Henry McVey, partner and head of global macro and asset allocation at KKR, suggests that investors should move towards private markets, as the traditional diversification model of stocks and bonds is no longer effective. He explained in a Bloomberg Television interview on September 18, 2026, that stocks and bonds are now positively correlated, undermining their classic role as portfolio hedges. This shift is driven by geopolitical tensions and increasing fiscal deficits.
McVey emphasizes that high levels of government debt, both in the U.S. and globally, are reshaping portfolio construction. He advises against hedging risk assets with government bonds, as governments, not corporations or consumers, are currently the most indebted sector of the economy. This marks a significant departure from historical trends and necessitates alternative approaches to asset allocation.
Instead, McVey recommends investing in assets linked to nominal GDP, such as infrastructure, real estate, and asset-based finance. He notes that most investors currently allocate 2% or less to infrastructure, despite its potential during times of sticky inflation. Over-leveraged governments will likely need to privatize new infrastructure projects, creating opportunities in logistics, transportation, and digital sectors. He also highlights shorter duration credit and asset-based lending as better alternatives to government bonds, which KKR believes can no longer serve as shock absorbers in portfolios.
KKR's research further suggests that in a heavily indebted developed market, currencies are likely to weaken faster than the long end of the curve. Investors should focus on macro themes that can deliver above-average growth and seek more control over investments, including operational improvements and clear revenue visibility. The firm also anticipates the Federal Reserve to raise interest rates again in December and March of the next year, holding at 4.375% through 2029, a hawkish stance attributed to rising GDP and heightened core inflation.
