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New Report Outlines Key Learnings for Asset Allocation Post Liberation Day
NEW YORK, May 20, 2025--(BUSINESS WIRE)--KKR, a leading global investment firm, today released "The Art of Learning," a new Insights piece by Henry McVey, CIO of KKR’s Balance Sheet and Head of Global Macro and Asset Allocation (GMAA).
While Henry McVey and his team continue to believe that we are still in a Regime Change for investing, they explain that the introduction of a potentially weaker dollar, coupled with their longstanding conviction in the correlation between stocks and bonds moving from negative to positive, could have significant implications for asset allocation.
They specifically note that the depreciation of the U.S. dollar, sell-off in equities and decline in bond prices seen following the April 2nd Liberation Day announcement have challenged the following two fundamental underpinnings of modern-day asset allocation theory:
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During risk off days, government bonds are no longer fulfilling their role as the ‘shock-absorbers’ in a traditional portfolio, upending the theory that when stocks sell off, bonds will always rally both in the U.S. and in other developed markets.
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While bonds and stocks were selling off together, the U.S. dollar was also weakening, raising a fear that local currency liabilities could be a more severe drag on performance than expected, especially during periods of volatility.
In light of these changes, McVey and his team posit that the traditional role of U.S. government bonds in 60/40 portfolio structures may diminish and that investors could benefit from incorporating international bonds to provide diversification benefits.
The report also examines the relative importance of goods versus services to the U.S. economy, estimating that the gross profitability of U.S. services exports currently surpasses the ‘lost profits’ on goods that the U.S. imports instead of manufacturing domestically. This points to the fact that, contrary to the popular interpretation of the ‘America First’ agenda, U.S. businesses have actually been outsourcing the production of low margin goods to help facilitate activity in relatively more profitable and productive areas. With that in mind, McVey and his team believe that more work needs to be done around extending America’s competitive advantage in higher-profitability, higher return services sectors of the economy, and that this would be a boon not only for businesses but also for workers.
In addition to these insights, the report discusses how partial tariff relief has arrived faster than originally anticipated. The team has lowered their effective tariff rate from 18% to 15% and revised GDP forecasts in the U.S., Europe, and China accordingly. The report also addresses key questions that the team has been receiving from clients following the Liberation Day announcement, including the outlook for capital markets, particularly outside the United States.