There has been a regime change in the global economy and investment world, says Henry McVey, head of global macro and asset allocation at KKR, the alternative asset manager. If ultralow interest rates and consumer spending marked the prior regime, a higher inflation rate and global fixed-investment boom will shape the worlds of business and finance in the coming years. That boom extends far beyond artificial intelligence, he notes, to encompass spending on national security, energy, supply-chain resilience, and more.
McVey, formerly chief U.S. investment strategist at Morgan Stanley, sees ample investment opportunities as countries spend to fortify power grids, shore up supply chains, and reshuffle trade routes. After traveling to Europe and Asia in recent weeks, he says he is even more bullish than before, and thinks this investment cycle is broader, more durable, and likely more inflationary than he originally envisioned.
McVey is also chief investment officer of KKR's $34 billion-in-book-value balance sheet, used to seed new businesses and make strategic acquisitions. He recently spoke with Barron's about the implications of greater spending and investment for various markets and regions around the world. While most of KRR's investments are focused in private markets, McVey highlighted public and private-equity investments that stand to benefit.
An edited version of the conversation follows.
Barron's: Is there an investment trend that the market has underestimated?
Henry McVey: We are in a fixed-asset investment boom. The headline attention is on AI, but it is broader than that. It involves the reconfiguration of supply chains, national security initiatives, and a fundamental reconstruction of the energy system. All four pillars are driving stronger incremental growth than what we have traditionally seen.
We were living in a world of tight fiscal and loose monetary policy, and low inflation. Central banks overreached via quantitative easing to stimulate leverage, which ultimately led to consumption. The current model is predicated on faster growth in nominal gross domestic product and profits. Deregulation, tax incentives, and bigger growth opportunities are leading to more fixed investment, including more broad-based capex [capital expenditure] in the corporate sector. It is almost the exact opposite of the prior two decades, and the investment community understands that -- but not the magnitude of the implications.
What are the implications?
The most interesting point is in Asia. Sixty percent to 75% of capex in the region isn't related to AI. The defense industry is growing; intra-Asia trade is booming, and the need for more power in new spaces is underappreciated. The story for Asia is up and to the right.
One of the more important structural trends across Asia is the continued deepening of trade within the region. Intra-Asia trade increased from 46% of total regional trade in 1990 to 60% in 2024, and we expect that share to reach approximately 68% by 2030. This shift reflects increasingly integrated supply chains, greater regional investment, and importantly, the emergence of Asian economies as larger end markets for one another.
This trend has further to run, creating opportunities in manufacturing, logistics, infrastructure, and businesses benefiting from rising regional consumption.
What other themes are attractive in Asia?
Corporate reform and corporate carve-outs is a megatheme in Japan, Korea, and increasingly in Singapore, which are must-own investment opportunities. For example, 70% of Japan's stock market trades below book value, 17% of assets are in cash, and real interest rates are negative. This is an incredibly compelling backdrop for private-equity investors.
There is also a consumption upgrade theme. Indian executives are seeing the middle- to upper-income consumer increasing spending and the lower-income consumer retrenching. It is the same story I heard in London and in the U.S. The bifurcation creates opportunity as many consumers upgrade their spending.
What are some examples?
Nominal GDP in India is growing faster than anyplace else, so that creates attractive opportunities for investments in hospitals, education, and retirement security. In China, the main theme is value for money, much like what happened in the U.S. after the 2007 downturn. South Korea and Japan are more mature societies, welcoming AI because automation and digitization help with demographic challenges.
In Japan, we have invested in PHC Holdings [ticker: 6523.Japan], a diabetes-management products company that helps address the growing need for chronic disease management in aging populations. Another investment is [privately held] Logisteed, which uses robotics, automated warehousing, and digital logistics systems to reduce dependence on manual labor. That helps companies respond to Japan's aging workforce and labor shortages.
How do you account for currency moves?
Currencies in Asia are generally undervalued, creating another tailwind for the region. Interest rates have been the focus for investors. For the next chapter, currencies are more front and center. Currencies respond to interest-rate moves and fiscal imbalances, and it seems we are in that world. The decision to hedge against currency swings will grow in importance.
What do higher interest rates mean for investors?
Inflation is at a higher resting heart rate than in the past. That means nominal GDP will be higher. You aren't going to get access to the low rates of the past, so you have to grow your way through this with productivity. That is where we are laser-focused at KKR. The ability to have a moat around your business and leverage technology and employee ownership, which keeps everyone rowing in the same direction, generates outsize results.
What does this new regime mean for the traditional 60% stocks, 40% bonds investment portfolio?
We have been advocating against government bonds for years, saying that the traditional correlation between stocks and bonds would go from negative to neutral or positive, preventing bonds from remaining a shock absorber in a portfolio. In the regime change I'm talking about, government debt is your Achilles' heel. Investors were probably overpricing the value of the risk-free rate.
I want to own more investments that aren't correlated to the stock market because the market has become increasingly concentrated. That would include more real assets, particularly infrastructure, in which most clients are underweight. Governments are levered and don't have excess free cash flow to fund all the fixed investment, so we are seeing spinoffs of transmission lines and roads -- for example, in India. There, we own Highway Concessions One, a toll-road and transportation infrastructure company, and India Grid Trust, a publicly listed infrastructure trust focused on electricity transmission.
Tactically, publicly traded corporate bonds with three to four years of duration look interesting now in most parts of the world. Investors have priced in too many central bank interest-rate hikes. As rates normalize and investors realize that central bankers are just taking away emergency rate cuts made in 2025 and not embarking on a massive tightening cycle as in 1994 or 2021, liquid credit looks like an interesting near-term opportunity. Shorter-term high-yield debt is a key focus.
What risks are you monitoring most closely?
I am focused on semiconductor pricing. The semiconductor business is highly cyclical. Right now companies have strong margins, but that may not always be the case. I am also monitoring the cash flow of the large language models. We estimate 40% of the hyperscalers' order book is coming from LLMs, so they need to deliver on their business proposition.
Another concern is budget deficits in France -- and in the U.S. and more mature Asian markets, where there are questions about what is the "right" government debt load. We think it is closer to 150% of GDP for developed economies, not 100% [where many debt/GDP ratios sit now]. One variable that could alter my regime-change framework would be a government shift toward tighter fiscal spending.
Could that happen in the coming months after elections in France or elsewhere?
AI, national security, defense, and supply-chain reconfiguration are largely existential threats. Both the public and private sector are going to spend around them for that reason.
There could be a tactical shift, but I don't think we will have a seismic change in government policies until the fixed-investment buildout is further along. That is why our portfolio is predicated on having the ability to withstand heightened geopolitical tensions, bigger deficits, a messy energy transition, and more supply-side shocks than in the past. We are looking to build portfolios that not only defuse those concerns but also position investors to benefit from the tailwinds.
China is quickly adopting AI. What are the implications?
AI is pervasive across sectors in China. There is a thirst to embrace AI in healthcare and consumer sectors. That should be a sign of what's coming.
Our thesis on productivity was predicated on automation, digitization, and machine learning coming out of the Covid pandemic, not AI. So far, AI may have contributed a tenth to a hundredth of the increase we saw in productivity from 1% in the past decade to 2.4% in the past eight quarters. To understand how AI drives that next leg of productivity, you need to look beyond U.S. firms.
It is borderline irresponsible to not understand China's technology effort, even if you are going to buy the Magnificent Seven stocks. China is making significant inroads in open-source and low-cost models. One part of the world may demand the Maserati of AI, and another a regular car that is fast but a cheaper alternative.
While China has developed globally competitive industrial businesses, translating that competitiveness into stronger corporate profitability and returns on capital remains a challenge. By comparison, Japan and Korea offer more visible opportunities [for investors] from corporate governance reform, shareholder returns, and operational improvement.
Where else are you finding opportunity?
When we survey CEOs of the companies we are invested in, the No. 1 term they use is resiliency. We call this the "security of everything." Post-tariffs, post-Covid, post-wars, they want to make sure their supply chains work. One of the biggest impediments is consistency of power. The opportunity in power storage is probably underappreciated. We have also been investing in the providers to the energy providers.
Additionally, we have invested in vocational training, with stakes in companies such as Lightcast, a labor-market analytics business that helps employers and educational institutions identify skills gaps and better align workforce training with labor market needs. We need more plumbers, welders, and shipbuilders. Goods jobs surpassed services jobs in August, which hasn't happened for years.
Also, Europe is getting a huge bump in intra-Europe trade. Germany is exporting less to China and more to Eastern Europe. Poland is a notable beneficiary of the shift toward more-regional European supply chains, particularly in automotive manufacturing, industrial components, and logistics. Its proximity to Germany, established manufacturing capabilities, and integration into European trade networks make it an attractive location for companies seeking to regionalize production.
Thanks, Henry.
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