely.
So walk us through some of the thinking that went into high grading and why it's so important right now for portfolios. OK, well, great. It's great to be back here again.
So I think both of you is one of my highlights of the year. So this should be a great dialogue. There's lots going on.
So the past couple of years, we've been talking about this glass half full. And our expectation was that investors were going to underappreciate the level of growth and the potential for margin and multiple expansion because of productivity. I think coming into 2026, some of that was in the price.
And what we saw from our analytics coming into this year was two things that made us a little bit cautious. One was the embedded growth rate on the S&P was already up to 16 percent. Typically, it's a historical average of about 11 in the last decade.
It was eight. So it had doubled. So expectations about growth were up and they were in the tech sector.
And the second is, is that people had gotten used to essentially no defaults in credit. And we thought that credit defaults would start to tick up. I want to come back to that.
That was the kind of cautionary tale. The positive was the ability to high grade the portfolio or upgrade it was extraordinarily cheap. And so in equities, everybody had concentrated in tech.
And there was the ability to buy quality as the market breadth widened, which I think is what's unfolding at about a 20 percent discount, which you don't get that often. So it's a little like going to the grocery store and having something on sale. And then on the on the credit side, let's use triple B's versus triple A's.
You could upgrade the quality of the portfolio. Big jump from triple B's to triple A's for 60. It only cost you 60 basis points and spread.
That historical average is usually 150 to 200. So it felt like to me the prudent thing to do when we pulled all our analytics together globally was to come up with a thesis about upgrading the portfolio or high grading. Our message is not to get out of the market.
We still see pretty robust earnings growth, pretty good GDP growth. But we did want to reflect a change where, as before, I think we'd had kind of glass half full sentiment was too cautious. That wasn't our view coming into this year.
Yeah. And, you know, you mentioned credit defaults. And I think it's really important to bring it up because you are talking about and we know we're late in the credit cycle.
So money's a little bit more expensive. Lenders are being a little bit more prudent. Is our credit defaults a risk here?
I think what you're going to see and you're seeing this across the public bank market, bank loan market and private credit is that you are seeing a tick up in defaults. That's really not where I'm focused. I think we're going to have a credit default cycle, not a crisis.
OK, what I do think is going to be problematic is I think the recoveries when things go wrong are going to be lower. And so what we've really been focused on is like where is the potential where defaults go up, but recoveries are going to be low. Typically, you recover about 60 to 70 percent of a default.
I think some instances and we can get into specifics. I know there's a lot of concern around software is going to be that is that the recoveries in certain parts of the market are lower. And so it really speaks to me on the credit side not to abandon credit, but to approach it with a really diversified portfolio.
I think where you get in trouble and credit is you really concentrate. Concentration is for equities, not for not for credit. Right.
We could do a whole show on just the software story, which has been really blowing up a lot lately. So, Lita, let me bring you in. So last year, the CIO, we put out our year ahead report and we titled it Escape Velocity.
And it was published in November. So we're a few months from publishing date. It was talking about AI innovation.
It was talking about easing monetary policy. Fiscal spending, which has helped markets and economies. Fast forward now to almost in March.
Does that story still resonate? Where are we inside that cycle? Yeah.
Thank you, Anthony. Great to be here with you again. We actually published an updated version of it in January as well.
But I would say, Anthony, so far, the year is actually unfolding pretty much like we expected, right? You have AI and policy tailwinds still supporting the global economy and looking ahead, the outlook is quite constructive. Now, we anticipate a friendly policy mix here, while Fed cuts are probably going to come later than we hoped.
The direction is still towards easing. And we also have the one big, beautiful bill stimulus from D.C. that is coming in. And in this election year, policy focus is very much likely to stay on affordability.
Right. And now you have AI, which remains a driver, you know, a really powerful driver, actually, in the market. The AI spending make up more than two percent of GDP, which is a huge jump compared to what it was last year.
And the technology is evolving to benefit more sectors. And, you know, finally, you know, I would say consumption is healthy, mainly led by higher income households, while, you know, policy measures could certainly support lower income groups as well. So when you put it all together, right, what do we have?
We have strong growth. We have supportive policy. We have maturing AI.
And that creates a really nice backdrop. But it also explains why the market leadership is shifting, right? We are moving from a pretty narrow focus on building AI infrastructure to a more holistic view as these business models get disrupted.
And the cyclical growth story plays out. What are we doing at UBS? Well, we're adjusting accordingly.
We still like the AI theme. We still like the U.S. market, but we are diversifying now more broadly. So we recently trimmed our exposure to the technology sector, to communication services as well.
And we're favoring health care, financials, utilities and consumer discretionary. We also see opportunities outside of the U.S., both in Europe and in Asia, where policy is also supportive, where AI innovation is also shaping up and probably at, you know, cheaper valuations. When it comes to credit, I think the way Henry laid out is really great.
You know, I second that in the sense that our focus is also very much on high quality. We're trying to avoid getting excess exposure to excessive risk, especially in high yield, where spreads are quite tight. We like a mix of high-grade corporates and agency mortgage-backed securities that give you a nice protection and lower correlation to the equity markets.
And private credit, I still think, has a complementary role to play. In terms of boosting income. So that's where we are in our outlook.
Great to hear it. Yeah. And in the AI story, obviously, it's one of those that exponentially changes.
Seems like day to day, week to week. So the story continues. And speaking of all those sectors that you mentioned, utilities, health care, that's such a fascinating story for investing, which we could get into.
Henry, the last time you were here with us almost a year ago, we talked about regime change, which is one of your themes. And, you know, you suggest that forward looking expected returns are compressing, that stock bond correlations are elevated. Essentially, you know, people think their money isn't going to go as far as it did before and, you know, stocks and bonds are moving together more than they usually do.
What what do you think is driving those dynamics? And how do you think that? Advisors and clients should be calibrating portfolios, given what we know, right?
So I think our regime change thesis was something we laid out after covid. And there are a couple of things that we saw. One was governments are running with bigger fiscal deficits.
You see that everywhere that I travel around the world. Second is you have heightened geopolitics. Third thing is, given that AI is a national security concern, you have a kind of a messy energy transition.
People want to go to renewables, but they need energy today. And then you've got a little bit of sticky or at least more volatile inflation. Those are the four kind of legs to the stool that we see around the regime change.
So what have we done in private equity? We're more focused on corporate carve outs and public to private where we're kind of making our own luck. There's more of an operational improvement versus just betting on low rates.
Second is we're doing much more in real assets. And I would highlight infrastructure has been a huge growth area for KKR globally. We see that that debt indebtedness from the governments.
They want to move more to the private sectors. Yet people had a really good experience around inflation protection that infrastructure provided during right after covid in twenty one and twenty two. And now we've started to add back some real estate into that, given that valuations have come down and in the credit markets.
We really like something called asset based finance. Again, you're getting long nominal GDP with some some pricing power. So what I would say is, given where we are with a little more inflation in the system, more volatility, bigger deficits, we want to own more things linked to nominal GDP.
We want to have, you know, make our own luck to a more operational improvement. And, you know, Salida has written and talked about this. But the public markets are concentrated.
And so what we're trying to do is build diverse portfolios in the private side that are really, I'd say, more stable relative to some of that concentration that you've seen in tech. And it doesn't mean tech's not going to work. But I think we're in a different environment than we were in twenty one, twenty, twenty one and twenty, twenty two.
Right. What about you, Salida? Do you see any structural changes when it comes to investing today versus, you know, what Henry was talking about the last couple of years?
Obviously, a lot has changed. Yeah. In recent years, we've been talking a lot about the five D's that impact markets like what are those five D's?
De-globalization, debt, digitalization, demographics and decarbonization. So I'm not going to go through each one of them. Don't worry.
I think they're all self-explanatory. But what I would say is when you put them all together, I think they point to two significant shifts. One is, you know, expect more volatility in the macro environment.
Right. Inflation expectations could be very much on a seesaw with, you know, deficits and de-globalization on one hand and then AI driven productivity gains on the other. Growth is also less predictable with supply chains evolving and AI creating more dispersions across different regions.
So that's one shift. And the second shift, I would say, is we are in a period of rapid investments that is mainly driven by technological breakthroughs, but also by necessity that is driven by demographic shifts. And I think Henry talks a lot about this defense needs that now require really new solutions.
Right. So what does that mean for investors? I think it means two things.
Number one, you need diversification on steroids. Diversification between equity and bonds is table stakes, but it's not enough. As we all know, gold certainly has gained renewed relevance in the midst of rising geopolitical tensions and increased central bank purchases.
So that's one. Two is what Henry talked about already. But I know that historically we've spent a lot of time on this is you've got to look at private real estate and infrastructure where you can get inflation linked cash flows.
Right. And I would say, you know, the third part is, you know, I think hedge, you know, sort of hedge funds certainly matter more when you have greater macro and policy volatility. So that's one of the second thing that investors should think about, I think, is you've got to get exposure to these big investment waves through both public and private markets.
Right. When it comes to AI, you know, it's no longer just about the big household names. You've got to look at data centers, you know, industrial equipment and energy solutions, especially when energy or electricity demand, I should say, is surging.
Right. Data centers are expected to make up about 9 percent of the overall U.S. electricity usage by 2035 from up from 4 percent today. So that's an important thing.
The other theme is, of course, longevity that we've been talking about for a while. By 2030, our expectation is that the revenue globally coming from this segment could reach eight trillion dollars compared to five trillion. We've seen only just a few years ago.
And that is driven, you know, by strong demand, of course, for obesity therapies, right, oncology and medical devices. And I would say the private side of it, I think private equity is very well positioned to support to help for, you know, in areas like next gen care delivery, you know, personalized medicine, of course, digital digital health. Yeah, I the story on AI, when you go back to that for a second, you talked about the data centers and all the utilities.
It's every almost everything nowadays, even in the small midcap space somehow is has some kind of a connection to AI. It's unbelievable how there are so many adjacent sectors and companies that are really being wholly affected. We use it every day here at UBS in our research and other things that we're doing.
And I never thought that we would adopt it so quickly. So it's a it's a great story. Henry KKR, you saw some record fundraising, also deployment last year.
Where do you see attractive opportunities right now in in private markets? Because as Alita said, there is a recommended allocation from CIO, roughly 10 to 20 percent of privates in a portfolio, depending on risk tolerance. Where do you see private markets today?
So I'd say there are a couple of things that jump out. One is around private equity, as I mentioned before, corporate carve outs. Like we're not going to have, in my view, a huge M&A boom the way we did in 2000.
But we what we are having is we're in a bull market for corporate repositioning. Companies are feeling pressure from activists. They want to get the return on capital up, capital heavy to capital light.
And so what's happening, I'd say the U.S. and Japan are the two epicenters where these are these are areas where they typical company might have five hundred to a thousand subsidiaries. They can't all be core. And so we've been able to come in with our operational toolkit and improve those.
The second is this whole idea, again, on the debt side of capital heavy to capital light, if you look at deals we've done where PayPal, Harley Davidson, other type of home building companies all the way into Europe where they want to increase the return on capital, they want to reinvest and grow. So we're able to come in and buy their receivables in a very targeted way and create income for investors. And so I know there's a lot of noise around direct lending and software.
I mean, one alternative to that is is the asset based finance world where really you're buying you're buying hard assets that are linked to nominal GDP. The third thing I would highlight is, again, infrastructure. I just got back from India, Europe.
We're seeing whether it's data, it's power grids, that stuff that Salita talked about that is in a secular bull market where you want to have you want to have exposure to that. And then I'll leave you with one last idea. There's a supply demand imbalance around what we call capital, what we call capital solutions at KKR, which is think about a company that doesn't want to issue equity, their stock price may be down, but they need capital and they're willing to do a convertible or a mandatory convertible or preferred.
And you're getting a return that is almost what you would get in an equity. But you have a lot more visibility on that return. You know, I hope to run risk at KKR, too.
And what I see is a supply demand imbalance there. And so that is those would be four ideas that I think are actionable today or investors in the private markets can perform. And again, the key to private market investors is to do what your financial advisor, UBS, is saying, be disciplined, diversify, don't try to time the market, all the things that you guys talk about.
I just want to reiterate that from the you know, from the the seats at KKR, we're in absolute agreement with what UBS has been saying. And and we like to have partners like you that take a long term view on that. Don't try to buy a concentrated credit fund.
Don't try to get all your private equity out in one year. Just be disciplined around that. Let the illiquidity premium work for you.
Follow the asset allocation that Salita and the team are kind of putting out for for you. And I think that the outperformance will come. Yeah.
And piggybacking off of that, then, Salita, what opportunities do you see right now is attractive in in private markets? OK, so we're hearing from advisors, too. That's that's a question that I think would be relevant, because I know you do talk to advisors a lot.
What are they saying about this? So maybe I'll just start with private equity. Yeah.
So in in private equity, you know, we actually think the improving IPO and M&A activity will unlock value. We're very much focused on middle markets where valuation seems to be more reasonable and leverage is lower. We particularly like those managers that have a value bias and try to drive returns from operational improvements rather than multiple expansion or financial leverage.
So value creation through execution is very much key for us there. So that's private equity, private or I would say infrastructure. So infrastructure.
I think that sits at the intersection of many of the D's that I just talked about when you asked the prior question. So there are actually quite interesting and plenty of opportunities, I think, there. So one thing is demand for digital infrastructure.
So cell towers, fiber, you know, data centers, et cetera. They are certainly outpacing supply. So that creates an opportunity.
Also, renewable energy is interesting, again, because the cost of technology, cost of solar is is coming down. And then, you know, I would say, you know, shifting supply chains and this push for self-sufficiency is certainly driving investments for transportation and logistics. So those are the areas we're looking at in infrastructure.
Private credits, that's where we get most of the questions from our clients and from advisors, obviously, given the headlines. Now, I would say when I look at the overall asset class, overall fundamentals, I think they're still in quite a solid place and it still provides an attractive income opportunity for portfolios. But maybe needless to say, selectivity is really, really important because, you know, spreads are tight, competition is very steep.
And we are already seeing dispersion among managers. Right. And, you know, also stress is building up.
We're seeing stress and sort of the lower to middle, middle markets, you know, in that sector. And I would say in this environment, it is quite possible to see underwriting standards slip, especially when this field has become really crowded. So, you know, manager selection is a very critical part of risk management, I think, and everything, but particularly in private credit today.
And we're very much focused on experienced managers that are focused on large, high quality borrowers and also sort of senior and sponsored back loans. And it also feels like it got crowded pretty quickly, as you were saying, you know, it's kind of a little overcrowded. Henry, I have to ask you, I mean, Salita kind of alluded to it a little bit.
There is this kind of recent headline panic about software, about private credit. And, you know, in the seat that you sit in every day, is there any merit to this? Is it warranted?
Is it maybe overblown? What are your thoughts on all the latest headlines that are happening right now? Look, I think this is where the private markets and the public markets are the same, which is the same way that you believe in dollar cost averaging on the public markets.
We at KKR believe in linear deployment. If you have a four year fund, do it over four years. Don't do it over two.
I've talked about sector diversification. We typically own 100 plus credits in our in our private credit. So you want to diversify that.
And then ultimately you want to be higher up in the capital structure, I think, with bigger companies. So Salita hit on this. But typically we try to underwrite things that are 150 million or more.
So I think there's the signal in the noise. I still think it's a attractive asset class. But I would I obviously from KKR's purchase, we have we've been doing you know, we've been in the business, we started it 50 years ago.
So we probably learned some lessons the hard way along the along the way. And you're not going to see us come to market with something where we're a sector focused fund or we're trying to put all the money out in two years. And I think that discipline is going to pay dividends for what KKR does for its its limited partners.
So that that's the way I would answer that. Ultimately, to make me think we're going to have a real credit cycle. I did say that I think recovery is going to be lower.
That's where I would focus is you'd have to really have a fall off in corporate profitability and unemployment, which is not our base case or UBS's base case for for this year. But again, they're just simple rules of the road. Privates can earn you the illiquidity premium, but you need to be disciplined about that.
And we're committed to doing that. And I think we want to do it alongside people like you that allow the investor to have a good a good experience. Yeah.
And you and your colleagues bring in years of experience in the space as well. Yes, Alita. Anthony, if I can check the software, since, you know, fielded a lot of questions specifically on this lately, you know, I think some of the panic around private credit and software in the public, you know, in the markets is a bit overdone.
Right. Because when I look at the managers in our platform and their underlying software companies, by and large, they're actually in pretty good shape. So similar time, I don't expect an imminent crisis there.
That said, I think some repricing of risk was and is quite reasonable because software attracted enormous amount of capital in twenty twenty one and twenty twenty two, and I think it's safe to assume that not all the loans that were underwritten at that point were done, you know, with the understanding of the pace of A.I. that we know today. Right. And I think over the next sort of months and years, we are going to see a dispersion between borrowers with or without a pretty strong A.I. mode.
So I think, you know, those software, you know, some of the software companies that could be easily commoditized will be the most vulnerable. That's what we're looking at. It's those that create dashboards, aggregate data or automate pretty basic workflow.
I think they're going to be vulnerable. On the other hand, mission critical software that is embedded in operating systems that are built around proprietary data. I think those will stay quite resilient.
So from our perspective, you know, how quickly the technology evolves is key. But even if the technology evolves really fast, you still have a real friction in terms of adoption, right, because of enterprise integration, regulation, data security. So our base case is really not a, you know, one big stressful period, but maybe, you know, several waves over the next few years.
And you might see pockets of stress. But it's again, I don't think it's a systematic event. Great.
Thank you, Shalita. At this point. Henry, just going to switch gears a little bit.
Something, one of the stories that you wrote in your recent paper was talking about, in your high grading paper, was talking about how you had just graduated from Wharton in 1997, the business school, then you returned to the workforce. Nineteen ninety seven again, the start, like the really we were in the start of the tech boom. And I also started in the business in 1997 and I was like, wow, is it always like this?
You know, and then, of course, you realize two years later or three years later, it's really not. So with you now kind of having that experience under your belt, when you think about artificial intelligence as an investment in general, where do you kind of think about, like when you're thinking about KKR strategy and using AI or investing in AI, how does it sit with you? Well, I'll start.
It does feel a lot like the 90s. In 2022, we had the bond market got hit. Same thing happened in ninety four.
Everybody moved to the sidelines. That was the opportunity to buy. And nobody really understood productivity.
My take on this cycle is that if you think about it right now, we actually started to see in our portfolio companies, remember, we have 200 data points because we own all these companies. Right. We started to see digitalization, automation, machine learning.
That's what's been driving the productivity boom thus far. Now you're starting to see AI, but it's less than 20 percent of the boom that we're seeing. And by the way, productivity has doubled this decade relative to the prior decade.
What I would say is this one has more of a debt focus than an equity focus. There was, you know, Pets.com and this, that, right, right, right. And remember that a lot of the focus in during that period was thinking about who were the tech enablers, what I think is going to happen the same way that that period you wanted to buy Amazon because it was actually an application of the Internet, I would be focused on the value shifting from the enablers to the applications of that.
And that's why we're spending more time around industrials, parts of health care services. And we're doing this globally. So there's kind of the headline and I'm very bullish, as we as we said, on on the data build out and the power demand.
But some of these companies are not going to cut the mustard around AI. And so what we're trying to do is like, what can you own that doesn't have an AI rating, you know, multiple on it? And then you can bring that technology.
And as I go around the world, the performing companies are not the they're not the ones that are just the the AI hot dot. What they are is the ones that are embedding the technology deep into the system where you create AI knowledge on the vertical. Financial services is a great industry for doing that.
Those are the software companies are going to do well. Those are the AI companies are going to do well. And most importantly, those are the enterprises that are going to perform.
And so we're going to have this period right now where we're in the fog of war. But what you're going to see is coming out of the other side. You're going to see some great companies across financial services, consumer.
I was around when E-Trade was going to put UBS and and Merrill Lynch out of business because financial advice was going to be a commodity. We're in a bull market for financial advice. The same way that you think about Amazon, you know, and Walmart.
Walmart is a critical what they do around AI and technology. Home Depot, these are amazing companies embrace technology. This is going to be another wave of that.
And if you can find those companies that are trading at decent valuations and bring that AI expertise, that's that's what's going to really be exciting, both in the private markets and the public markets. By the way, we have a staff. We have an in-house staff of kind of McKinsey experts where every company and it's called KKR Capstone, we go to every company and we're taking that knowledge and doing a diagnostic across our portfolio companies.
We're not going to get all of it right. But think about the flywheel and the network that we're building as you do that across twenty five offices globally and 200 portfolio companies. So there's a there's a fail forward in a learning aspect kind of that this flywheel that I think you're starting to see revenue per employee at our portfolio companies and also we don't have time to go through it.
Some my group in particular is doing some really interesting stuff around AI that's helping our deal sourcing, as well as our execution and our currencies and things like that. So it's a robust topic and there will definitely be winners and losers. And you just got to tilt towards the what I think of the logical long term driver.
Yeah. Long term innovation is real, essentially. Yeah.
Yeah. And it's here to stay in the 60s and productivity, the 90s and productivity. We're having productivity after a decade of not having that.
A lot of people who have invested who are in the market right now actually haven't gotten the benefits of that. These cycles operate differently. And I think there's a real opportunity to guide your investors to these kind of long term winners and not speculate because ultimately a stock is its current earnings in perpetuity.
Then then some value assigned to the future growth. Don't get burned by over assigning too much value to the future growth. And I think that's where we're we're trying to spend time at KKR to make sure we get that right on the private side.
Well, to have you come back and talk more about that in depth, I think that's a really interesting conversation. Thanks, Henry. Before I let you both go, something that you both have in common is you travel quite extensively internationally for your jobs, also for personal vacation time.
I hope that you both get some time soon. But just, Salita, when you travel throughout the world, you're in Asia, Europe, everywhere. What what do you take back with you when you come back to the States?
What's the sort of the feeling out there when it comes to investing? What are clients thinking about? What are advice for financial professionals thinking about outside of the borders of the United States?
So you mentioned the beginning. We've been doing this for four years. Four years.
It's now our tradition. She travels more than I do. I used to have to leave, but she's taken me.
Every year, this question really goes to Henry because he gets to go to the cool places. But now it's yours. Well, this year, just to prepare for this question, I did a world tour twice over, so I'm ready.
Look, so joking aside, I did quite a bit of time in Asia recently, Shanghai, Hong Kong, Singapore, whatever, Australia and even Japan. So I would say one takeaway for me is obviously we have a location in our portfolios, but let's talk about a typical investor. I think one cannot one cannot avoid this part of the of the world in their investments as part of their strategic, I think, asset allocation.
And I think when you're there, it hits you even more. So I've been to other cities a bunch of times, but I actually went to Shanghai for the first time in 20 years. And I couldn't recognize, obviously, part of the city and all the advancements that has happened.
And while I was there in Shanghai, I attended the UBS Greater China Conference. And what struck me was, of course, Gen AI was on the agenda, but it certainly was not the headline. The buzz was all around how in China, AI is shaping industries like mobility.
So robotaxis, the cost of it in China is about one fifth of of the US. And also the other hot topic was around humanoid robotics. And first of all, in terms of robotaxis, I think with the way the supply chains are and the more efficiency that they have around production, that's obviously driving this cost.
And then humanoid robotics, there is a very strong belief that China can commercialize that pretty fast, especially on on factory floors. So I just want to be careful. I mean, when I say this, I'm not saying you should just put all your money in China.
Certainly that's not the message. One really needs to stick with, you know, long term asset allocation. Henry said he seems to like our strategic asset allocation, too.
So that message is there. But my message is actually broader than that, which is. It's important to make sure one does not have when investing blinders on because there's also a lot of great innovation that is happening outside outside of the US as well.
And in our portfolios in UBS right now, we are leading to certain areas within Asia, for example, China Tech, Japan and Singapore markets. You also asked what else we're taking away. Great shopping in Tokyo and hopefully great food, too.
I can imagine definitely the cuisine must be incredible. Thanks, Alita. Henry, I know you were in India recently traveling with some colleagues.
What was it like for you? What did you take away from that? So I think about our Asia footprint.
I usually over indexed to Japan, as Alita said, that that's our corporate reform story sets by 25 to 30 percent of our Asia private equity. The other big one is India consumption upgrade. And that story is alive and kicking, particularly the middle to upper income financial services, education, health care services that is really we're seeing an acceleration in that.
I think for us, the other big thing in India is we've been there since early 2000s on private equity. Our infrastructure business, a lot of the same things we talked about, which is data build out, not enough power renewables. And we are it's that part of the world is on fire and the government wants they need tax revenues, so they're moving more stuff into the to the to the private market.
So that is a big those are tied to two big things. I would say globally what I'm watching, though, is that we've been in a world about global trade and that's what everybody's talking about on tariffs. I think the next chapter of globalization may be global services.
And we can come back and talk about this. But the US and India are kind of leaving or leading that. Certainly Japan has some of that.
But Europe needs to speed up there. And I think China needs to speed up there. So I think there is some differentiation around having a consumption economy, exporting services instead of goods.
And that's something and then this and then tying that into the infrastructure to make sure all that can get around. And so that's a big meaty theme, but that's a huge part of our focus in Asia. And what you're seeing is Asia trade is exploding.
If you think about Europe or the US, it's about 70 percent kind of interregional trade with the Americas and Europe. And that number in Asia is forty five percent. So all the things that you said stick out and that's happening.
The good news. I had the same reaction that Salita did, which is most of global investors actually don't have enough allocation to the region. And so I'm not I'm not saying go put all your money in it tomorrow.
But I can tell you that big global institutional money is overweight the US at a time that international earnings are breaking out and that breadth is going to pull people in. And it's going to rewrite valuations. Excellent, Henry.
Thank you very much. It's an honor to have you back. Great to be with you guys.
It's a real tradition to get to come here. The new studio and just the partnership, it's very much appreciated. We look forward to having you in.
Thanks, Henry. Salita, always a pleasure to see you. Thank you also to your both of your teams for helping coordinate everything here.
Maybe it won't be a year this time. Maybe maybe it'll be every six months. Yeah, I'll come back when you get back.
I just need to get Salita back in New York so we can actually. Yeah, we have to keep you on the ground a little bit. Thank you both again.
Great to see you. And thank you all for thanks for joining us. That's all the time we have for this terrific conversation with Salita and Henry.
Of course, I want to thank you all for spending this time with us. And we look forward to another strong year of programming ahead from our chief investment office and our great partners like KKR. Until then, we'll keep you updated with all the latest views from our House View publications, our blogs, alerts and our videos, as well as our podcast.
And as always, we encourage you to continue this conversation with your financial advisor here at UBS. Thanks for joining us, everybody. I'm Anthony Pastore from New York City.
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