Market outlook: Is the glass still half full? with Henry McVey (KKR) & Solita Marcelli (UBS CIO)
The desk remains cautiously optimistic about market conditions in 2025, as articulated by Henry McVey from KKR and Solita Marcelli from UBS, who emphasize a fundamentally supportive environment driven by strong productivity and fiscal initiatives. Per the full note , McVey highlights the importance of economic cycles and productivity gains in the U.S., asserting that after significant volatility in 2022, the outlook is improving. Consensus appears to support this view, with a focus on the potential for U.S. growth as other regions, like Europe and Asia, exhibit stronger fiscal spending, albeit amidst continuing uncertainties in policy directions.
What the desk is arguing
The desk suggests that the overall economic landscape, while volatile, shows promising signs of stabilization and growth. According to McVey’s insights, factors such as productivity improvement and fiscal initiatives could catalyze positive market developments in the coming years. This positions the market outlook as "half-full," indicating the potential for upside despite underlying risks.
In the U.S., productivity is expected to be a key driver, as McVey recently acknowledged, further suggesting that this overall economic cycle will be defined by these productivity gains as seen in other regions. The S&P's dip of approximately 1.4% noted in the discussion highlights the current volatility, but the underlying fundamentals remain supportive for long-term investment.
Where it sits in our coverage
Our consensus target for the EUR/USD stands at 1.075, with a range observed between 1.04 and 1.12, in line with insights from major players like jpmorgan and bofa. The specific targets are as follows: - jpmorgan: 1.10 (Mar-26) - bofa: 1.04 (Mar-26)
This view aligns closely with the broader expectations of a strengthening USD but diverges at the lower end of the spectrum, with our target at the upper range, indicating a slightly more bullish stance than bofa.
How other firms see it
Overall, firm consensus leans towards moderate optimism for the USD, particularly among firms like jpmorgan that anticipate dollar strength amid global economic growth. Conversely, bofa presents a more cautious outlook, projecting lesser potential for growth in USD strength in their target forecasts.
Key currency pairs to monitor include EUR/USD, as the market dynamics around this pairing will reflect ongoing changes in economic policy and growth expectations, particularly in relation to U.S. Federal Reserve actions.
01Market outlook is cautiously optimistic, driven by productivity gains and fiscal initiatives.
02Volatility in the S&P 500 emphasizes current market uncertainty but does not overshadow potential long-term growth.
03Firm targets indicate an overall bullish view for USD in the near term.
04Monitoring currency pairs like EUR/USD will be essential as economic indicators evolve.
Market implications
Watch for EUR/USD approaching key levels around 1.075 this quarter, as this aligns with our target amidst rising productivity expectations in the U.S. Any announcements regarding fiscal policies or economic growth indicators will be critical in shaping market sentiment towards these levels.
Risks to this view
Key risks include potential geopolitical tensions or economic downturns that could derail productivity gains. Additionally, a reversal in U.S. monetary policy could introduce significant volatility, impacting the outlook for growth and the strength of the USD.
ubs
Hello, everyone, and thank you so much for joining us for today's special livestream, Market Outlook, Is the Glass Still Half-Full? It is Thursday, March 13th at 4 p.m. Eastern Time.
I'm Anthony Pastore, your host for the next 30 minutes or so, and I am thrilled to be joined today by CIO Americas for UBS Global Wealth Management, Salita Marcelli, and Henry McVeigh, a great friend of CIOs in the studios. He's the head of Global Macro and Asset Allocation and Firmwide Market Risk, and the CIO of the KKR Balance Sheet. You'd think after all this time, Henry, your title would roll off the tongue a little bit more.
It's long. Anyway, really wonderful to have you both. Salita, always good to see you.
I think we had planned this to sit together a couple of weeks ago, and, boy, the timing is just really perfect. A week of a lot of volatility as we speak. The S&P closed today around, well, it's still closing out, but it looks like it's down about 1.4%.
And, Henry, your outlook for the year ahead is the glass is still half-full. Why, and what's the conviction behind that? Do you still think that's the story?
Yeah, I think our view, one, again, thank you both for having me here. In 2022, we had said kind of walk, don't run. The market went down 25%, and then we've kind of had this notion of the glass half-full, because there's so many things going on out there that seem uncertain.
I think that this economic cycle, particularly in the U.S., will be driven by strong productivity. I just got back from Europe last night. They're actually really basking in the glory of actually spending in some real fiscal initiatives, and Asia and the Middle East, both areas I've been to recently, are doing well.
There's obviously a lot of concern. If you went through Trump's policies, you'd say lower tax is great for the markets, right? Fiscal discipline, probably good for the bond market.
And those type of forces where you have less regulation, people would say that's good. The offset has been that the way that tariffs have been communicated to both corporations and individuals is very unsettling. I think we're gonna have to get through April to see that.
The final point is there's the fundamentals and there's the technicals. The technical picture right now, I run firm-eyed market risk, and I look across. There's no net issuance. 85% of the supply that's coming to market is actually refinancing.
So bear markets, to me, you have high valuations, you have negative operating leverage, and then you have some excessive issuance. We certainly aren't having that. So is it gonna be bumpy?
I think it will be bumpy, because we're having a change in administration and change in policies, but I think we'll make it through, particularly as we think about credit, infrastructure, and we can talk about it. We're actually using this volatility in private equity to do some really interesting things, including some public to privates and large stakes in activist positions. Yeah, I definitely wanna get into more of that with you, Henry, for sure, because it's an interesting time for private credit, private equity, especially during periods of volatility like we're in now.
Salita, I wanted to kind of pivot towards the economic developments that you're expecting for the rest of the year. Henry used a really good word, uncertainty. We've heard it a lot.
There's even an uncertainty index that's approaching 2020 levels. We're talking like COVID. So there's a lot of uncertainty.
Fear, I don't think, is the word, but when you consider everything that's happening in the latest developments, what's the economic picture you see for the rest of the year? Sure, thanks, Anthony, and great to have you, Henry, here. It's now a tradition.
We do this twice a year. Hope we can see this for many years. Look, clearly the risks have increased.
In fact, in our scenario analysis, Anthony, we have increased the probability of an economic downturn over the next six to 12 months to about 30% recently, and I think that's because of the indirect impact of tariffs, whether it's the changing buying behavior or business sentiment. I mean, they're starting to build up, and these tariffs on Mexico and Canada are a notable risk. That said, the good news is the U.S. economy has entered into this phase from a position of strength.
Unemployment is low. We're still seeing job growth, and the consumer, when you look at it overall, it still looks quite healthy. Now, we have seen some of the softer data, like sentiment, pull back, but the real activity data, that hasn't changed significantly at this point, and I think that's why we have not seen a significant widening in credit spreads like we normally do in times of equity market turbulence.
So, I think at this point, fixed income markets seem to have the cooler head. Now, I would say maybe bottom line, from an economic growth perspective, we expect this year's growth to moderate compared to last year, but still be positive. Coming into this year, we said GDP growth would be somewhere between two to 2.5%.
If we were having this conversation in January, then I would say we'll probably be at the upper end of that range. Now, I'm leaning towards the lower end of that range, and maybe even lower than 2%, but in our base case, we do not see recession. And maybe lastly, what I would say is our view is predicated on a few assumptions.
Number one, that President Trump would stop short of universal tariffs, and two, is that the tariffs on our North American partners would be pared back sooner than later. Thank you, Salita. Yeah, it's a bit of a head spinner.
I think we were just talking about that. The headlines are constantly coming in, and even today, there was a threat of 200% tariffs on Europe, particularly with their wine and champagne, and I think that would upset a lot of people. But, you know, Henry, I wanna get your views here after what Salita said, thinking about the economic developments for the rest of the year and what we expect in front of us.
How are you, and how is KKR, kind of navigating all of this? And you kind of started talking a little bit about it initially. What's going on there?
So we've been doing this for a couple of years. I think, you know, what we're trying to do is always adapt our playbook. So our base case this year has been that tariffs would go from 4% of imports to 11%.
That is actually unchanged. What's changed, though, is that, what Salita said, is the knock-on effect. We've gone from 40 basis point drag to 80 basis point drag on GDP.
So we're just around 2%. What are we doing? So if I was here in 2021, we would have talked about 60% of our deal activity and P would have been private to private.
Today, about 40% is corporate carve-out. So companies that probably, good company, bad capital structure. We are really ramping up our public to privates.
We just announced some large stakes in companies where you have activists agitating. We've served as a white knight. And then the last kind of piece of the puzzle is we're using our existing platforms to buy down the multiples as things get cheaper.
So I think sometimes people think about this asset class as, you know, it's static. You gotta really think about private markets as dynamics. How do you get yourself in trouble in this market?
It's having too much leverage. And our founders, you know, Henry Kravis and George Roberts, have really been pushing to make sure that when we're doing these transactions right now that we have an extra cushion. I really wanna also build on what Salita's point on credit, you know, you have friends, sometimes they have friends that can get very agitated and you have friends that are very calm.
I always watch the calm friends, which is the credit markets, right? We've got $180 billion insurance company and then we've got KKR's balance sheet, which is $40 billion. When I watch the behavior of credit, it's telling you that it's gonna be okay.
I think within credit though, where we're really seeing opportunities is around companies that want to go from capital heavy to capital light. And what they're doing is they're selling off assets. We're buying those receivables.
We're getting really good collateral that actually does well in a higher inflation environment. And so the catalyst, the uncertainty is actually serving as a catalyst on both the equity side and the debt side. And so if we are good stewards of the capital in terms of our capital structures, this volatility, as long as it's not, you know, we're not down 40% of the market, this actually gets buyers and sellers to think about how can they improve their corporate footprint.
That's a great environment for KKR. Excellent. Yeah, and Salita, I think probably one of the more important questions that you probably get a lot from advisors is how are we positioning right now?
You know, coming from, you know, some data that we just had the producer price index this morning, it came in at a decline of one 10th of a percent. So maybe that surprised a few people, but still, as you said, jobs are still fairly strong. So with everything in the economic backdrop and the way the markets are, how is CIO positioning right now?
Yeah. So Anthony, our core message has been to stay invested, but diversify, and hedge the downside risk. And I would say the latter part of that advice has probably become a lot more important now that we have higher level uncertainty in the market.
That said, you know, our view is that stocks are going to move higher over the next six to 12 months. US is still our preferred market. And I think here, we do have an opportunity to build some exposure to growth themes like artificial intelligence and power and resources, because ultimately, our view is that economy is going to be able to stand up well, earnings growth will continue to be solid, and AI spending will remain robust.
Also, I would say, you know, some of the sizable moves that we have seen in sectors like technology, I think have been amplified because of extended positioning, which at this point pretty much has become much more clearer. And on the policy front, I expect to see as the year progresses, slowly, more clarity, right? I mean, we have the April 2nd deadline around reciprocal tariffs.
Maybe as we get into the summer, more news around reconciliation, reciprocal budgets. So, in terms of regionally, I mean, of course, we've seen other regions more recently outperform the U.S. market, but I think some of the catalysts behind that performance have already been accounted for. In fact, we did recently take, you know, took profits on some of the bigger winners, like the Germany equity markets and Chinese tech stocks.
Whereas in the U.S., I think a lot of the negative news is now finally priced in. So, that's our view on equities. And I would say on fixed income, there's also, you know, there's also a lot is going on.
Our focus there, I'm gonna talk about public markets right now. We can talk about privates a little bit, but, you know, we're still focused on high quality assets. We like investment grade corporates.
We like mortgage-backed securities and five-year part of the treasury curve. And I think it is possible that in the near term, we might see rates creep back up, given how dovish Fed expectations are in the market. I think at this point, still 80 basis points cuts is priced in.
But directionally, our view is that the direction of travel is gonna be lower and we might see 4% on the 10-year by the end of this year. Yeah, and just to clarify, it's sitting at four and a quarter right now, the 10-year, four and a quarter percent. Thank you, Salita.
And also, just as a reminder, we have a funding expiration, government funding expiration that's coming tomorrow. So, we could be in, you know, for a shutdown, but we'll have to see how that goes. It's always something.
We never know what's coming next. But anyway, Henry, let's go back because I'm talking about the private markets. Generally speaking, and we talked about this a little bit before we started today, you look at private markets and you think, okay, maybe they're not as kind of at risk of all the volatility because they're longer-term investments.
So, what are you seeing right now in private markets as the opportunity? And are there any areas that you're avoiding right now? Yeah, I'll start with the positives and then we can go into the cautious.
So, on the positives, infrastructure is accelerating. Everywhere I go around the world, the news out of Germany, what did they talk about? $500 billion on infrastructure was recently in Asia. Asia's trading more with itself as we deglobalize.
That is creating logistics opportunities, lots of different things around towers and data. That's probably, and then in the US and Europe, we're seeing some companies that got over-levered going into fiber. And if you believe Trump in the United States, energy infrastructure.
So, that's an area where we've seen no slowdown. I would say on the credit side, we are seeing back to this idea, a lot of corporates, you've seen this with financial services around credit card receivables, around home building, they want higher valuations and they're starting to transact. And then in private equity, we have changed our playbook.
I mean, we are doing things, you wanna have an operational lever. One thing I would say, you need to make your own luck in this market, right? And so, how do you do that?
You make that, you do that by finding companies where you can either strategically improve their position or operationally. We've spent a lot of time on the operational side and we just, that's kind of three yards in a cloud of dust. It's working very effectively.
Where do you not wanna be? You don't wanna be in leverage structures where there's just a little bit of equity. That's the number one sin.
A lot of what, you know, I read Salita's stuff and I follow up. You guys have been very consistent about being thoughtful about your asset allocation. That is the right message right now, right?
The two years of up 25, that's gone. This is gonna be a market where we go two steps forward, one step backwards. The US probably got overbought, but the long-term productivity story is still going there.
What am I watching? Right now, I'm watching the growth market. To me, there's still things where I feel like the valuations are full.
And so, we're probably doing a little bit less in that market. And then, I do feel like it's a little more competitive in direct lending right now because you've had less M&A. So, that's where I would stay focused.
Overall, what you don't wanna see, given the tariffs, we need to make sure that productivity in the United States stays strong. That has been the bug spray to some of the deficits and the policy that's been uncertain. So, if productivity changed, that would make me feel different about most risk assets.
It's not our base case, though. Does the PPI number, though, coming out today, the Producer Price Index, give you any kind of, I don't know, pause? Our overall view, and we have 150 to 200 companies, depending on the day, that we can survey.
We still see this higher resting heart rate, it's one of the reasons I think credit emerges as a better asset class this cycle because I don't think the Fed can push, or the ECB, or whoever, is gonna be able to push the discount rate down to zero. We just see, between wages, I would say, around bigger deficits, messy energy transition, and geopolitics, things in our supply chain just bounce more. So, and we have more, we call it the security of everything.
Our CEOs tell us we want resilience. And so, we're doing a lot, and you can put a lot of capital behind data, security of data, security of water, security of food, security of energy, transportation. That's become a mega theme, in addition to what I talked about, this capital heavy to capital light.
If I had to say, 60 to 70% of the things we're doing at KKR fall in those two buckets, and we're just doing it across different parts of the capital structure. Yeah, great, thanks, Henry. So, Lita, what about CIO, where is our positioning when it comes to private markets now?
Yeah, not that different than what Henry discussed. We see opportunities across the private markets, and I think it's going to keep on playing a really critical role in our portfolios. So, maybe if we just start with private credit, I mean, it's true that the spreads have tightened because the competition has come back to the loan market, but you're still getting high single digit, low double digit yields there.
And our focus is very much on the higher quality. We're focused on companies with strong fundamentals, senior, upper middle markets, and sponsored backed loans there. And then coming into private equity, look, I think the policy uncertainty has certainly tempered the optimism around the M&A activity, deal activity that we had coming into this year.
But I think as the year progresses and the speed of these policy changes or the news slows down a little bit, we're going to see an improvement. And we still see opportunities there. We still like secondaries that gives you double digit discounts to NAV.
We like value oriented buyout strategies. And again, looking for managers that have a strong track record in operational value creation, rather than like highly levered deals because the finance and cost is still high. And then of course, I mean, I couldn't say it any better than, or any more passionate than Henry.
So that's the hard one to follow. But look, we see opportunities in real assets. Infrastructure is still a very good diversifier in our portfolios with less correlated returns.
And it also gives us opportunity to get exposure to some of the really important themes like artificial intelligence, like power and resources, because there's still momentum around data centers and electrification. And then maybe lastly, I'll mention real estate here. There is obviously renewed concerns around cost of capital.
And of course, policy, this is really clouding the picture, probably more so for newer developments. That said, we're seeing opportunities in distressed real estate debt, as well as properties where they might be experiencing financial distress, but the underlying assets are still pretty solid. And we see most of that in multifamily.
Great, thank you for this. So real assets, they're still picky, but there's still opportunities there. In real estate, picky, real assets infrastructure, Right, and you know what, thank you.
And by the way, I want to kind of pivot a little bit because you both mentioned artificial intelligence. It's almost like you can't have a conversation about investing without it, because some people say all roads lead to AI. It's almost like AI leads to everything else because there are so many adjacent businesses now, whether it's farming, technology, infrastructure, energy.
So what are your thoughts on the whole AI theme? Where do you see the investment opportunities, Henry? To Salita's point, we're very active right now on the data center area, where you can really create downside structure, downside protection, and upside.
These are companies that have no net debt, and they need, but they need capital to grow. And so you're essentially getting a AAA rating, but you're coming in with a higher cost of capital. That's incredibly advantageous for what we do in infrastructure.
We are in the cooling around that. I do think DeepSeek is a shot across the bow, which it means it's probably going to expand the market and probably break the stranglehold that NVIDIA and certain utility companies had on that, but it'll grow the overall market size. So we've been doing deals recently in Singapore, Europe, we're the largest owner-operator of fiber in Europe, I think.
And then we've been quite active around the U.S. data centers, partnering with the large players. So it's important in our portfolio companies across Japan. I mean, we don't have enough time, but we are implementing it and we're seeing some really positive results, but it's probably less than 20% of the portfolios.
But as that grows, it's driving productivity. That's why I keep coming back to this. To date, digitalization and automation have driven productivity.
I think one of the next legs will be AI and that will be good for earnings growth and margins. Yeah, I mean, we're just getting started and DeepSeek really was the disruptor of the disruptors. So it'll be interesting to see what happens next.
So Lita, just remind us of what CIO's thoughts on AI. So first of all, the one common theme that I would thread that I heard in every answer that Henry said today is productivity gains, which is super critical. Because developed countries, unfortunately, are facing this combination of declining labor force and high levels of indebtedness.
And I think here, AI will be the critical sort of key wildcard. And we're already seeing early signs of AI impact with the major AI enabler companies. And I don't think that's surprising because usually companies like to taste their own cooking.
In fact, Ulrike, who's our CIO for Global Equity, she recently published a report and showed an analysis that big AI companies at this point have seen some of the biggest gains in terms of revenue per worker since the launch of ChatGPT. Because their employees are becoming a lot more efficient in certain tasks like software development or ad targeting and so on and so forth. So when I look forward in terms of impact of AI and where we would wanna invest in the near term, I think without question to me, at least, is still those companies that are building the infrastructure for AI, right?
Because that's where a lot of the AI spending is going. But then looking beyond that, I mean, we just talked about DeepSeek and other developments as they will continue to lower costs and widen the adoption. And I think as that happens, more and more companies are going to benefit from it.
They're gonna be able to lower their costs in their business, boost their revenues, improve their margin. And when you have multiple, many, many, many companies across the board do that, then that helps increase the economic productivity gain that supports a higher GDP and that supports a higher equity market. So that's how I think about it.
It's a really, it's an interesting and fascinating time in our lives to see this happen and the efficiencies that it adds also are just on another level. Henry, one last question before we wrap up. We were talking about this.
I know the both of you have a crazy travel schedule coming up, but you literally just came from Mexico and the Middle East, and now you're traveling to Asia next week, or maybe this week. What are you learning from being overseas, being in these other regions, when it comes to the investing perspective that you're walking away with? I'd say, well, one is Mexico is probably gonna go into a recession related to the tariffs.
The capex that comes into that country has slowed down dramatically. That's point one. Point two is the government is, to Salita's point earlier, they are going to want to do a deal to keep the Americas together.
So I think we're gonna have some tension, but I think we'll settle out and that will work. But you're definitely feeling the adverse effects. I go to China where the PPI came out last week.
It was essentially negative. I mean, the CPI was almost down 1%. They are having deflation.
Think about the US in a post 2007 where you had a deleveraging. That will take some time. I think it's really important what Xi said, where Xi Jinping said it's okay now for private entrepreneurs to make a profit on the way to common prosperity.
That's why the stock market did go up. That's a fundamental change. I haven't been hearing that for years.
So everybody should take note of that. Then there's the US in the middle where I think there's this great productivity story, but we're probably shooting ourselves in the foot a little bit on tariffs. I think the agenda that the Trump administration has, if they can overcome that, is actually positive.
And so there are good companies right now trading at pretty interesting valuations. And then Europe would be the surprise one to me. I just got back last night.
People should pay attention. We've been in a world where the periphery has been outperforming the core. Both the UK and Germany are now spending.
Some of the valuations reflect that. But I would leave you with the idea that the US is still probably gonna be the dominant global equity market, but you've gotta find something that's been left behind this year. And it's that broadening and the diversification.
When I read what UBS does, I think you guys do a really good job of kind of going through, sifting through, and being like, here's where there's good relative value. And I think you had a nice call and some of that stuff. So I would just ask people in the viewership to stay tuned into what you're seeing because I think those calls, it's not just gonna be US large cap tech that carries us from here.
And some of the glass half full may actually occur outside the US. Great. Henry, thank you.
We really appreciate the great partnership we have. It's my pleasure. It's an honor to be here with both of you.
Yeah, with you and KKR, the whole team. So thanks for being here. In like in the middle of all your crazy world traveling.
I had it on the calendar. I wouldn't miss it. You'll just have me back.
Thank you. Thank you for the partnership. Yeah, and Salita, always a pleasure.
Salita Marcelli, Chief Investment Officer. Thank you all for joining us. That's all the time we have for today.
I just wanna thank you for spending a little time with us this afternoon. And we're looking forward to more programming like this from our Chief Investment Office. And of course, our great partners like KKR.
And as a reminder, our next CIO Monthly Livestream is gonna take place in April, April 3rd. That's a Thursday at 1 p.m. Eastern time.
Until then, we will continue to update you on the latest views through our House View Publications, our CIO blogs, alerts, videos, like our regular series, UBS Trending, and of course, our many podcasts featuring many experts from around the industry. And of course, UBS's own CIO. And as always, if you wanna have more of this conversation, we encourage you to always continue that with your UBS Financial Advisor.
Thanks for joining us, everybody from New York City. I'm Anthony Pastore. Have a great rest of your day.
We'll see you soon. UBS Chief Investment Office's investment views are prepared and published by the Global Wealth Management Business of UBS AG or its affiliates. The views and opinions expressed in this material by external guest speakers are those of the author, speaker, and are not those of UBS, its subsidiaries or affiliates.
Accordingly, UBS does not accept any liability over the content of this material or any claims, losses, or damages arising from the use or reliance of all or any part thereof. This material has no regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and is published for informational purposes only. For a full legal disclaimer applicable to the independent investment views produced by UBS, please visit our website at ubs.com forward slash CIO dash disclaimer.
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