KKR White Paper 53 1906 PDF

INSIGHTS
GLOBAL MACRO TRENDS

VOLUME 9.4 • JUNE 2019
Stick to the Plan

TABLE OF CONTENTS
INTRODUCTION�� 4
SECTION I: MACRO BASICS�� 11

Economic Outlook, Including Trade�� 11
United States Outlook ��15
Europe Outlook�� 17
KKR GLOBAL MACRO & ASSET
ALLOCATION TEAM China Outlook ��18
Henry H. McVey Mexico Outlook�� 20
Head of Global Macro & Asset Allocation Interest Rate Outlook�� 22
+1 (212) 519.1628
henry.mcvey@kkr.com Equities: EPS/Valuation/Total Return�� 25
Where We Are in the Cycle�� 30
Frances B. Lim
+61 (2) 8298.5553
frances.lim@kkr.com
David R. McNellis
+1 (212) 519.1629
SECTION II: KEY THEMES�� 33
david.mcnellis@kkr.com Corporate Carve-Outs��33
Aidan T. Corcoran Yearn for Yield�� 35
+1 (353) 151.1045.1
aidan.corcoran@kkr.com Own Some Cash Flow Compounders �� 38
Brian C. Leung Buy Dislocation/Dispersions�� 40

+1 (212) 763.9079 Experiences Over Things �� 42
brian.leung@kkr.com
Rebecca J. Ramsey
+1 (212) 519.1631
rebecca.ramsey@kkr.com SECTION III: INVESTMENT CONSIDERATIONS/RISKS�� 44
Reliance on Technology�� 44
Special thanks to Ken Mehlman, Complex Geopolitical Environment�� 45
General (Ret) David Petraeus,
Travers Garvin, Phil Kim, Kristopher Novell, Corporate Margins at Risk��47
Neil Brown, Paula Roberts, and
Nishant Kachawa.
SECTION IV: CONCLUSION�� 48
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© 2019 Kohlberg Kravis Roberts & Co. L.P.
2 KKR INSIGHTS: GLOBAL MACRO TRENDS
All Rights Reserved.
Stick to the Plan
With all the geopolitical ‘noise’ swirling around these days, there is
a growing propensity in the investment community to react quickly
to near-term news flows, or even head to the sidelines until there
is greater visibility. Our advice: stick to the plan. No doubt, overall
portfolio risks are higher these days, but our work is telling us that
there is still an attractive path forward for thoughtful investors who
are willing to invest heavily behind big, large tail macro themes.
Specifically, we want to own
more cash-flowing assets “
linked to nominal GDP as part If it ain’t broke, don’t fix it.
of our goal of frontloading
as much yield as possible in
”
THOMAS BERT LANCE
the portfolio. This approach DIRECTOR OF THE OFFICE OF MANAGEMENT AND BUDGET, 1977
should help mitigate both
concerns about late cycle
behavior as well as aggressive central bank policies. We also favor
owning more Opportunistic Credit and Special Situations, both
strategies that have the flexibility to lean into dislocations. Finally, we
feel compelled to embrace Complexity through a variety of investment
disciplines, including Energy, Private Equity, Real Estate, and
Infrastructure. If we are right about our worldview, then our existing
asset allocation framework, which includes an investment process
that we have developed over nearly two decades, should continue to
serve us well amidst the recent spike in uncertainty. Said differently,
if “it ain’t broke, don’t fix it.”
KKR INSIGHTS: GLOBAL MACRO TRENDS 3

Introduction EXHIBIT 2
As a Percentage of GDP, Budget Deficits Increase by

While I am not one hundred percent sure if Thomas Bert Lance,
President Jimmy Carter’s Director of the Office of Management and
4.1%, on Average, During U.S. Recessions
Budget was the original creator of the quip “if it ain’t broke, don’t fix Change in Budget Deficit During Recessions
it”, I do find his 1977 public statement about government interven-
tion to be the most relevant – and somewhat ironic – source of this 9%
iconic phrase. Almost eerily given present circumstances, Lance 8%
went on to explain, “That’s the trouble with government: Fixing things 7%
that aren’t broken and not fixing things that are broken.” Well, with
6%
public deficits ballooning, corporate debt levels surging, and geopo-
litical tensions rising, one does have to wonder whether the United 5%
Average = 4.1%
States – and for that matter, many of its peers – are doing enough to 4%
‘fix’ those issues that now are plaguing both global GDP growth and 3%
capital markets stability.
2%
EXHIBIT 1 1%
The Combination of the Tax Cuts and the Recent Budget 0%

Deal Could Drive a Record Divergence Between the U.S.
Dec-69
Nov-73
Jan-80
Jul-81
Jul-90
Mar-01
Dec-07
Budget Balance and the U.S. Unemployment Rate
Divergence Between Unemployment and the Budget Deficit Start of Recession
Data as at December 31, 2018. Source: Monticello Associates, CBO,

Unemployment Rate (LHS, inverted)
Haver Analytics.
Budget Balance % GDP (RHS)
Budget Bal % GDP, Apr18 CBO Baseline (RHS)
Budget Bal % GDP, Consensus (RHS)
0% 8% Cutting through all the headline noise, we are of the mindset that
Korean War
Vietnam War 6% globalization, or the notion that there is merit to the growing interde-
2% pendence of the world’s economies, cultures, and populations, is under
4%
2% serious review – and potentially under attack. To many individuals with
4%
0% whom we speak, globalization just has not delivered the prosper-
6% -2%
ity and harmony that they were told it would. Nominal GDP has
decelerated, not accelerated, and with it, wealth concentration has
-4%
8% intensified, not dissipated. As a result (and as we detail below), the
-6%
reversal of globalization is now manifesting itself both in terms of
-8%
10% shrinking cross border flows (Exhibit 4) and softening global trade
-10% as a percentage of GDP (Exhibit 106). Consistent with these trends,
12% -12% we are also seeing a fraying of traditional political structures, which
'48 '58 '68 '78 '88 '98 '08 '18 is leading to more extreme representation by both the left and the
Data as at April 4, 2019. Source: Bloomberg. right. These emerging headwinds are significant, as they potentially
represent a structural break in the traditional world order that histo-
rians will use to define the last 30 years. If we are right about where
we are headed, then investors should brace for a period of lower
absolute returns with both higher volatility and increasing disper-
“ sions. Hence, the value of sound portfolio construction within each
We are of the mindset that individual fund as well as across entire investment plans, including
endowments, pensions, and family offices, has never been more
globalization, or the notion that important, we believe.
there is merit to the growing

interdependence of the world’s
economies, cultures, and
populations, is under serious
review—and potentially under
attack.
”
EXHIBIT 3 view is that emerging issues surrounding rule of law and national secu-
rity have now become intertwined with more conventional trade issues.
National Security Issues Are Now Being Bundled with
Rule of Law and Trade Negotiations In our humble opinion, this development is not a positive one, and
as such, we are now using a target multiple that is lower than the
historical median on the S&P 500 to compensate for some additional
risk premium that we think is now required (see Section I). To be
Traditional sure, central banks are now more dovish than what we thought in
Trade
2018, and we now have the Federal Reserve easing twice in our base
case for 2019. As we show in Exhibit 52, an accommodative Federal
Reserve is almost always a good thing for risk assets. However,
this time may be slightly different, as current headwinds feel more
structural in nature, including heightened potential for sustained dis-
Rule National inflation as well as more permanence around trade-related tensions.
of Law Security Moreover, while this recovery has been long in duration, it has been
short on synchronized momentum.
So, if we had to speculate today on tomorrow about this cycle, the

majority of our team would posit that this one clearly will be remem-
Data as at May 29, 2019. Source: KKR Global Macro & Asset Allocation bered – depending on what region one evaluates – as a series of
analysis. mini-economic, idiosyncratic cycles that are neither strong enough to
drive up inflation and curtail investment excesses, nor weak enough
to induce a more traditional recession on a global basis. That said,
EXHIBIT 4
given the fundamental interlinkage of global supply chains that are
Cross-Border Capital Flow Trends, a Traditional Proxy now being challenged, there is a growing contingency on the team
for Globalization, Are Reversing as Protectionism Ramps who are increasingly worried about a more synchronized downturn
Upwards occurring in 2020. Regardless of exactly how things play out, our
team is fully confident that a backdrop of uneven growth, coupled
Global Cross Border Bank Lending as a % of GDP with periodic bouts of volatility, favors a global investment approach
45% that can transition across capital structures to gauge relative value. It
also benefits allocators with longer duration sources of funding that
allows investors to avoid any forced selling at disadvantaged levels
40% when they should actually be adding to risk assets.
We also want to underscore our existing macro view that we could

35% be entering a period where the growth rate of nominal GDP and
-44% decline global profits are more aligned. There is even the potential that prof-
its lag GDP growth in an economic downturn. In the past decade, by
30%
comparison, global profits have reached uncharted territory, driven
by unprecedented central bank resolve, lower corporate taxes in the
25%
20%
“
96 98 00 02 04 06 08 10 12 14 16 18 20 The trend towards large corporate
Data as at May 31, 2019. Source: BofA Merrill Lynch, Bloomberg. multinationals divesting non-core
subsidiaries remains strongly in
Meanwhile, from a purely tactical perspective, Lance’s phrase also
resonates well with how KKR’s Global Macro, Balance Sheet, and force. The complexity associated
Risk Analytics team (GBR) is feeling about its current asset allocation
framework. Specifically, whereas we had increased risk exposure
with these transactions is
in early January and then dialed some of that very same exposure substantial, but carve-outs often
back in February after a roaring surge in risk assets, we now don’t
feel compelled to dial back up our risks. As we detail below, we are
have the potential to unlock
structurally more cautious on the ‘trade war’ that is unfolding – and significant value, particularly as it
what that means for the traditional global world order – than some
of the investors with whom we speak. Mexican trade issues appear
relates to cash flow generation.
headed in the right direction; however, when it comes to China, our ”
United States, robust buybacks, and vigorous cost take-outs. More- So, what is our call to arms for the second half of 2019 and beyond?
over, with U.S. margins now at record levels, we think that the profit See below for full details, but our key messages are as follows:
gap that has existed between the U.S. and the rest of the world could
also converge (Exhibit 6). We remain bullish on deconglomeratization, or carve-outs. In addi-
tion to what we see occurring in the United States, recent trips to To-
EXHIBIT 5 kyo and London lead us to believe that the trend towards large corpo-
U.S. Corporate Profit Growth and Nominal GDP Are rate multinationals divesting non-core subsidiaries remains strongly
Becoming More Aligned… in force. Recent divestiture announcements out of Hitachi, Nestle,
General Electric, Bayer, and Walt Disney only add to our optimism.
Ratio of U.S. Corporate Profits Growth From what we can tell, a combination of sagging returns on capital,
to U.S. Nominal GDP Growth (5-Year CAGRs, Rolling)
increased shareholder activism, and intensifying local competition
5.0 4Q13 all suggest that more activity is in store, which we view positively
4.5 for Private Equity managers. Key to our thinking is that the complex-
4.0 ity associated with these transactions is substantial, but carve-outs
3Q06
often have the potential to unlock significant value, particularly as it
3Q97 3.1 relates to cash flow generation. In addition to the sizeable opportu-
3.0
2.4 nity we are seeing in Private Equity for global corporate carve-outs,
3Q87
2.0
we are also observing similar compelling trends across Energy Real
1.4
Assets and Infrastructure, particularly in the area of optical fiber.
Importantly, we like the opportunity set for this theme not only on the
1.0 4Q18
0.6
equity side but also on the debt side.
0.0
3Q90 4Q01 4Q08 The ‘Yearn for Yield’ underscores the structural reinvestment risk
0.3 -0.2 -0.5 that we think has emerged for income-oriented investors. From our
-1.0
perch at KKR, we see reinvestment risk as one of the greatest chal-
1Q00
1Q15
1Q70
3Q07
2Q11
1Q85
1Q55
4Q03
3Q62
2Q81
3Q77
3Q92
2Q66
4Q73
4Q88
4Q58
2Q96
lenges that CIOs now face. Importantly, this risk is coming during a
period that we have identified as The Uncomfortable Truth, which we
Data as at December 31, 2018. Source: U.S. Bureau of Economic
Analysis, Haver Analytics. define as record low interest rates amidst bulging deficits and soar-
ing debt loads. Our advice is to own more cash-flowing assets linked
to nominal GDP, build more flexibility across mandates, and shorten
EXHIBIT 6 duration where appropriate. Importantly, despite our view that infla-
tion will remain low in the medium term, we respect that the ‘Au-
...As the Profit Gap Between the U.S. and the Rest of the thorities’ are trying to shrink existing debt loads by holding nominal
World Begins to Finally Converge interest rates below nominal GDP. As such, we believe strongly that
Change in Trailing 12-Month EPS Since 2007 Peak
an overweight to modestly leveraged Infrastructure and certain Real
Estate investments with yield is prudent to add some ballast to one’s
MSCI US MSCI Europe portfolio. We are also quite constructive on Asset-Based Finance,
100% MSCI Asia Pacific xJ which continues to provide us with lots of shorter duration opportu-
80% nities with good cash flowing characteristics and sound collateral.
72.7%
60%
Lean into periodic dislocations and growing dispersions. As we
40%
show later in Exhibit 92, our implied default indicator has spiked to
20% 17.6% recessionary levels multiple times in recent years, despite the reality
0% that we have not technically had a recession. We view these false
readings as compelling because it confirms our thesis that the capital
-20%
-28.1% markets are giving investors multiple opportunities to lean into dislo-
-40% cation to buy mispriced assets. Given inadequate dealer inventories,
-60% rising geopolitical tensions, and slowing liquidity growth, we believe
that the frequency of these occurrences is likely to increase, not
-80%
decrease, in the coming quarters. Meanwhile, as we detail below (Ex-
-100% hibits 96 and 97) our research shows that dispersions across many
2011
2010
2015
2008
2019
2009
2013
2017
2007
2012
2014
2016
2018
equity and debt markets are starting to increase again – a backdrop

that we believe allows investors to buy attractive cash-flowing assets
Data as at March 31, 2019. Source: KKR Global Macro & Asset Allocation at reasonable valuations at this late point in the capital markets cycle.
analysis.
At the moment, we are playing this macro theme through our Oppor-
tunistic Credit and Distressed/Special Situations allocations, but we
do believe it is constructive for Equity Hedge Fund managers as well.

Own some secular growth stories that are ‘Cash Flow Compound- We are raising our Cash allocation to three percent from two percent.
ers’ amidst slowing nominal GDP. With China’s nominal GDP falling We had added one percent to Cash when we took the money off
from 36.0% year-over-year growth in 1994 to a low of 6.7% in 2016, the table in Public Equities in February 2019 (see Insights: Another
overall global nominal GDP growth has suffered mightily. This decline Swing at the Plate). However, given the unsettled backdrop of late,
makes sense to us, as China typically accounts for one third of total we think that having even a little more extra dry powder makes sense
global growth these days. As we look ahead, we are still not expect- these days. Where might we use it in a dislocation in the second half
ing any rebound soon, as the OECD projects that China’s nominal of the year? We likely would add to Special Situations/Distressed,
growth will fall further towards just 5.9% by 2030. a position we have been building incrementally over the last 12-18
months. We might also start to put some money back into Private
Meanwhile, though GDP and corporate profits are not 100% correlat- Growth investments, an area where we currently hold a substantial
ed, they are linked, and the GDP slowdown is having an impact on the underweight. The reality is that valuations in the Private Growth area
ability for companies to grow. All told, the percentage of companies got stretched, but they are finally starting to adjust meaningfully, an
in the MSCI All Country World that are poised to grow eight percent emerging opportunity for investors who have been patient in this
or more has fallen sharply to 23% in 2018 from more than 40% dur- area.
ing the 2000 – 2001 period. Beyond just China, we also link some of
the slowdown to the massive impact disruptive technology has had in We reiterate our Overweight positions in Traditional Private Equity (300
almost every industry. In fact, according to investment bank Goldman basis points overweight), Distressed/Special Situations (400 basis points
Sachs, global earnings excluding technology have not grown in abso- overweight), Asset-Based Finance (600 basis points), and Energy/Infra-
lute terms since the Global Financial Crisis (GFC). In terms of where structure (500 basis points overweight). As these positions indicate,
to invest behind our favorable outlook on secular growth stories, we we think that the value of the illiquidity premium is higher later in the
currently favor several regional themes over global ones, including cycle. One can see this in Exhibits 7 and 8. We also want to signal
U.S. business services, European logistics, Asian travel, and U.S. au- that we are adopting more of a later cycle playbook by targeting
tomation. Importantly, we feel strongly that the Public Equity markets overweight positions in Distressed/Special Situations as well as
are actually trading well below the Private Growth markets in many strategies linked to collateral and nominal GDP like Asset-Based
parts of the world, especially in China. Regardless of whether they Finance and Energy/Infrastructure.
are in the Public or Private Markets, we tilt heavily in favor of compa-
nies that have established cash flowing business models where there are EXHIBIT 7
identified economies of scale that result in significant improvement in Private Equity Typically Outperforms Over the Cycle
cash flow yields. By comparison, we are quite cautious on companies Relative to Public Equities. However, the Majority of the
that cannot generate positive cash flow, and we look for their cost of
Alpha Comes When Capital Markets Conditions Are Not
capital to rise meaningfully into 2020.
So Ebullient
In terms of what this all means for our asset allocation positions, we U.S. Private Equity Average Relative Returns in
note the following: Various Market Environments, %
We are lowering our U.S. Short Duration Government Bond bet to five
percent from seven percent. We still like this investment idea, but two- 11.6
10.2
year U.S. yields have fallen from a high of 2.61% in January to 1.93%
currently1. So, some of the easy money has been made. Overall, 6.3
though, we still retain an outsized position because, when we look
around the world, U.S. two-year Treasuries offer a current coupon
that – apart from China two-year bonds – dwarfs almost any other
sovereign debt that we can find (regardless of duration).
Our Opportunistic Credit bet increases by another 100 basis points to

eight hundred basis points, compared to a benchmark of zero. This bet
remains an outsized one for us, but we are convinced that more –
not less – flexibility is required to be effective in the Liquid Credit -7.5
market these days. In particular, we want to have the ability to toggle < 0% 0-10% 10-20% > 20%
amongst Levered Loans, High Yield, and Structured Products. We
S&P 500 Total Return
are currently tilted more towards Levered Loans in our Opportunistic
Credit portfolio. However, we might actually increase this exposure Note: Private Equity returns as per Cambridge Associates. Data based
further, given that Levered Loans have lagged High Yield of late. on annual returns from 1989-2016. Source: Cambridge Associates,
Bloomberg, KKR Global Macro & Asset Allocation analysis.
Also, as we detail below, we are seeing dispersions start to widen
across sectors and between securities within a sector, both trends
which could provide tailwinds to Opportunistic Credit managers.
1 Data as at June 13, 2019. Source: Bloomberg.

EXHIBIT 8 EXHIBIT 9
The Illiquidity Premium in Private Credit Has Actually KKR GMAA Target Asset Allocation
Grown in Importance Since 2016 Relative to Publicly
Traded Levered Loans and High Yield KKR GMAA STRATEGY KKR GMAA
JUN-19 BENCHMARK FEB-19
Illiquidity Premium as a Proportion of Yield, %
ASSET CLASS TARGET (%) (%) TARGET (%)
Traded High Yield Traded Leverage Loans Public Equities 53 53 53
U.S. 20 20 20
120%
Europe 15 15 15
101.2%
100% 93.3% 94.1%
Turkey -1 0 -1
86.2%
78.5% 79.9% All Asia ex-Japan 10 7 10
80%
67.2% 68.1% Japan 5 5 5
60.0% 60.1% 58.8% 59.5%
55.3% 58.1% 56.9%
60% 52.9% 53.5% Latin America 4 6 4
46.9% 44.7%
Total Fixed Income 23 30 24
40% 34.9%
Long Duration Gov’t 0 20 0
20% 12.0% U.S. Short Duration 5 0 7

6.2% 6.5%
1.5% Asset-Based Finance 6 0 6
0%
High Yield 0 5 0
2011
2013
2010
2014
2016
2018
2015
2008
2017
2009
2007
2012
Levered Loans 0 0 0
Data as at December 31, 2018. Source: Ares Capital, Bloomberg.
High Grade 0 5 0
Emerging Market Debt 0 0 0

We reiterate our Underweight positions in Long Duration Global Sover- Opportunistic Credit 8 0 7
eign debt (2000 basis points), High Grade Debt (500 basis points), and
Global Direct Lending 0 0 0
Latin American Public Equities (200 basis points). As our allocation
preferences indicate, we think that there is better value in the short- Real Estate Cr (B-piece) 2 0 2
end of the U.S. Treasury curve (e.g. 2-Year notes) relative to the long Stabilized Credit 2 0 2
end of the curve. Also, given that we hold approximately 30-40% of
our total allocation in some form of private securities that hopefully Real Assets 9 5 9
capture the value of an illiquidity premium, we think our ‘barbell’ ap- Opportunistic Real Estate 2 2 2
proach, which includes both overweight positions in Cash and shorter
Energy / Infrastructure 7 2 7
duration U.S. government bonds, makes a lot of sense. Meanwhile,
within global Public Equities, we still tilt away from Argentina and Gold 0 1 0
Mexico relative to Asian Equities. Brazil is certainly improving off a Grains (Corn) 0 0 0
low base (and has done better than its regional peers on a 12-month
Other Alternatives 12 10 12
basis), but we see its recovery this year as more cyclical than secu-
lar. Corruption headwinds, complex taxation, and high unemployment Traditional PE 8 5 8
are all still issues that make us somewhat guarded about the country. Distressed / Special Sit 4 0 4
Growth Capital / VC 0 5 0
Cash 3 2 2
“ Data as at May 31, 2019. Source: KKR Global Macro & Asset Allocation
analysis.
We also want to underscore our
existing macro view that we could Looking at the big picture, our view is that we may be “stuck” in a
be entering a period where the trading range. On the one hand, interest rates remain low, particu-
larly relative to cash flows, and this arbitrage should prevent any long
growth rate of nominal GDP and sustained, 2007-like downturn in risk assets (Exhibit 11).
global profits are more aligned.
”

EXHIBIT 10 On the other hand, corporate margins are high, valuations are gener-
ally full, and earnings power is slowing. Importantly, these headwinds
The Earnings Yield Arbitrage Relative to the Risk-Free
are intensifying at a time when global trade tensions now definitely
Rate Is Still Positive in the U.S., But It Has Narrowed require a higher risk premium, we believe. As we describe in greater
Meaningfully in Recent Years detail below, we are more focused on the long-term impact of trade
Differential: 12-Month Earnings Yield Less Fed Funds Rate on capital expenditures – not just the direct hit to the consumer
segment of the economy. Indeed, many of the sell-side and media
9% reports we have read are likely underestimating the magnitude of the
capex hit to GDP. Our quick math is that a 10% reduction in capex
7% linked to CEO reticence is on par or greater than all direct tariff drags
combined (Exhibit 26).
5% Against this macroeconomic backdrop, we generally like our posi-

Avg: 4.0%
tioning, and as such, we still feel inclined to stick with many of the
3% themes we laid out in January. Said differently, “If it ain’t broke,
3.3% don’t fix it.” Simply stated, we feel confident in our long-term macro
themes, and as such, we think the potential for continued outperfor-
1% mance in our portfolio during the second half of 2019 remains signifi-
cant. Key to our thinking is that we want to allocate capital towards
-1% ideas being awarded a significant complexity discount, particularly
relative to underlying cash flows. Our deconglomeratization thesis is
clearly a play on this mindset, but as we detail below, we think that
-3% that there are other significant opportunities where cash flow is at-
'98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 tractively priced – and with some downside protection – in the debt
Data as at May 20, 2019. Source: Bloomberg. markets too. In particular, we strongly favor Asset-Based Finance, B-
piece Real Estate Credit and Infrastructure assets linked to nominal
GDP, particularly those with yield. Without question, at this point in
EXHIBIT 11 the cycle we want to own assets with collateral that are long fiscal
initiatives over monetary ones. Finally, given our view that we are
Our Equity Risk Premium Model Indicates That We Are
now in a structurally slower nominal GDP environment (Exhibit 46),
Headed Towards a Lower Return Environment for U.S. we think that owning some early stage secular winners in the Public
Equities Equity markets also makes sense.
S&P 500 Expected Returns
If we are wrong in our outlook, we think that it will be because
Expected Excess Returns Over Cash growth trends become worse than the more modest slowdown that
Forward Two Year Realized Excess Returns Over Cash we are forecasting. However, as we detail below, we think that a
strong consumer savings pool and an accommodative Fed should
40%
bolster our base case relative to something more extreme. There
30% is also the risk that economic growth could rebound faster than
Correlation: expected if President Trump does ultimately secure an attractive
60% trade deal, despite the Fed having already eased meaningfully. In this
20%
scenario central bankers would have to move more quickly than the
10% consensus is now forecasting. However, given our view that infla-
tion remains challenged and the government’s stimulus will start to
0% dissipate in the second half of the year, we think the potential for an
upside surprise in growth during the next six to 12 months is much
-10% more unlikely.
-20%
-30%
Apr-00
Apr-07
Apr-14
Jan-95
Jul-98
Jan-02
Jul-05
Jan-09
Jul-12
Jan-16
Oct-96
Oct-03
Oct-10
Oct-17
Data as at May 31, 2019. Source: KKR Global Macro & Asset Allocation
analysis.

KEY CALLS IN OUR MID-YEAR 2019 UPDATE Finally, as we describe below in Section III (Investment Consider-
ations/Risks), overall activity in the Technology sector is becoming
• We now expect the Fed to cut rates by 50 basis points in the somewhat outsized, we believe. All told, Technology is now driving
second half of 2019, starting in July or September. Previ- 100% of global earnings growth, and it is accounting for nearly 40%
ously, we had no cuts in our Fed outlook for 2019 of lease up in certain areas of the Real Estate market. Meanwhile,
new issuance in the Credit markets is skewing heavily towards le-
• If our ‘mild recession’ base case comes to pass in 2020, we vered transactions in the Software arena. So if the Technology sector
would expect another 100-150 basis points of cuts next year, were to stumble for any reason (including increased regulation), the
leaving rates hovering just above zero knock-on effect on the global economy could be profound. At the mo-
ment, we do not expect a major crack in the digital economy, but we
• Importantly, however, our dovish Fed outlook does not do believe that the recent underperformance of several high profile
translate into sharply lower expectations for the long-end of technology IPOs underscores our point that private investors have
the curve. Specifically, our fair value model points to 10- already begun to overpay for cash flows – many of which we think
Year yields trading in a 2.0-2.5% range in the second half of may not materialize as robustly as the consensus now thinks.
2019 (year-end target = 2.25%), which implies no significant
change relative to current levels
• We use a 16.3x multiple for the S&P 500 heading into 2020,
compared to a historical median of 17.0x for today’s low real
rate environment. We think that peaking corporate margins
and heightened trade tensions largely keeps the market “
“stuck” in a trading range through year-end 2020 (with the
S&P 500 returning four to 11% during this period.) The good At a much broader and higher
news for alpha generation is that dispersions are widening, as
the massive tailwind from Quantitative Easing (QE) dissipates
level, we think that a structural
divide between the U.S. and
• We are bullish on our five key macro themes: Deconglomera-
tization, Yearn for Yield, Lean Into Complexity/Dislocation,
China is likely to continue. As
Own Some Cash Flowing Secular Growth, and Experiences part of this new reality, China’s
over Things
government is going to move to
• As we detail below, the underlying dependence on Technol-
ogy for the global economy/capital markets is likely underap-
internalize its economy as fast as
preciated. All told, nearly 100% of global profits this cycle are it possibly can.
– to date - linked to the Technology sector
”
EXHIBIT 12
We Favor Upfront Yield, Collateral and Mandate Flexibility as We Enter a New Phase of This Cycle
KKR GMAA Target Asset Allocation, % Over / Under Weight
10
5
0
-5
-10
-15
-20
-25
Asset-Based Finance
High Yield
High Grade
Long Duration
Gov't Bonds
Opportunistic Credit
US Short-Duration
Fixed Income
Cash
Stabilized Credit
Distressed / Special Sit

Real Estate Cr
(B-piece)
Traditional PE
Real Assets
Growth Capital / VC
Public Equities Turkey
Public Equities
Latin America
Gold
Public Equities All

Asia ex-Japan
Energy / Infrastructure
Data as at May 31, 2019. Source: KKR Global Macro & Asset Allocation analysis.

SECTION I: Macro Basics In the following section we update our global GDP forecast by region,
including the United States, Europe, China, and Mexico. One can
Economic Outlook, Including Trade see a snapshot of our overall conclusions in Exhibit 14. While we are
upgrading our U.S. forecast slightly at the headline level, the quality
“I want 5G, and even 6G, technology in the United States as soon as of the GDP growth has deteriorated. Moreover, U.S. growth is clearly
possible. It is far more powerful, faster, and smarter than the current decelerating. Meanwhile, we remain cautious on growth in Europe
standard. American companies must step up their efforts, or get left be- and Mexico, both regions that continue to struggle with tough political
hind. There is no reason that we should be lagging behind on...something crosscurrents as well as uneven fixed asset investment. Finally, we
that is so obviously the future. I want the United States to win through retain our below consensus forecast for GDP for China.
competition, not by blocking out currently more advanced technologies.
We must always be the leader in everything we do, especially when While we still feel confident in our economic frameworks, we do
it comes to the very exciting world of technology!” Donald J. Trump, want to highlight that trade tensions make forecasting visibility more
February 21, 2019 clouded than usual. We think that President Trump maintains his re-
cent decision to raise the tariff rate to 25% from 10% on the existing
EXHIBIT 13 U.S. $200 billion of goods through the end of at least 2019, and we
EM Countries Are Expected to Account for More than now think that there is a greater than 50% chance that he imposes
Three-Quarters of Total Global Growth in 2019 the additional $325 billion in tariffs. This step-up in the $325 billion
in tariffs represents a change in our thinking since February. As we
2019 Real Global GDP Growth, % show in Exhibits 15 and 16, respectively, implementing the final set of
3.5 +0.4 +3.3 tariffs would affect not only key consumer goods like smart phones,
+0.4 but it would also tariff goods where there are fewer options to switch
3.0 production outside of China. Over time, this ‘new’ reality will surely
+1.4
U.S. makes accelerate the shift of supply chains in many areas to other lower
2.5 up 11% cost Asian producers like Vietnam, Thailand, and Malaysia.
2.0 EXHIBIT 15
Other Emerging Markets
1.5
make up another 42%
of growth in 2019
Successive Rounds of U.S. Tariffs on China Will
+1.2
Increasingly Hit Goods with Fewer Sourcing Alternatives
1.0
Average % of U.S Imports Sourced from China
China alone makes up 36%
0.5
of growth in 2019
68%
0.0
China Other US Other World
Emerging 51%
Markets
Data as at April 9, 2019. Source: IMFWEO, Haver Analytics.
22%
EXHIBIT 14
We Are Generally More Cautious on Global Growth and

Inflation in 2019
1st Round (25% 2nd Round (10% Items Not Yet
2019 GROWTH & INFLATION BASE CASE ESTIMATES Tariffs on $50 Tariffs on $200 Tariffed (~$325
Billion of Goods) Billion of Goods) Billion of Goods)
GMAA Bloomberg KKR GMAA Bloomberg
Target Real Consensus Target Consensus Data as at May 31, 2019. Source: U.S. International Trade Commission
GDP Growth Real GDP Inflation Inflation Dataweb, Haver Analytics, KKR Global Macro & Asset Allocation analysis.
Growth
U.S. 2.4% 2.6% 1.8% 1.9%
Euro Area 1.2% 1.2% 1.5% 1.3%
China 6.2% 6.3% 2.3% 2.2%
Mexico 1.2% 1.4% 4.0% 3.9%
GDP = Gross Domestic Product. Bloomberg consensus estimates as at

June 6, 2019. Source: KKR Global Macro & Asset Allocation analysis.

EXHIBIT 16 EXHIBIT 18
The Final $325 Billion Includes Some Very Important Europe Is Likely the Most Exposed to Global Trade
Consumer Products Tensions, Given Its High Percentage of Exports
Gross Exports as a % of GDP
BRIEF DESCRIPTION 2017 U.S. TRADE
IMPORTS FROM 2008 2018
CHINA, US$ BILLION)
Mobile phones 45 46%

39%
Laptop computers 37
33%
Toys (other than bicycles, puzzles, models) 12
Video game consoles and machines 5 20%
12% 12%
Computer monitors 4
Solid state HDDs 4
Flat Panel TVs over 34.29 cm 4 EU China U.S.
Multifunction office machines 2 Data as at April 26, 2019. Source: Eurostat; Bureau of Economic
Analysis; State Administration of Foreign Exchange (China) and China
Knitted cotton apparel 2 National Bureau of Statistics.
National Flags 2
At a much broader and higher level, we think that a structural divide
Data as at July 11, 2018. Source: U.S. International Trade Commission
Dataweb, Haver Analytics. KKR Global Macro & Asset Allocation analysis. between the U.S. and China is likely to continue. As part of this
new reality, China’s government is going to move to internalize its
economy as fast as it possibly can. Already, exports as a percentage
EXHIBIT 17 of GDP have been shrunk to 18% of GDP, compared to 36% in 2007
(Exhibit 19). For perspective, U.S. exports as a percentage of GDP
U.S. Firms Generate a Significant Amount of Revenues are 12% and Europe’s are 46%. Indeed, after 24 years of traveling
by Selling Into China. We Feel Strongly This Reality Has to China, my conclusion after my most recent trip is some structural
Been Underappreciated damage has been done to the U.S.-China relationship. As such, it is
caveat emptor on both sides of the world.
2017: U.S. Surplus (Deficit) with China, US$ Billions
(China Sold to U.S. Less U.S. Sold to China)
There are several layers of disappointment and/or concern amongst
President Trump's only focus both parties to consider. First, many U.S. CEOs in China are disap-
20 pointed that President Xi’s original economic reform plan from 2013
has actually not progressed as much as they might have hoped for. In
59 fact, the percentage of U.S. CEOs in China who were optimistic about
38 business conditions recently dropped to 38% from 45%, accord-
ing to the 2018 U.S. China Business Council Survey we track. Not
-284 surprisingly, this sentiment is adversely affecting their commitment
Key risk if China
goes after U.S. to maintain such a large presence in China, despite the total address-
207
businesses in China able market (TAM) being huge in most areas.
Second, Chinese CEOs view the ZTE and Huawei incidents as game
Goods Goods Services Services US Surplus changers. Somewhat perversely, these two crackdowns in the West
through through imports through With China have created an accelerated rush in China to become less dependent
trade* subsidiaries subsidiaries on foreign manufacturers, particularly those in the U.S., as the Chi-
nese move even more quickly to internalize as much of their supply
*China goods sold to U.S. from China net of goods sold from non- chain as possible. While this internalization may create greater self-
Chinese affiliates operating in China. Likewise, U.S. goods sold to China reliance, this shift could actually lead to higher inflation, less cross-
is net of goods sold to China by other countries’ affiliates operating in the
U.S. Data as at June 11, 2018. Source: Deutsche Bank, China Macro: U.S.
border flows, and potentially lower profits over time, we believe.
Economic Balances With Partners.
Third, as the Chinese government creates more favorable operating
environments for local champions to gain market share, U.S. com-
panies in China are being forced to invest more in capex to remain
competitive. For those U.S. firms operating in China that redeploy

even more into capital expenditures and research and development EXHIBIT 21
in order to maintain their lead over local players, the outlook for their
China’s Share of Global Mobile Phone Manufacturing Is
business and profits could diminish quite quickly, in our view.
Rising …
EXHIBIT 19 Global Smartphone Shipments, Units, Millions
Importantly, Trade Is Becoming a Smaller Part of China’s 1600
Economy
1400 China makes and sells more
China: LTM Trade as a % of GDP smartphones than Apple and
Samsung combined Other
1200
LTM Exports % GDP LTM Imports % GDP
1000
40
Feb-07, 35.6 800 Chinese
36 Brands
Global trade is a smaller 600

32 Blackberry
part of China's economy
400 Apple
28
Sep-06
200
24 29.2 Jun-18 Samsung
Nokia
18.0 0
20
07 08 09 10 11 12 13 14 15 16 17 18
16 Jun-18 Data as at March 19, 2019. Chinese brands include Xiaomi, Huawei, ZTE,
12 15.1 OPPO, Vivo, Lenovo (HK-based), Coolpad, Gionee, Hisense and K-Touch.
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: Morgan Stanley Global Smartphone Model.
Data as at June 30, 2018. Source: China Customs, Haver Analytics.
EXHIBIT 22
EXHIBIT 20 …However, It Is Still Not the Owner of Critical Upstream

China Continues to Rebalance Its Economy Towards Technology. Looking Ahead, However, We Expect This to
Higher Value Added Goods and Services. Ultimately, Change
We View This Migration as Deflationary Global Semiconductor Industry:
Market Share By Production, 2018
China % of Total Exports, 12mma
China, 5% Others, 2%
Ordinary Trade (Higher Value Add)
Reexports (Lower Value Add) Taiwan,
60 6%
May-19
55
57.5
Europe, 9%
50
USA, 45%
45 Japan, 9%
40
Korea, 24%
Re-exports are now less than
35 May-19
a third of exports
31.2
30
Data as at May 21, 2019. Source: 2019 Semiconductor Industry
02 04 06 08 10 12 14 16 18
Association Factbook, WSTS, IHS Global, PwC.
Data as at May 31, 2019. Source: China Customs, Haver Analytics.
“
Against this macroeconomic
backdrop, we generally like our
positioning, and are largely
inclined to stick with many of the
themes we laid out in January.
” KKR INSIGHTS: GLOBAL MACRO TRENDS 13
Our bottom line: Investors should make no mistake about where we Beyond the aforementioned trade issues surrounding technology,
are headed, given how intertwined the two countries are. Simply we would not be surprised to see Taiwan become a tension point
stated, we think that a modern day ‘cold war’ of sorts has emerged again. The U.S. election in 2020 – and all the hype that will lead up
between China and the United States. Consistent with this view, to it – also remains a wild card. Finally, the hope of any accelerated
we think that we are at an inflection point for global supply chains, SOE reform or privatization now appears more challenging, as by
particularly those that rely on proprietary technology. Just consider controlling its SOEs, the government is in charge of the lion’s share
that out of $70 billion Huawei spent buying components in 2018, of employment opportunities across China.
some $11 billion in Huawei allocations went to U.S. firms including
Qualcomm, Flextronics, and Broadcom. One can see some of this de-
pendence in Exhibit 23. Without question, these relationships are now
all in play in a world where it appears U.S. national security concerns
have trumped more traditional trade priorities.
EXHIBIT 23
Huawei’s Supply Chain Is Quite Global, Including a Heavy Dependence on the U.S.
Huawei Top Suppliers
Huawei Top Suppliers by Revenue, Yuan Billions Revenue Exposure Huawei, %

10 9.0 25%
23% 22%
8 20%
6 4.3 15%
13% 3.9 3.5
3.6 11%
4 11% 3.4 3.4 3.0 2.7 10%
2.8
8%
2 6% 5% 5%
5% 5%
0 0%
Foxconn BYD TSMC Q-Film FIH Mobile Flex SK Hyrix Broadcom Qualcomm Sunny Optical
Industrial (China) (Taiwan) (China) (China) (U.S.) (S. Korea) (U.S.) (U.S.) (China)
Internet
(China)
Data as at March 31, 2019. Source: Goldman Sachs, The Economist.
EXHIBIT 24
China and the U.S. Are Benchmarking Themselves Across Many Key Growth Areas of the Global Economy
Mobile Payments Volume, Orbital Rocket Science & Engineering Patent Applications, 2017,
2018, US$ Trillions Launches, 2018 Graduates, 2014, Thousands Thousands
1447
39
1382
40
31
607
377
0.45
U.S. China U.S. China U.S. China U.S. China

Data as at latest available. Source: PBoC China Payment System Development Report, Forrester, Federal Aviation Administration (FAA), Blue Book of
China Aerospace Science and Technology (CAST), First University Degrees from the National Science Board: Chapter 2 Higher Education in Science and
Engineering, World Intellectual Property Organization database.

United States tial 2020 recession call; see Where Are We in the Cycle starting on
page 30 for further details), while we think another 40 basis points
We must stop being so passive. For ten years now, U.S. policymakers could manifest in 2019.
have done very little as China pursued policies that have resulted in an
enormous trade imbalance. This approach has not worked, and it is past Importantly, if President Trump does add on the next $325 billion in
time for the U.S. government to become more aggressive. tariffs as we now expect, we think that it could have a quite meaning-
ful impact not only on growth (i.e., a 40-50 basis point hit in 2020)
Robert E. Lighthizer, Testimony before the U.S. China Eco- but also inflation (the inflation drag would increase to 80 basis points
nomic and Security Review Commission: Evaluating China’s annually). The delta between the 0.5% hit to GDP and 0.8% pres-
Role in the World Trade Organization Over the Past Decade, sure on CPI is due to CPI’s focus on consumer items, which is where
June 9, 2010. ‘Round 4’ of tariffs hits hardest.
As we indicated in our January outlook piece, we are still forecast- While the consumer impact is not to be underestimated, we actually
ing a deceleration in GDP in 2019, albeit it is likely now more modest are spending more time on what trade headlines mean for CEO con-
in aggregate after the upside surprise to first quarter 2019 GDP. To fidence and ultimately growth. Simply stated, the capex impact from
this end, my colleague David McNellis is raising his U.S. 2019 GDP tariffs is the biggest ‘X-factor’ out there, we believe – something we
estimate to 2.4% from 2.25% previously. Importantly, though, on a think is being notably understated and not fully appreciated in sell-
bottom‐up basis, note that our 2019 GDP upgrade is rather ‘low qual- side forecasts. Specifically, Wall Street estimates generally do not
ity’ in nature, as inventories drive most of the upside. assume any headwind to corporate capex from tariff-related uncer-
tainty (e.g., exectives are now unsure whether to invest incremental
Maybe more importantly, though, than focusing on a point estimate capital into the U.S., Mexico, China, Vietnam, etc., so better to wait
of GDP, is the progression of GDP trends. To this end, we have until we have more clarity). Exhibit 26 underscores our point that the
tried to create an easy to understand ‘roadmap’ that investors can risk to a capex slowdown could be substantial. To date, the evidence
follow. One can see this in Exhibit 25, which we think is a compel- so far is that capex has moderated a bit due to tariffs, but not col-
ling ‘dashboard’ that can be used to outline how we suggest thinking lapsed (Exhibit 27). As such, we will all need to watch that capex
about the potential U.S. economic effects from the tariffs, including momentum does not erode more meaningfully in 2020 than the 2.2%
China Rounds 1-4, as well as the potential auto tariffs. Bottom line year-over- year growth we are forecasting for 2019.
is that all the measures in total are a GDP drag of approximately 80
basis points in 2020 (hence why we are not pushing out our poten-
EXHIBIT 25
To Date, Proposed Tariff Measures Represent an Aggregate Potential U.S. GDP Headwind of 1.25%, of Which We Think
Approximately 0.4% Could Manifest in 2019. In 2020, However, the Drag From Tariffs Could Reach 80 Basis Points
IMPLEMENTED,
ANNOUNCED, OR TOTAL DIRECT
THREATENED AS OF POTENTIAL GDP 2019E POTENTIAL 2020E POTENTIAL
MAY 2019? EFFECT IMPACT IMPACT COMMENT
China Round 1: Partial impact already

Implemented -0.10% -0.07% 0.00%
$50 billion Tariffs @ 25% felt in 2018
China Round 2: Partial impact already

Implemented -0.10% -0.09% 0.00%
$200 billion Tariffs @ 10% felt in 2018
China Round 3: Impacts from mid-May

Implemented -0.20% -0.09% -0.13%
Prior $200 billion to 25% onwards
Assumes 2H19 imple-

China Round 4: mentation, and some
Announced -0.50% -0.11% -0.44%
$325 billion Tariffs @ 25% partial offset from
pre-buying
On May 15th, President
Autos:
Trump announced
25% Auto & Auto Part Threatened -0.25% -0.03% -0.23%
a 6mo delay to his
Tariffs on Europe and Japan
decision
TOTAL -1.25% -0.38% -0.79%
Data as at June 7, 2019. Source: KKR Global Macro & Asset Allocation estimates, Bureau of Economic Analysis, Census Bureau, Office of the U.S. Trade
Representative, Haver Analytics.

EXHIBIT 26
Capex Deferrals Due to Tariff Uncertainty Remain the Most Important ‘X-Factor’ in Our Outlook
Approximate Cumulative Potential Tariff Impacts as a % of U.S. GDP
Deferral of business investment due to

tariff-related uncertainty could present a 1.4%
greater obstacle to growth than the combined
effects of all the proposed direct tariffs +0.25% +1.25%
+0.5% 1.0%
Measures Already Taken
+0.2%
+0.1%
+0.1%
Round 1: $50bn Round 2: Additional Round 3: Prior Round 4: Additional Ttl China Tariff, Potential Tariff on Ttl Potential 10% Deferral of
China Tariffs @ $200bn @ 10% $200bn raised to $325bn @ 25% Potential Auto & Parts from China+Auto Tariff U.S. Business
25% Rate Rate 25% Rate Rate Consumption Europe and Japan Consumption Investment
Impact @ 25% Rate Impact Spending
Data as at May 16, 2019. Source: KKR Global Macro & Allocation estimates, Bureau of Economic Analysis, Census Bureau, Office of the U.S. Trade
Representative, Haver Analytics.
EXHIBIT 27
Looking at the bigger picture (and again consistent with our view
that President Trump will implement the next $325 billion in tar- To Date, the Evidence Suggests Tariff Uncertainty Has
iffs), we remain on the hawkish side of the trade debate. To be sure, Slowed – But Not Collapsed – U.S. Investment Trends
there may ultimately be some opening up of Chinese markets to buy
more goods such as soybeans, but rule of law issues are likely to Growth in U.S. Real Fixed Investment Spending, %
remain problematic between the two countries. Moreover, Trump has
6.3%
allowed national security issues to bleed into the current trade nego-
tiations, a political move that we think has longer-term implications 5.3%
than many investors currently appreciate. Said differently, even if the 4.8%
current impasse on trade is resolved, there will not be an easy fix on
the race for global technological dominance.
3.4%
Hence, we view this latest salvo in the U.S.-China trade war as one
2.2%
that has – over time – serious implications for global supply chains
1.7%
and capital allocation. Our view is that China will escalate the already
rapid pace of development and acquisition of high value added indus-
tries, particularly as the latest moves by President Trump could likely
foster distrust in regard to global supply chains, especially around
the reliance of foreign markets for needed technology. Businesses, 2014 2015 2016 2017 2018 2019e
particularly those in technology related industries, will be looking to
develop supply chains in other locales such as Vietnam, the Philip- Data as at June 7, 2019. Source: Bureau of Economic Analysis, Haver
pines and Thailand to circumvent U.S.-China trade concerns. If we Analytics, KKR Global Macro & Asset Allocation estimates.
are right, then we should expect lower global growth than in the past
and likely a structural peak in corporate profitability.
“
Simply stated, the capex impact
from tariffs is the biggest
‘X-factor’ out there, we believe.
”
Growth in Personal Consumption Expenditures Remains, Easy Central Bank Policy in Europe Is Only Partially
to Date, Quite Steady Being Offset by Tight Credit Conditions
Growth in U.S. Real PCE, % Elements of 2019 Eurozone GDP, ppt
3.7% 0.1 -0.1
0.3 -0.2 1.2
0.1
2.9% 0.8
2.7%
2.5% 2.6%
2.3%
0.1
Intercept ECB Housing Lagged TW EUR Credit Output 2019

ZIRP EUR Brent Conditions Gap Forecast
Intercept is the sum of Intercept Coefficient and the lagged dependent

2014 2015 2016 2017 2018 2019e variable. Data as at May 31, 2019. Source: Bloomberg, Eurostat, European
Data as at June 7, 2019. Source: Bureau of Economic Analysis, Haver Central Bank, European Commission and KKR Global Macro & Asset
Analytics, KKR Global Macro & Asset Allocation estimates. Allocation analysis.
Europe Somewhat ironically, Europe is more susceptible to the vagaries of

trade than almost any other region where we do business. Remem-
My colleague Aidan Corcoran continues to hold steady his 2019 ber that our thesis is that global trade peaked in 2008, and the ten-
Eurozone Real GDP forecast of 1.2%, unchanged from his February sions of late have only accelerated this slowdown. Given that gross
update in Another Swing at the Plate. One can see this in Exhibit 29. exports account for 46% of Eurozone GDP versus 19% for China and
Importantly, the key driver of the model remains an outsized positive 12% for the U.S., this downward pressure is significant. Moreover in
influence from central bank intervention. In fact, it generates greater Germany, which is often considered the engine of Eurozone growth,
than two thirds of the positive uplift in the quantitative model that the trade balance with China can add 60 basis points of growth in a
Aidan has been using for quite some time. good year and minus 30 basis points in a bad year.
We Are Maintaining Our 2019 Eurozone Real GDP Our Forecast Is for Eurozone Inflation to Reach 1.5% in
Growth Forecast of 1.2% the 2019-2020 Period
6% Eurozone Real GDP, Y/y % Change Eurozone CPI, Y.y % Change
4% Actual
4% Actual Forecast
Forecast
Adjusted R-Square:
2% 3%
91.7%
0%
2%
-2%
Adjusted R-squared = 90.4% 1%
-4%
-6% 0%
2010
2018
2006
2008
2012
2014
2002
2020
2004
2016
2011
2013
2010
2003
2014
2004
2016
2018
2015
2006
2008
2019
2005
2017
2009
2007
2012
2002
Data as at May 31, 2019. Source: Bloomberg, Eurostat, European Central Data as at May 31, 2019. Source: Bloomberg, Eurostat, European Central
Bank, European Commission and KKR Global Macro & Asset Allocation Bank, European Commission and KKR Global Macro & Asset Allocation
analysis. analysis.

EXHIBIT 32 underscores the reality that there is very little cyclical inflation in the
Eurozone economy these days (i.e., all the inflation build-up is linked
Disposable Income Is Supporting European Inflation,
to the historical intercept).
While the Region’s Consumer Remains in Decent Shape
Elements of 2019 Eurozone Inflation Forecast, ppt China
1.8 0.0
0.2 -0.1 1.5 Despite strong real GDP growth of 6.4% year-over-year in 1Q19, my
1.6
0.4 colleague Frances Lim is retaining her below consensus 2019 real
1.4
1.2 GDP growth target of 6.2%. Trade tensions (Exhibit 34), a weak auto
1.0 sector, and a maturing consumer are all weighing on growth trends.
1.0
0.8 Maybe more important, though, than a point estimate in time is that
0.6 our 2019 forecast still continues to represent a notable decelera-
0.4 tion from 6.6% growth last year and 14.2% growth as recently as in
0.2 2007.
0.0
Intercept Disp. Import PPI: Food REER vs. 2019 Similar to the U.S., though, we think that direct tariff impacts un-
Income Price Products 40 Forecast derstate the longer-term – and potentially more important – effect
trade wars are having on CEO sentiment, particularly as it relates to
capital expenditures. Based on our high-level conversations in China
Intercept is the sum of Intercept Coefficient and Momentum. Data
with executives across a variety of industries, we think the potential
as at May 31, 2019. Source: Bloomberg, Eurostat, European Central
Bank, European Commission and KKR Global Macro & Asset Allocation for a second half slowdown is now more likely than the consensus
analysis. forecast embeds.
As one might guess, further escalation in the trade arena will likely
EXHIBIT 33 be met with fiscal and monetary stimulus including more reserve
required ratio cuts, liquidity injections, pledged supplementary lend-
Exports Now Represent a Sizable 50% of Gross GDP in ing, and other short-term liquidity tools. Moreover, as the Fed begins
Germany to lower rates, we expect China to follow with interest rate cuts to
Real German GDP, % and Exports as a % of Real GDP manage the rate differential, while maintaining tight capital controls,
to limit currency depreciation. On the fiscal side, we expect even
55%
German Exports, % of German GDP more targeted stimulus focused on infrastructure, the consumer, and
German GDP, % of EZ GDP the auto sector.
45%
35%
“
This shift in the structural outlook
25%
for trade influences our thinking
2001
2003
2011
2000
2010
2006
2008
2018
2005
2015
2009
1999
2007
2013
2017
2002
2004
2012
2014
2016
Data as at May 31, 2019. Source: Bloomberg, Eurostat, European Central

on Europe’s business model for
Bank, European Commission and KKR Global Macro & Asset Allocation recovery. Specifically, unlike after
analysis.
the 2011 crisis, Europe cannot
This shift in the structural outlook for trade influences our thinking on
grow its way out of the current
Europe’s business model for recovery. Specifically, unlike after the slowdown by just increasing
2011 crisis, Europe cannot grow its way out of the current slowdown
by just increasing competitiveness and weakening its currency. competitiveness and weakening
Rather, it now needs some consumption, which requires Germany
to reduce its current account surplus. It also requires some fiscal
its currency. Rather, it now needs
spending, which France is clearly attempting. Meanwhile, Spain and some consumption, which requires
Italy are now contributing to Eurozone growth via higher wages, but
their sovereign debt loads continue to limit the upside, we believe.
Germany to reduce its current
account surplus. It also requires
On the inflation front, Aidan still forecasts inflation to miss the ECB’s
two percent target. Specifically, we look for annual inflation to come some fiscal spending.
in just shy of 1.5% in 2019. One can see this in Exhibit 32, which ”
EXHIBIT 34
China Continues to Add More Stimulus to Support Growth as the Trade War Escalates. Despite This Impressive Effort
by the Government, We Wonder If Slowing Growth in Capital Expenditures Will Require Even More Stimulus
Approximate Cumulative Potential Tariff Impacts as a % of China GDP Approximate Recent Stimulus
as a % of China GDP
0.3%
+0.8%
2.0%
1.9% -1.8%
+0.6%
+0.2% +1.0%
+0.1%
+0.1%
Round 1: Round 2: Round 3: Round 4: Total Tariff, 5-10% Total Fiscal May 2019 Recent
$50bn China Additional Prior $200bn Additional Potential Deferral of Impact Stimulus Targeted Stimulus
Tariffs @ $200bn @ Raised to $325bn @ Consumption Business Reserve
25% Rate 10% Rate 25% Rate 25% Rate Impact Investment Required
Spending Ratio Cut
Fiscal stimulus includes value added tax cuts, personal income tax cuts, personal income special deductions, social insurance reduction, infrastructure
spending, and other various tax cuts implemented since May 2018. The targeted reserve required ratio cut refers to the May 2019 policy response to the
latest escalation in tariffs. Data as at May 31, 2019. Source: KKR Global Macro & Asset Allocation analysis.
Year-to-date, core inflation has been soft falling to 1.6% year-over- EXHIBIT 35
year on weak domestic demand. At the same time, however, head-
line inflation actually increased to 2.7% in May 2019 from just 1.5% Real GDP Growth in China Is Expected to Continue to
year-over-year in February 2019 on the back of higher commodity Decline Meaningfully in the Years Ahead
prices (Exhibit 37). A key driver has been bad weather, which has led China: Real GDP Growth Y/y, %
to a 13-18% year-over-year increase in vegetable prices. In addition,
the outbreak of swine flu has brought the supply of pigs to the lowest Real GDP Y/y
level in over a decade. As a result, pork prices are already up 18% OECD Long Term Projections
year-over-year, and will remain elevated for a few more months, as it 16
takes at least six months for piglets to reach full size. As such, given 2007
14
that pork has an estimated 2.5% weighting for the country’s CPI bas- 14.2
12 China has already
ket, pork prices could add up to 50 basis points to headline inflation, 2010 had a hard landing
we believe. If there is good news on the headline inflation front, we 10 10.6
believe that the recent VAT tax cut, which became effective April 1, 2020
8
2016 5.5
2019, should help offset the 10 basis point price increase from tariffs 6 2030
6.7
that we had been previously forecasting. All told, we believe average 3.2 2040 2050 2060
4
CPI for 2019 will be around 2.3% year-over-year, which is below 1.9 1.4 1.4
the three percent threshold and leaves the PBoC with ample room to 2
ease monetary policy. 0
80 85 90 95 00 05 10 15 20 25 30 35 40 45 50 55 60
Data as at March 31, 2019. Source: China National Bureau of Statistics,
OECD, Haver Analytics.
“
We think the potential for a
second half slowdown in China
is now more likely than the
consensus forecast embeds.
”
Despite the Slowdown in Its GDP, China Continues to …While PPI Is Softer on Weak Profitability/Pricing Power,
Innovate in Key Strategic Areas, Including Robotics Slower Overcapacity Reduction, and Softening Global
Annual Supply of Industrial Robots, Thousands
Demand
China: Headline PPI Y/y (L)
350
Asia / Australia China: Industrial Capacity Utilization (R)
300 Of which: China
12 79
Europe 10
250 America 78
8
6 77
200 4
2 76
150 0 75
-2
-4 74
100
-6
73
-8
50
-10 72
05 07 09 11 13 15 17 19
0
94 96 98 00 02 04 06 08 10 12 14 16 18 Data as at March 31, 2019. Source: China National Bureau of Statistics,
Haver Analytics.
Data as at 2018. Source: IFR World Robotics 2018.
Mexico
EXHIBIT 37
We are using this mid-year update to downgrade our 2019 GDP
China Headline Inflation Is Currently Higher on Food growth estimate for Mexico to 1.2%, which is below both consensus
Prices… expectations of 1.4% and our prior forecast of 1.6%. Even though the
China: CPI, Y/y , % threat of U.S. tariffs is averted for now, significant growth headwinds
remain and we believe there is a non-trivial chance that the U.S.
Ex Food & Energy Food Energy Headline CPI
could again threaten Mexico with protectionist measures leading up
3.5 to the 2020 elections.
Food inflation causing CPI to rise
3.0 May-19
2.5 2.7 What’s ailing the Mexican economy? Well, a recent trip to the nation’s
2.0
capital confirmed that the combination of rising U.S.-China trade ten-
1.5
1.0 sions, roadblocks in USMCA2 approval, construction delays in Mexico
0.5 City, recent credit rating downgrades, and Pemex’s long-term fiscal
0.0 sustainability concerns will all likely keep a lid on private investment
-0.5
(Exhibit 40). Meanwhile, on the public expenditure front, Andrés Man-
-1.0
-1.5 uel López Obrador (AMLO) has actually shown himself to be fiscally
prudent thus far. Somewhat ironically, though, this discipline is re-
Apr-16
Oct-16
Apr-17
Oct-17
Apr-18
Oct-18
Apr-19
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
sulting in cuts to current expenditure in many areas of the economy.

Finally, while consumer confidence is actually hovering near record
Data as at May 31, 2019. Source: China National Bureau of Statistics, highs, it has not led to a boom in consumer spending. In fact, actual
Haver Analytics.
private consumption data continues to underperform expectations, as
many in Mexico’s population worry about increasing violence, slowing
growth, and potential conflicts with the United States.
“
While consumer confidence in
Mexico is actually hovering near
record highs, it has not led to a
boom in consumer spending.
”
2 United States, Mexico, Canada Agreement.

We Expect Mexico Real GDP to Grow Just 1.2% in 2019, MXN Is Already Trading More Than One Standard
Dragged Down by Both Tight Monetary Conditions and Deviation Below Its Long Term Average in Real Effective
Lackluster Investment Appetite Exchange Rate Terms
Components of Mexico Real GDP Growth Model Mexico: Real Effective Exchange Rate (CPI-based)
% Deviation from Long Term Average
2.5% 1.1%
35% MXN
2.0% strength
-0.3% 25%
+1stdev
1.5% 15%
1.2% 1.2%
-0.7% 5%
1.0% -0.1%
-5% Bull
0.5% -15%
-1stdev Base
0.0% -25%
Baseline US GDP Credit Manu. Mex 2019e
MXN
-35% weakness Bear
Growth Condition Confid. Equities growth
Data as at June 7, 2019. Source: Bloomberg, Banxico, Haver Analytics, -45%

KKR Global Macro & Asset Allocation analysis. '87 '90 '93 '96 '99 '02 '05 '08 '11 '14 '17 '20 '23
Data as at May 31, 2019. Source: Bloomberg, Banxico, Haver Analytics,
KKR Global Macro & Asset Allocation analysis.
EXHIBIT 40
Investment Has Been Non-Existent in Mexico of EXHIBIT 42

Late, Weighed Down by the Energy Downturn,
Policy Uncertainty, Rising Trade Tensions, and Fiscal We Forecast That Inflation Differentials Between the U.S.
Sustainability Concerns and Mexico Remain Outsized Through 2023
Mexico GDP Components (1Q13 =100) Annual Average CPI Estimates, Y/y % Change
6% Mexico (GMAA forecast) U.S. (GMAA forecast)

Real GDP Consumption
140 Investment Exports 4.9%
5%
130 4.0%
4% 3.7%
3.5%
3.3% 3.2%
120 3%
2.2%
2.0%
2% 1.8% 1.8%
110 1.5%
1.0%
1%
100
Investment is Low
0%
90
2018a 2019e 2020e 2021e 2022e 2023e
'13 '14 '15 '16 '17 '18 '19
Data as at June 7, 2019. Source: Bloomberg, Banxico, Haver Analytics,
Data as at May 31, 2019. Source: Bloomberg, Banxico, Haver Analytics,
Separately, we expect headline inflation to average four percent in

2019, which is up from our previous estimate of 3.8%. As such, it is
now in line with Banxico’s estimate and just above consensus expec-
tations of 3.9%. In light of persistently elevated inflation expectations
and risk premia, we believe the central bank of Mexico will maintain a
cautious monetary stance. Keeping financial conditions tight and real
rates high at or greater than 4.2% will be needed to combat stub-
bornly elevated domestic prices and anchor the peso, we believe. As

such, we do not expect any rate cuts this year. EXHIBIT 44
Technology’s Effect on Producer Prices by Industry Has

Finally, on the currency front, we expect the Mexican peso to de-
preciate by approximately two percent per annum over the next five
Been Significant in Recent Years
years, which is actually better than the 4.8% implied by forward Technology's Effects on PPI by Industry
curves. Key to our thinking is that the peso is a high carry currency (Annualized % Change in PPI, 2005-2018)
(i.e., its nominal short-term rates are 8.25%, compared to 2.40% in PPI excluding technology PPI including technology
the U.S.) as well as the fact that it screens quite undervalued in our
models after depreciating 39% over the past five years. 5.5% -37bp
-82bp
5.0%
4.5%
Interest Rate Outlook 4.0% -44bp -68bp
3.5% -11bp
As we noted in our most recent Insights essay, The Uncomfortable 3.0% -1bp
2.5% -83bp
Truth, dated April 2019, our macro framework continues to suggest 2.0% -9bp
that long-term rates will be stuck at low levels for the foreseeable 1.5%
future. Importantly, we are making this call despite rising deficits in 1.0%
0%
many of the markets in which we invest. There are several key un-
Overall
Info Tech
Prof Svs
Manufacture
Finance
Healthcare
Retail Trade
Agriculture
derpinnings to our thesis. First, we think that technology is creating
structural downward pressure on inflation. One can see this in Ex-
hibits 43 and 44, respectively, which show the consistent downward
pressure that technological transparency/advancement are having on Note: Healthcare is proxied by hospitals, retail trade by general
both consumer and producer prices. merchandise trade, finance by securities/investment. Data as at 2005
through 2018. Source: Haver Analytics, BEA input-output tables,
EXHIBIT 43 Vanguard, KKR Global Macro & Asset Allocation analysis.
Moore’s Law Is a Drag on Inflation, Particularly in the
Early Years of Innovation
Second, our research shows that the direction of interest rates
Moore's Law Is a Drag on Inflation generally correlates with growth in nominal GDP. One can see this in
Technology drag on inflation (RHS)
Exhibit 45. This viewpoint is significant because nominal GDP in both
Production cost including technology (LHS) the United States and China, two of the major drivers of global GDP,
Production cost excluding technology (LHS) has slowed materially in recent years. Third, we think that demo-
Indexes for Product ion Cost s
150 4% graphic forces are increasingly driving more demand for income-
Annual Inflation Rate Diff
140 related products. In fact, by 2030, all baby boomers will be older than
3%
130
age 65. As a result of this new demographic reality, one in every five
2% U.S. residents will be above retirement age.
120
110 1%
100
0%
90
Avg = 0.4pp -1%
80
70 -2%
“
As we noted in our most
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Note: In the BEA’s input-output data (I-O), we identified technology-

recent Insights essay, ‘The
related inputs as follows: computer and electronic products; broadcasting
and telecommunications; data processing, internet publishing, and
Uncomfortable Truth,’ our macro
other information services; and computer systems design and related framework continues to suggest
services. We identified as closely as possible Producer Price Index
(PPI) series for each industry in the I-O, including all four technology that long-term rates will be stuck
inputs. The weightings were multiplied by technology’s PPI to arrive at
the contribution to each industry’s PPI. For each industry’s PPI minus at low levels for the foreseeable
technology, we subtracted the tech contribution from PPI and divided
it by one minus technology’s weight. Data as at 2005 through 2018.
future. Importantly, we are
Source: KKR Global Macro & Asset Allocation calculations, Haver
Analytics, BEA, BLS, Vanguard.
making this call, despite rising
deficits in many of the markets
in which we invest.
”

EXHIBIT 45 Finally, we believe the technical tailwinds in the bond market are
still quite compelling, despite the increase in issuance that we have
Global Interest Rates, Particularly in the U.S., Are Highly
seen in recent years. Indeed, as my KKR colleague Chris Sheldon
Correlated with Nominal GDP Growth who runs our Liquid Credit franchise reminds me, outright supply
Nom 10yr Yld is actually shrinking in key markets such as High Yield. Moreover,
16%
Nom GDP y/y (3yr Avg.) while quantitative easing has turned towards quantitative tightening,
the pace of it is now much more gradual. In Europe, for example, the
14% introduction of another central bank-driven lending program to its
banks has pushed back meaningfully the slope of sovereign debt exo-
Correl = 77%
12% dus (Exhibit 47). This shift in policy is important not only in Europe
but also in major markets like the United States, as the 10-year U.S.
10% Treasury bond has never really traded more than 250 basis points
above the 10-year German bund in the 30 years of data that we have
8% been tracking (Exhibit 48).
6% EXHIBIT 47
The ECB Remains Focused on Ensuring There Is

4%
Adequate Liquidity in the System
2% ECB Balance Sheet, EUR Billions
Public Sector
TLTRO-III and Other
TLTRO-II Purchase
0% Future LTROs
Program
Assets
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
Forecasts
Data as at May 19, 2018. Source: Bloomberg, Haver Analytics, MSCI, 5000 TLTRO-III eases the liquidity
glide path in the EZ
IBES, KKR Global Macro & Asset Allocation analysis. 4500
4000
3500
3000
EXHIBIT 46 2500
2000
With China Slowing, Global Nominal GDP Growth 1500
1000
Continues to Trend Downward 500
Global and China Nominal GDP (USD), 3yr Rolling CAGR 0
2022
2024
2023
2021
2018
2019
2020
2017
Global, LHS China, RHS
14% 30% TLTRO is Targeted Long Term Refinancing Operation. Data as at May 31,
2019. Source: KKR Global Macro & Asset Allocation analysis, European
12% Central Bank.
25%
10%
20%
8%
6% 15% “
4% Pulling all the pieces together,
10%
2% we come away expecting the Fed
0%
5% to cut rates by 50 basis points in
-2% 0%
the second half of 2019, starting
in July or September. If our ‘mild
2001
2010
1989
1998
2019
1995
2013
2007
1986
1992
2004
2016
Data as at April 9, 2019. Source: IMF, Haver Analytics.

recession’ base case comes to pass
in 2020, we would expect another
100-150 basis points of cuts next
year, leaving rates hovering just
above zero.
”
We Believe That U.S. Rates Can’t Break Out to the Upside As China’s Current Account Surplus Shrinks, Its Desire to
as Long as the Yield on German Bunds Remains So Low Own as Many U.S. Treasuries Will Wane Too, We Believe
U.S.-Germany 10-Year Rate Spread, % China: Current Account % GDP (L)
May-19 China: Holdings of US Treasury Securities US$T (R)
3.0 2.33
12 18
2.5
10 16
Apr-89
2.0 2.16 May-99 Sep-05 8 14
1.5 1.51 1.18
6 12
1.0
4 10
0.5
2 8
0.0
0 6
-0.5
-2 4
-1.0
-4 Regime 2
-1.5 Change
89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 -6 0
00 02 04 06 08 10 12 14 16 18 20
Data as at May 31, 2019. Source: Bloomberg.
Data as at December 31, 2018. Source: U.S. Department of Treasury,
State Administration of Foreign Exchange, Haver Analytics.
EXHIBIT 49
U.S. Savers Have Stepped in to Account for a Larger In every one of those occasions, the Fed ended up cutting over the next
Percentage of U.S. Treasury Ownership 12 months, by a median of fully 100 basis points. In three out of those
four occasions, the economy ended up falling into recession within
U.S. Treasury Security Ownership, %
1.5 years, with 1998 being the only exception. What’s really interest-
U.S. Federal Reserve ing, though, is that equity market performance was generally quite
Foreign Central Banks & Savers strong following these short-end curve inversions. Specifically,
U.S. Savers equity markets rose over the next 12 months in three out of the four
past instances – and by a median of fully 13%. It seems that while
2014 2Q'2018
short-end curve inversions do signal coming economic trouble, the
equity market’s first reaction is usually to rally in celebration of lower
14.1%
19.5% rates.
32.2%
48.8%
37.2%
48.3%
“
Data as at June 30, 2018. Russell Napier, CBO, Treasury, TIC Data,
Maybe even more important,
Federal Reserve. interest rate markets embed
a strong expectation of cuts,
Turning to the short end of the yield curve, we now expect the Fed
to start cutting rates later this year. Economic momentum is slow- which means that the Fed would
ing amidst trade-related uncertainty, and Core PCE inflation is again implicitly tighten financial
below the Fed’s two percent target (Exhibit 51). Maybe even more
important, interest rates markets embed a strong expectation of cuts, conditions if it failed to act—
which means that the Fed would implicitly tighten financial conditions
if it failed to act—something we do not think it wants to do. History
something we do not think it
offers a useful guide to the current environment: U.S. two-year yields wants to do.
have fallen to more than 50 basis points below the fed funds rate,
reflecting a market expectation for cuts. This backdrop is something
”
that has happened only four other times since the 1980s (Exhibit 52).

EXHIBIT 51 Pulling all the pieces together, we now come away expecting the Fed
to cut rates by 50 basis points in the second half of 2019, starting in
After a Decade, the Fed Is Still Badly Missing Its Target
July or September. If our ‘mild recession’ base case comes to pass
of Two Percent Inflation in 2020, we would expect another 100-150 basis points of cuts next
U.S. Core PCE, Y/y % year, leaving rates hovering just above zero. Importantly, however,
Core PCE Y/y FOMC 2% Target our dovish Fed outlook does not translate into sharply lower long-end
expectations. Our fair value model points to 10-year yields trad-
3.0%
ing in a 2.0-2.5% range in the second half of 2019 (year-end target
= 2.25%), which implies no significant change relative to current
2.5% levels. If we do fall into recession next year, we think 10-year yields
could flirt with closer to one percent, but we would still target a
2.0% year-end 2020 rate of 1.5%. These relatively moderate 10-year ex-
pectations are consistent with the pattern we have observed in prior
1.5% cycles. Specifically, as we show in Exhibit 52, while the Fed cuts
short rates by a median of 100 basis points, 10-year yields fall by a
Apr-19
median of just two basis points. We think this dichotomy is because
1.0% 1.6%
the Fed cuts themselves help to stoke hopes of reflation, which in
turn help prop up the long end as inflation expectations rise.
0.5%
Nov-10
May-07
May-14
Jul-15
Jul-08
Nov-17
Mar-06
Mar-13
Jan-19
Jan-05
Sep-09
Jan-12
Sep-16
Equities: EPS/Valuation/Total Return
Data as at June 7, 2019. Source: BEA, Haver Analytics, KKR Global As we turn towards the back half of 2019, we thought it might make
Macro & Asset Allocation analysis. sense to review what has changed in our thinking since January. As
a refresher, in January we made the following assumptions in our
forecast:
EXHIBIT 52
• In terms of forward P/E, we thought SPX would trade in the
Prior Times U.S. 2-Year Yields Dipped 50 or More Basis 15.5x to 16.5x range. Throughout the year, the multiple has
Points Below the Fed Funds Target ranged from a low of 14.2x on January 3rd to a high of 17.2x on
April 30th (Exhibit 56).
12-Month
Forward
2-Year 12-Month Change • In terms of 2019e EPS, we thought it would come in at $167-
Yield - Fed Forward in U.S. Months $168 per share (2.5% growth), now essentially in line with cur-
Funds Change in 10-Year 12-Month Until Offi- rent expectations of $168-169 (which have fallen from north of
Target Fed Funds Yield (Basis Forward cial Onset $175 at the beginning of the year).
(Basis Target (Ba- Points) S&P 500 of Next
Points) sis Points) 10-Year Total Return Recession
• We estimated 6-14% upside in U.S. Equities (inclusive of divi-
Apr-89 -53 -150 2 11% 16 dends). As of May 31, the S&P 500 had returned roughly 11%.
Aug-98 -59 -25 93 40% 32

As we look ahead, we take comfort that the consensus forecast for
Sep-00 -52 -350 -120 -27% 7 2019 earnings per share now appears much more reasonable to us.
One can see this in Exhibit 55. This new, more conservative forecast
Sep-06 -54 -50 -5 16% 16 of 2.7% is down significantly from an unrealistic 10% in October
2018, and it is now essentially in line with our own forecast of 2.5%.
Jun-19 -53 ??? ??? ??? ???
Maybe more important, though, in our view is that the earnings revi-
Median -54 -100 -2 13% 16 sions downgrade cycle is ending, and it is actually turning upward.
Indeed, earnings revisions in the U.S. have quietly improved for the
Dates represent the first month in a cycle in which two-year yields third straight month to 1.02 (positives relative to negatives) in May
were more than 50 basis points below the fed funds rate. Data as at 2019 from a trough reading of 0.54 in February 2019.
June 7, 2019. Source: BEA, Haver Analytics, KKR Global Macro & Asset
Allocation analysis.

EXHIBIT 53 Looking out to the second half of 2020, our Earnings Growth Leading
Indicator (EGLI) is actually pointing to some acceleration – albeit
Our Preliminary Model for S&P 500 EPS Growth
modest – in earnings growth. One can see this in Exhibit 53. We cau-
Indicates Some Modest Acceleration in 2H20 tion that trade tensions could certainly derail the modest rebound, but
S&P 500 EPS Growth: 12-Month Leading Indicator right now our preliminary 2020 forecast calls for 6.3% year-over-
year growth in 2020 (which is roughly half of the 12.2% currently
ACTUAL PREDICTED (3mo MA)
anticipated by consensus). So, similar to last year, we do again ex-
pect downward pressure on forward estimates, which supports our
40% view that markets are not likely to run away to the upside.
30% EXHIBIT 55
20% Consensus Now Expects 2.7% EPS Growth in 2019, Down

10% Dec-20p
From 10% at the Start of the Year
6.3% Consensus 2019 S&P 500 EPS Growth Estimate
0%
-10% Dec-19p Oct-18

2.2% 11% 10.0%
-20% 10%
9%
-30% May-09a Jan-10p 8%
-40% -30.9% -36.9% 7% Dec-18
6.5%
1991
2003
2000
1988
1994
2018
1985
2006
2015
2009
1982
2012
1997
6%
5%
Data as at May 31, 2019. Source: Bloomberg, Haver Analytics, S&P, IBES. 4% 2.7%
3% GMAA forecast
2% 2.5%
EXHIBIT 54 1% 1.9%
Feb-18 Jul-18 Dec-18 May-19
Importantly, This Improved Outlook Is Contingent on
Credit Conditions and PMIs Remaining Steady Around Data as May 31, 2019 Source: Bloomberg, Haver Analytics, S&P, IBES,
Current Levels
2019 CON- 2020 CON- DELTA
EXHIBIT: 56
TRIBUTION TRIBUTION
We Are Using a 16.3x Multiple for 2020, Compared to a
Credit Spreads -1.7% 1.3% 3.1%
Median of 17.0x, to Reflect a More Conservative Outlook
ISM PMI -0.9% 0.9% 1.7%
Distribution of Fwd P/E When Real 10y UST Yield is in
0.2-0.6% Range (1990 - Present)
Oil Prices -3.1% -2.6% 0.5%
Max
Apr-19 Peak
Trade-Weighted USD -0.4% -0.1% 0.3% 20x Today Median 18.7x
Dec-18 17.2x
16.1x 17.0x
G7 ex US Monetary Policy -0.3% 0.0% 0.3% 18x 14.9x
Min
Baseline Growth 5.3% 5.3% 0.0% 16x 11.5x
Consumer Confidence 0.4% 0.1% -0.2% 14x
Real Home Price Apprec. 2.9% 1.4% -1.5% 12x
TOTAL 2.2% 6.3% 4.1%

10x
Data as at May 31, 2019. Source: Federal Reserve, Bureau of Labor
Statistics, Nat’l Association of Realtors, ISM, Conference Board, 0x
Bloomberg, KKR Global Macro & Asset Allocation analysis.
Data at May 31, 2019. Source: Bloomberg, S&P.

EXHIBIT 57 While we will not officially publish a formal 2020 forecast until early
next year, we did want to lay out a preview of how we are thinking
Our Earnings Growth Leading Indicator (EGLI) Is
about how things could play out. To this end, we note the following
Pointing to Some Modest Acceleration in Earnings ‘rough’ assumptions:
Growth in 2020. However, the Model Does Not Capture
the Impact of Tariffs on Expected Growth • EPS Growth: We are currently using 6.3% year-over-year growth
S&P 500 Earnings Growth Lead Indicator for 2020, which is implied by our Earnings Growth Leading Indi-
Components of December 2020 Forecast cator (EGLI). That would suggest around $178.20 in EPS for the
10% S&P 500 in 2020.
1.0%
9%
1.3% -0.1%
8% • Forward P/E: Amidst escalating trade tensions in 2019, the mul-
7% 1.4%
6.3% tiple on the S&P 500 recently de-rated by 6.3%, falling to around
6% 5.3% -2.6% 16.0x before rebounding during June. Importantly, though, we
5% have also shifted into a lower real rate environment. Specifically,
4% since January real rates have fallen to 0.3% from 0.8%, which
3% means that a higher implicit multiple should be used – all else
2% being equal. All else is not equal, however, given heightened trade
1% concerns and peaking margins. As such, we are using a 16.3x
0% multiple for 2020, compared to a historical median of 17.0x.
Credit Spread
Stronger USD
Home Price
Confidence
Oil Headwind
Forecast
Baseline
• Total return: So, when we pull it all together, our base case,
including a two percent dividend yield, calls for a four to 11%
percent return through year-end 2020, assuming the S&P 500
Our Earnings Growth Leading Indicator is a combination of seven macro trades at approximately 15.8x to 16.8x our 2020 EPS estimate of
inputs that in combination we think have significant explanatory power $178.20 per share next year. One can see this in Exhibits 59 and
regarding the S&P 500 EPS growth outlook. Data as at May 31, 2019. 60.
Source: Bloomberg, Haver Analytics, S&P, IBES, KKR Global Macro &
Asset Allocation analysis. EXHIBIT 59
Our Work Suggests That U.S. Equities Can Deliver Only

EXHIBIT 58 Modest Upside Through 2020
If Our EGLI Is Right, Then the Consensus EPS Estimates S&P 500 Preliminary 2020e Price Target
for 2H19 and 2020 Are Too High S&P Total Return at Various P/E and EPS Y/y Levels
P/E
S&P 500 Quarterly Earnings Growth, Y/y % Change
EPS 14.8X 15.3X 15.8X 16.3X 16.8X 17.3X 17.8X
27%
28% 26% $166 2,451 2,534 2,617 2,700 2,784 2,867 2,950
25%
23% $169 2,495 2,580 2,665 2,749 2,834 2,918 3,003

Consensus 2019 - 2020 Expectations
$172 2,540 2,626 2,712 2,798 2,884 2,970 3,056
18%
14%
14% $175 2,584 2,672 2,759 2,847 2,934 3,022 3,109
12% 12%
13% 11%
9% $178 2,628 2,717 2,806 2,895 2,985 3,074 3,163
8%
$181 2,672 2,763 2,854 2,944 3,035 3,125 3,216
2%
3% 1% -1% $184 2,717 2,809 2,901 2,993 3,085 3,177 3,269
-2% $187 2,761 2,855 2,948 3,042 3,135 3,229 3,322

Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec
18 18 18 18 19 19 19 19 20 20 20 20
$190 2,805 2,900 2,995 3,090 3,186 3,281 3,376
Data as at May 31, 2019. Source: Bloomberg, Haver Analytics, S&P, IBES,
Data as at May 31, 2019. Source: Bloomberg, S&P, KKR Global Macro &
Asset Allocation analysis.

EXHIBIT 60 When we consider the two conflicting signals together (i.e., low rates
versus full valuations), we feel comfortable with our mostly modest
In Percentage Terms, We Now See 4%-11% Upside in U.S.
upside forecasts through year-end 2020. Said differently, although
Equities (Inclusive of Dividends) Over the Next 18 Months low rates should help support equity prices, we think the chance that
S&P 500 Preliminary 2020e Total Return Target U.S. Equities materially outperform their long-term historical average
(Assuming SPX ends 2019 at May 31st levels)
through the end of 2020 is quite low, given recent strong perfor-
mance, geopolitical tensions, and current corporate profitability. This
S&P Total Return at Various P/E and EPS Y/y Levels
viewpoint is consistent with our original January comments that eq-
P/E uities may be “stuck” in a trading range throughout the medium term.
EPS 14.8X 15.3X 15.8X 16.3X 16.8X 17.3X 17.8X
So, given our more modest return for Global Equities during the
-0.9% -9.1% -6.1% -3.0% 0.1% 3.2% 6.3% 9.3%
next 12-18 months, we think that the key to alpha generation will be
0.9% -7.5% -4.4% -1.2% 1.9% 5.0% 8.2% 11.3% differentiation. So, where should an investor lean in and out? Our
two cents is that Europe is cheap, but we expect the public equity
2.7% -5.9% -2.7% 0.5% 3.7% 6.9% 10.1% 13.3% markets in Europe to stay low-priced amidst low rates. Interestingly,
again in 2020, the consensus is forecasting a material boost in EPS
4.5% -4.2% -1.0% 2.3% 5.5% 8.8% 12.0% 15.3%
from the Financials sector (Exhibit 62); we remain more cautious
6.3% -2.6% 0.7% 4.0% 7.3% 10.6% 13.9% 17.2% because of the negative impact that low rates have on Europe’s
financial institutions, insurance companies in particular. As discussed
8.1% -0.9% 2.4% 5.8% 9.1% 12.5% 15.9% 19.2% earlier, we also believe that Europe could be more adversely impact-
ed by trade tensions than the consensus currently believes.
9.9% 0.7% 4.1% 7.5% 10.9% 14.4% 17.8% 21.2%
11.7% 2.3% 5.8% 9.3% 12.8% 16.2% 19.7% 23.2%
13.5% 4.0% 7.5% 11.0% 14.6% 18.1% 21.6% 25.1% “

Data as at May 31, 2019. Source: Bloomberg, S&P, KKR Global Macro & When we consider the two
Asset Allocation analysis.
conflicting signals together (i.e.,
Beyond the more traditional valuation metrics described above,
low rates versus full valuations),
we also try to understand how stock market valuations look when we feel comfortable with our
compared to GDP growth and the intersection of corporate profits
and interest rates. As Exhibit 61 shows, global equities generally look mostly modest upside forecasts
somewhere between fairly valued to downright expensive on a mar-
ket capitalization-to-GDP perspective. However, when we adjust for
through year-end 2020.
interest rates, they appear to be at attractive levels. Our bottom line: ”
EXHIBIT 61
Our Global Cycle Dashboard Suggests That U.S. Equities Are Moderately Overvalued on the Whole. However, the
Rates-Adjusted Equity Valuation Metric Suggests There May Be Further Room to Run
Equity Valuation Metrics Economic and Credit-Related Metrics
Avg.
Embedded Across
Avg. EPS Grwth Credit and
Across Avg. (Rate-Adj. Cycle- Unemp. Credit Trailing 5yr
All Across Eq- EV/ Market Cap Equity Related Rate (in- Spreads Equity Mkt
Metrics uity Metrics EBITDA Fwd P/E % of GDP Valuation) Shiller P/E Metrics verse) (inverse) Return
U.S. 0.7 0.7 1.5 0.5 1.4 -0.7 0.8 0.8 1.5 0.7 0.1
Europe 0.2 -0.1 0.1 0.0 0.6 -1.4 0.1 0.8 2.0 0.7 -0.3
EM 0.1 -0.1 0.9 -0.1 0.0 -0.5 -0.6 0.3 0.6 0.6 -0.4
Japan -0.3 -0.7 -1.2 -1.0 1.0 -1.3 -1.0 0.4 1.2 -0.8 0.9
Data as at May 22, 2019. Note: Readings show number of standard deviations Rich/(Cheap) vs. History. Source: MSCI, IBES, Bloomberg, KKR Global Macro
& Asset Allocation analysis.

EXHIBIT 62 EM such as non-Japan Asia, which we underscore with our 300
basis point overweight to this region in our target asset allocation.
Europe: Consensus Expects 4.8% Earnings Growth in
This viewpoint is also consistent with what our EM/DM model is
2019, Driven by Financials, Industrials and Consumer suggesting (Exhibit 65). Our bet is that, similar to what we saw in the
MSCI Europe 2019e Earnings Growth Contribution 1999-2001 timeframe, a double bottom is in the process of occurring.
As such, we would buy into attractive long-term markets, particularly
Europe 4.8% those that could benefit from the rethinking of global supply chains,
including Vietnam, Indonesia, and the Philippines. On the other hand,
Materials (3.7%)
REITs we remain short Turkey, given its excesses, and we remain under-
1.0% Growth
Telcos 2.0% contribution
weight Latin America. Brazil continues to bump along the bottom,
Healthcare 2.2% with no apparent sustainable catalyst. In Mexico, we think lack of
Energy 4.9% investment as well as ongoing tensions with the United States will
Utilities 6.7% likely keep the country risk premium wide for some time.
Tech 8.6%
Cons Disc 16.0% EXHIBIT 64
Staples 17.7%
Industrials 18.6% EM May Have Put in a ‘Double Bottom’ Relative to DM,
Financials 26.1%
Similar to What Happened in 1999-2001
-10% 0% 10% 20% 30%
Relative Total Return, MSCI EM/DM
Data as at May 31, 2019. Source: Bloomberg, Factset, IBES Consensus,
(Dec-'87 = 0%)
MSCI.
Sep-10
350% 81 Sep-94
305%
EXHIBIT 63 months 288%
108
300%
months
Emerging Markets: Consensus Expects 1.3% Earnings 40
Growth in 2019, Driven Largely By Financials 250% 84 months
months
MSCI EM ex-Tech 2019e Earnings Growth Contribution 200% May-19
119%
150%
MSCI EM 1.3% 64
EM ex-Tech 9.2% months
100%
Energy (4.3%) Jan-16
Growth 50%
Healthcare 2.4% Sep-01 113%
contribution
Telcos 3.2%
17%
Industrials 5.1% 0%
Utilities 5.8% 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19
Staples 6.8%
REITs 9.5% "Double-Bottom" in 99-01 Again in 16-18?
Materials 16.5%
Cons Disc 18.5% Data as at May 31, 2019. Source: MSCI, Bloomberg, Factset, KKR Global
Financials 36.4% Macro & Asset Allocation analysis.
-10% 0% 10% 20% 30% 40%
* Note that EM tech earnings are expected to decline by 35% Y/y.
We’ve excluded it from the chart as it would show a -460% contribution
to overall EM earnings. Data as at May 31, 2019. Source: Bloomberg,
Factset, IBES Consensus, MSCI.
“
Meanwhile, we also do not believe that Japan is poised to outper- Global equities generally look
form meaningfully, given its heavy dependence on global trade. And
beyond the issues that Japan may face from a slowdown in global somewhere between fairly valued
trade, we also expect domestic headline noise around the upcoming
consumption tax increase. If we had to speculate today on tomorrow,
to downright expensive on a
our base case now is that there is greater than a 50% chance it is market capitalization-to-GDP
pushed to 2020 as part of a potentially larger reform package. In the
interim, however, there could be significant bouts of uncertainty and
perspective. However, when we
volatility, we believe. adjust for interest rates, they
In terms of Emerging Markets as an Equity asset class, we think that appear to be at attractive levels.
the long-held bear market is in the process of bottoming. As a result,
we continue to support our January 2019 call to lean into areas of
”

EXHIBIT 65 Where Are We in the Cycle?
Our EM Model’s Indicators Still Tilt Slightly More
Predicting recessions correctly is likely the toughest part of forecast-
Positive ing. However, we are of the mindset that it is worth doing because
it forces everyone on our team to deeply assess and discuss the
‘Rule of the May Jan Aug May Sep Jun DEC
Road’ ’15 ’16 ’16 ’17 ’17 ’18 ’18 direction of a variety of global macroeconomic variables during our
formal investment committee meetings. Similar to what we laid out in
Buy When January, we are still forecasting something akin to a modest reces-
1 ROE Is Stable ↔ ↔ ↔ ä ä ä ä sion – defined by weak capital spending and exports, partially offset
or Rising
by modest consumption trends – between now and the end of 2020.
Valuation: It’s For our nickel, we believe that there is a lot of late cycle behavior
2 Not Different ↔ ä ä ä ↔ ↔ ↔ occurring that will likely be corrected amidst heightened geopolitical
This Time tensions during the next few quarters.
EM FX Fol-
3 lows EM æ æ ↔ ↔ ä ↔ ä As part of this view, our overarching thesis remains that financial
Equities assets will not outperform real economy assets at the same pace that
they did in the past. All our data continues to suggest that central
Commodities bankers used quantitative easing (QE) to pull returns forward, and
4 Correlation in ↔ ↔ ↔ ↔ ↔ ä ↔
EM Is High
in so doing, they accelerated an inequality trend that was already in
place for nearly two decades. Not surprisingly, politicians are now
Momentum focused on ‘righting’ this wrong, and in doing so, we expect them to
5 Matters in EM æ æ ä ↔ ä ↔ æ focus more on nominal GDP growth, which leads to higher wages,
Equities
than the trickle-down effect of boosting financial asset prices.
Overall We recommend selective engagement with EM investing in 2019.
EXHIBIT 66
Momentum is tenuous but many equity indexes and FXs look fairly
washed out. Falling commodity prices are a concern, but earnings
fundamentals have been impressively resilient across most countries
We Are Quite Long in the Tooth in Terms of Pure Cycle
and sectors. Duration at 120 Months
Duration of US Economic Expansions (Months)
Data as at December 20, 2018. Source: KKR Global Macro & Asset
June 2009 Current (Jun-19) 120
November 2001 - December 2007 73
March 1991 - March 2001 120
November 1982 - July 1990 92
July 1980 - July 1981 12
March 1975 - January 1980 58
November 1970 - November 1973 36
February 1961 - December 1969 106
April 1958 - April 1960 24
“ May 1954 - August 1957
October 1949 - July 1953
39
45
We are forecasting something October 1945 - November 1948
June 1938 - February 1945
37
80
akin to a modest recession– March 1933 - May 1937
November 1927 - August 1929 21
50
defined by weak capital July 1924 - October 1926

July 1921 - May 1923
27
22
spending and exports, partially March 1919 - January 1920 10
44
offset by modest consumption December 1914 - August 1918
January 1912 - January 1913 12
trends–between now and the end June 1908 - January 1910

August 1904 - May 1907
19
33
of 2020. For our nickel, we believe December 1900 - September 1902 21 Median = 37
that that there is a lot of of late Data as at June 15, 2019. Source: NBER, KKR Global Macro & Asset
cycle behavior occurring that
will likely be corrected amidst
heightened geopolitical tensions
during the next few quarters.
”
Market Performances Following Long Stretches of S&P 500 Margins Have Approached Peak Levels at a
Consecutive Performance Are Usually Choppy Time When Wages and Input Costs Are Rising. By Sector,
Technology Is at the High End, While Healthcare Is at
# OF CONSEC- the Low End
UTIVE YEARS
OF POSITIVE CUMULATIVE S&P 500 Sector Operating Margins Relative to History
RETURNS START END RETURN CAGR
25y Max/Min Range Latest
3 1954 1956 113% 28.7% 30
3 1963 1965 61% 17.1% 25
3 1970 1972 41% 12.2% 20
15
3 1978 1980 67% 18.7%
10
4 1942 1945 146% 25.2%
5
4 1958 1961 104% 19.5%
0
Industrials
Utilities
Materials
Cons Disc
Healthcare
S&P 500
Telcos
Energy
Tech
5 2003 2007 83% 12.8%
6 1947 1952 154% 16.8%
8 1982 1989 299% 18.9%

Data as at June 7, 2019. Source: Bloomberg, S&P.
9 1991 1999 450% 20.9%
9 2009 2017 259% 15.3%

So, what data are we looking at to gauge the lengthiness of the cy-
Avg. 18.7% cle? Well, as we show in Exhibits 66 and 67, both the duration of the
CAGR economic cycle as well as the consistency of asset appreciation has
been notable. In addition, as we show in Exhibits 70 and 71, it would
Data as at December 31, 2017. Source://www.econ.yale.edu/~shiller/,
Bloomberg. be hard to look at any historical employment data set and not say
that we are late cycle. A similar story holds true in certain cyclical
areas of the economy such as autos. One can see this in Exhibit 68.
EXHIBIT 68
EXHIBIT 70
Our Work Shows That Cyclical Areas of the Economy The Late-Cycle Acceleration in Goods Employment Is
Such as Autos Are Past Their Peak This Cycle Showing Clear Signs of Fatigue
KKR GMAA U.S. Light Vehicle SAAR Model (000s)
U.S. Payroll Employment: Goods, 3-Month Moving Average
Trend Light Vehicle Sales (Based on 2000-2017 Trend) Current
100
Actual + Estimated Light Vehicle Sales Cycle
2016 50
2004
18000 16948.3 17149.5 0
1985
1977 16050.5 -50
2022e
16000 14972.8 Average of
16000 -100
past 7 cycles
14000 -150
2019e
14500 -200
12000 -250
1990 Cyclical trough Recession
12314.2 -300
10000 1981 2008 0% 12% 25% 37% 50% 62% 75% 87% 100%
10363.3 10402.5
8000 Where We Are in Business Cycle (% Cycle Completed)
Data as at June 7, 2019. Source: Bureau of Labor Statistics, Haver
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
2015
2019e
2022e
Analytics.
Data as at May 31, 2019. Source: Bloomberg, Haver Analytics, KKR Global
Macro & Asset Allocation analysis.

While We Expect Services to Outperform Goods, We Do Housing-Related Expenditures Are Not Yet in Full
Expect Payrolls in the Services Sector to Keep Moderating Recovery Mode
As Well
Housing-Related % of GDP
U.S. Payroll Employment: Services, 3-Month Moving Average 23%
250 Current
Cycle 22%
200
150
21%
100
50
20%
0
-50 Average of
past 7 cycles 19%
-100
-150 18%
Cyclical trough Recession
-200
0% 12% 25% 37% 50% 62% 75% 87% 100% 17%
Mar-80
Dec-82
Sep-85
Jun-88
Mar-91
Dec-93
Sep-96
Jun-99
Mar-02
Dec-04
Sep-07
Jun-10
Mar-13
Dec-15
Sep-18
Where We Are in Business Cycle (% Cycle Completed)
Data as at June 7, 2019. Source: Bureau of Labor Statistics, Haver
Analytics. Housing Related includes New Construction and Improvements, Rent and
Owners’ Equivalent Rent, and Household Utility Spending Furnishings,
Household Equipment, and Routine Household Maintenance. Data as at
Yet, in areas such as housing, we still think that we are only mid- March 31, 2019. Source: Bureau of Economic Analysis.
cycle at best. Supporting our constructive view is the reality that
residential construction as a percentage of GDP is now just 18.9%,
compared to 22.5% as of the end of 2005. In addition, housing stock EXHIBIT 73
has grown old, which fuels our bullish stance on areas such as home
improvement. One can see this in Exhibit 73. We continue also to Average Age of the Housing Stock Has Moved Up
forecast solid household formation statistics. All told, we expect U.S. Considerably Since the GFC. We View This Bullishly
net new household formation of around 1.3-1.4 million annually over Average Age of Housing Stock, Years
the next five years, which would represent a 30-40% acceleration
from the 1.0 million average that prevailed over the past five years. 35
Generational trends are also suportive: Millennials are starting to age 34
into the key household-enlarging demographic of 35-44 year-olds. 33
Meanwhile, the senior population is living at home longer into old 32
age, which is another demographic support for housing demand. 31
30
29
28
27
“ 26
Yet, in areas such as housing, we 25

1980
2000
1996
2008
1976
2012
1984
1968
1992
2004
2016
1988
1972
still think that we are only mid- Data as at December 31, 2017. Source: Bureau of Economic Analysis,
cycle at best. Supporting our Haver Analytics.
constructive view is the reality

that residential construction as
a percentage of GDP is now just
18.9%, compared to 22.5% as of
the end of 2005.
”

EXHIBIT 74
The Key to Any Potential Recession in 2019/2020 Is How the Consumer Performs
90% 24 Month U.S. Recession Probability Breakdown
ConsCreditCards, 14%
ConsCreditCards, 14%
70% Factor , 19%
HomeBuilds, 11% CI Loans, 26%
Factor G, 7% HYSpreads, 13%
Factor G, 13% Factor H, 10%
50% LEI, 7% S&P 500, 9%
Factor F, 5% Factor F, 4% CoreCPI, 8% Factor H, 11%
Factor E, 4% Factor , 5%
Inventory, 5% ConsSpending, 6%
Factor E, 5% ConsSpending, 7% Factor C, 11% Factor , 11%
30% ConsSpending, 5% Factor D, 5% Factor C, 13%
Factor D, 5% NewOrders, 4% Factor B, 7%
Factor C, 5% Factor A, 5% Factor C, 18%
Factor B, 10%
Factor B, 5% CorpIntCov, 10% CorpIntCov, 17%
10% NewOrders, 5%
Other, 8% Factor A, 11% Factor B, 11%
Other, 7% Other, 5%
Other, -2%
CorpIntCov, -10%
-10%
Factor A, -7%
ConsDelinquencies, -36%
ConsDelinquencies, -38%
-30%
-50%
Asia Crisis (Dec 1997) Tech Bubble (Dec 1999) Financial Crisis (Dec 2006) Dec 2017 May 2019
Data as at May 31, 2019. Source: KKR Global Macro & Asset Allocation analysis.
So, what are the key variables that we are watching to see whether a SECTION II: Themes
recession could occur earlier or later than 2020? On the earlier side,
a spike in trade tensions surrounding Huawei and/or a more rapid #1: Corporate Carve-Outs Recent trips to Europe and Japan give us
deterioration in corporate margins are the key areas on which we are increased confidence that our ‘deconglomeratization’ thesis still has
focused. Not surprisingly, banks are growing apprehensive, and as a legs to run much further into this cycle. Several factors influence
result, they are tightening lending standards, which is creating minor our thinking. First, many big conglomerates are underperforming in
shock waves in our recession model. One can see this in Exhibit 74. certain regions of the world. General Electric certainly has raised
awareness about the pitfalls of trying to be all things to all people in
In terms of what could go right and extend the cycle, global central the United States. However, our research suggests this problem runs
banks could turn even more dovish and the cloud of uncertainty that much deeper and broader. Said differently, we think that the uptick in
has defined the trade talks could lift. Already, in Asia we see that ‘deconglomeratization’ is a global phenomenon. Indeed, just consider
Australia, New Zealand, India, and Malaysia have cut rates, while in the significant decline in return profiles that we are seeing in Asia,
the United States the Federal Reserve has done a total about face as illustrated in Exhibit 76, which shows how dramatically the returns
since Chairman Powell muttered that the bank’s balance sheet was of conglomerates have fallen to below average from above average
on “autopilot” in late December 2018. Moreover, if President Trump since the Global Financial Crisis.
shifts his focus towards more domestic issues ahead of the Novem-
ber 2020 election, he could not only back away from trade but also
focus on domestic catalysts such as a highway spending reauthoriza-
tion and/or improved drug pricing.
Our bottom line, though, is that the economy is likely to muddle “

through, with quarterly GDP bouncing unevenly between 0.5% and
2.5% before sputtering a bit more consistently in early 2020. Against
Not surprisingly, banks are
that bumpy backdrop, there is a greater probability this cycle of ongo- growing apprehensive, and as
ing rolling regional and/or sectoral recessions (e.g., Europe in 2011,
U.S. Retail in 2013, U.S. Energy in 2016, etc.) versus a 2007-like
a result, they are tightening
broad-based, global catastrophe. Maybe more importantly, though, is lending standards, which is
our strong belief that corporate profits are no longer likely to grow
faster than nominal GDP. If we are right, then it would represent a creating minor shock waves in
major change to the macroeconomic backdrop that we all enjoyed
during the prior decade.
our recession model.
”
EXHIBIT 75 As we show in Exhibit 77, we believe that this opportunity for more
corporate carve-outs is a structural, not a cyclical, one. The real-
The Number of European Union Spin-off Announcements
ity is that return on capital for many large global conglomerates has
So Far This Year Is at Record Levels been in secular decline for some time. Intensifying local competition
18 Number of Spin Off Announcements in Western Europe in many sectors, which we show in Exhibit 78, is certainly a major
Every Year Since 2000 factor, but untimely acquisitions, shifts in regulatory regimes, and
16 poor leadership are also significant contributors to what has emerged
14 as one of the most favorable value creation opportunities for global
private equity firms and thoughtful strategic buyers, we believe.
12
10 EXHIBIT 77
8 Rate of Returns for FDI Declining in Many Areas of the

6 Global Economy
4 Rate of Return on Outward Foreign Direct Investment, %
2 US UK Germany Netherlands
16%
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 14%
Note: 2018 data is annualized. Data as at February 22, 2019. Source: 12%
Morgan Stanley.
10%
8%
EXHIBIT 76 6%
Conglomerates Are Losing Their Advantage In Emerging 4%
Asia, and As Such, More Corporate Repositioning Stories 2%
Are Likely
0%
10-Year Shareholder Returns of Conglomerates (India and SEA) 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15
Minus Total Shareholder Returns of Pure Plays, Basis Points
Data as at December 31, 2016 or latest available year. Source: National
Statistics, OECD.
360
“
Against a bumpy backdrop,
there is a greater probability this
cycle of ongoing rolling regional
-110
and/or sectoral recessions (e.g.,
2003-2012 2007-2016
Europe in 2011, U.S. Retail in
Data as at September 14, 2019. Source: Dealogic, Bain & Company, Asia 2013, U.S. Energy in 2016, etc.)
Conglomerates: End of the Road.
versus a 2007-like broad-based,
global catastrophe. Maybe more
Consistent with this trend, the pace of carve-outs has been surging,
particularly in Europe. One can see this in Exhibit 75. A recent report
importantly, though, is our strong
by Ernst & Young on corporate behavior highlighted that this trend is belief that corporate profits are no
gaining momentum, as fully 75% of European respondents indicated
a carve-out was their preferred method of divestment, up sharply longer likely to grow faster than
from 48% last year. Seventy-nine percent of these same individuals
reported that streamlining their operating model will factor into their
nominal GDP.
divestment plans over the next 12 months. ”

Local and Regional Competitors Are Increasingly The Gap Between Target Returns and Traditional Fixed
Challenging the Returns of Multinational Firms Income Instruments Likely Means a Greater Move into
Top 500 Global Companies Return on Equity, LTM as at 2016, %
Alternative Products...
Multinational Firms Local Firms Median Pension Plan Assumed Return
vs. 30-Year Treasury Rates
Technology
9% Assumed Rate of Return UST 30-Year Yield
Other Consumer
8%
Industrial
Cyclical Consumer 7%
Utilities 6%
All Sectors 5%
Financial
4%
Diversified
3%
Basic Materials
2%
Media & Communciations
Energy 1%
-5% 0% 5% 10% 15% 20% 25% 0%
2000
2010
2014
2002
1992
2004
2016
1994
2018
2006
1996
2008
1998
2012
Data as at January 31, 2017. Source: National Statistics, OECD, The
Economist.
Data as at December 31, 2018. Source: The Pew Charitable Trust.
#2: ‘Yearn for Yield’ Without question, we think that reinvestment

EXHIBIT 80
risk remains one of the biggest concerns in the market today, and as
such, we are constantly looking for creative strategies to satisfy the ...Insurers Have Added Substantially to Private Credit and
ongoing ‘Yearn for Yield’ that we continue to forecast. At the moment, Real Estate Credit in Recent Years
the two areas of the investment management business most under
“attack” by low rates are pension plans and insurance companies, we Change in Asset Allocation Between 2014 and 2017, %
believe. The much hoped for rebound in interest rates after the end of Total
of Quantitative Easing never occurred, and barring a collapse in the 10 2014 2017
dollar, we do not see global rates moving materially higher during the
next few years. Not surprisingly, given this backdrop, many yield-ori- 8
ented allocators of capital have been consistently moving into Private
Credit and Real Estate Credit. One can see this in Exhibit 80.
6
“ 4
The much hoped for rebound in 2

interest rates after the end of QE
never occurred, and barring a 0
P&C Real Life and Annuity P&C Private Life and Annuity
collapse in the dollar, we do not Estate Credit Real Estate Credit Private Credit
Credit
see global rates moving materially Data as December 31, 2018. Source: KKR Insurance Survey
higher during the next few years.
Not surprisingly, given this
backdrop, many yield-oriented
allocators of capital have been
consistently moving into Private
Credit and Real Estate Credit.
”
So, what is driving rates so low? Beyond a strong technical backdrop EXHIBIT 82
from the central banks, there are several factors to consider, we
Wealthy Baby Boomers Are Leading the Surge in Savings
believe, on why rates may stay lower for longer. First, we think that
there are demographic and socioeconomic influences that are lead-
We Are Seeing Across the U.S.
ing to lower rates. We note a strong ‘Yearn for Yield’ evident among U.S. Savings Rate by Age of Head of Household
U.S. consumers, who continue to sock away savings at a heady rate 13%
relative to the current advanced state of the economic cycle. We
can quantify this trend in several of the emerging markets where we
invest, but our data in the U.S. is fairly compelling. One can see this
in Exhibit 82.
6%
For our nickel, we think multiple long-tailed factors are driving the
high U.S. savings rate, including lingering consumer caution in the 3%
post-GFC era and the structural savings needs of an aging society,
particularly relative to incomes (Exhibit 84). Indeed, our research
shows that the savings rate for individuals aged 55 years and older is
now a chunky 13%, which is significant given that this demographic
controls much of the current wealth in the United States. One can
-2%
see this in Exhibit 82. There also has been a sizeable uptick in global
reserves (Exhibit 83). These increases are important because central Under 35 35-44 45-54 55 and Over
banks are looking for safe homes for their assets, particularly if they
Data as at 2013. Source: Moody’s Analytics analysis of 2013 Federal
feel comfortable with the local currency. Reserve data.
EXHIBIT 81
In an Unusual Break from Recent History, Savings Rates EXHIBIT 83

Have Not Declined This Cycle The War Chest of Foreign Currency Reserves Is
12
Recessions US Personal Savings Rate (%)
Increasingly Finding Its Way Into Fixed Income
Securities, Which Is Further Depressing Yields
10 FX Reserves as a % of GDP
Mar-95
Jun-09 Jun-97 Current
8 7.6 Dec-18
7.2
Jun-02 6.8 16.8
Thailand
6.2 39.9
6 China 13.3
22.5
Malaysia 22.6
4 Dec-00 27.1
4.4 Korea 5.5
Dec-07 24.3
2 3.4 10.0
Philippines
21.7
Russia 4.8
0 22.7
Jun-00
Mar-09
Jun-07
Jun-14
Dec-10
Mar-02
Dec-03
Mar-16
Mar-95
Dec-17
Sep-05
Dec-96
Sep-12
Sep-98
India 6.4
13.8
Mexico 4.8
14.3
Data as at April 1, 2019. Source: Bureau of Economic Analysis, NBER, 6.2
Turkey
KKR Global Macro & Asset Allocation analysis. 9.6
Indonesia 6.8
10.9
Data as at January 31, 2019. Source: Respective national statistical

agencies, Haver Analytics.

U.S. Households Are Not Spending Relative to Their Net The Government Has Focused on Stimulating Nominal
Worth This Cycle GDP Through Monetary Policy
US Household Net Worth as % of Disposable Income U.S. Fed Funds Rate, % Points Above/(Below)
U.S.Nominal GDP Growth
Personal Savings Rate (%, RHS)
3yr Moving Avg.
700% 14%
Tight Monetary Policy

6% 1982
12% 5.7%
650% 4%
10% 2009
2%
600% 0.8%
8% 0%
550%
Loose Monetary Policy

2019e
6% -2% -2.6%
500% -4%
4% 2005 2012
1978 -3.7%
-4.1%
-6% -5.6%
450% 2%
2002
2008
2005
2014
1960
1990
2017
1984
1966
1969
1996
1999
1963
1993
1972
1978
1987
1975
2011
1981
'81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11 '14 '17 '20
Data as at May 20, 2019. Source: Bloomberg. Data as at May 18, 2018. Source: Bloomberg, KKR Global Macro & Asset
Importantly, though, we think selectivity is warranted when looking

for yielding assets in today’s low rate environment. For our nickel, we EXHIBIT 86
would try to own yielding assets linked to nominal GDP. For example, Easy Monetary Policy Drove a Wide Dispersion Between
in both Europe and the United States we are finding compelling op- Financial Real Asset and Real Economy Prices
portunities in the Asset Based Finance arena to provide attractive
short-term housing loans to qualified buyers in good growth markets. Financial and Real Economy Prices Total Return
Performance in Local Currency Since January 2009, %
In our view, these types of investments provide not only collateral
in what is likely a late cycle environment but also produce upfront
250%
cash flows with plenty of equity cushion. Finally, assets linked to Asset prices Real Economy Prices
nominal GDP also provide inflation protection and macro ballast in an 200%
environment where we know that the ‘Authorities’ are running poli-
150%
cies that are quite aggressive. Specifically, as we show in Exhibit 85,
holding nominal interest rates below nominal GDP is an effort to not 100%
only inspire growth but also to defease the substantial debt liabilities 50%
that have been accumulated during the last decade since the GFC.
0%
-50%
Commodity
S&P 500
European HY
US HY
MSCI World
SXXP
MSCI EM
Topix
US IG
Germ. Bond
European IG
Gold
US Bond
Japan Bond
US Nominal GDP
EU Nominal GDP
US House Price
US wages
European wages
US CPI
European CPI
EA House Price
“
We note a strong ‘Yearn for Yield’ Data as at December 31, 2017. Source: Goldman Sachs.
evident among U.S. consumers,
who continue to sock away
savings at a heady rate relative to
the current advanced state of the
economic cycle.
”

#3: Own Some Secular Growth Winners That Are Cash Flow Com- EXHIBIT 88
pounders Amidst Slowing Nominal GDP As we mentioned earlier,
We Are Looking for Companies With True Economies of
there has been a notable deceleration in China’s nominal growth rate
(Exhibit 46). In addition, we also think that disruptive forces, particu-
Scale in Key Secular Growth Areas Such as Data
larly in the Technology, Healthcare, and Financial Services Technol- Data Interactions per Connected Person per Day
ogy sectors, are creating something akin to an industrial revolution
IDC estimates that every connected person 4,909
that we have not seen since the 1870s. Against this backdrop of a in the world will have one digital interaction
slowing China and increasing disruption, we have seen the percent- every 18 seconds by 2025. Today more than
age of companies with top line growth of eight percent or more five billion consumers interact with data
every day; by 2025 that number will be six
decline to 23% of the MSCI All Country World, compared to 45% in billion or 75% of the world's population
2000/2001 (Exhibit 87). In our humble opinion, many of these struc-
tural growers now enjoy not only a cheaper cost of capital but are
increasingly benefiting from a network effect that allows them to gain
greater operating leverage than their peers. In many instances we 1,426
are witnessing fast-moving corporate ‘winners’ taking market share
while maintaining pricing, and as such, the outlook is quite bright, 584
298
we believe. Key markets like cybersecurity and value-added payment
systems are obvious examples of this new world order playing out,
but we also believe that this ‘winner take all approach’ is also occur- 2010 2015 2020 2025
ring in logistics, defense electronics, and even food and healthcare Data as at November 2018. Source: IDC. https://www.seagate.com/files/
delivery platforms that we see in Asia. Importantly, though, we prob- www-content/our-story/trends/files/idc-seagate-dataage-whitepaper.pdf
ably would avoid or own smaller positions in some of the high profile
growth companies in areas where anti-monopoly or anti-competitive
behavior is being charged by elected officials in Europe and the At the moment, we actually are seeing better value in the public
United States. markets, particularly relative to many private markets, in countries
such as China and the United States. Implicit in what we are saying is
EXHIBIT 87 that we believe that some private company valuations have run too far,
Few Companies Generate Top-Line Growth These Days too fast to be supported through initial public offerings the way some
of the Venture Capital and Growth communities may hope. Hence, we
% of MSCI World Companies With Expected Sales maintain our more cautious stance on Private Growth and other early
Growth of Greater Than Eight Percent
stage financings in our target asset allocation.
50%
“
Against this backdrop of a slowing
40%
China and increasing disruption,
we have seen the percentage of
companies with top line growth
30%
of eight percent or more decline
to 23% of the MSCI All Country
23%
World, compared to 45% in
20%
98 00 02 04 06 08 10 12 14 16 18 2000/2001. In our humble opinion,
Data as at December 31, 2018. Source Bloomberg, S&P. many of these structural growers
now enjoy not only a cheaper cost
of capital but are increasingly
benefiting from a network effect
that allows them to gain greater
operating leverage than their
peers.
”
Private Investments in Six of the 10 Best-Funded U.S. Demand for European Logistics Has Exceeded Supply
Tech Startups to Go Public Since 2015 Have Fallen from Every Year Since 2009
the Peak Levels They Hit in Funding Rounds Before the European Logistics Thousands of Square Meters, %
Companies’ Stock Debuts
30 10.0%
The Top 10 Best Funded U.S. Tech Companies to Go Public Since 2015 Completions 9.0%
25 Take Up
8.0%
Vacancy
7.0%
20
6.0%
15 5.0%
4.0%
10
3.0%
2.0%
5
1.0%
0 0.0%
2010
2011
2017
2009
2013
2012
2014
2016
2018
2015
Data as at 2018. Source: CBRE, Euromonitor.
EXHIBIT 91
Data as at May 25, 2019. Sources: Pitchbook (Total raised), company
SEC filings (private share prices, amount raised at peak price), Wall Street
We Are Bullish on Data and Analytics Across a
Journal. Variety of Sectors
Industry Datasphere CAGR, 2018-2025, %
Ultimately, we believe that the poor performance of several recent Healthcare is poised to grow given the advancements in healthcare
analytics, increasing frequency and resolution of MRIs, and other image
IPOs in the Growth arena support our view that cash flow matters.
and video-related data being captured in today’s advanced modes of
One can see this in Exhibit 89. To be sure, we are not back to 1999, medical care
but we do believe that several recent investment rounds in the Pri- 36%
vate Growth markets have been at speculative levels. In our humble 30%
opinion, investors should avoid where possible business models that
27% 26%
are predicated on low marginal revenue economics amidst contin- 25%
ued high fixed costs. We also believe that estimates around the total
addressable market have been exaggerated in certain instances. Im-
portantly, though, we view recent disappointment in performance as
a long-term opportunity, and accordingly, we do expect to shift our
significant underweight in Private Growth back to an equal weight or
overweight as leading investors in the sector are forced to acknowl-
edge that some of their valuation metrics have gotten too robust.
Global Healthcare Manufacturing Financial Media and
Services Entertainment
“
Data as at November 2018. Source: IDC. https://www.seagate.com/files/
In an odd time characterized www-content/our-story/trends/files/idc-seagate-dataage-whitepaper.pdf
by low interest rates and

sluggish global GDP growth, we
expect above average periodic
dislocations across the capital
markets.
”
#4: Buy Dislocation/Dispersions As we described in our April 2019 EXHIBIT 93
Insights note The Uncomfortable Truth, we are living in an odd time
Periodic Dislocations Mean That Investors Need to be
characterized by low interest rates and sluggish global GDP growth.
Against this backdrop we expect above average periodic disloca-
More Nimble Than in the Past
tions across the capital markets. Indeed, as we show in Exhibit 92, % of Loans Above Par
our implied default model has hit recessionary levels several times
since 2009, despite the reality that we have not yet had a technical 90%
recession in the United States. We view this backdrop as an opportu-
80%
nity because it confirms our strong view that assets are consistently
being mispriced. 70%
60%
EXHIBIT 92
50%
Our Implied Default Rate Has Hit Recessionary Levels
Several Times, Despite the Reality That We Have Not Yet 40%
Had a Technical Recession in the United States 30%
U.S. High Yield Implied Default Rate, % 20%
Implied Default Rate Avg (6.2%) 10%
0%
14% Oct -02
Apr-19
Jun-18
Oct-18
Dec-18
Feb-19
Dec-17
Apr-18
Aug-18
Feb-18
14.7% Oct-11 Feb -16
12% 11.2% 11.0%
Data as May 31, 2019. Source: LSTA.
10%
8% However, this phenomenon is not just a story in Credit. Rather, it

pervades all asset classes, including Public Equities. To understand
6% this, we need not look any further than China, where technology/
Jun -19
growth stocks corrected materially in the fourth quarter of 2018
4% 4.0% (Exhibit 94). At the same time, stocks in Europe with similar growth
attributes barely budged during the same period (Exhibit 95).
2%
Jun-07
0.8% EXHIBIT 94
0%
1990 1994 1998 2002 2006 2010 2014 2018 China Equities, Technology Growth Stocks in Particular,
Data as at June 6, 2019. Source: Bloomberg. Have Experienced a Massive Correction…
MSCI China Price-to-Sales
8
Info Tech Average Since 1995
7
“ 3
In our humble opinion, investors 2
should avoid where possible 1
business models that are 0

predicated on low marginal
2011
2013
1999
2001
2003
2015
2005
2019
1995
2009
2017
2007
1997
revenue economics amidst Data as at May 31, 2019. Source: MSCI, Factset.
continued high fixed costs.

”

…While in Europe, Growth Stocks Are Still Expensive As the Tailwind from Quantitative Easing Slows,
Eurostoxx 600 High vs. Low Sales Growth PE
the Macro Environment for Security Selection
Premium Should Improve
100%
Average Pair-wise Correlations of All S&P 500 Stock Combinations
90% (Daily Returns 2Q86-April 30, 2019)
80%
80%
Clustered / macro market
70% 70%
60% 60%
50%
50%
40%
40%
30%
30%
20%
10%
20%
0% 10% Differentiated /
96 98 00 02 04 06 08 10 12 14 16 18 stock picker's market
0%
Note: High sales growth is greater than eight percent while low sales
2010
2000
2014
1990
2002
1986
1992
2004
2016
1988
1994
2018
2006
1996
2008
1998
2012
growth is less than four percent. Data as at May 31, 2019. Source: IBES,
Datastream, Goldman Sachs Global Investment Research.
Data as at April 30, 2019. Source: BofA Merrill Lynch U.S. Equity &
Quantitative Strategy.
Maybe of more significance, though, is that we are finally seeing

dispersions widen out. This shift in the macroeconomic backdrop as
EXHIBIT 97
liquidity exits the system likely means that stock picking and security
selection are going to become more important again. Indeed, both Dispersions Are Now Just Starting to Widen. This Shift Is
Exhibits 96 and 97 speak to this new reality where the micro might Bullish for Security Selection
begin to trump the macro again. If we are right (and we think that
Average Intersector Correlations vs. Pairwise
we are), some asset allocators could be exiting certain hedge funds
Correlations Within Sectors
and long only managers at a time when their performance is likely to
improve. 2.0
Stocks more differentiated
1.8 than sectors
“ 1.6
Meanwhile, in the Emerging 1.4
Markets, as countries move up 1.2
the GDP-per-capita curve, we 1.0
continue to see demand for basic 0.8
healthcare offerings, including 0.6
private insurance and specialized 0.4

Sectors more differentiated than stocks
surgery care, especially in fast- 0.2

2001
2010
2000
2008
1998
2005
2011
2009
2013
2017
1999
2003
2007
2012
1997
2014
2002
2004
2016
2018
2015
2006
growing consumer markets such

Data as at December 31, 2018. Source: BofA Merrill Lynch U.S. Equity &
as Brazil, China, Indonesia, and Quantitative Strategy.
India.
”

#5: Experiences Over Things As a firm, KKR has been investing EXHIBIT 99
behind this theme for the lion’s share of our team’s nearly eight years
Healthcare Has Been the Only Consistent Growth Area in
at the firm. Interestingly, when we re-underwrote this theme from a
macro perspective again this summer, we actually came away more
U.S. Personal Consumption Since 1967
bullish, not less. Key to our thinking is that the pace of implementa- 75% U.S. Personal Consumption Expenditures, % of GDP
tion appears to have accelerated in recent quarters. Importantly,
we do not think the trend towards experiences is just the ‘Amazon’
effect. Rather, we believe that key influences such as increased
70% PCE % GDP 68%
healthcare spending, heightened rental costs, and rising telecommu- Avg.1968-2018 = 63.0%
nications budgets (e.g., iPhones) are leaving less and less discre-
tionary income for traditional items, particularly mainstream retail.
Recent trips to continental Europe as well as Asia have lent support 65%
to our view that this trend towards experiences is global in nature
and cuts across a variety of demographics. For example, in Japan
and Germany, aging demographics are boosting the use of later 60%
stage healthcare offerings, while younger individuals in the U.S. are PCE (ex Healthcare) % GDP
embracing more health, wellness and beautification. Avg. 1968-2015 = 54.0%
54%
EXHIBIT 98 55%
Healthcare, Consumer Services, Recreation and Travel Consumer Spending ex-Healthcare

remains at average levels
Now Outpace Spending on Traditional Things 50%
1967
2017
1987
2007
2012
1982
1997
1977
2002
1992
1972
Wallet Share: Goods vs. Services
20% 23%
Retail Goods (RA) Data as at April 29, 2019. Source: KKR Global Macro & Asset Allocation
Healthcare (LA) analysis, Haver Analytics, BLS, IDC.
Consumer Services,
Recreation &Travel (LA) 22%
19% Meanwhile, in the Emerging Markets, as countries move up the GDP-
per-capita curve, we continue to see demand for basic healthcare
offerings, including private insurance and specialized surgery care,
21%
especially in fast-growing consumer markets such as Brazil, China,
18% Indonesia, and India. Importantly, the trend towards services extends
well beyond just the Healthcare sector. Recreation, travel, and leisure
20% all appear to be market share gainers versus basic ‘things’ that con-
sumers traditionally bought with their disposable income. Moreover,
17% consumers are more willing to use the Internet to price shop, making
19% them more fickle in some instances.
As one might guess, there are times when our team does macro
16% 18% analysis on a particular topic while working with a deal team on
an investment. An on-the-ground visit to a certain country and/or
Mar-10
Mar-11
Mar-09
Mar-19
Mar-13
Sep-09
Mar-04
Mar-12
Sep-13
Mar-14
Mar-06
Mar-08
Mar-16
Mar-18
Mar-05
Mar-15
Sep-04
Sep-10
Sep-11
Sep-14
Mar-07
Mar-17
Sep-06
Sep-08
Sep-16
Sep-18
Sep-05
Sep-15
Sep-07
Sep-17
Sep-12
company can help to confirm that the micro and the macro are totally
Data as at March 31, 2019. Source: Evercore ISI. in sync, which is what we are usually searching for when we deploy
capital on behalf of our limited partners. Our recent trip to China was
one of those times, as Frances Lim and I had several corporate meet-
“ ings that confirmed her bullish thesis about the massive opportunity
set linked to the burgeoning Chinese millennial population. By way
We are finally seeing dispersions of background, of the total 828 million millennials in Asia, Frances
widen out. This shift in the estimates that fully 40%, or 330 million, are today in China. To put
the 330 million in perspective, we would note that there are ‘just’ 66
macroeconomic backdrop as million millennials in the U.S. One can see this in Exhibit 100. Said
differently, China’s millennial population alone is now roughly the
liquidity exits the system likely same size as the entire population of the United States. Also, as we
means that stock picking and show below, millennials are now a sizeable proportion of the overall
Chinese population. Given this heft and growth, they will unequivo-
security selection are going to cally dominate the labor force and consumer markets over the next
become more important again. two decades.
”
Against this current backdrop, we have come to appreciate that Chi- EXHIBIT 101
nese millennials have developed distinct consumption preferences in
Chinese Millennials Save Less and Allocate Three Times
recent years. As we show in Exhibit 101, they spend about one-third
more on leisure. They value fresher and healthier food and product
More of Their Income to Leisure
alternatives than their parents, and they price comparison shop much Spending Breakdown China Overall vs. Chinese Millennials
more than their elders and many of their global peers. We link many
of these traits to their tech-savvy ways – and it is not just goods Housing, Transport, Utilities Shopping, Food
purchased. Just consider that it only took Didi, China’s ride hailing Shopping, Non-Food Leisure
leader, three years to reach 50% penetration, while Uber has yet to
reach 50% penetration after seven years in the U.S. Meanwhile, Ali- 100%
Pay has only taken four years to hit a penetration rate of 50%, while 9%
90%
ApplePay has yet to reach the 50% milestone in the United States. To 80%
14% 30%
be sure, some of this accelerated migration in China is linked to the 70%
country’s desire to use technology to accommodate its population of 28% 16%
60%
1.4 billion as well as to create national champions, but it also speaks
50%
to the rapid adoption of technology throughout the country. Favorable 16%
40%
logistics also help greatly in a country where courier costs are low
30%
and population density is high. 49%
20% 37%
EXHIBIT 100 10%
0%
With More than 6x as Many Millennials in Asia than in China Overall Chinese Millennials
the U.S. and Europe Combined, the Asian Millennial Will
Data as at December 31, 2016. Source: Goldman Sachs Global Investment
Reshape the Global Consumer Market Research.
2017: Number of Millennials
Born 1980-1994 (Millions)
EXHIBIT 102
828
We Believe That Potential Spending of High Earners
5.0x the number of millennials in China
Will Be Oriented Towards Upgrades and Experiential
and 12.5x the total number in Asia Spending
relative to the U.S
Millions of Chinese Living in High Income Households
330 222
328
60 66
130
Euro Area U.S. India China Asia
47
Asia includes China, India, Japan, Hong Kong, Korea, and ASEAN
(Indonesia, Malaysia, Philippines, Thailand, Singapore, Vietnam). Data as
at June 24, 2017. Source: United Nations World Population Prospects,
Haver Analytics.
2018 2028 2038
Data as at 2018. Source: Global Demographics estimates, HSBC.
“
Against this current backdrop,
we have come to appreciate
that Chinese millennials have
developed distinct consumption
preferences in recent years.
”
Millennials Have Different Attitudes and Buying Habits Technology Has Been the Key to EPS Growth This Cycle
Than Older Generations LTM Earnings, January 2009 = 100
300
Millennials Attitudes, Buying Habits and Attitudes
According to a 2018 Harris Poll
83% World Technology
78% 250
72%
World ex Tech
69%
Europe
200
150
100
View Live Plan to Increase Prefer Have Participat-
Experiences as Spending on SpendingMoney ed in a Live
Helping Experiences in on an Experience Event in the Last
Connection With the Coming Year or Event Over 12 Months 50
Friends, Buying
Community or Something
People Around Desirable
the World
0
Data as at 2018. Source: Harris Poll of Millennials. 85 88 91 94 97 00 03 06 09 12 15 18
Data as at June 6, 2019. Source: Worldscope, Datastream, and Goldman
Sachs Global Investment Research.
SECTION III: Investment Considerations/Risks
#1: Reliance on Technology While maybe not as extreme as 2000, EXHIBIT 105
this cycle has clearly been heavily technology dependent. How
dependent? As Exhibit 104 shows, essentially all the earnings growth
Technology Remains an Area of Outsized Growth in the
this cycle has come from the Technology sector. However, it is not Credit Markets These Days
just corporate profits that are being driven by technology. Indeed, we Growth in Par Outstanding by Sector, 2009-2018
recently heard one major CEO in the real estate sector acknowledge
that fully 35% of commercial lease ups during the past 12 months
Leveraged Loans High Yield
were directly linked to the Technology sector.
Technology, Media and

Telco Has Driven Nearly
38.5 40% of Growth in the Loan
“ Market This Cycle
However, it is not just corporate

profits that are being driven by 21.5
3.9
technology. Indeed, we recently 29.9 11.6 7.7 4.0
heard one major CEO in the real 17.0
10.7 11.5 11.2 13.3
20.7
1.3
estate sector acknowledge that 0.4 -3.1
fully 35% of commercial lease ups

Healthcare
Industrials
Basics
Utilities
Consumer
Financials
TMT
Energy
during the past 12 months were

directly linked to the Technology Data as at December 31, 2018. Source: LCD, Morgan Stanley.
sector.
”

On the debt side, a similar concentrated bet is being made. As we EXHIBIT 106
show in Exhibit 105, Technology, Media, and Telecommunications now
Trade as a Percentage of Global GDP Peaked More Than
accounts for around 40% of total issuance for Levered Loans, and it
is certainly sizeable in the High Yield market as well.
10 Years Ago
Global Merchandise Exports as a % of Global GDP
At the moment, we find it hard to avoid allocating capital to Technol- Sep-08
ogy deals because of all the technological change we see transpiring 28
26.4
around the world. However, in the asset allocation accounts where
we do portfolio construction, we are becoming increasingly valua- Feb-19
tion sensitive, and as such, we are watching our pace of deployment 24 22.3
closely in the Technology arena. We also are shying away from Tech-
nology deals where the embedded value creation in the deal depends
on huge cost savings and high leverage levels. So, our bottom line 20
is certainly not to avoid investing in parts of the Technology sector.
Rather, we are acknowledging that the sector’s outlook has gotten in-
creasingly frothy, and as such, we are proponents of aggressive use
16
of many of the sophisticated asset allocation tools that we have been
advocating for some time (see October 2018 Insights note Rethinking
Asset Allocation for further details).
12
80 85 90 95 00 05 10 15 20
#2: An Increasingly Complex Geopolitical Environment The populist
and geopolitical disruptions that my colleagues Ken Mehlman and Data as at May 9, 2019. Source: IMFWEO, Haver Analytics.
Travers Garvin predicted in each of the past three years have again
manifested themselves in 2019. These trends are disrupting global
trade, paralyzing the largest democracies in Europe, and sidelining EXHIBIT 107
policymaking in the U.S. While the U.S. and China may ultimately Geopolitical, Societal, and Technological Changes Are
muddle through on tariff matters in the near-term, the broader geo-
Now Having a Substantial Impact on Both Economies
political struggle between these two nations has now been exposed
– on trade, on technology, on rule of law and national security -- and
and Markets
it is not likely to abate.
GEOPOLITICAL SOCIETAL TECHNOLOGICAL
Importantly, there is political instability across all regions these days. Failure of governance Adverse consequenc-
Failure of urban plan-
For example, in Europe the recent elections for the European Parlia- (global, national,
ning
es of technological
ment confirmed that the balance of power is shifting away from the regional) advances
traditional center parties (Christian-Democrat and Social-Democrat),
Breakdown of critical
which – for the first time since 1979 (first European Parliament elec- Interstate conflict Food crises infrastructure and
tions) – have lost their combined majority. The old, post-World War II networks
political parties, built around class and economic structures and party
loyalty have eroded with the increased prominence of identity, migra- Large-scale terrorist Large-scale involun- Large-scale cyberat-
attacks tary migration tacks
tion and climate change as core voting issues. At the same time,
radical populist parties, while gaining seats, remain below the 25% Profound societal
State collapse or crisis Data fraud/thefts
threshold and are strongly internally divided on core issues, such as instability
migration and Russia. In this context, Liberals (economically to the
Weapons of mass
right and socially on the left) and Greens (who have now become an Infectious diseases
destruction
established political force in Northwestern Europe) will have a strong
voice in the upcoming appointments of key personnel (presidency of Water crises
EU Commission, EU Council, EU parliament and European Central
Bank) and legislative initiatives over next five years. Both parties Source: The Global Risks Report, World Economic Forum.
have a strong pro EU agenda.

Meanwhile, French President Macron has maneuvered himself into Also, in this populist environment, the Technology and Healthcare
the midst of the EU decision-making machinery. He is not only build- sectors can expect bipartisan examination, and potentially pro
ing a coalition with the liberals but also leveraging that position to consumer legislation (for example: drug prices and surprise medi-
seek a strengthening of the institutional structures of the European cal billing) and regulatory actions (Google antitrust). Beyond these
Union, a stronger European backbone on the international scene, industries, expect continued scrutiny on gun sales, consumer loan
including on trade, and a further injection of French influence into products, bankruptcies, treatment of workers, and outsourcing. So
the EU decision-making machinery. In the United Kingdom, polariza- needless to say, our call for corporate and investment leaders to
tion linked to Brexit is only further intensifying, and it is putting the remain acutely focused on establishing and demonstrating the social
Conservative Government, the Labour Party, the two-party politics value of their businesses remains in full force.
system (Conservatives-Labour) and the Four Nations Union (Eng-
land, Scotland, Wales, Northern Ireland) under severe, even existen- EXHIBIT 109
tial, pressure. The Wave of Discontent Across Europe Taps into
EXHIBIT 108
Concerns About Globalization, Immigration, a Dilution of
National Identity, and the EU Itself3
Regulatory Issues and Investment, Not Tariffs, Were of
% of Votes Won By Nationalist Party in Most Recent European Election
Paramount Concern in a Recent U.S.-China Business
Council Survey
Impact of U.S. - China Trade Tensions on Business
Increased Scrutiny From

Regulators in China 28%
Delay or Cancellation of Investment

in the U.S. or China Due to Uncertainty 15%
Lost Sales Due to Tariffs That Have

13%
Been Implemented by China 1%-8%
Lost Sales Due to Customer
9%-16%
Uncertainty of Continued Supply 11% 17%-24%
25+%
Increased Scrutiny From
Regulators in the U.S. 8%
Other 6%
Uncertainty Due to Trade Tensions 6%
Lost Sales Due to Concerns About Doing

Business with American Companies 6%
Increased Sales or Opportunities 4%
Lost Sales Due to Tariffs That Have

Been Implemented by the U.S. 2% Data as at April 2019. Source: BBC.
Data as at 2018. Source: U.S. China Business Council Survey.

“
The U.S. certainly remains a hot spot of political uncertainty as well. So needless to say, our call for
Already, policymakers have begun to pivot to the 2020 elections,
with a record 23 Democrats seeking to oppose President Trump.
corporate and investment leaders
Such a large field, combined with Democratic base voters’ dislike to remain acutely focused on
of President Trump, is likely to pull Democratic policy to the left.
President Trump welcomes confrontation and will likely look for establishing and demonstrating
nearly daily opportunities to stoke this fight, hoping to frame 2020 as
a choice, not a referendum on his leadership. A critical question is
the social value of their businesses
how this drama impacts U.S./China trade, EU/U.S. trade, Japan/U.S. remains in full force.
trade, NAFTA/USMCA – particularly as President Trump uses tariffs
or the threat of trade barriers to reinforce his disruptive bona fides
”
and focus attention on topics he favors (see Mexican tariffs and im-
migration).
3 https://www.bbc.com/news/world-europe-36130006

Given all the above, our view is that investors should make sure EXHIBIT 111
to maintain some additional liquidity or shock absorbers in their
…Though Better Productivity Growth Has Been an
portfolios. Hence, we have made the decision at mid-year to add a
little more Cash to our portfolio. However, there is a bigger shift in
Important Offset to Rising Wages, Keeping Unit Labor
approach that should be implemented, we believe. Specifically, as
Costs Stable
Ken and Travers have been advocating through their work at KKR, U.S. Unit Labor Cost* (8-quarter average)
investors need to spend more time on the “soft stuff,” including
reputational risks. To this end, we believe that all allocators of capital 4.0% More
wage
should carefully assess whether companies and industries act like
pressure
monopolists, can appropriately mitigate the negative externalities of 3.0%
their business models, and thoughtfully consider business practices
that are “allowed but not proud” – and look to invest with companies 2.0%
who credibly maintain their social “license to operate.” This approach
1.0%
certainly applies not only to new technology platforms, but really to
all business behavior. Finally, we also believe that short-term greed 0.0%
will lead to long-term decline in value; said differently, long-term
thinking about corporate positioning, culture, and community engage- Less
-1.0% wage
ment has never been more important. pressure
-2.0%
#3: Corporate Margins Are at Risk One of the benefits of working
in the KKR Global Macro & Asset Allocation team is that it provides -3.0%
a wonderful window into the key questions that potential investors '85 '90 '95 '00 '05 '10 '15 '20
and/or companies are wrestling. Right now our backlog for deal-re- * Unit Labor Cost Growth = Wage Growth - Productivity Growth. Data
lated work is highest in the area of corporate profitability. Specifical- as at March 31, 2019. Source: Bloomberg, Haver Analytics, Bureau of
ly, a lot of the ‘swing factor’ we see around profitability for both new Economic Analysis.
investments and existing portfolio companies centers around margin
sustainability. In particular, will downward pressure on operating
leverage – most often driven by higher wages amidst limited pricing Coming into 2019, we had more conservative operating margins
power – dent EBITDA margins more than budgets suggest at this assumptions than the consensus, expecting margins to compress by
point in the cycle? As we show in Exhibits 110 and 111, we think that 20 basis points or so rather than expand for a third straight year.
the answer is yes more often than not at at this point in the economic Consensus has since converged towards our view, and the analyst
cycle, though productivity growth has emerged as a key buffer. community now expects margins to fall to 11.3% this year from 11.5%
in 2018. As we look ahead into 2020, though, we still continue to
EXHIBIT 110 think that operating margins will come under additional pressure
We Believe That Slowing Growth Amidst Higher Wages again. As we show in Exhibit 110, our proprietary model for tracking
Will Become a Headwind to Margins in 2019… the revenue-wage differential falls towards just one percent by the
fourth quarter of 2019. In our base case, we assume hourly earnings
S&P 500 Revenue Less Wage Growth Scenarios, % of 3.2% and revenue growth of 4.3%. In our bear case, the revenue-
Revenue Growth less Wage Growth wage differential turns negative by the end of this year, a backdrop
Base that last occurred in 2007.
Bear
Bull
4Q18e
10%
5.3%
5%
4Q19e “
0%
1.0%
Coming into 2019, we had more
-5% conservative operating margins
-10%
assumptions than the consensus,
-15%
expecting margins to compress by
-20%
20 basis points or so rather than
'96 '99 '02 '05 '08 '11 '14 '17 '20 expand for a third straight year.
Data as at April 30, 2019. Source: Bloomberg, Haver Analytics, KKR
Global Macro & Asset Allocation analysis.
Consensus has since converged
towards our view.
”

EXHIBIT 112 SECTION IV: Conclusion
Productivity Growth Climbed to 1.7% Year-over-Year in the
This is the top to, uh, you know, what we use on stage, but it’s very, very
First Quarter, the Fastest Pace Since 2010 special because, if you can see, the numbers all go to eleven. Look…,
U.S. Productivity Growth right across the board. Eleven, eleven, eleven and then…
(Output / Hours Worked)
Nigel Tuffnel, Spinal Tap
6%
5% We have been doing macroeconomic analysis for nearly two decades,
4% 1Q19 and it certainly feels to us right now that – after the most recent tar-
3% 1.7% iff confrontation with China, Mexico, and India – the current environ-
ment has gone to eleven on a scale of one to 10. This reality humbles
2%
us because it means that the risk of a blunder for macro investors
1% and asset allocators is extremely high – even for those who have
0% been navigating global markets for quite some time. The stakes are
-1% also higher, as we are now likely living in a world of lower returns
'90 '95 '00 '05 '10 '15 '20 with above average dispersions.
Data as at March 31, 2019. Source: Bureau of Labor Statistics, Haver

Against this backdrop, we are relying more than ever on the propri-
Analytics.
etary macro frameworks that we have built over the last two decades
to guide our thinking. At the moment, our work is telling us to own
EXHIBIT 113
more assets linked to nominal GDP as part of our goal of frontloading
as much yield as possible in the portfolio. It is also telling us to hold a
Is The Trade War Really Having an Impact on Sourcing little more Cash to be able to lean into periodic dislocations. Beyond
Costs and Logistics? Yes, It Absolutely Is Cash, it likely means owning more Opportunistic Credit and Special
Situations. Finally, we also feel compelled to embrace Complexity
U.S. Goods Imports, 3-Month Average, Y/y %
through corporate carve-outs in our Energy, Private Equity, Real
Vietnam Taiwan Korea China Estate, and Infrastructure allocations.
35 Vietnam +37%
There are clearly risks to consider. Tariffs are undoubtedly overhangs
30 Taiwan +22% to both growth and confidence, and as we indicated earlier, we view
25 the U.S.-China tensions as much more concerning than the U.S.-
Korea +16%
20 Mexico ones (and we do not mean to belittle them either). Beyond
15 heightened geopolitical tensions, we think both corporate margins
10 and excesses in the Technology sector warrant investor attention.
5
0 Overall, though, we think the most likely outcome is more of a muddle
-5 through one – one that is defined by isolated downturns that create
-10 short-term dislocations. Ultimately, though, low rates, de-levered
China -14% financial institutions, and accommodative central banks should help
-15
-20 to prevent a 2007 repeat. So, stick to the plan. If we are right, then
we think our existing asset allocation framework should continue to
Jan-14
Jun-14
Nov-14
Apr-15
Sep-15
Feb-16
Jul-16
Dec-16
May-17
Oct-17
Mar-18
Aug-18
Jan-19
serve us well. Said differently, if ‘it ain’t broke, don’t fix it.”
Data as at June 3, 2019. Source: EvercoreISI.

“
At the moment, our work is telling
That said, we note that the recent upturn in productivity has been an
important mitigant. Indeed, as we show in Exhibit 112, productivity
us to own more assets linked to
actually jumped 1.7% year-over-year in the first quarter of this year, nominal GDP as part of our goal
which is the fastest pace since September 2010. Rising productiv-
ity could be a material offset to the negative operating margins we
of frontloading as much yield
have seen in prior cycles, as it helps to keep unit labor costs stable as possible on the portfolio. It
(Exhibits 110 and 111). However, if trade tensions continue to ratchet
up rather than down (which is our base view), CEOs may once again is also telling us to hold a little
pull back on capital expenditure – which is key to productivity – at more Cash to be able to lean into
exactly the time spending needs to increase (to boost productivity).
periodic dislocations.
”
Important Information
References to “we”, “us,” and “our” refer to Mr. McVey not intended to, and does not, relate specifically to any events or targets will be achieved, and may be signifi-
and/or KKR’s Global Macro and Asset Allocation team, as investment strategy or product that KKR offers. It is be- cantly different from that shown here. The information in
context requires, and not of KKR. The views expressed ing provided merely to provide a framework to assist in this document, including statements concerning financial
reflect the current views of Mr. McVey as of the date the implementation of an investor’s own analysis and an market trends, is based on current market conditions,
hereof and neither Mr. McVey nor KKR undertakes investor’s own views on the topic discussed herein. which will fluctuate and may be superseded by subse-
to advise you of any changes in the views expressed quent market events or for other reasons. Performance
herein. Opinions or statements regarding financial This publication has been prepared solely for informa- of all cited indices is calculated on a total return basis
market trends are based on current market conditions tional purposes. The information contained herein is with dividends reinvested. The indices do not include
and are subject to change without notice. References to only as current as of the date indicated, and may be
any expenses, fees or charges and are unmanaged and
a target portfolio and allocations of such a portfolio refer superseded by subsequent market events or for other
should not be considered investments.
to a hypothetical allocation of assets and not an actual reasons. Charts and graphs provided herein are for
portfolio. The views expressed herein and discussion of illustrative purposes only. The information in this docu- The investment strategy and themes discussed herein
any target portfolio or allocations may not be reflected ment has been developed internally and/or obtained may be unsuitable for investors depending on their spe-
from sources believed to be reliable; however, neither cific investment objectives and financial situation. Please
in the strategies and products that KKR offers or invests,
KKR nor Mr. McVey guarantees the accuracy, adequacy note that changes in the rate of exchange of a currency
including strategies and products to which Mr. McVey
or completeness of such information. Nothing contained
provides investment advice to or on behalf of KKR. It may affect the value, price or income of an investment
herein constitutes investment, legal, tax or other advice
should not be assumed that Mr. McVey has made or will adversely.
nor is it to be relied on in making an investment or other
make investment recommendations in the future that are
decision. Neither KKR nor Mr. McVey assumes any duty to, nor
consistent with the views expressed herein, or use any
or all of the techniques or methods of analysis described undertakes to update forward looking statements. No
There can be no assurance that an investment strategy
herein in managing client or proprietary accounts. Fur- representation or warranty, express or implied, is made
will be successful. Historic market trends are not reliable
ther, Mr. McVey may make investment recommendations or given by or on behalf of KKR, Mr. McVey or any other
indicators of actual future market behavior or future per-
and KKR and its affiliates may have positions (long or formance of any particular investment which may differ person as to the accuracy and completeness or fairness
short) or engage in securities transactions that are not materially, and should not be relied upon as such. Target of the information contained in this publication and
consistent with the information and views expressed in allocations contained herein are subject to change. no responsibility or liability is accepted for any such
this document. There is no assurance that the target allocations will information. By accepting this document, the recipient
be achieved, and actual allocations may be significantly acknowledges its understanding and acceptance of the
The views expressed in this publication are the personal different than that shown here. This publication should foregoing statement.
views of Henry McVey of Kohlberg Kravis Roberts & Co. not be viewed as a current or past recommendation or a
L.P. (together with its affiliates, “KKR”) and do not nec- solicitation of an offer to buy or sell any securities or to The MSCI sourced information in this document is the
essarily reflect the views of KKR itself or any investment adopt any investment strategy. exclusive property of MSCI Inc. (MSCI). MSCI makes no
professional at KKR. This document is not research and express or implied warranties or representations and
should not be treated as research. This document does The information in this publication may contain projec- shall have no liability whatsoever with respect to any
not represent valuation judgments with respect to any tions or other forward‐looking statements regarding MSCI data contained herein. The MSCI data may not be
financial instrument, issuer, security or sector that may future events, targets, forecasts or expectations regard- further redistributed or used as a basis for other indices
be described or referenced herein and does not repre- ing the strategies described herein, and is only current or any securities or financial products. This report is not
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INSIGHTS

GLOBAL MACRO TRENDS

Stick to the Plan

KKR INSIGHTS: GLOBAL MACRO TRENDS 3

As a Percentage of GDP, Budget Deficits Increase by

The Combination of the Tax Cuts and the Recent Budget 0%

Data as at December 31, 2018. Source: Monticello Associates, CBO,

there is merit to the growing

So, if we had to speculate today on tomorrow about this cycle, the

We also want to underscore our existing macro view that we could

equity and debt markets are starting to increase again – a backdrop

6 KKR INSIGHTS: GLOBAL MACRO TRENDS

Our Opportunistic Credit bet increases by another 100 basis points to

1 Data as at June 13, 2019. Source: Bloomberg.

KKR INSIGHTS: GLOBAL MACRO TRENDS 7

20% 12.0% U.S. Short Duration 5 0 7

Emerging Market Debt 0 0 0

8 KKR INSIGHTS: GLOBAL MACRO TRENDS

5% Against this macroeconomic backdrop, we generally like our posi-

KKR INSIGHTS: GLOBAL MACRO TRENDS 9

Distressed / Special Sit

Public Equities Turkey

Public Equities All

10 KKR INSIGHTS: GLOBAL MACRO TRENDS

We Are Generally More Cautious on Global Growth and

U.S. 2.4% 2.6% 1.8% 1.9%

Euro Area 1.2% 1.2% 1.5% 1.3%

China 6.2% 6.3% 2.3% 2.2%

Mexico 1.2% 1.4% 4.0% 3.9%

GDP = Gross Domestic Product. Bloomberg consensus estimates as at

KKR INSIGHTS: GLOBAL MACRO TRENDS 11

Mobile phones 45 46%

Video game consoles and machines 5 20%

Solid state HDDs 4

Flat Panel TVs over 34.29 cm 4 EU China U.S.

12 KKR INSIGHTS: GLOBAL MACRO TRENDS

Global trade is a smaller 600

Data as at June 30, 2018. Source: China Customs, Haver Analytics.

EXHIBIT 20 …However, It Is Still Not the Owner of Critical Upstream

Huawei Top Suppliers by Revenue, Yuan Billions Revenue Exposure Huawei, %

Data as at March 31, 2019. Source: Goldman Sachs, The Economist.

U.S. China U.S. China U.S. China U.S. China

14 KKR INSIGHTS: GLOBAL MACRO TRENDS

China Round 1: Partial impact already

China Round 2: Partial impact already

China Round 3: Impacts from mid-May

Assumes 2H19 imple-

TOTAL -1.25% -0.38% -0.79%

KKR INSIGHTS: GLOBAL MACRO TRENDS 15

Deferral of business investment due to

Measures Already Taken

Intercept ECB Housing Lagged TW EUR Credit Output 2019

Intercept is the sum of Intercept Coefficient and the lagged dependent

Europe Somewhat ironically, Europe is more susceptible to the vagaries of

KKR INSIGHTS: GLOBAL MACRO TRENDS 17

Data as at May 31, 2019. Source: Bloomberg, Eurostat, European Central

sulting in cuts to current expenditure in many areas of the economy.

20 KKR INSIGHTS: GLOBAL MACRO TRENDS

Data as at June 7, 2019. Source: Bloomberg, Banxico, Haver Analytics, -45%

Investment Has Been Non-Existent in Mexico of EXHIBIT 42

6% Mexico (GMAA forecast) U.S. (GMAA forecast)

Separately, we expect headline inflation to average four percent in

KKR INSIGHTS: GLOBAL MACRO TRENDS 21