“We Are Not Bearish, But…” – Private Equity Giant Says It’s Time To Sell

Thursday, February 28, 2019
By Paul Martin

by Tyler Durden
ZeroHedge.com
Thu, 02/28/2019

One week after PIMCO’s chief investment officer of global credit, Mark Kiesel, told Bloomberg that now is the time to start selling risk as “the market has priced in a lot of good news right now” and with all major asset classes overbought, the Pimco CIO “would be tilting the portfolio towards high quality Treasuries, agencies, investment-grade corporate bonds, owning less high-yield and owning less levered companies” adding that “this has been a situation where the rising tide has lifted all boats”, another financial icon has echoed this call. In its latest Global Perspectives note, private equity giant KKR, has issued a similar warning on publicly traded stocks: It’s time to sell the rally.

One month after KKR’s bullish turn paid off handsomely, with the firm turning tactically overweight US equities just in time to catch the best rally in the S&P since 1987, the private equity giant is now turning more cautious, saying equities are no longer cheap and investors should hold the same amount of U.S. stocks as suggested by benchmarks.

Commenting on his abrupt change in sentiment just one month after he turned bullish, Henry McVey, KKR’s head of global macro and asset allocation, wrote that “we are not bearish, but we do not think that public markets will continue to appreciate in a straight line from current levels if earnings growth continues to disappoint”. And, as McVey reminds, the equity upgrade in January was “based on our belief that investors were already pricing in a recession, ” he said. Now, “We think that fear is no longer being discounted in global equity prices, U.S. ones in particular.”

Here is the key excerpt from the firm’s extended monthly report:

Looking at the big picture, our macro framework suggests that risk asset prices are now more appropriately valued on an absolute basis as well as relative to financial conditions. One can see this in Exhibit 1. As such, we are downgrading our tactical overweight to U.S. Equities back towards an equal weight position. With the proceeds, we take our Cash position to an equal weight position relative to our benchmark of two percent versus our January 2019 allocation of one percent. To review, we had upgraded U.S. Equities from 300 basis points underweight in 2018 relative to our benchmark to a 100 basis point overweight position in January 2019 based on our belief that investors were already pricing in a recession (whether or not one actually occurred). Today, after a solid 10% move up in the S&P 500 since January 1, 2019, we think that fear is no longer being discounted in global equity prices, U.S. ones in particular. We are not bearish, but we do not think that public markets will continue to appreciate in a straight line from current levels if earnings growth continues to disappoint.

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