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INSIGHTS GLOBAL MACRO TRENDS

VOLUME 8.4 • JUNE 2018 New Playbook Required TABLE OF CONTENTS

INTRODUCTION�� 3

CHANGES/UPDATES TO OUR ASSET ALLOCATION FRAMEWORK ��5

Global Government Bonds and U.S. Government Securities ��6

Real Assets ��6

Global Equities ��6

Private Equity ��6 KKR GLOBAL MACRO & ASSET High Grade Debt and High Yield ��6 ALLOCATION TEAM Grains (Corn) ��6 Henry H. McVey Head of Global Macro & Asset Allocation Cash ��6 +1 (212) 519.1628 Risks to Portfolio Positioning �� 7 [email protected] David R. McNellis +1 (212) 519.1629 [email protected] SECTION I: GLOBAL ECONOMIC OUTLOOK ��8

Frances B. Lim U.S.: A Stronger Outlook ��9 +61 (2) 8298.5553 [email protected] Euro Area: We Remain Constructive, But Below Consensus �� 10

China: The Balancing Act Continues �� 12 Paula Campbell Roberts +1 (646) 560.0299 Mexico: Prevailing Amidst Uncertainty ��14 [email protected] Interest Rates Outlook: More of the Same ��15 Aidan T. Corcoran Global EPS and Valuation Update ��18 + (353) 151.1045.1 [email protected] Oil Update: Stronger for Longer ��24 Rebecca J. Ramsey Where Are We in the Cycle? ��26 +1 (212) 519.1631 [email protected] Brian C. Leung +1 (212) 763.9079 SECTION II: KEY INVESTING THEMES �� 29 [email protected] The Shift From Monetary to Fiscal Stimulus ��29

Yearn for Yield: Own More Cash Flowing Assets ��31

Buy Complexity, Sell Simplicity �� 33

Deconglomeratization: Corporations Are Increasingly Shedding Assets �� 34

Experiences Over Things 2.0 �� 36

Emerging Markets: Stay Selective in EM, But Stay Invested �� 38

MAIN OFFICE SECTION III: RISKS TO CONSIDER �� 40 Kohlberg Kravis Roberts & Co. L.P. 9 West 57th Street Input Costs Rising/Margin Degradation Likely Means Avoid Price Takers ��40 Suite 4200 Rising Geopolitical and Socioeconomic Tensions ��42 New York, New York 10019 + 1 (212) 750.8300 Growing Credit Market Concerns ��44

Regime Change for Stocks and Bonds?��46 COMPANY LOCATIONS Americas New York, San Francisco, Menlo Park, Houston, Orlando Europe London, Paris, Dublin, Madrid, CONCLUSION �� 47 Luxembourg Asia Hong Kong, Beijing, Shanghai, Singapore, Dubai, Riyadh, Tokyo, Mumbai, Seoul Australia Sydney

From a macro and asset allocation perspective, we think we may be on the cusp of a secular shift where a new playbook for investing may be required. Most importantly, we now see a significant ‘baton hand-off’ in many of the markets that we cover from monetary policy towards fiscal stimulus — perhaps the most important “ The problem with fiction, it shift in the last decade. This has to be plausible. That’s not change in policy leads us to true with non-fiction. favor investments with greater ” linkages to the real economy THOMAS K. WOLFE AMERICAN AUTHOR AND JOURNALIST — versus purely financial assets — than in the past. We also continue to see nationalist agendas supplanting more global ones. Against this backdrop, we now favor more upfront yield in the portfolio, we advocate shortening duration, and we place a premium on low- cost liabilities. We also continue to view Asia as the world’s incremental growth engine.

KKR INSIGHTS: GLOBAL MACRO TRENDS 3 One quick glance at the newspaper headlines these days, and I am peaked around 2008 after a multi-decade upward run. Hence, our left thinking that the events of 2018 would be difficult for someone view is that President Trump’s trade negotiations may just further even as creative as the late Tom Wolfe to imagine. Indeed, recent accelerate a global growth headwind that has actually been with us trips to Mexico City, Rome, London, Spain, and Washington, D.C. all for some time, particularly as China insources production of more confirm my view that we are truly living in unprecedented times – intermediate goods. It could also lead to further volatility in the cur- times that might likely have seemed ‘implausible’ for the legendary, rency market, as trade-affected countries try to regain competitive Virginia-born, author who penned such literary classics as Bonfire of advantage through potential devaluations. the Vanities, The Right Stuff, and Electric Kool-Aid Acid Test. We remain bullish on the Yearn for Yield, but we are further turn- The good news is that uncertainty almost always breeds opportunity ing our focus towards hard assets that benefit more from nominal for those who are not only prepared but also willing to adapt. We GDP running so hot relative to nominal interest rates. Both the would like to think we are both, and as such, we are using this mid- demographic work done my colleagues Paula Roberts and Ken Mehl- year update to lay out some important changes to our asset alloca- man (see What Does Population Aging Mean for Growth and Invest- tion framework. See below for details, but – to some degree – we ments, February 2018) as well our recent insurance piece (see New think that a new playbook may be required. To this end, we note the World Order, April 2018) supports our view that the structural bid for following mega macro trends: yielding assets remain outsized. However, given our high conviction view that governments are committed to driving higher nominal GDP One must now invest through the lens of fiscal policy accommoda- at a time of low nominal interest rates (which has traditionally been tion, not monetary policy accommodation. Without question, this the cure for deflation/disinflation), we want to continue to increase shift within many markets we cover could be the most important one our allocation to yielding assets backed by nominal GDP. This call is in a decade, driven by governments shifting their emphasis away a big one, we believe; we think it has legs in terms of duration, and from monetary policy, which has dominated the landscape since the we believe it warrants a notable overweight position from an asset Global Financial Crisis (GFC), towards fiscal policy. At the moment, allocation perspective. the U.S. is clearly leading the pack, but many countries, including Italy, Spain, and Mexico, are trying to use fiscal stimulus to help not Similar to the late 1990s, we think that the market is giving inves- only stimulate growth but also to thwart the growing socioeconomic tors a wonderful opportunity to buy complexity at a discount. Im- divide that has been created in the GFC’s aftermath. See below for portantly, for investment managers with operational expertise, there more details, but we think that this ‘baton hand-off’ may likely require is potentially a lucrative opportunity to buy companies at a discount, a different investment playbook than what worked during the 2009- reposition or restructure them, and sell them back into the public 2017 period. Specifically, it could favor assets with greater linkages markets at a significant valuation increase. Consistent with this view, to the real economy than purely to the financial markets (Exhibit 69). our quant work shows that Momentum and Growth are the two most It also means that equity multiples have likely peaked, something we coveted strategies by equity investors over the last three years. At have not previously been saying (Exhibit 47). By comparison, during the same time, Value and Dividend are the two least preferred. From the past few years sluggish economic growth meant above normal our perch at KKR, this arbitrage is an extremely compelling one. policy accommodation from global central banks, which was a boon A similar story is playing out in Credit, which supports our heavy for owners of most financial assets, including long duration debt overweight to Opportunistic Credit over High Grade Debt. So, overall, and equity (i.e., growth stocks). We also believe this change from though many headline indexes across the equity and debt markets monetary to fiscal stimulus reinforces our strong desire to lock in low appear full, we continue to identify some good values if one is will- cost liabilities, one of the key themes from our January 2018 outlook ing to not follow the herd, lean into complexity, and originate capital piece (see You Can’t Always Get What You Want). structures that are not subject to short-termism.

Nationalist agendas are now aggressively being emphasized over global ones. My colleague Ken Mehlman and I laid this theme out in detail in our January 2018 piece (You Can’t Always Get What You Want), but the speed and the magnitude of recent actions have caught “ even us off guard. Without question, President Trump in the United States is ushering in a different era as it relates to global trade. At One must now invest through the moment, we estimate roughly 40% of the United States’ total the lens of fiscal policy trade deficit is derived from three areas: transportation (Mexico), apparel (China), and technology (China). In terms of specifics, we accommodation, not monetary estimate that over 100% of the U.S. trade deficit with Mexico is in one category, transportation, while nearly two-thirds of the trade policy accommodation. Without deficit with China is centered in the apparel and computer categories. question, this shift within many So, if one is to focus on the signal and not the noise, then we believe any attempt to narrow the deficit will have to involve significant markets we cover could be the changes in these three areas (Exhibit 103). As such, we advocate a most important one in a decade. heightened scrutiny on capital deployment across these three sectors – at a minimum – of the global economy. Our bigger picture conclu- “ sion, which we detail below in Exhibit 104, is that global trade actually

4 KKR INSIGHTS: GLOBAL MACRO TRENDS We remain bullish on our ‘Deconglomeratization’ thesis. This theme is EXHIBIT 1 not new, but it is a powerful one that is accelerating the pace of corpo- KKR GMAA 2H18 Target Asset Allocation Update rate restructurings across the global capital markets. To some degree, outsized activism in the public markets is forcing CEOs to refine their ASSET CLASS KKR GMAA STRATEGY KKR GMAA global footprints, which has been a boon to private equity investors. JUNE 2018 BENCH- MARCH In addition, there are key markets, particularly in Japan, where in our TARGET MARK (%) 2018 view there are just too many companies with too many subsidiaries. (%) TARGET (%) All told, a full 25% of the Nikkei 400 has 100 or more subsidiaries, and Public Equities 53 53 53 many have more than 300 divisions below the parent company. We have seen a similar burst of corporate carve-out activity across Europe U.S. 16 20 15 in recent quarters, a trend that we believe will continue. The catalysts Europe 17 15 17 for this acceleration, in our view, are the rising cost of capital (which is forcing CEOs to revisit their global footprints), increasing global com- Turkey -1 0 0 petition (where locals are reclaiming share), and a surge in in activist All Asia ex-Japan* 10 7 10 dollars (which are aggressively advocating for change). Japan 7 5 7

Experiences Over Things 2.0 We continue to be bullish on our Latin America 4 6 4 Experiences Over Things thesis, but we believe that there are some larger forces at work within the consumer segment of the global Total Fixed Income 24 30 22 economy that warrant investor attention. For example, as detailed Long Duration Global Government 0 20 3 by a recent piece from the Council on Foreign Relations (see The Short-Duration U.S. Bonds 3 0 0 Work Ahead: Machines, Skills, and U.S. Leadership in the Twenty-First Century), we are increasingly struck by how fast overall consumer Asset-Based Finance 8 0 8 behavior patterns are changing. See below for further details, but High Yield 0 5 0 our bottom line is it is not business as usual in the global consumer arena. Specifically, we think that there are several structural forces Levered Loans 3 0 3 at work, including technology, demographics, and education, that are High Grade 0 5 0 radically changing how, when, and where consumers are spending their time and money against a backdrop of stagnant real wages in Emerging Market Debt 0 0 0 many economies. Importantly, these changes are now occurring at a Actively Managed Opportunistic 6 0 6 time when savings rates are falling sharply in large markets like the Credit United States. Global Direct Lending 2 0 2

We continue to favor EM over DM, but we acknowledge that our Real Estate Credit (B-piece) 2 0 0 mid-cycle pause thesis is playing out more intensely than we originally envisioned. As such, we continue to advocate more Real Assets 11 5 10 selectivity in the second phase of this secular bull market in EM. Real Estate 3 2 3 After beginning to hook upwards in 2016, our proprietary Emerging Markets model now indicates that we are actually entering a mid-cy- Energy / Infrastructure 7 2 7 cle phase for EM, which is usually associated with solid, albeit more Gold 0 1 0 volatile, returns. In particular, valuation is no longer as compelling as it once was in EM, but return on equity is improving, as margins are Grains (Corn) 1 0 0 expanding in Technology as well as many ‘old economy’ sectors. The Other Alternatives 11 10 11 bottoming in commodities is also important, according to our model. At the moment, we are constructive on both EM Public Equities and Traditional PE 8 5 8 EM dollar-based Government Debt but less so on EM Corporate Debt. Distressed / Special Situation 3 0 3 Implicit in what we are saying is that we think the recent appreciation in the dollar is not the beginning of the second leg of a dollar bull Growth Capital / VC / Other 0 5 0 market after the currency’s strong run from 2011-2015. In terms of Cash 1 2 4 areas of focus within EM, we favor Asia by a wide margin over Africa and/or Turkey, both areas where we see structural imbalances build- *Please note that as of December 31, 2015 we have recalibrated Asia Public Equities as All Asia ex-Japan and Japan Public Equities. Strategy ing. We also remain notably underweight Latin America, which has benchmark is the typical allocation of a large U.S. pension plan. Data as served us well so far in 2018. On the sector front, we are currently at June 15, 2018. Source: KKR Global Macro & Asset Allocation (GMAA). most concerned by the sharp decline that we are seeing in the margins within the EM Consumer Discretionary sector (Exhibit 94).

KKR INSIGHTS: GLOBAL MACRO TRENDS 5 Based on these key investment themes, we are providing the follow- on our investments later in the cycle, which is typically when PE ing updates to our asset allocation framework. outperforms Public Equities. By comparison, given that we think Growth Investing has been awarded too much money to deploy at a We are shifting our three percent position in long-duration global gov- time when valuations appear full, we continue to underweight this ernment bonds to short-duration U.S. government securities. Previously, asset class, particularly in Asia (where our travels lead us to believe we had a zero weighting to the short end of the global curve. In that sentiment is now on par with the late 1990s in the U.S.). making this change, we are now 20% underweight long-term government bonds (i.e., 2,000 basis points underweight relative to the We retain a notable underweight to both traditional High Grade Debt and benchmark, which is the maximum amount allowable). Simply stated, High Yield. All told, as we show in Exhibit 1, we are collectively un- we don’t want to own long-duration government bonds when govern- derweight these asset classes by 1000 basis points. In lieu of these ments around the world have shifted their tool kits from monetary positions, we continue to favor Opportunistic Credit (six percent) and stimulus to fiscal. We also believe that long-term bonds at their cur- Asset-Based Finance (eight percent). We view the former as a play rent prices with such low yields cannot satisfy their traditional roles on our Buy Complexity thesis, while we view the latter as a defensive in an asset allocation framework as either a ‘shock absorber’ and/or vehicle to protect against higher nominal GDP and higher nominal relevant income stream. For our nickel, we continue to believe that interest rates. this cycle is different: Long-duration bonds will not rally materially when stocks sell-off in the next downturn. This call is a major one, We are adding a one percentage point positon in Grains, Corn in particu- but one we are comfortable making. Also, as we describe below, we lar. As any Bloomberg terminal will attest, the price of corn has been see much more value in the short-end than the long-end, given the in a structural downtrend, with what we believe finally culminated in flatness of the yield curve. So, if we are wrong and bonds do rally in a cathartic move down in price during late June. However, at today’s the second half of 2018, then we believe that two-year notes in the U.S. levels, we believe the current risk-reward is quite compelling. Key provide a positive carry hedge with significant upside convexity, which to our thinking is that the long-term fundamentals will prevail, as is extremely hard to find in today’s markets. there is large and growing demand for protein across both developed and developing markets, and corn is a key component in the animal We are adding further to our Real Assets with Yield thesis. To review, feedstock. Moreover, if trade does become an issue and China fails to we already have an 800 basis point overweight to Asset-Based import U.S. soybeans, then Brazil will increase its supply of soybeans Finance versus a benchmark of zero percent, and we target a 700 at the expense of corn. If we are right, then this would further tighten basis point weighting in Energy/Infrastructure, compared to a bench- the market for corn. Finally, we think Corn is an interesting inflation mark weighting of 200 basis points. We certainly appreciate that this hedge against nominal GDP growing materially faster than what we puts a lot of investment eggs in one basket, but given our view on the are currently forecasting. movement towards fiscal stimulus from monetary stimulus as well as the consequences from running nominal GDP over nominal interest Our Cash balance drops to one percent from four percent. However, rates, we think that our major overweight position is warranted. In don’t get us wrong; we still like Cash in the U.S. We are merely fact, we are using this mid-year update to further increase the size of redeploying our excess Cash into tactical areas like Grains and CMBS this bet by adding a two percent position to the B-piece of our Real B-Piece, where we see near-term market mis-pricings. Indeed, un- Estate Credit portfolio. All told, we think this investment can return like in the past, Cash is increasingly becoming a competitive asset 11-14% annually, with around 10% of that total in the form of cash class in markets like the U.S. Moreover, given our view that multiples coupon. We also believe that this asset class satisfies our desire to in Public Equities have peaked and that credit spreads can’t tighten gain more upfront coupons as well as to hold assets that benefit from further, we think the ability to earn one to two percent in U.S. dollars rising nominal GDP. with no duration risk is increasingly becoming compelling. Also, Cash has a zero correlation with the other asset classes in which we traf- Within Global Equities, we remain notably underweight Latin America, fic, and as such, our one percent position gives us a little flexibility to and we are using this opportunity to sell a one percent position in add to risk assets if markets pull back meaningfully in the second half Turkey. By comparison, we remain overweight All Asia ex-Japan by of 2018. three hundred basis points. Overall, we are still constructive on EM, but we do think that weaker players – particularly those with both current and fiscal account deficits will face a more challenging road ahead (Exhibit 98). Meanwhile, we remain overweight Europe and Japan, both areas where we feel that monetary policy is likely to stay loose amidst structurally low inflation. Within Europe, we favor “ Germany, France, and Spain, at the expense of the U.K. and Italy. In Japan, we favor active management and a focus on value creation Our bigger picture conclusion strategies. Finally, we hold an underweight in U.S. Public Equities, is that global trade actually but we are using this update to add back one percentage point to the U.S. (going to 16% from 15% versus a benchmark of 20%). peaked around 2008 after a multi-decade upward run. Within Private Equity, we remain 300 basis points overweight traditional Private Equity and 500 basis points underweight Growth Invest- “ ing. As we describe below in more detail, we want more ‘ball control’

6 KKR INSIGHTS: GLOBAL MACRO TRENDS EXHIBIT 2 Our Asset Allocation Reflects Our Preference for Yield and Growth Assets That Are Linked to Nominal GDP Relative to Government Bonds, Asia Over Latin America, and Private Equity Over Growth Equity

10 R GMAA Target Global Asset Allocation vs Strategy Benchmark, PPT

20 Gold Cash EM Debt High Yield Real Estate High Grade Govt Bonds US Equities Grains (Corn) Traditional PE Energy / Infra Opport Credit apan Equities Levered Loans Turkey Equities Europe Equities Lat Am Equities RE Credit (Bpiece) Long Duration Global AssetBased Finance Global Direct Lending All Asia ex Equities Distressed / Special Sits Growth Cap / VC Other Short Duration US Bonds Data as at June 20, 2018. Source: KKR Global Macro & Asset Allocation analysis.

While we feel confident about our preferred macro and asset al- Finally, the Technology sector could come under pressure. For our location strategies, we are fully cognizant that there are risks to our nickel, we believe that a fall-off in this sector would be significant, as portfolio positioning. First, there is growing risk that, given the move- it currently represents nearly 26% of S&P 500’s market capitaliza- ment away from monetary stimulus toward fiscal initiatives, includ- tion as well as 46.5% of the U.S. equity return during the last three ing investments that may require more savings, interest rates move years (and 99.4% YTD in the U.S.). In EM, it is now the largest sector sharply upward in a path that is well beyond what either we and/or by market capitalization in 2018 for the first time ever (Exhibit 45). the futures markets are suggesting. This shift would not only create At the moment, we think that capital expenditures, particularly Tech losses in the fixed income investments, but we also believe that it would, spend, are booming in many parts of the world. So, while Tech’s as we describe below in more detail, dent equity multiples more than growing influence is now worthy of investor attention, we do not yet we are already anticipating. We hedge this concern by our massive see any immediate signals that its trajectory is about to turn down. underweight to long duration Government Bonds as well as our Buy Complexity thesis, which tends to favor Value stocks and bonds over Looking at the big picture, we think that an investor can distill our Growth securities at this point in the cycle. macro calls down to two important themes. First, many governments around the world are beginning to turn towards an increasing use Second, credit conditions could deteriorate faster than we are cur- of fiscal stimulus at the expense of traditional monetary tools. The rently forecasting. At the moment, our work shows that the second significance of this transition may not be fully appreciated, in our half of 2019 is the period when both top line growth and margins humble opinion. Moreover, the stark reality is that very few investors should begin to come under pressure. If it happens earlier than we in today’s market have deployed capital into an environment when expect, then we believe it will be linked to rising financing costs and rates are structurally rising, not falling. higher wages. It could also be linked to surging input costs, compli- ments of either heightened trade tensions or over-stimulation of the Second, we believe that more fiscal stimulus will likely drive nominal ‘old economy’ by fiscal stimulus late in the cycle, which could cause GDP well in excess of nominal interest rates. This shift represents more of a boom-bust cycle than we are currently envisioning. a major change, as today’s politicians look for innovative ways to provide economic relief to a growing number of discontented voters, Third, as we mentioned at the outset, there are material geopoliti- many of whom have not seen their wages increase in years. It also cal risks, including the recent sparring between the U.S. and China reflects a decision by governments to control more of their own (which we expect to continue), to consider. We generally do not make economic destiny via a more nationalistic approach versus being too explicit overweight sector or country calls based specifically on geo- reliant on global connectivity to succeed. In our view, this new real- political tensions, but today’s political landscape is being dominated ity is likely to unsettle the global capital markets for some time. So, by a handful of unconventional politicians, many of whom have less in this environment, the investment ‘playbook’ feels all but certain: traditional diplomatic strategies. So, against this backdrop, we do be- capture upfront yield, own more hard assets, shorten duration, lock lieve that our underweight to select parts of EM, Mexico and Turkey in low cost liabilities, and avoid countries with large current account in particular, is a potentially thoughtful approach to the conundrum deficits. that many investors now face. Our heavy overweight to Real Assets also gives us some additional downside protection. Ultimately, the two swing factors in the global macro outlook that determine whether the shift towards fiscal impulses from monetary

KKR INSIGHTS: GLOBAL MACRO TRENDS 7 ones as well as the move towards nationalist agendas from global EXHIBIT 4 ones work are productivity growth and confidence. Specifically, If We Are Generally More Bullish On Global Growth But central banks are not forced to tighten more quickly than they want Now More In Line With Others on Inflation and heightened trade tensions do not derail sentiment, then current supply side reforms such as lower taxes and increased fixed invest- 2018 GROWTH & INFLATION BASE CASE ESTIMATES ment could prove to a be a boon for both the real economy and the global capital markets. If not, we will look back a few years from now GMAA BLOOMBERG KKR GMAA BLOOMBERG TARGET CONSENSUS TARGET CONSENSUS and wonder why political leaders were adding stimulus and grant- REAL GDP REAL GDP INFLATION INFLATION ing subsidies at this time in the cycle. In the interim, however, we GROWTH GROWTH think that our current asset allocation recommendations are likely to produce strong risk adjusted returns in a world where – inspired by U.S. 3.0% 2.8% 2.7% 2.5% unorthodox fiscal policy amidst a rising populist bent – volatility is Euro Area 2.1% 2.3% 1.6% 1.6% going up at the same time that absolute returns across many traditional asset classes are likely going down. China 6.6% 6.5% 2.2% 2.2%

Section I: Global Economic Outlook Mexico 2.3% 2.2% 4.4% 4.4%

GDP = Gross Domestic Product. Bloomberg consensus estimates as at As many folks know, we huddle the KKR Global Macro & Asset Al- June 15, 2018. Source: KKR Global Macro & Asset Allocation analysis. location team together several times a year to update our outlook. We recently held one of these get-togethers, in mid-June in New York, and it was a wonderful opportunity to update our regional growth Another noteworthy insight from our global team was that, despite forecasts as well as to mark-to-market our views on important macro stronger global growth, we are seeing some strange behavior pat- topics such as oil and interest rates. terns that we think warrant investor attention. For starters, within the Emerging Markets complex, our work shows that higher oil prices, So, when we left Boardroom A in KKR’s New York headquarters that higher rates, and weaker currencies in many instances are dent- June day, we came to the conclusion that we remain above consen- ing consumer buying patterns in markets such as Indonesia. As a sus for GDP growth around the globe in every region except Europe. result, operating profits within the EM Consumer Discretionary sector One can see this in Exhibit 4. Importantly, contrary to public opinion, are tanking – likely more than many folks may currently appreciate we still think that China’s economy crashed during the 2011 to 2015 (Exhibit 94). Second, in Europe, corporate loan growth has actually period when nominal GDP fell to six percent from roughly 20%. As slowed materially into the face of better than expected GDP growth. such, we think that the risk of a major global slowdown in China – One can see this in Exhibit 11. A similar trend is playing out in many and for the global economy overall – is now quite low. Hence, our parts of the U.S. as well, which also seems inconsistent with better base case remains that the potential for continued global growth than expected growth. Third, our data shows that global trade ten- during the next 12 months, particularly in the U.S., is the most likely sions are already causing uncertainty around sourcing, investments, scenario. and hiring. At the moment, we have trimmed U.S. GDP by 10 basis points to account for rising tensions, but this estimate could prove to EXHIBIT 3 be low. China Remains the ‘Swing Factor’ in Global Growth Again This Year Finally, in terms of economic forecasting, we do want to highlight that we are shifting our economic ‘proxy’ for Latin America to Mexico 2018 Real Global GDP Growth, % from Brazil. All told, KKR has deployed more than two billion dollars 4.5 of capital in Mexico during recent years, and the Firm now either +3.9 4.0 +0.6 directly or through its portfolio companies employs more than 10,000 +0.4 3.5 individuals across a variety of business in Mexico. So, not surprising- +1.7 U.S. makes ly, we are spending more time assessing macroeconomic and political 3.0 up 11% trends in Mexico than in the past, especially given the significance of 2.5 Other Emerging the upcoming election in early July. 2.0 Markets make up +1.2 another 43% of 1.5 growth in 2018 1.0 China alone makes up 0.5 31% of growth in 2018 0.0 China Other U.S. Other World Emerging Markets Data as at April 8, 2018. Source: IMFWEO, Haver Analytics.

8 KKR INSIGHTS: GLOBAL MACRO TRENDS U.S. Outlook: A Stronger Outlook EXHIBIT 6 The Combination of Tax Cuts and the Recent Budget In the U.S. my colleague Dave McNellis is boosting his U.S. GDP Deal Could Increase the Deficit to 5.5% of GDP in 2019 growth forecast up to 3.0% from 2.7% previously. By comparison, the consensus is now at 2.8% growth, compared to 2.6% at the Divergence Between Unemployment and the Budget Deficit beginning of the year. Unemployment Rate (LHS, inverted) Budget Balance % GDP (RHS) As we show in Exhibit 5, a key insight from our U.S. GDP model is Budget Balance % GDP, Apr18 CBO Baseline (RHS) that it is now more reliant on financial conditions, including credit Budget Balance % GDP, GMAA Forecast (RHS) conditions, rising household net worth, and accommodative global policy rates. Improved housing activity relative to our original expec- 0% Korean War 8% tations in January has also become a modest tailwind. In contrast, Vietnam War 6% higher oil prices are becoming a notable headwind in our model, and 2% 4% we now expect them to increasingly weigh on indications through 2% at least late 2019. Interestingly, a ‘graying’ workforce is now a fairly 4% consistent issue for GDP, which we believe speaks volumes about the 0% importance of immigration to overall economic growth in the United 6% -2% States. -4% 8% -6% EXHIBIT 5 -8% Our GDP Model Has Become More Positive on the 10% -10% Outlook for 2018, Though Underlying Variables Are No 12% -12% Longer Universally Supportive 1948 1958 1968 1978 1988 1998 2008 2018 Elements of 4Q18e GDP Leading Indicator Data as at April 23, 2018. Source: Department of Labor, Department of 4.0% Commerce, CBO, Goldman Sachs. 3.5% 0.3% 0.1% 3.0% 1.3% 0.2% 3.0% 0.0% 0.4% 2.5% 0.1% Importantly, Dave does not rely just on his quantitative model to 1.7% 2.0% forecast growth; he also forecasts GDP growth from a fundamental perspective in an attempt to drive the most accurate results between 1.5% the two methodologies. So, what’s changed on the fundamental side 1.0% Up from 1.1% Up from 0.1% since the beginning of year? Well, we have boosted our forecast for 0.5% previously previously Real Personal Consumption Expenditure (PCE) to 2.6% from 2.4%, 0.0% and we also now expect Fixed Investment to grow fully 5.5% this year, compared to 4.0% last year and just 0.7% in 2016. Baseline Forecast EXHIBIT 7 Policy Rates Other Factors

Rising Oil Prices We Think An Upturn in Fixed Investment Spending Will Credit Conditions Graying Workforce Steady Home Sales Be One of the Key Drivers of GDP Growth in 2018 Accomodative Global

Rising Household Wealth U.S. Fixed Investment Growth, Yy Data as at June 15, 2018. Source: KKR Global Macro & Asset Allocation 7.0% analysis. 6.2% 6.0% 5.5%

5.0% “ 4.0% 4.0% Our U.S. GDP model is now 4.0% more reliant on financial 3.0% conditions, including credit 2.0% 0.7% conditions, rising household 1.0% 0.0% net worth, and accommodative 2014 2015 2016 2017 2018e global policy rates. Data as at May 31, 2018. Source: Bureau of Economic Analysis, Haver Analytics, KKR Global Macro & Asset Allocation analysis. “

KKR INSIGHTS: GLOBAL MACRO TRENDS 9 EXHIBIT 8 EXHIBIT 9 Personal Consumption Growth Is Moderating Relative to The ECB Remains a Powerful Force of Economic Growth Recent Years, But Still Robust in an Absolute Sense in Europe

U.S Real PCE Growth, Yy Elements of 2018 Eurozone GDP Forecast

4.0% 3.6% 3.0% -0.0% -0.1% 3.5% 0.1% -0.1% 2.5% 0.9% 2.3% 2.9% 3.0% 2.7% 2.8% 2.6% 2.0% 2.5% 1.5% 1.5% 2.0%

1.5% 1.0%

1.0% 0.5% 0.5% 0.0% Baseline ECB Easier Lagged Stagnant Trade Forecast 0.0% IRP Credit EUR Brent Housing Weighted 2014 2015 2016 2017 2018e Conditions Mkt EUR Data as at May 31, 2018. Source: Bureau of Economic Analysis, Haver Data as at June 15, 2018. Source: Eurostat, European Commission, Analytics, KKR Global Macro & Asset Allocation analysis. Statistical Office of the European Communities, Haver Analytics.

Overall, despite heightened uncertainty around trade policies, growth EXHIBIT 10 trends in the U.S. remain quite favorable, and as we look ahead, we are particularly focused on whether increased fixed investment will Europe Too Is Finally Seeing Positive Fiscal Stimulus After lead to a boost in productivity. If it does, then it would go a long way Years of Belt Tightening towards reducing stress within the investment community about the Eurozone Structural Balance, Y/y Diﬀerence, PPTs of GDP aggressive fiscal stance taken by President Trump and his administration. If it does not, however, then we likely have too big an expo- 40 24 sure to Global Equities at our current equal weight position. 20 3 0 Euro Area Outlook: We Remain Constructive, But Below Consensus -20 -6 -40 -27 My colleague Aidan Corcoran is now forecasting 2.1% GDP growth -60 -40 for 2018, up 10 basis points from his January estimate. By compari- -80 -70 -78 son, the consensus for growth in Europe is 2.3% for 2018, up from -100 2.1% in January 2018. Interestingly, our quantitative model, which -120 we show below in Exhibit 9, points to strong real GDP growth that is -140 more in line with the consensus. To Aidan’s credit, however, his fundamental work showed that we should be more conservative than the -160 -149 2011 2012 2013 2014 2015 2016 2017 2018 model in the first half of 2018, an insight that served us well during the spring slowdown. Data as at May 3, 2018. Office of the European Communities, Haver Analytics.

As we have shown in the past, the powerful influence of the ECB’s monetary policy is still acting as an important tailwind to our model. “ To put this in perspective, we estimate that QE from the ECB ac- counted for nearly two-thirds of total growth in Italy in recent years. Overall, despite heightened uncer- For Spain, we think that the percentage contribution to growth from tainty around trade policies, growth the ECB’s activities is one-third of total growth. trends in the U.S. remain quite fa- On the other hand, the recent appreciation of the euro as well as less robust housing conditions act as modest headwinds to the model at vorable, and as we look ahead, we this point in the cycle. Importantly, though, recent trips to Spain and are particularly focused on whether France suggest that housing is turning more constructive, and as such, we feel confident this variable could turn from negative to posi- increased fixed investment will tive during the next 12-18 months. lead to a boost in productivity. “

10 KKR INSIGHTS: GLOBAL MACRO TRENDS EXHIBIT 11 would also be a significantly greater number than the largest EU Credit Growth in the Euro Area Has Generally Been country by population, Germany, which is projected to total 83 million Disappointing, Despite Heavy Central Bank Intervention people per the EU’s projections for 2050.

Euro Area Corporate LoansGDP EXHIBIT 12 Higher Debt Countries Have Greater Risk of Poverty for 50% Their Citizens

45% At Risk of Poverty Rate for 2016, 300 279 40% 242 222 207 35% 197 178 180182 183 167 30% Jul-10 Jun-11 Apr-13 Jan-16 Feb-15 Nov-17 Oct-07 Dec-16 Mar-14 May-12 Jan-05 Feb-04 Sep-08 Mar-03 Dec-05 Nov-06 Aug-09 Data as at June 1, 2018. Source: Haver Analytics. U Italy Spain Ireland France Austria Belgium Also, as we show in Exhibit 10, fiscal policy has moved from a major Sweden Germany Switzerland overhang to a tailwind. Our instincts tell us that actual fiscal sup- etherlands port will likely be greater than this, as more fiscal stimulus is sorely Data as at April 30, 2018. Source: Statistical Office of the European needed to address the populist concerns that continue to impact the Communities, Haver Analytics. political environment all around Europe. Meanwhile, high debt loads are clearly a structural problem in Europe, an issue that goes hand-in hand with slower growth and the inability to fund new social pro- EXHIBIT 13 grams for the less fortunate. Not surprisingly, this macroeconomic backdrop only further encourages social discord and populist tilts. Many Countries Have Also Had to Absorb Waves of Non- EU Immigrants

Without question, immigration is a significant component of the cur- 2016 Non-EU Nationals as Part of Total Immigration rent populist tension. True, immigration could actually be an impor- Non-EU Nationals, Thousands, LHS tant part of the solution to Europe’s demographic challenge, but the Total Immigrants, Thousands, LHS numbers can be daunting, particularly on a forward-looking basis. Non-EU % of Total Immigration, RHS Consider, for example, that Africa’s population, which is increasingly turning towards Europe as a migratory destination, is set to 1,200 70% increase from 1.3 billion today to 2.5 billion by 2050, which would 1,000 60% be about five times the current EU population. So, if we assume that 50% five percent of Africa’s projected population migrates towards Europe 800 40% by 2050 (which is not a totally crazy number, we believe), it would 600 lead to an African population in Europe of nearly 126 million (note: 30% 400 we keep EU borders constant and count only new immigrants versus 20% existing or second generation immigrants, so it could actually be 200 10% higher). At 126 million people, the population of Africans in Europe 0 0% Italy Spain France Greece Sweden Germany

“ Netherlands United Kingdom Our instincts tell us that more fis- Data as at April 30, 2018. Source: Statistical Office of the European cal support is likely needed to ad- Communities, Haver Analytics. dress the populist concerns that Another key finding from our recent trip is that Europe’s growth has continue to impact the political slowed more significantly than what we have seen in Asia and the environment all around Europe. U.S. of late. One can see this in Exhibit 14. However, we currently view the slowdown as a move back towards potential growth, not a “ signal that any recessionary conditions are fast approaching. The one

KKR INSIGHTS: GLOBAL MACRO TRENDS 11 exception to this viewpoint is the United Kingdom, as we continue China: The Balancing Act Continues to believe that the U.K. consumer is now really feeling the pressure of several macro headwinds, including lower availability of credit My colleague Frances Lim is boosting her 2018 GDP forecast to 6.6% (Exhibit 15). from 6.5%. A major driver of the increase is the reality that first quarter 2018 GDP came in much stronger than we expected at 6.8% EXHIBIT 14 versus our original view that growth was poised to decelerate from Growth Indicators in Both Manufacturing and Services recent levels. Without question, deleveraging of the financial services Have Deteriorated Across Europe industry has been significant. One can see this in Exhibit 19. While deleveraging has also impacted fiscal spending and infrastructure Composite PMI growth negatively, the government has employed counter cyclical Germany France Euro one measures to ease liquidity conditions. For example, interest rates have actually fallen in China versus increasing in the U.S. In fact, the 60 current period is the first time since late 2016 that the PBoC did not raise the reverse repo rate when the Fed raised interest rates. At the 58 same time, Frances is lowering her inflation forecasts to 2.2% from 56 2.3% previously. Higher oil prices versus last year will push headline inflation up; however, we expect this increase will be more than 54 offset by lower food price inflation. 52 EXHIBIT 16 50

48 After a Stronger Start to the Year, We Are Boosting Our 2018 Real GDP Growth Forecast for China to 46 6.6% From 6.5%...

China: Quarterly GDP Growth, Yy, % Jan-18 Jan-14 Jan-15 Jan-16 Jan-17 Sep-14 Sep-17 Sep-15 Sep-16 May-18 May-14 May-15 May-16 May-17

Data as at April 30, 2018. Source: Statistical Office of the European Real GDP Communities, Haver Analytics. Nominal GDP 20% GDP Deﬂator Jun-11 EXHIBIT 15 15% 19.7%

There Has Been a Sharp Fall in Consumer Credit Mar-18 Dec-15 10% 10.2% Availability in the U.K. 6.4% Sep-11 6.8% U.K. Household Unsecured Lending Availability, % 5% 9.4% Balance of Respondents Dec-15 Mar-18 30% 0.3% 3.1% 0% 20% -5% 10% 10 11 12 13 14 15 16 17 18 Data as at June 10, 2018. Source: China Bureau of National Statistics, 0% KKR Global Macro & Asset Allocation analysis. -10%

-20%

-30%

-40% “ In trying to eradicate Jun-11 Dec-11 Jun-17 Dec-17 Jun-13 Jun-16 Jun-15 Jun-14 Jun-12 Dec-13 Dec-15 Dec-16 Dec-14 Dec-12 Jun-10 Dec-10 Jun-07 Dec-07 Jun-09 Jun-08 Dec-09 Dec-08 Data as at April 30, 2018. Source: Statistical Office of the European deflationary pressures from the Communities, Haver Analytics. country, China’s government has forced capacity to come out of many ‘old economy’ sectors. “

12 KKR INSIGHTS: GLOBAL MACRO TRENDS EXHIBIT 17 EXHIBIT 19 ...But We Are Lowering Our Full Year 2018 CPI Forecast While China’s GDP Appears Stable, There Have Been in China Based on Recent Softness Some Substantial Changes Occurring as Financial De-

China: CPI, Yy, % leveraging Occurs China: Real GDP Growth, Yy, % Ex Food & Energy Pork Vegetables Other Food Real GDP Financials (16%) Ex-Financials (84%) Energy Headline CPI 20 Jun-15 3.5 18.8 3.0 2.5 16 2.0 May-18 1.5 1.8 12 1.0 Mar-18 0.5 9.1 0.0 8 -0.5 6.8 -1.0 4 4.0 -1.5

0 Jul-17 Jul-15 Jul-16 Oct-17 Oct-15 Oct-16 Apr-17 Jan-17 Apr-15 Apr-18 Apr-16 Jan-15 Jan-18 Jan-16 11 12 13 14 15 16 17 18 Data as at June 10, 2018. Source: China Bureau of National Statistics, KKR Global Macro & Asset Allocation analysis. Data as at April 2018. Source: Ministry of Finance of China, China National Bureau of Statistics, Haver Analytics.

This year China’s official budget deficit is targeted to shrink by 40 Importantly, our base view remains that China has already crashed basis points to 2.6% from 3.0%. Furthermore, off-balance sheet fis- as an economy. One can see this in Exhibit 20, which shows that cal expenditures are also likely to be constrained by ongoing delever- nominal GDP actually fell 67% from 2011 to 2015. Subsequently, with aging initiatives. So, unlike many of the other countries where KKR the country’s producer price index (PPI) jumping back into positive does business, China is not aggressively loosening its fiscal policy. territory, nominal GDP has actually rebounded 100% or so to around Why? Because it already has in past years (Exhibit 18), and now the 12%. Moreover, in trying to eradicate deflationary pressures from government believes it is time to have a more disciplined approach to the country, China’s government has forced capacity to come out of capital allocation. many ‘old economy’ sectors. This decision has been instrumental in returning profitability to not only China’s major industrial produc- EXHIBIT 18 ers, but we heard a sigh of relief from commodity producers in other China Has Already Used Fiscal Stimulus to Drive Growth markets such as India too.

% of GDP, 3mma % of GDP, 3mma EXHIBIT 20 Off-budget deficit Nominal GDP in China Fell 67% from 2011 to 2015; Augmented fiscal deficit-3mma As Such, We Think that China’s Economy Has Already Official fiscal deficit-3mma 4 4 Crashed China: PPI, Yy, %, LHS 0 0 China: Nominal GDP, Yy,%, RHS 12 30 83% correlation -4 -4 between PPI and GDP Jun-11 Inflation peaked 25 8 19.7 in 1Q17 -8 -8 20 4 A 67% -12 -12 decline 15 0 -16 -16 10 07 08 09 10 11 12 13 14 15 16 17 18 -4 Mar-18 Dec-15 5 Data as at March 31, 2018. Source: Goldman Sachs Research. 6.4 10.2 -8 0 00 02 04 06 08 10 12 14 16 18 Data as at March 31, 2018. Source: China National Bureau of Statistics, Haver Analytics.

KKR INSIGHTS: GLOBAL MACRO TRENDS 13 EXHIBIT 21 We expect headline inflation to moderate towards 3.8% year-over- With Supply Being Rationalized, Chinese Industrial year by the end of 2018, essentially in-line with Banxico’s forecasts. Profits Appear to Have Bottomed Recent meetings in Mexico City confirm our thesis that the central bank remains vigilant, particularly given the multitude of domestic China: Industrial Profits Y/y (L) and external risk factors that could now reignite inflation expectations. As such, we believe that the central bank will likely intervene % China: Headline PPI (R) % aggressively above 20 pesos to the dollar to prevent higher inflation, 40 10 corporate margin degradation, and slower consumer imports. 8 30 EXHIBIT 22 Apr-18 6 21.9 The Mexican Economy Remains Heavily Skewed Towards Proﬁts bottomed 4 20 with PPI Services, Including Trade Apr-18 2 3.4 Mexico GDP By Major Industry Category 10 0 -2 1994 2017 0 70% -4 61.6% 60% Industry is falling a bit behind 58.9% -10 -6 from earlier gains while 11 12 13 14 15 16 17 18 services has shown 50% meaningful improvement Data as at April 30, 2018. Source: China National Bureau of Statistics, Haver Analytics. 40% 31.4% 29.5% 30% Agriculture Looking ahead, we expect the Chinese government to balance ongo- has becomea Taxes are smaller share ing growth initiatives in important areas like environmental protection 20% stagnant while continuing ongoing reform in other areas that need purging, of GDP particularly within the shadow banking arena. The good news is 10% 4.9% that a tight labor market, less available square footage in housing, 4.9% 4.0% 4.8% stable wage growth, and strong U.S. and European growth all help 0% to provide President Xi Jinping with additional ‘air cover’ to make Agriculture and Industry Services Taxes on the changes necessary to transition the Chinese economy towards a Livestock Products more sustainable trajectory in the quarters ahead, we believe. Data as at December 31, 2017. Source: Instituto Nacional de Estadística Geografía e Informática, Haver Analytics. Mexico: Prevailing Amidst Uncertainty

Despite all the headwinds the country has faced of late (e.g., higher inflation, rising interest rates, trade tensions, and no investment growth over the last 12 months), the Mexican economy is actually doing quite well. Unemployment is at 3.4%, compared to a natural unemployment rate of 4.7% according to the OECD. Meanwhile, most economists believe that the economy’s output gap is essentially zero, formal sector jobs are growing at 4.5% year-over-year, and real wages are rising again. Most impressive to us, though, is that the economy has weathered the massive downturn in energy prices in recent years (remember that Pemex used to account for 30% of total “ tax receipts). Without question, the economy has proved to be more flexible and dynamic than in the past. Despite all the headwinds the country has faced of late (e.g., Looking ahead, we are forecasting 2.3% real GDP growth for Mexico this year, compared to 2.0% growth in 2017 and a consensus fore- higher inflation, rising interest cast of 2.2% for 2018 (Exhibit 4). However, the risks are skewed to the downside in our view due to the ongoing uncertainty associated rates, trade tensions, and no with NAFTA negotiations negatively impacting — in addition to trade investment growth over the last 12 — both investment and private consumption. months), the Mexican economy is actually doing quite well. “

14 KKR INSIGHTS: GLOBAL MACRO TRENDS EXHIBIT 23 EXHIBIT: 25 The Mexican Currency Is Now at a Critical Juncture, We The Informality Rate and the Poverty Rate Go Hand Believe in Hand in Mexico, Both of Which Are Higher in

Mexico: Real Eﬀective Exchange Rate (CPI-based) Southern States % Deviation from Long Term Average Mexico Poverty and Informality Rate, %

Northern states 35% MN Southern states R = 0.91 25% 90 Linear (Southern states) +1stdev 15% 80 5% 70 -5% 60 -15% Bull -1stdev Informality rate, % 50 -25% Base -35% 40 MN Bear -45% 30 87 90 93 96 99 02 05 08 11 14 17 20 23 10 20 30 40 50 60 70 80 90 Data as at May 31, 2018. 2018 thru 2023 KKR Global Macro & Asset Poverty rate, % Allocation estimates. Source: Instituto Brasileiro de Geografia e Data as at May 1, 2018. Source: Bloomberg, Haver Analytics, OECD. Estatística, Instituto Nacional de Estadística Geografía e Informática, Haver Analytics. Interest Rates Outlook: More of the Same

EXHIBIT: 24 Consistent with our above consensus GDP forecast back in Janu- Both Trade and Politics Will Dramatically Affect the ary, we also entered the year more hawkish than the consensus Outlook For Mexico and the Federal Reserve on the path of interest rates. As we update our forecasts at mid-year 2018, not much has actually changed in Scenario Analysis Based Upon Andrés Manuel López Obrador Victory or our view for either the long-end or the short-end of the U.S. yield Defeat in the Mexican Presidential Election and NAFT Outcomes curve. Specifically, we continue to look for a 10-year yield of 3.25% in December 2018, while our short-end call remains that the Federal AMLO wins AMLO loses Reserve will boost rates four times this year. ↓ MXN ↑ MXN NAFTA = Growth (but ↓ Potential) ↑ Growth Agreement Reached ↑ Inflation ↓ Inflation ↑ Risk Premium ↓ Risk Premium ↓↓ MXN ↓ MXN U.S. Withdraws ↓↓ Growth (via Investment) ↓↓ Growth (via Investment) “ from ↑↑ Inflation ↑ Inflation NAFTA Interestingly, Chairman Powell ↑↑ Risk Premium ↑ Risk Premium explicitly mentioned during his Data as at May 31, 2018. Source: KKR Global Macro & Asset Allocation analysis. June press conference that fiscal stimulus is one of the important Despite better-than-expected economic resilience of late, our bigger factors pushing up his assessment picture conclusion is that Mexico will continue to face a structural productivity growth issue relative to other EM countries. In particular, of rates, which is consistent we find it hard to believe that Mexico will be able to get GDP growth with our theme regarding the much above three percent, which is usually the threshold required to be considered an elite EM growth story. We link the drag to lack of increasing primacy of fiscal policy productivity gains, a large informal economy, worsening security, and over monetary policy. corruption/rule of law – all issues that have plagued it for some time and show no signs of turning the corner in any electoral scenario. “

KKR INSIGHTS: GLOBAL MACRO TRENDS 15 EXHIBIT 26 Moreover, the Fed now forecasts that it will raise rates another three There Is No Change to Our Fed Funds Outlook. The Fed times in 2019 to reach 3.125%. Put another way, the FOMC now and Markets Have Gravitated Increasingly Towards Our believes that by the end of next year, rates will be in the restrictive territory above its 2.875% long-run target. For our part, we believe Point of View the Fed will hike only two times next year, as we expect it will ulti- Expected Total Number of Fed Hikes in 2018 and 2019 mately feel pressure not to tighten financial conditions too drastically via pressuring the yield curve too much lower or the dollar too much 7.0 higher. 6.0 5.4 Interestingly, Chairman Powell explicitly mentioned during his June press conference that fiscal stimulus is one of the important factors pushing up his assessment of rates, which is consistent with our theme regarding the increasing primacy of fiscal policy over monetary policy. This point is significant because it underscores our strong view that the Federal Reserve and current administration are 2.5 rooting for very different outcomes in terms of some key economic metrics. On the one hand, President Trump has made it clear that he wants to boost both wages and the participation rate. On the other hand, the Federal Reserve feels uncomfortable with unemployment at such low levels. Moreover, the threat of higher wages may force it to accelerate even further the pace of tightening. One can see the Market Market KKR GMAA FOMC (123117) (Current) different dynamics at play in Exhibits 28 and 29, respectively.

Data as at June 13, 2018. Source: FOMC, Bloomberg, KKR Global Macro EXHIBIT 28 & Asset Allocation analysis. President Trump Would Like to See Wages Increase More Meaningfully. We Are Not Sure the Fed Feels as Strongly EXHIBIT 27 Unemployment Rate and Average Hourly Earnings We Continue to Expect the U.S. 10-Year Yield to Push Towards the Mid-Three Percent Range by the Peak of This Average Hourly Earnings, Yy % Chg Cycle 5.0% Unemployment Rate (inverted, RHS) 2% 4.5% 3% Expected U.S. 10-Year Yield Forecast 4.0% 4% Market (123117) Market (Current) KKR GMAA 5% 3.5% 3.50% 6% 3.0% 3.25% 7% 3.00% 3.10% 2.5% 8% 2.50% 2.60% 2.0% 9% 1.5% 10% 1.0% 11% 89 94 99 04 09 14 19 Data as at May 4, 2018. Source: Bloomberg.

Dec-18 Dec-19 Data as at June 13, 2018. Source: Bloomberg, KKR Global Macro & Asset Allocation analysis. “ Further out, we think the gap However, the same consistency of approach cannot be said for either resolves itself with German the Federal Reserve or other market participants. In fact, during the most recent FOMC meeting on June 13, 2018, the Federal Reserve bunds selling off more than U.S. raised its total rate hike expectations in 2018 to four from three, Treasuries from current levels. bringing it in line with our in-house forecast. It also upgraded its assessment of economic activity across a wide range of variables, “ including inflation, unemployment, and GDP.

16 KKR INSIGHTS: GLOBAL MACRO TRENDS EXHIBIT 29 EXHIBIT 31 While the Fed Seems Happy With the Recent Increase Money Supply Growth Is Now Running Below Nominal in the Prime Age Participation Rate, the Trump GDP Growth

Administration Would Like to See a More Broad-Based U.S. GDP vs. Money Supply Growth Expansion of the Work Force Nominal GDP Growth M2 Growth Labor Force Participation Rate 12% Total Prime-Age (25-54 Year Olds), RHS 10% 68% 85% 8% 6% 67% 84% 4%

66% 2% 83% 0% 65% -2% 82% -4% 64% 96 98 00 02 04 06 08 10 12 14 16 18 81% 63% Data as at June 14, 2018. Source: BEA, Haver Analytics.

62% 80% 89 94 99 04 09 14 19 Given our conviction around higher rates in the U.S., we spent some Data as at May 4, 2018. Source: Bloomberg. time thinking through the relationship between long-term rates in the U.S. and Europe. Interestingly, as we show in Exhibit 33, the difference between the U.S. and German 10-year rate has now recently As we mentioned above, we think that the Fed continues on a gradual reached nearly 250 basis points, which we view as a truly monu- hiking pace. In the near-term, we do not think this campaign will mental divergence in the supposedly integrated capital markets. derail the economy because financial conditions are still quite loose (Exhibit 30). However, we are more concerned about 2019. Key to Looking ahead, we believe the gap will remain wide in the near our thinking is that, coupled with the end of QE in the U.S., financial term, as the ECB has signaled a high degree of patience in applying conditions will begin to become much more restrictive by 2019 if stimulus to ensure inflation returns to target. In fact, at its June 2018 money supply growth begins to wane. One can see this rising threat conference, the ECB made the unusual move of committing itself to in Exhibit 31. no rate hikes before summer of 2019, at the earliest.

EXHIBIT 30 Further out, we think the gap resolves itself with German bunds Despite Several Fed Hikes, Financial Conditions Are Still selling off more than U.S. Treasuries from current levels. In fact, our Quite Accommodative quantitative bunds model calls for it to close quite dramatically, with a spike in the German 10-year to 1.2% by the end of December 2018, Goldman Sachs U.S. Financial Conditions Index a full 85 basis points increase over the next six months, followed 105 by another 110 basis points rise over the subsequent twelve months Tighter (Exhibit 32). While this model accurately captures the purely quantita- 104 tive pressures, it misses the huge pressure on the ECB to close the Easier 2004-06 103 hiking cycle First Fed last few basis points of inflation shortfall, after many years of failing hike since to meet its mandate. 102 1999 hiking 2006 cycle 101 So, although capital market pressures are significant, we are not yet breaking the glass on European rates, and we now change our call 100 on the bund. Specifically, we had been calling for the 10-year bund 99 to reach one percent by the end of 2018, but now believe it will be 2019 before this happens, for the reasons outlined above. Moreover, 98 90 93 96 99 02 05 08 11 14 17 in the interim, investors in Europe should get ready for even greater participation in European markets by U.S. domiciled investors, as the Data as at June 8, 2018. Source: Goldman Sachs, Bloomberg. forward curve is pricing in euro appreciation making it attractive for USD investors who can lock in the euro, hedging FX risk at a profit.

KKR INSIGHTS: GLOBAL MACRO TRENDS 17 EXHIBIT 32 Global EPS and Valuation Update Our Quantitative Bund Model Indicates a 2.3% Yield By 4Q19, Though We Believe the ECB’s Dovish Stance Will From almost any vantage point, 2018 has emerged as one of the most unusual periods for earnings revisions that we have seen in Prevent that From Occurring in the Near-Term years. What happened? Well, after essentially ignoring the Trump tax 10-year German Bund Yield, % cuts through the fourth quarter of 2017, the sell-side community was forced to crank up their earnings revisions in January 2018 as full Actual Predicted 2018 and 2019 Quantitative Forecasts year guidance was given. According to our work, earnings revisions 6.0 for the U.S. hit a 30-year high in the first quarter of 2018. 5.0 However, it was not enough, as first quarter EPS results were very 4.0 strong with 72% of companies beating on EPS, 73% beating on sales Dec-19 and 57% beating on both – the highest proportion of EPS and sales 3.0 2.3% beats since 20001. Driving the huge overage in first quarter 2018 2.0 were the following considerations: Dec-18 1.2% 1.0 • All told, first quarter 2018 earnings results beat analysts’ expec- 0.0 tations by five percent, while pre-tax profits beat expectations by three percent. The overall beat was led by Technology, Financials -1.0 and Industrials, three sectors that combine to contribute almost ‘00 ‘02 ‘04 ‘06 ‘08 ‘10 ‘12 ‘14 ‘16 ‘18 ‘20 60% of 2018e EPS growth for the S&P 500. Data as at June 15, 2018. Source: ECB, KKR Global Macro & Asset Allocation analysis. • Average Brent crude prices in the first five months of the year have been about 34% higher than comparable prices a year ago. We estimate that every 10% increase in average oil prices EXHIBIT 33 increases S&P 500 earnings by approximately 1.3%. Impor- We Think the Gap Between the U.S. Treasury and the tantly, though, while energy companies are clear beneficiaries German Bund Begins to Narrow of higher oil prices, there are some notable offsets that actually weight on EPS growth. For example, the recent 20% increase in U.S. - Germany 10-Year Rate Spread, % gasoline/heating oil costs is akin to a $61 billion ‘tax hike’ on the consumer, which negates about 80% of the income boost from 3.0 Dec-18e personal tax cuts. Also, higher energy input costs are a drag on 2.5 2.25 the margins of transportation stocks. We are not sure how this Apr-89 cycle will play out, but we do know that during the last two late 2.0 2.16 May-99 1.51 Sep-05 cycle commodity price surges (in 1999 and 2007), their operating 1.5 1.18 Dec-19e margin fell by fully two and four percentage points, respectively 1.70 1.0 (Exhibit 100).

0.5

0.0

-0.5

-1.0

-1.5 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 Data as at June 12, 2018. Source: Statistical Office of the European Communities, Haver Analytics. “ From almost any vantage point, Overall, our views on global rates are admittedly less divergent rela- 2018 has emerged as one of tive to consensus than they once were, as markets have converged towards our thinking. Regardless, we continue to position for an the most unusual periods for upward drift to rate expectations in coming quarters, which supports earnings revisions that we have our call for investors to lock in low cost liabilities and/or own businesses that benefit from the structural bottoming in rates that we are seen in years. suggesting is underway. “

1 Data as at May 24, 2018. Source: IBES, Factset.

18 KKR INSIGHTS: GLOBAL MACRO TRENDS EXHIBIT 34 EXHIBIT 36 Full Year S&P 500 2018 Bottom-Up EPS Estimates Have Financials and Technology Still Make Up Close to 50% of Climbed to $161.50 on the Back of a Very Strong First the 2018e S&P 500 EPS Growth

Quarter 2018 Earnings Season S&P 500 Consensus 2018e EPS Contribution to S&P 500 Consensus Bottom-up 2018e EPS Estimates Growth Estimates un18 S&P 500 21.0% 163 161.50 161 Utilities 1.2% GMAA 159 Staples 1.4% 160.30 REITS Growth 157 1.4% Telcos 2.3% Contribution 155 Top-down Materials 3.4% 153 154.00 Cons. Disc. 9.1% 151 Industrials 9.4% Health Care 11.1% 149 Energy 14.0% 147 Dec-17 Info Tech 23.2% 147.10 145 Financials 23.4% 117 417 717 1017 118 418 718 0% 5% 10% 15% 20% 25% Data as at May 24, 2018. Source: KKR Global Macro & Asset Allocation Data as at May 24, 2018. Source: KKR Global Macro & Asset Allocation analysis, Bloomberg, Haver Analytics, S&P, IBES. analysis, Bloomberg, Haver Analytics, S&P, IBES.

EXHIBIT 35 EXHIBIT 37 The Downturn in Revisions Supports Our View That the EBITDA Growth Forecasts Have Not Kept Pace With the Rate of Change in U.S. Earnings Is Now Moderating Surge in EPS Growth Expectations

S&P 500: 2018e Growth Estimates S&P 500 Earnings Estimate Revision Ratio EBITDA EPS 1 Month 3 Month Average 22% 3.0 20% Passage of 2.5 18% Tax reform 2.0 16% 14% 1.5 12% 1.0 10% 0.5 8% 0.0 86 90 94 98 02 06 10 14 18 6% 116 516 916 117 517 917 118 518 The 3-month revision ratio is defined as the total number of earnings estimate increases divided by total number of earnings estimate Data as at May 24, 2018. Source: KKR Global Macro & Asset Allocation decreases during the last three months. Data as at May 24, 2018. analysis, Bloomberg, Haver Analytics, S&P, IBES. Source: KKR Global Macro & Asset Allocation analysis, Bloomberg, Haver Analytics, S&P, IBES, BofAML. Against this backdrop of strong first quarter 2018 results and robust oil prices after the recent OPEC meeting, we are raising our 2018 EPS forecast for the S&P 500 to $160.30, compared to our prior forecast of $153.90 (now implying 21.3% growth in 2018 versus “ 16.5% previously). As we show in Exhibit 40, this new forecast is now roughly in line with what our Earnings Growth Leading Indicator Outside of the U.S., we see a (EGLI) model has been suggesting (excluding the one-time bump). different picture, as Europe and As reference, the bottom-up consensus forecast is now at $161.50 (22.3% expected growth), compared to $147.10 in December 2017 EM earnings growth is expected (11.3% growth). Meanwhile, the top-down consensus forecast is at to trail that of the U.S. in 2018. $154.00 or so, little changed from around $153.00 back in December 2017. From what we can tell, not all the top-down strategists have “ fully adjusted their earnings outlook for the recent Trump corporate tax cuts.

KKR INSIGHTS: GLOBAL MACRO TRENDS 19 EXHIBIT 38 EXHIBIT 40 We Have Boosted Our S&P 500 EPS to $160.30, Our U.S. Earnings Growth Lead Indicator (EGLI) Points Which Is More In Line With What Our Quantitative to a Strong 12.3% Expansion in 2018, Followed by More Model Is Suggesting Modest Momentum in 2019

2018e S&P 500 EPS Estimate, USShare S&P 500 EPS Growth: 12-Month Leading Indicator

ACTUAL PREDICTED (3mo MA) 165 +6.40 160.30 160 +11.20 153.90 155 40% 150 30% Jun-18a 145 +10.60 13.9% 20% 140 Dec-18e 135 132.20 10% 12.3% 130 0% Jun-19e 125 4.9% -10% 120 GMAA 8% Tax GMAA Add Back GMAA -20% Baseline Organic Reform Old 4% EGLI New -30% 2018e EPS EPS 2018e Haircut 2018e May-09a Jan-10a -30.9% -36.9% Growth EPS EPS -40% Data as at June 15, 2018. Source: KKR Global Macro & Asset Allocation 1991 1997 1985 1988 1994 1982 2015 2018 2012 2009 2003 2006 analysis, Bloomberg, Haver Analytics, S&P, IBES. 2000 Data as at June 15, 2018. Source: KKR Global Macro & Asset Allocation analysis. While not as bullish as our fundamental outlook (because a model can’t explicitly capture a tax cut), our quantitative EGLI remains quite constructive in the near-term. One can see this in Exhibit 39, which Looking out to 2019, our preliminary EPS estimate is $168.30 for the shows that essentially every input into the indicator except oil is cur- S&P 500, which is roughly five percent year-over-year growth (and rently positive. in line with the 2019 deceleration in EGLI). Our more conservative EPS outlook for 2019 reflects four areas of concern in our assump- EXHIBIT 39 tions: a) tougher comps versus 2018; b) higher cost of capital; c) Most Inputs to Our Proprietary U.S. Earnings Growth continued tightening of financial conditions; and d) late-cycle pres- Lead Indicator (EGLI) Are Still Positive in 2018 sures, including higher input costs and wages. Our EPS slowdown is also consistent with both our EGLI (which shows growth slowing S&P 500 Earnings Growth Leading Indicator: by 2019) and our recession model (Exhibits 65 and 66), as our work Components of December 2018 Forecast shows that the U.S. could face a mild economic slowdown by 2020.

Outside of the U.S., we see a different picture, as Europe and EM +1.5% +1.0% 12.3% earnings growth is expected to trail that of the U.S. in 2018. In +0.8% Europe, for example, 2018 earnings growth estimates have declined +3.9% +1.2% -1.4% to 8.2% from 9.1% in the beginning of the year. A 10% appreciation in the trade-weighted euro in 2017, coupled with Euro Area PMI +5.3% Was a 9.9% momentum tumbling to five-year lows, has largely been responsible tailwind to for the softness in earnings trends. But the FX headwind will likely model in 2017 fade in coming quarters and we continue to expect global growth to accelerate to 3.7% in 2018e, which should lend support to European earnings. Baseline Rising High ISM Lower Falling Better Oil Price Forecast Home Pxs PMI USD YY Credit ConsumerHeadwind Probably more important, though, is that Financials are now respon- Spreads Conf sible for an incredible 38% of expected growth this year. Lower loan Data as at June 15, 2018. Source: KKR Global Macro & Asset Allocation losses, improved trading results, and less punitive interest rates are analysis. all helping, a trend we expect to continue. The other notable area of earnings upside is Natural Resources. We note that 2018 Energy earnings estimates have been revised up by more than 17 percentage points year-to-date to 26.5% year-over-year. In fact, beyond Natural Resources and Financials, there have been downgrades in all other sectors of the European capital markets.

20 KKR INSIGHTS: GLOBAL MACRO TRENDS Likewise, in Emerging Markets, 2018 earnings growth estimates EXHIBIT 43 have decelerated on the margin to 14.6% year-over-year from a high There Has Been a Significant Divergence Between of 16.5% back in February. With that said, estimates are still up 1.3 Earnings Growth Upgrades in Resources and Financials percentage points from 13.3% at the beginning of the year. Notably, Technology and Financials combined are expected to make up almost Versus Downgrades in Cyclicals and Defensive Sectors 50% of expected growth this year. Meanwhile, similar to Europe, En- MSCI Europe 2018e EPS Growth Estimate ergy and Materials have seen some of the strongest earnings revision Indexed to 100 trends year-to-date, up 8.7 percentage points and 11.2 percentage Resources points, respectively. In our view, rising yields, a stronger U.S. dollar, Cyclicals (Indus, CD, Tech) and intensifying U.S.-China trade tensions are the key headwinds to Defensive (Staple, HC, Util, Telco) monitor going forward, as they could put a damper on the commodi- 160 Financials ties-led earnings growth story. 140 EXHIBIT 41 120 Financials Are Now Responsible for an Incredible 38% of Estimated European Earnings Growth this Year 100 80 MSCI Europe Consensus 2018e EPS Contribution to Growth Estimates 60 Europe 8.2% 40 Telcos (2.5%) Healthcare 1.1% 20 Growth 117 317 517 717 917 1117 118 318 518 Utilities 1.1% contribution REITs 1.2% Data as May 24, 2018. Source: KKR Global Macro & Asset Allocation Tech 1.4% analysis, Bloomberg, Haver Analytics. Materials 7.7% Staples 8.4% Cons Disc 8.6% Industrials 8.8% EXHIBIT 44 Energy 26.5% 37.6% Financials Earnings Revision Trends Show that Europe Has Been Stuck in a Downgrade Cycle (i.e., More Downgrades than -10% 0% 10% 20% 30% 40% Upgrades) Data as May 24, 2018. Source: KKR Global Macro & Asset Allocation analysis, Bloomberg, Haver Analytics. MSCI Europe: Earnings Revision Ratio, FY2

1m 3m

EXHIBIT 42 1.8 2018 European Earnings Growth Estimate Has Declined 1.6 to 8.2% from 9.1% at the Beginning of the Year 1.4 1.2 MSCI Europe EPS Growth Estimate 1.0 2018e 2019e 0.8 Jul-16 12% 11.5% 0.6 12% 0.4 11% 11% Jan-18 0.2 9.7% 10% 0.0 10% 00 02 04 06 08 10 12 14 16 18 9% Data as May 24, 2018. Source: KKR Global Macro & Asset Allocation 9% May-18 analysis, Bloomberg, Haver Analytics. 8% 8.2% 8% 7% Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Jul-18

Data as at May 24, 2018. Source: KKR Global Macro & Asset Allocation analysis, Bloomberg, Haver Analytics.

KKR INSIGHTS: GLOBAL MACRO TRENDS 21 EXHIBIT 45 with the forward P/E declining year-to-date by a full 3.0 multiple 2018 EM Earnings Estimates Have Decelerated On the points already (to 16.9x from 20.0x). Margin to 14.6% from a High of 16.5% Back in February EXHIBIT 47 MSCI EM Consensus 2018e EPS Contribution to Growth Estimates P/E Multiples Have Declined in Eight of the Past Eight Fed Tightening Cycles and Are Now On Track to Make It EM 14.6% Nine of Nine Healthcare 1.1% Staples 1.8% Growth CHANGE IN FORWARD P/ES DURING A FED TIGHTENING CYCLE Telcos 2.5% contribution Utilities 3.4% Rate Hike Cycle Industrials 5.5% REITs 6.1% Start Cons Disc 8.3% Materials 10.0% 1/31/94 5/31/99 5/31/04 2/29/72 4/29/83 2/28/74 12/16/15 Energy 12.2% 11/30/76 11/28/86 Financials 20.6% Tech 28.6% Stop 0% 10% 20% 30% Present 7/31/74 7/31/06 8/31/73 5/31/89 8/31/84 5/31/00 2/28/95 Data as May 24, 2018. Source: KKR Global Macro & Asset Allocation 4/30/80 analysis, Bloomberg, Haver Analytics. Trailing P/Es

Start 19.4x 12.2x 11.0x 12.5x 12.5x 14.9x 23.5x 16.5x 17.6x EXHIBIT 46 Cyclicals and Resources Stocks Are Enjoying the Stop 15.1x 9.9x 7.0x 10.7x 11.0x 12.6x 22.2x 14.0x 16.9x Strongest EPS Revisions in EM Change -4.29 -2.3 -4.06 -1.85 -1.46 -2.36 -1.31 -2.48 -0.7 MSCI EM 2018e Earnings Growth Estimate Data as at May 31, 2018. Source: Cornerstone Macro.

Resources Cyclicals Defensive Financials 25% Tech So, when we pull it all together, we estimate that the S&P 500 could 23% achieve a total return of approximately 7.8%, which would be about 21% 2,829 on the S&P 500. In absolute numbers, this price target as- 19% 17% sumes a multiple of 17.7 times an earnings number of $160.30. Of 15% the 7.8% total return we forecast, two percent comes from dividend 13% yield and 20% from earnings growth, partially offset by 12% in mul- 11% tiple compression. To be sure, though, predicting short-term stock 9% market returns is a difficult at best, and as such, we have provided a 7% range of four to 12% using assumptions that under different sce- 5% narios, we think could be reasonable this year. One can see the range 117 317 517 717 917 1117 118 318 518 of outcomes in Exhibits 48 and 49, respectively. Data as May 24, 2018. Source: KKR Global Macro & Asset Allocation analysis, Bloomberg, Haver Analytics.

So, what does this all mean for valuation and returns relative to our prior forecasts? To review, in January our base case assumed that the S&P 500 could trade at 18-19x our ‘old’ 2018 EPS estimate of “ $153.90 for a total return with dividends of 7-13%. Today, by comparison, given that we are further along in the tightening cycle, we now Today, by comparison, given believe that some multiple compression is warranted. Our forecast for a lower multiple should actually not be all that surprising, we be- that we are further along in the lieve, given that earnings multiples have actually contracted in every tightening cycle, we now believe one of the last eight prior cycles. Indeed, as one can see in Exhibit 47, the average P/E decline has been about 2.5 multiple points on aver- that some multiple compression age. For this cycle (which began in December 2015), the forward P/E is warranted. has ‘only’ declined by approximately 0.7 multiple points. However, as certainty about the magnitude of the Fed’s tightening campaign has “ gained momentum in 2018, the de-rating has been more exaggerated,

22 KKR INSIGHTS: GLOBAL MACRO TRENDS EXHIBIT 48 EXHIBIT 50 We Now Think the S&P 500 Can Trade in the 17x-18x Assuming Eight Percent Total Return for the S&P 500, Range in 2018... It Will Be Driven by About 20% EPS Growth, Plus Two Percent of Dividend Income, Offset by 12% of S&P Price Index at Various P/E and EPS Levels Multiple Contraction EPS 16.2x 16.7x 17.2x 17.7x 18.2x 18.7x 19.2x S&P 500 Total Return Decomposition $152 2,459 2,535 2,612 2,688 2,764 2,840 2,916 Dividend EPS Growth Chg in Multiples Total Return $154 2,492 2,569 2,646 2,723 2,800 2,877 2,954 50% $156 2,524 2,602 2,680 2,758 2,836 2,915 2,993 2018e $158 2,556 2,635 2,714 2,794 2,873 2,952 3,031 30% $160 2,589 2,669 2,749 2,829 2,909 2,989 3,069

$162 2,621 2,702 2,783 2,864 2,945 3,027 3,108 10%

$164 2,653 2,735 2,817 2,900 2,982 3,064 3,146 -10% $166 2,685 2,769 2,852 2,935 3,018 3,101 3,184

$168 2,718 2,802 2,886 2,970 3,054 3,138 3,223 -30% First time EPS growth is oﬀset by multiple Data as at May 24, 2018. Source: KKR Global Macro & Asset Allocation contraction since 201011 analysis, Bloomberg, Haver Analytics. -50% 2010 1996 1998 2000 2002 2004 2006 2008 2012 2014 2016 2018 EXHIBIT 49 Data as at May 24, 2018. Source: KKR Global Macro & Asset Allocation …Which Implies Four to 12% Total Return (Including analysis, Bloomberg. Dividends) for Full Year 2018

S&P Total Return at Various P/E and EPS Y/y Levels EXHIBIT 51 EPS y/y 16.2x 16.7x 17.2x 17.7x 18.2x 18.7x 19.2x With Real 10-Year Yields in the 0.0-0.6% Range, Today’s 15.3% (6.0%) (3.2%) (0.3%) 2.5% 5.4% 8.2% 11.1% S&P 500 Forward PE of 17.0x Is Actually In Line With Its Long-Term Median of 16.9x 16.8% (4.8%) (1.9%) 1.0% 3.8% 6.7% 9.6% 12.5% S&P 500: Median Forward PE Across Rate Environments (1990-Present) 18.3% (3.6%) (0.7%) 2.2% 5.2% 8.1% 11.0% 13.9%

19.8% (2.4%) 0.6% 3.5% 6.5% 9.4% 12.4% 15.4% Today = 17.0x 20x Max = 20.0x 19.2x 21.3% (1.2%) 1.8% 4.8% 7.8% 10.8% 13.8% 16.8% 17.7x 22.8% 0.0% 3.1% 6.1% 9.1% 12.2% 15.2% 18.2% 18x 17.1x 16.9x 16.7x 16.4x 16.3x 24.3% 1.2% 4.3% 7.4% 10.5% 13.5% 16.6% 19.7% 16.1x 16.0x 16x 25.8% 2.4% 5.6% 8.7% 11.8% 14.9% 18.0% 21.1% 13.6x 27.4% 3.7% 6.8% 9.9% 13.1% 16.2% 19.4% 22.5% 14x

Data as at May 24, 2018. Source: KKR Global Macro & Asset Allocation 12x analysis, Bloomberg, Haver Analytics. 0.0-0.6% 3.1-3.6% 0.6-1.1% 1.1-1.5% 1.5-2.1% 2.1-2.5% 2.5-3.1% 3.6-4.0% 4.0-5.7% -1.9-0.0% Real 10-Year UST yield (10-Year Less CPI) Note: Real yields proxied with 10-Year UST yield less U.S. headline inflation. Data as at May 31, 2018. Source: KKR Global Macro & Asset Allocation analysis,, Bloomberg.

KKR INSIGHTS: GLOBAL MACRO TRENDS 23 Oil Update: Stronger for Longer EXHIBIT 53 On a Seasonally-Adjusted Basis, the YTD Rate of Draws As our asset allocation targets suggest, we retain a notable over- Suggests OECD Inventories Could Normalize to Pre-2014 weight to Energy/Infrastructure. To review, two things have been driving our thinking in 2018. First, the massive oil inventory glut that Levels in 14 months fuelled the commodity bear market of 2014-16 is now almost fully OECD Total Commercial Inventories, Millions of Barrels, corrected. As we show in Exhibit 52, OECD inventories have fallen Seasonally Adjusted fully 10% since mid-year 2016, and they are now on pace to revert to Deficit -0.2mbd (IEA, EI, IHS f'cast) pre-crisis levels within the next year in our view. Admittedly, OPEC Deficit -0.7mbd (OPEC f'cast) will add some supply back to the market in coming months, but we Deficit -0.1mbd (EIA f'cast) expect the OPEC additions will only offset the Venezuelan and Iranian Deficit -0.6mbd (Actual YTD Pace) supplies that are falling offline. All told, we suspect inventories will continue declining at the recent pace, and as such, we believe official 3,100 forecasting agencies such as the U.S. Energy Information Adminis- 3,000 tration (EIA) and the International Energy Agency (IEA) may need to further upgrade their inventory estimates (Exhibit 53). 2,900

EXHIBIT 52 2,800 Trend = EIA 2,685 The Supply Normalization Story in Oil Continues as 2,700 IEA, IHS, EI OECD Inventories Are Just 130 Million Barrels Above the Jun-21 2,600 OPEC YTD Pace Pre-4Q14 Levels, a Big Improvement from 352 Million May-19 Jul-19 Barrels Last August 2,500 2008 2010 2012 2014 2016 2018 2020 2022 2024 OECD Total Commercial Inventories, Millions of Barrels, vs. Trend Data as at May 21, 2018. Source: KKR Global Macro & Asset Allocation Jul-16 analysis, Bloomberg, Haver Analytics, IEA, EIA, Energy Intelligence. 3200 3,127 OECD inventories are now above 3100 trend by just 130mb, which is a marked improvement from 256mb -10.0% What’s driving long-dated futures and energy equities higher these last October and 352mb last August. 3000 days, we believe, is a shift in the oil story from one of outsized global demand growth (the key feature of the second half of 2017, in our 2900 view) to one of lackluster non-U.S. supply growth (Exhibit 56). Impor- 2800 Trend tantly, while we expect demand growth to wax and wane in coming 2,685 Apr-18 years, we see the supply issue as a much more durable theme. To be 2,813 2700 sure, some of the big events that tightened supply in recent months— including Venezuela’s melt-down and the Iran sanctions—are non- 2600 recurring items. That said, we do not see those issues going away 2500 anytime soon. Maybe even more importantly, we are now seeing ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 Data as at May 21, 2018. Source: KKR Global Macro & Asset Allocation analysis, Bloomberg, Haver Analytics, IEA, EIA, Energy Intelligence.

Second, we also think the oil market is entering an important new “ phase of its recovery, as long-dated oil futures have finally started What’s driving long-dated futures moving higher in recent weeks. This change is significant because energy equities are tied much more closely to long-dated (e.g., and energy equities higher these 5-Year forward) prices than to spot prices. As a result, it has only days, we believe, is a shift in the been in recent weeks that energy equities have started outperform- ing global benchmarks. oil story from one of outsized global demand growth (the key feature of the second half of 2017, in our view) to one of lackluster non-U.S. supply growth. “

24 KKR INSIGHTS: GLOBAL MACRO TRENDS evidence of lackluster conventional oil production growth in regions EXHIBIT 56 outside of OPEC (Exhibit 57), which we suspect will be a persistent Declines in Conventional Oil Supply Are Now issue in coming years as a lack of new project sanctioning starts to Substantially Offsetting Surging U.S. Shale Production impact the flow of volumes coming online (Exhibit 58). Oil Supply Growth, Millions of Barrels Day EXHIBIT 54 (Six-Month Annualized Rate of Change) While Spot Oil Prices Have Been Recovering for Over USA Rest of World a Year, Long-Dated Prices Have Only Started Increasing 4,000 Recently 3,500 3,000 Brent Crude Oil Prices,USBarrel 2,500 1,815 80 Spot Price 5-Year Forward Price 2,000 1,500 75 1,000 Nov-17 70 500 708 61218 0 65 62.74 -500 Apr-18 Jun-17 -1,000 60 -932 56.27 .5% Jun-15 Jun-16 Jun-17 Oct-14 Oct-15 Oct-16 Oct-17 Feb-16 Feb-17 Feb-18 55 Feb-18 Feb-15 55.95 Data as at May 22, 2018. Source: Energy Intelligence, Haver Analytics, 50 KKR Global Macro & Asset Allocation analysis.

EXHIBIT 57 Jul-17 Oct-17 Apr-18 Jun-17 Jan-18 Feb-18 Sep-17 Dec-17 Nov-17 Aug-17 Mar-18 May-18 We Are Now Seeing Evidence of Lackluster Conventional Data as at May 22, 2018. Source: Bloomberg, KKR Global Macro & Asset Oil Production Growth Outside of OPEC Allocation analysis. Six Month Annualized Rate of Crude Oil Production Growth (Thousand of BarrelsDay, Seasonally Adjusted) EXHIBIT 55 Energy Equities Are Tied Much More Closely to Long- 1,815 Dated Prices than to Spot Prices

% Change Since June 30, 2017

Spot Brent Oil Price 5-Year Deferred Brent Oil Price 70% Energy Equities Relative Performance 60% 50% 40% -445 30% -616

20% USA Non-OPEC ex US OPEC 10% Data as at April 30, 2018. Source: Energy Intelligence, Haver Analytics, 0% KKR Global Macro & Asset Allocation. -10% Jul-17 Oct-17 Apr-18 Jun-17 Jan-18 Feb-18 Sep-17 Dec-17 Nov-17 Aug-17 Mar-18 In sum, despite the recent move up in oil prices, we still like our May-18 Energy equities relative performance = MSCI ACWI Energy Relative to overweight position in the sector. Fundamentals are strong, invento- MSCI ACWI. Data as at May 22, 2018. Source: Bloomberg, KKR Global ries are getting lean, and we see upside to the long-dated oil futures Macro & Asset Allocation analysis. prices that govern energy equity values. In the private markets, we also think this is an attractive time for investors to acquire producing assets, hedge current production at today’s attractive spot prices, and benefit from longer-term upside if our thesis on long-dated pricing plays out as we expect.

KKR INSIGHTS: GLOBAL MACRO TRENDS 25 EXHIBIT 58 EXHIBIT 60 The Pipeline of Projects Set in Motion Prior to the Oil We Are Quite Long in the Tooth in Terms of Pure Cycle Price Collapse Will Sustain Sanctioned Production Duration at 108 Months

Growth Through 2019 Duration of U.S. Economic Expansions (Months) Sanctioned Peak Capacity by Start Year Thousands of Barrels per Day June 2009 Current (Jun-18) 108 2500 Nov-17 update Apr-18 update November 2001 - December 2007 73 March 1991 - March 2001 120 November 1982 - July 1990 92 2000 July 1980 - July 1981 12 March 1975 - January 1980 58 1,455 1500 November 1970 - November 1973 36 February 1961 - December 1969 106 -1,182 April 1958 - April 1960 24 1000 May 1954 - August 1957 39 October 1949 - July 1953 45 500 October 1945 - November 1948 37 273 June 1938 - February 1945 80 March 1933 - May 1937 50 0 November 1927 - August 1929 21 2017 2018 2019 2020 2021 2022 July 1924 - October 1926 27 Data as at April 30, 2018. Source: Cambridge Associates, KKR Global July 1921 - May 1923 22 Macro & Asset Allocation analysis. March 1919 - January 1920 10 December 1914 - August 1918 44 January 1912 - January 1913 12 June 1908 - January 1910 19 EXHIBIT 59 August 1904 - May 1907 33 Performance in the Energy Sector Has Been Abysmal; December 1900 - September 1902 21 Median = 37 We Now Believe There Are Significant, Near Term Value- Data as at June 12, 2018. Source: National Bureau of Economic Research Creation Opportunities (NBER), KKR Global Macro & Asset Allocation analysis.

Energy 5-Year Average Annualized Return, % 40% EXHIBIT 61 35% 30% Nine Years of Consecutive Positive Performance for 25% the S&P 500 Is Highly Unusual; We Are Now Halfway 20% Through Our 10th Year 15% # OF CONSECU- 10% TIVE YEARS OF CUMULATIVE 5% POSITIVE RETURNS START END RETURN CAGR 0% 3 1904 1906 67% 19% -5% ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 3 1954 1956 111% 28% Data as at 4Q17. Source: Cambridge Associates, KKR Global Macro & 3 1963 1965 60% 17% Asset Allocation analysis. 3 1970 1972 40% 12% 4 1942 1945 143% 25% Where Are We in the Cycle? 4 1958 1961 102% 19% 5 2003 2007 83% 13% Similarly to many of the folks with whom we speak, we too are 1947 1952 148% 16% spending a lot of time assessing where we are in the cycle. From 6 our perch at KKR, our work suggests that the financial markets cycle 8 1921 1928 435% 23% in the U.S. is more mature than the economic one. One can see this 8 1982 1989 291% 19% in both Exhibits 60 and 61, respectively, which show that both the duration of the expansion and the consistency of the capital markets 9 1991 1999 450% 21% performance are largely unmatched. 9 2009 2017 259% 24% Avg. CAGR 20%

Cumulative total return on an annual basis. Data as at December 31, 2017. Source: http://www.econ.yale.edu/~shiller/, Bloomberg.

26 KKR INSIGHTS: GLOBAL MACRO TRENDS EXHIBIT 62 EXHIBIT 63 5-Year Annualized Risk-Adjusted Returns in the U.S. Are 10-Year Cumulative Equity Returns Are Now Beginning to Approaching Peak Levels Look More Full Too

S&P 500 Rolling 5-Year Annualized Risk Adjusted Returns S&P 500 Rolling 10-Year Annualized Returns, %

2.5 24% y

t Dec-17

i 20% l

i 2.0

t 1.7 a l

o 16%

V 1.5

s 12% n

r 1.0 u t

e 8% R

f 0.5 o 4% o i t

a 0.0

R 0% -0.5 -4%

-1.0 -8% 1927 1942 1957 1972 1987 2002 2017 1936 1949 1962 1975 1988 2001 2014 Data as at December 31, 2017. Source: Bloomberg. Data as at December 31, 2017. Source: Bloomberg.

EXHIBIT 64 Our Cycle Dashboard Suggests That Many Asset Classes at the Aggregate Level Are Now Fairly to Fully Valued; As Such, More Investment Creativity Will Be Required

Equity Valuation Metrics Economic and Credit-Related Metrics

Embedded EPS Avg. Across Credit Credit Trailing 5yr Avg. Across Avg. Across EV/ Fwd Market Cap Growth (Rate-Adj. Shiller and Cycle-Related Unemp. Rate Spreads Equity Mkt All Metrics Equity Metrics EBITDA P/E % of GDP Equity Valuation) P/E Metrics (inverse) (inverse) Return

U.S. 0.8 0.8 1.5 0.5 1.5 -0.6 0.9 0.8 1.4 0.8 0.3

Europe 0.2 -0.1 0.1 0.1 0.9 -1.3 0.0 0.7 1.6 0.7 -0.1

EM 0.1 0.0 1.1 -0.3 0.2 -0.5 -0.5 0.3 0.5 0.7 -0.4

Japan -0.1 -0.5 -1.1 -1.0 1.5 -1.3 -0.9 0.7 1.2 -0.2 1.1

NOTE: Table above represents Cycle Metrics - Number of Standard Deviations Rich/Cheap. Data as at May 31, 2018. Source: Bloomberg, Factset.

In Europe and China, by comparison, we believe that both their the various macro inputs we watch are aggregated together, we do economies and markets are in more catch-up mode relative to the not view markets at levels that are flashing a danger zone. What we U.S. Not surprisingly, this viewpoint drives our overweight positions have recommended, though, as a safety precaution, is to lock in low in both Europe and Asia, compared to our modest underweight posi- cost liabilities and/or own businesses that benefit from the structural tion in the United States. bottoming in rates that is now under way, we believe.

Importantly, regardless of region, the key variable on which every Another reason that we have not shifted our asset allocation to a investor must have a strong view is interest rates. Why? Because as notably more defensive stance is that our proprietary recession we show in Exhibit 64, markets around the world are quite expensive model is not suggesting an economic slowdown in imminent. In on a market capitalization-to-GDP basis. Indeed, only if one adjusts fact, the model in Exhibit 65, which was originally devised by Paula for interest rates (which is what we do in the column to the right of Roberts and Nishant Kachawa, suggests that the risk of recession is market capitalization to GDP in Exhibit 64), do valuations actually ap- benign over the next 12 months with only a modestly elevated risk of pear more reasonable. For our nickel, we think that rates have struc- recession over 24 months. Were the model to turn more long-term turally bottomed, but will only head higher over time. So, when all cautious, we believe the cause would be linked to the overall health

KKR INSIGHTS: GLOBAL MACRO TRENDS 27 of the consumer. At present, however, given tax cuts and low unem- So, for those that follow our asset allocation framework closely, our ployment, we are not yet ready to lead the leading indicators in the core view is to not yet massively pull back from risk-assets. Rather, model. That said, as the model also shows, there are some variables we continue to advocate a diversified portfolio that now benefits that have turned more cautious. Specifically, heightened levels of more from an improvement in nominal GDP. It also favors yield- risk two years out is currently being driven by potentially tightening oriented investment strategies that are shorter in duration, tilts more financial conditions, as interest rates rise, stock market performance towards Asia than the Americas, and attempts to harness the illiquid- moderates, and corporate interest coverage declines. ity premium in key areas such as Asset Based Lending and Private Equity.

EXHIBIT 65 Our Quantitative Model Suggests that Tightening Financial Conditions Are Leading to Increased Levels of Risk for the U.S. Economy Over the Next 24 Months, Potentially Foreshadowing a Mild Economic Downturn in 2020

Probability of a Recession in 24-Months Recessions 24m

100 Asia Crisis Tech Bubble Global 80 Financial May-18 Crisis 60

0 an11 an17 an13 an15 an18 an16 an14 an12 an10 an01 an97 an99 an95 an98 an96 an07 an03 an09 an05 an08 an06 an04 an02 an00 Green to red variance corresponds to likelihood of a recession. Data as at June 1, 2018. Source: KKR Global Macro & Asset Allocation analysis.

EXHIBIT 66 The Most Important Positive Offset to the Growing Storm Clouds Is the Health of the U.S. Consumer

24-Month Probability Breakdown

ConsCreditCards Factor A ConsCreditCards HomeBuilds Factor D HomePrice Factor D HomePrice CRELoans S&P 500 Factor C S&P 500 ConsConf ConsConf Factor F Factor A Factor A Inventory Payrolls ConsSpending ConsSpending Payrolls FedFunds FedFunds ConsSpending Factor G FedFunds Factor G NewOrders Factor B Factor E Factor B FedFunds Factor B Factor B CorpInterestCov CorpInterestCov NewOrders CorpInterestCov Factor E Other Other Other Other CorpInterestCov

Factor E ConsDelinquencies ConsDelinquencies

Asia Crisis (Dec 1997) Tech Bubble (Dec 1999) Financial Crisis (Dec 2006) Dec 2017 May 2018 Data as at June 1, 2018. Source: KKR Global Macro & Asset Allocation analysis.

28 KKR INSIGHTS: GLOBAL MACRO TRENDS Section II: Key Investing Themes EXHIBIT 68 G4 Sovereign Issuance Less Central Bank Purchases #1: The Shift From Monetary Stimulus to Fiscal Stimulus Has Shows that Net Issuance Will Expand Notably in 2H18 Emerged As a Big Call For Investors

Central Net Issu- As part of our Paradigm Shift thesis, which we laid out in January Net Is- Y/y % Bank Pur- Y/y % ance Less Y/y % 2017 (see Outlook for 2017: Paradigm Shift), we argued that growing suance Change chases Change QE Change socioeconomic tension would inspire governments around the world to shift their focus towards fixing the underwhelming growth rates in 2011 2,446 1,032 1,414 the nominal economy relative to financial assets (Exhibit 69). In doing 2012 2,064 -16% 508 -51% 1,556 10% so, the change in emphasis would ease the positive technical bid that investors have enjoyed in recent years. One can see this transition 2013 1,890 -8% 1,063 109% 826 -47% starting to play out in Exhibits 71 and 72, respectively. 2014 1,482 -22% 809 -24% 674 -18% EXHIBIT 67 2015 1,044 -30% 1,091 35% -48 -107% QE Technicals will Turn into a Modest Headwind (Net Selling) Beginning in October 2018, Driven 2016e 964 -8% 1,477 35% -514 -971% Largely By the Fed 2017e 964 0% 1,132 -24% -167 -68% Monthly Changes in Balance Sheet (bn) 2018e 1,453 51% 775 -32% 677 506%

110 ECB Fed Total 12,306 7,888 4,419 Forecasts TLTRO II 70 roll oﬀ* G4 = BoJ, BofE, Fed, Eurozone. QE = Quantitative easing. Data as at June 14, 2018. Source: National Treasuries, Morgan Stanley Research. 30

-10

-50 ECB QE -90 unwind

Turning -130 Point in Oct18 -170

-210 17 18 19 20 21 22 23 24 25 *Maturity of each of the four operations is fixed at four years. But we smoothed out the “lump-sum” repayments over the calendar year for “ illustrative purposes. Data as at February 28, 2018. Source: KKR Global Macro & Asset Allocation analysis. Federal Reserve, European Central At its core, the strategy is for Bank. the ‘Authorities’ to run nominal

Whether we have been lucky or good, our Paradigm Shift playbook is GDP well in excess of nominal gaining further momentum, and it now extends well beyond places interest rates to not only help like the U.S. to many countries these days, including Italy and Mexico. At its core, the strategy is for the ‘Authorities’ to run nominal GDP pay off the debt created by the well in excess of nominal interest rates to not only help pay off the fiscal stimulus but also to create debt created by the fiscal stimulus but also to create some inflation in the system to inspire faster revenue growth – and with it, some pric- some inflation in the system to ing flexibility around key metrics such as wage growth. inspire faster revenue growth – and with it, some pricing flexibility around key metrics such as wage growth. “

KKR INSIGHTS: GLOBAL MACRO TRENDS 29 EXHIBIT 69 EXHIBIT 71 We Think That Governments Are Now Focused on The Government Has Focused On Stimulating Nominal Driving Better Returns in the Real Economy Relative to GDP in Today’s Low Interest Rate Environment... the Financial Economy U.S. Fed Funds Rate, % Points Above(Below) Financial and Real Economy Prices Total Return U.S. Nominal GDP Growth Performance in Local Currency Since January 2009 3yr Moving Avg. 300% 6% 1982 250% Fnn Asset Re En Pres Pres 5.7% 200% 4%

150% 2009 2% 1.0% 100% Restrictive Policy Rates

50% 0%

0% -2% -50% 2017 -100% -4% 2005 2012 -3.1% 1978 -4.2% Loose Policy Rates Gold

SXXP -3.7% Topix US IG

US HY -5.6% US CPI -6% S&P 500 US Bond MSCI EM US wages Japan Bond Commodity MSCI World Germ. Bond European IG 1981 European HY 2011 1975 1978 1987 1972 1993 1999 1963 1996 1969 1966 1984 2017 1990 1960 European CPI 2014 2005 2008 2002 EA House Price US House Price 2020e European wages US Nominal GDP EU Nominal GDP

Data as at December 31, 2017. Source: Goldman Sachs. Data as at May 31, 2018. Source: Bloomberg, KKR Global Macro & Asset Allocation analysis.

EXHIBIT 70 The U.S. Government Has Likely Ushered in a Period of EXHIBIT 72 Rising Fiscal Imbalances ...Which Often Leads to an Increase in the Rate of Inflation

U.S. Fiscal Balance 1.5% 0.9% From 2010 Thru 2017, 0.0 1.0% Fed Funds Have Been 300 Basis Points Below Nominal GDP 0.5% 0.3% -1.0

0.0% -2.0 -0.1% -0.5% -0.3% -3.0 -2.7 -2.6 (3yr CAGR) -3.1 -1.0% -3.3 -3.4 -1.0% -4.0 -4.0 -1.5%

-5.0 Y/Y Change in Inﬂation Rate 2yrs Later -2.0% -5.0 -1.9% -6.0 -2.5% 2013 2014 2015 2016 2017 2018e 2019e (5)% (5)-(3)% (3)-0% 0-3% 3-5% 5% e = Consensus estimates per Bloomberg. Data as at May 31 2018. Source: Bloomberg, KKR Global Macro & Asset Allocation analysis. Fed Funds-Nominal GDP (3-Year MovingAvg.) Data as at May 31, 2018. Source: Bloomberg, KKR Global Macro & Asset Allocation analysis.

30 KKR INSIGHTS: GLOBAL MACRO TRENDS So, what does this mean for investors? For starters, it likely means From an asset allocation and positioning standpoint, we believe our lower expected returns for financial assets. It is also likely to lead to message is quite clear on what not to own. Specifically, our strong more volatility in the global capital markets, something that is now view is that investors should move away from longer-duration global increasingly becoming apparent to investors, particularly in the equity government bonds, which is why we have a 2,000 percentage markets. One can see this in Exhibit 74. point – yes 2,000 percentage point - underweight to Long-Duration Government Bonds. We also think that our nominal GDP over nominal EXHIBIT 73 interest rate thesis means that investors should continue to lock in As Governments Shift From Monetary to Fiscal Stimulus, low cost liabilities, which is a theme we have been touting for some We Expect More Volatility time. Finally, if we are right, then Cash will increasingly become a more formidable asset class. Already in the U.S., the 1-3 month T- % of Days With Intraday Trading Swings of At Least Two Bills are above or at least competitive with what a global investor can Percent in the S&P 500 earn after going five- to 10-years out on the duration curve in many other parts of the world. Finally, we like select global Financials, 52.6% particularly those levered to rising rates and lower credit losses.

46.8% EXHIBIT 75 41.3% 34.1% Cash Will Increasingly Become a More Competitive Asset 30.2% Class in the United States 27.0% 23.0% Gross Dividend Indicated Yield, % 22.2% 16.9% 17.1% SPDR Barclays 1-3 Month T-Bill 14.6% 15.0% 17.1% 13.4% 12.4% Vanguard Short-Term Bond ETF 7.9% 6.7% 7.5% 2.0 iShares 1-3 Year Treasury Bond ETF 4.7% 4.8% 4.4% 3.6% 1.6% 2.8% 1.6% 1.2% 1.2% 1.8 0.0% 0.8% 0.8% 0.8% 1.6 1.4 1998 1996 1994 1988 1992 1990 2018 2016 2014 2012 2010 2008 2006 2004 2002 2000 1.2 Data as at May 1, 2018. Source: Bloomberg. 1.0 0.8 0.6 EXHIBIT 74 0.4 We See Expected Future Returns for the Investment 0.2 Management Industry Headed Lower During the Next Jul-16 Jul-15 Jul-17 Jan-17 Jan-16 Jan-18 Sep-16 Sep-15 Five Years Sep-17 Nov-16 Nov-15 Nov-17 Mar-18 Mar-17 Mar-16 May-15 May-18 May-17 May-16 Past and Future Expected Returns by Asset Class, CAGR, % Data as at June 6, 2018. Source: Bloomberg.

CAGR Past 5 Years: 2012-2017, % CAGR Next 5 Years: 2017-2022, % #2: Yearn for Yield: Own More Cash Flowing Hard Assets 15.8 In recent years the Global Macro & Asset Allocation team has done a 12.8 substantial amount of work around the high net worth (see The Ultra 10.2 High Net Worth Investor: Coming of Age, May 2017) and insurance mar- 10.0 kets (see New World Order, April 2018). My colleagues Paula Roberts and Ken Mehlman have also supplemented this industry work with 6.1 some detailed, top down analysis on demographics (see What Does 4.8 4.4 4.0 Population Aging Mean for Growth and Investments?, February 2018). 2.1 Across all cases, we continue to believe that the Yearn for Yield thesis 1.6 1.2 0.3 is a multi-year theme with significant structural tailwinds behind it.

U.S. 10 S&P 500 Private Hedge Real Estate Cash Consistent with this view, KKR’s asset allocation framework in recent Year Equity Funds (unlevered) Treasury years has over-weighted sectors and themes where we felt investors Bond would be rewarded with solid cash flow without too much leverage. Data as at December 31, 2017. Source: Bloomberg, Cambridge However, given that we now have higher conviction that govern- Associates, NCREIF, HFRI Fund Weighted Composite Index (HFRIFWI ments around the world are more committed to running nominal Index), KKR Global Macro & Asset Allocation. GDP above nominal interest rates, we want to make sure that we are further migrating even more towards assets that appreciate nicely when nominal GDP increases at a healthy clip.

KKR INSIGHTS: GLOBAL MACRO TRENDS 31 To this end, we are adding a two percent position to the strategy of EXHIBIT 76 owning the B-piece stack of CMBS mortgages. This instrument acts MLPs Are One of the Few Assets With Above Average like a zero coupon bond in terms of accretion, and we believe that it Yields can offer investors an approximate 10% cash-on-cash return with an all in target gross return of 11-14% annually. Unlike the CLO seg- +- One StDev 10yr Avg. Current ment of the market, the retention rules around the B-piece have not 12 changed, supporting our view that an excess of capital will not pour MLPs are One of Few into this space as many bank regulation rules are relaxed. 11 Assset Classes that Currently 10 Oﬀer AboveAverage Yields Importantly, though, our biggest overweight to our Yearn for Yield 9 thesis remains our eight percent overweight to Asset-Based Fi- 8 nance. Indeed, across Europe, the U.S., and Asia, we continue to see 7 plentiful opportunities to deploy capital in areas such as residential 6 construction, mortgages, locomotives, and other hard assets. Impor- 5 tantly, as bank book values have again begun to grow in the banking 4 Indicated Yield sector, publicly traded financial intermediaries have finally started to 3 ‘reposition’ their portfolios, including selling performing hard assets 2 with onerous capital charges as well as seeking out capital-relieving 1 joint ventures with third party investors, including alternative asset 0

managers. ‘Last-mile’ residential construction in areas such as Spain MLPs and Ireland has been a particular focus of ours of late within Asset- US High Yield

Based Finance. We also view Asset-Based Finance as an elegant EM Sovereign US Corporates EM Corporates Leveraged Loans

play on our desire to lock in low-cost liabilities in today’s QE-driven DJ Dividend Index Bbg NA REIT Index market, allowing investors to earn above average spreads. Data as at June 12, 2018. Source: Bloomberg. Meanwhile, our decision to boost our Energy/Infrastructure allocation to seven percent from five percent and a benchmark of two percent in January 2018 has served us well. Today we feel equally EXHIBIT 77 as enthusiastic. In particular, we are now seeing more public and private resource companies selling ‘non-core’ assets at decent With Public REITs Now Badly Lagging the S&P 500, prices. In many instances these properties are producing assets that We Think an Interesting Investment Opportunity Is act somewhat as a ‘bond in the ground’ for investors, generating Being Created high single-digit cash-on-cash returns. Moreover, there is often the Historical Price Performance potential for development and efficiency upside, which can lead to a total return in the mid-teens in many instances. SPX Index, RHS BBREIT Index, LHS

On the Infrastructure side, we also have a more constructive view, 3000 310 favoring areas such as mid-stream MLPs, towers, and other hard assets with contractual/recurring cash flows as well as the potential 2800 300 for restructuring and/or divestitures. Overall, if we are right that 290 governments around the world are now targeting improved growth 2600 in the real economy, not just boosting financial assets via monetary 280 stimulus, then we believe Real Assets should be a bigger part of 2400 one’s portfolio on a go-forward basis. 270 2200 260

2000 250 “ 1800 240 Jul-15 Jul-16 Jul-17 Jan-17 Jan-16 Jan-18 Oct-16 Oct-15 Oct-17 Apr-17 Apr-15 Apr-16 Importantly, though, our biggest Apr-18 overweight to our Yearn for Yield Data as at June 12, 2018. Source: Bloomberg. thesis remains our eight percent overweight to Asset-Based Finance. “

32 KKR INSIGHTS: GLOBAL MACRO TRENDS In sum, we are bullish on cash-flowing, hard assets that can be EXHIBIT 79 modestly levered to deliver investors a 12-14% return. Interestingly, …And These Trends Continue in 2018. We Believe These given that banks are being encouraged to lend more these days, one Dynamics Are Creating an Interesting Arbitrage for can actually buy collateralized assets linked to nominal GDP from banks looking for capital relief and then borrow from the same bank Private Equity at attractive terms to lock in what we view as a durable spread. To Global Investment Styles: Total Return, YTD, % be sure, this option is not available everywhere, but key markets in Ireland, Australia, and the United States have yielded compelling op- 10% 8.9% portunities of late. 8% 6.4% #3: Buy Complexity, Sell Simplicity 6% 5.1% 4.2% 4% While this thesis is not a new one for us, it remains an extremely 2.8% profitable play on what current market conditions are offering inves- 2% 1.2% tors with 1) longer duration liabilities and/or 2) the ability to facilitate operational improvements. As we show below, the best performing 0% strategies of the past three years have been Momentum, Quality, and -2% (0.8%) (0.9%) Growth. In many instances, investors follow these strategies yet they

fail to adequately incorporate valuation into their investment process- Value Quality Growth Dividend es. Yet, at the same time the market is shunning Value and Dividend Small Size MSCI ACWI Momentum

Yield. We like this arbitrage a lot, particularly given that we believe Minimum Vol markets often only get this bifurcated later in an economic expansion Data as at June 12, 2018. Source: Bloomberg, BAML Research. (when what is working continues to work until it can’t).

EXHIBIT 78 On the credit side, a similar set-up of Haves versus Have-Nots has Over the Past Three Years Momentum Strategies Have unfolded, according to my colleague Chris Sheldon. One can see this Meaningfully Outperformed the Broader Market… in Exhibit 81. Interestingly, though, performance year-to-date has fa- vored more risky credits, a trend that we believe is likely to continue. Global Investment Styles: Total Return, 3-Year, % EXHIBIT 80 50% 47.0% The Valuation Premium of U.S. Growth Stocks vs. U.S. 40.1% 37.6% 40% 34.7% Value Stocks Is Now the Most Extreme Since 2000 30.4% 29.4% Price to Book, Indexed to 100 30% 23.2% 23.1% Russell 1000 Value vs. Benchmark 20% 150 Russell 1000 Growth vs. Benchmark 10% 140 0% 130 Value Quality Growth

Dividend 120 Small Size MSCI ACWI Momentum Minimum Vol 110

Data as at June 12, 2018. Source: Bloomberg, BAML Research. 100

90 “ 80 We are bullish on cash- 70 1997 1999 2001 2003 2005 2007 2009 1995 2011 2013 2015 2017 flowing, hard assets that can Data as at May 31, 2018. Source: Bloomberg. be modestly levered to deliver investors a 12-14% return. “

KKR INSIGHTS: GLOBAL MACRO TRENDS 33 EXHIBIT 82 EXHIBIT 83 After Nine Full Years of a Bull Market, 40% of Russell 2000 The Rate of Return On FDI Is Declining

Companies Still Have EV/EBITDAs of Less than 10x Rate of Return on Foreign Direct Investment, % EVEBITDA of U.S. Stocks With EVs of 500mm-5bn US UK Germany Netherlands 6x Negative EBITDA 9% 16% 11% 14% 6-8x 40% of these 16% 12% companies have EVEBITDAs of = 10x 10% 8-10x 15% 8%

10x 6% 50% 4% EV to Next Twelve Months Estimated EBITDA, based on consensus EBITDA estimates per Bloomberg. Universe = 1,070 Russell 3000 2% stocks with EVs of $500mm-$5bn and EBITDA estimates available in Bloomberg. Data as May 31, 2018. Source: Bloomberg, KKR Global Macro 0% & Asset Allocation analysis. 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 Data as at January 2017. Source: National Statistics, OECD, Haver Analytics. So, while we fully acknowledge that several key metrics, U.S. employment trends in particular, suggest we are late cycle, we take significant comfort in the large bifurcations that the global capital EXHIBIT 84 markets are presenting. Specifically, we like the bifurcations that we now see extending across both Equities and Credit. This backdrop Intensifying Local Competition Has Dented the Return is especially compelling for investment managers who can buy into Profile of Global Multinationals complex situations at a discount, provide a meaningful degree of operational improvement or expertise, and then sell them back out into the capital markets at a notable premium to what they paid. This Top 500 Global Companies Return on Equity, LTM as at 2016, % arbitrage will not last forever, in our opinion, but while it does, asset Multinational Firms Local Firms allocators should lean in aggressively. Technology #4: Deconglomeratization: Corporations Are Increasingly Shedding Other Consumer Assets Industrial Cyclical Consumer In our view, this idea is a big one; it is global, and it has duration. It Utilities also reflects a push by more activist investors for management teams to optimize their global footprints, particularly as domestic agendas All Sectors take precedence over global ones. Central to this story is that cross- Financial border returns are falling for many multinational companies, which Diversified one can see in Exhibits 83 and 84, respectively. Basic Materials Media & Communciations Energy -5% 0% 5% 10% 15% 20% 25%

Data as at January 2017. Source: The Economist, Bloomberg. “ We like the bifurcations that we At the moment, Japan has emerged as one of the most compelling pure play examples on our thesis about corporations shedding non- now see extending across both core assets and subsidiaries. Without question, the macro backdrop Equities and Credit. for this phenomenon is compelling for at least three reasons. First, many of Japan’s largest companies have literally hundreds of subsid- “ iaries that could be deemed non-core, and as corporate governance and shareholder activism gain momentum, they have increasingly

34 KKR INSIGHTS: GLOBAL MACRO TRENDS been identified as potential sources of value creation. All told, as we to cover basic infrastructure needs across key markets such as wa- show here in Exhibit 85, at least a quarter of the Nikkei 400 has 100 ter, roads, telecom, and rail (Exhibit 87). or more subsidiaries. EXHIBIT 86 Second, the deposit-to-GDP ratio in Japan is 135.5%. This high level U.S. Upstream Now Seems to Be in Consolidation Mode underscores our view that banks have plenty of excess capital to lend to acquirers of these subsidiaries. In many instances, a private equity U.S. Upstream Transactions: Deal Value and Count by Year, US Billions firm can get at least 7x leverage, with an all-in cost of funds that is below two percent. Third, enterprise value-to-EBITDA multiples in Deal Value, LHS Deal Count, RHS Japan are often at or below historical averages, a set-up that we do not find in many other markets around the world. 100 92 500 474 EXHIBIT 85 90 456 450 423 80 75 400 Japan Has Emerged as One of the Most Compelling 69 377 70 65 350 Pure Play Examples on Our Thesis About Corporations 329 Shedding Noncore Assets and Subsidiaries 60 303 300 50 45 250 NUMBER OF LISTED COMPANIES BY NUMBER OF 40 33 200 CONSOLIDATED SUBSIDIARIES 30 150 300 NUMBER UNDER 10 50 100 OR 20 100 OF COMP. 10 -49 -99 -299 MORE 10 50 - 0 Nikkei 400 400 51 157 91 77 24 2013 2014 2015 2016 2017 2018 YTD Ann. TSE First 1,956 882 802 155 90 27 Section 2018 YTD is annualized. Data as at May 31, 2018. Source: PLS.

TSE Second 539 467 71 1 0 0 Section EXHIBIT 87 Mothers 239 226 13 0 0 0 The World Needs to Invest an Average of $3.7 Trillion in JASDAQ 773 693 79 1 0 0 Infrastructure Assets Every Year Through 2035 in Order to Keep Pace With Projected GDP Growth Total 3,507 2,269 964 154 91 28 THE NETWORK INFRASTRUCTURE NECESSARY TO SUPPORT Data as at 2017. Source: Macquarie. GLOBAL ECONOMIES PROJECTED GDP GROWTH, 2017-2035 AVERAGE AN- AGGREGATE NUAL NEED, ANNUAL SPENDING, We also note that we are seeing a lot of corporate ‘streamlining’ oc- 2017-2035, USD SPENDING AS A 2017-35, USD curring outside of the traditional multinational sector. Indeed, after TRILLIONS % OF GDP TRILLIONS several quarters of inactivity, we are finally seeing U.S. energy companies rightsizing their footprints, as Wall Street encourages many of Ports 0.1 0.1 1.6 these entities to shed slower growth assets in favor of ‘hot’ shale ba- Airports 0.1 0.1 2.1 sins. While this activity may not necessarily be long-term bullish for the stocks of publicly traded energy companies, it is creating signifi- Rail 0.4 0.4 7.9 cant, near-term value creation opportunities for the buyers of these properties, particularly for players with expertise in the production Water 0.5 0.5 9.1 and midstream segments of the oil and gas markets. Telecom 0.5 0.6 10.4

Also, within the Infrastructure sector, we have seen a notable Roads 0.9 1.0 18.0 number of divestitures of hard assets in recent quarters, particularly those with contractual revenue set-ups. It appears that Europe has Power 1.1 1.3 20.2 emerged as the most active region for Infrastructure carve-outs, Total 3.7 4.1 69.4 though trend lines in both the United States and Asia are firming too. Importantly, this carve-out opportunity is in addition to some of Data as at June 2017. Source: McKinsey Bridging Infrastructure Gaps: Has the structural increases in infrastructure investment that we think The World Made Progress? will occur as governments rely more on fiscal spending than monetary stimulus to bolster growth in the years ahead. All told, in 2017, McKinsey Consulting estimated that the global economy will need to spend $3.7 trillion annually, or 4.1% of global GDP, from 2017-2035

KKR INSIGHTS: GLOBAL MACRO TRENDS 35 #5: Experiences Over Things 2.0 EXHIBIT 89 Indian Millennials Spend More than 36% of Their For several quarters we have been highlighting the secular trend by Incremental Income on Entertainment and Travel consumers away from ‘Things’ and towards ‘Experiences’ ― think posting a delicious meal on Instagram versus adding another sweater Indian Millennials Expenditure by Category of to the wardrobe. As we travel around (particularly in Asia), technol- Incremental Income, % ogy has made the trend towards Experiences Over Things a secular Leisure trend with far ranging implications in major sectors such as Health- Travel, 3.5% Vehicle care/Wellness, Leisure, Financial Services, and Entertainment. In the Ownership, 5.4% U.S., consumers are earmarking an ever increasing amount of their paychecks for what we are increasingly viewing as ‘fixed charges’ such as healthcare, rental expenses, and iPhone maintenance. One Property, 7.0% can see this in Exhibit 88. Entertainm ent Incl. Home EXHIBIT 88 Eating Out, Appliances, 32.7% 8.3% Discretionary Purchases in Key Areas Such As Shelter,

Healthcare, and Technology Are Becoming More Fixed in Savings, Nature, We Believe 10.5% Share of Consumer Wallet Mobile and TechTelecomMedia % of Total Spend, LHS Apparel and Accessories, Computer, Rent % of Total Spend, LHS 21.4% 11.2% 32% Healthcare % of Total Spend, LHS 100% Brick & Mortar % of Total Retail, RHS 30% 99% Note: incremental income is money remaining after monthly essentials (rent, utilities) and education. Data as at February 2018. Source: 28% 98% Deloitte Database (Thomson One) and Analysis, Trend-setting Millennials Redefining the Consumer Story. 26% 97%

24% 96% Not surprisingly, the trend towards Experiences Over Things is a 22% 95% global one. In particular, we see it unfolding in large, key EM markets such as China and India (Exhibit 89). Recent visits to Indonesia 20% 94% and Mexico confirm a similar phenomenon, though we do think that China’s strong position in e-commerce as well as its more sophisti- 18% 93% cated infrastructure is creating a more rapid increase in experiential spending relative to some other EM countries we have visited in 16% 92% recent quarters. 0001 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Data as at December 31, 2017. Source: KKR Global Macro & Asset Yet, perhaps what is most important to us these days may be what Allocation analysis, Haver Analytics, BLS, IDC. is driving this change in consumer preferences amongst the masses. For example, the more we travel the more we are struck by the extent to which education drives the choices consumers make. One can see the profound impact of education on U.S. citizen’s employment and income opportunities in Exhibit 90. However, while the U.S. example is extreme, it is not isolated, and we see similar consumer backdrops across Europe, Latin America, and Asia. “ As many as one-third of American workers may need to change occupations and acquire new skills by 2030 if automation adoption is rapid. “

36 KKR INSIGHTS: GLOBAL MACRO TRENDS EXHIBIT 90 The U.S. Unemployment Rate and Education Levels Go Hand-in-Hand

2017 Unemployment Rate and Weekly Earnings by Educational Attainment, % and US

Median Usual Weekly Earnings, US Unemployment Rate, %

2,000 1,836 7% 1,743 1,800 6.5% 6% 1,600 1,401 5% 1,400 4.6% 1,173 4.0% 836 907 1,200 4% 1,000 3.4% 3.6% 712 774 800 3% 520 2.2% 600 2.5% 1.5% 2% 400 1.5% 1% 200 - 0% Less than a High school Some college, Associates Bachelors Masters Doctoral Professional Total high school diploma no degree degree degree degree degree degree diploma Data as at December 31, 2017. Source: Bureau of Labor Statistics.

The other major influence on consumer behavior is technological EXHIBIT 91 change and how it is affecting the consumer experience/well-being, Public Expenditures On Assistance and Retraining for particularly around employment trends. To this end, we note the fol- Unemployed Workers in the U.S. Remains Quite Low lowing from the Council on Foreign Relations report entitled The Work Ahead: Machines, Skills, and U.S. Leadership in the Twenty-First Century: Public Expenditures on Assistance and Retraining for Unemployed Workers in Top Developed Economies as a % of GDP • Nearly two-thirds of the 13 million new jobs created in the U.S. Top Ten since 2010 required medium or advanced levels of digital skills. Denmark 2.05% Sweden 1.27% • As many as one-third of American workers may need to change France 1.01% occupations and acquire new skills by 2030 if automation adop- Finland 1.00% tion is rapid. The average worker will journey through over a Hungary 0.90% dozen separate jobs during his or her lifetime while education Netherlands 0.77% will become a lifelong affair, not something completed prior to Austria 0.74% entering the workforce, with retraining becoming the new normal. Belgium 0.72% Luxembourg 0.66% • The United States spends roughly one-fifth of what the average Eu- Germany 0.63% ropean country spends on active labor market programs, which are Bottom Five designed to provide individuals who lose their jobs with the training, Israel 0.16% skills, and job counseling needed to return to the job market. Latvia 0.14% Japan 0.14% Of the 32 countries included United States 0.10% in the data, the U.S. spends nearly the least amount, “ Mexico 0.01% second only to Mexico We think fully understanding Data as at April 2018. Source: Council on Foreign Relations. the influences of education and technology on today’s consumers So, our bottom line is that it is not business as usual in the large and growing global consumer arena. To be sure Experiences Over Things are now prerequisites for success. continues to gain momentum, and we want to play this trend in size. If we are right, then both the However, as we detailed above, we think fully understanding the influences of education and technology on today’s consumer are now upside and downside an investor prerequisites for success. If we are right, then both the upside and downside an investor now faces in this area of the global economy now faces has never been more has never been more extreme, in our view. extreme, in our view. “

KKR INSIGHTS: GLOBAL MACRO TRENDS 37 #6: Emerging Markets: Stay Selective in EM, But Stay Invested EM is an attractive play on rising GDP-per-capita in less developed markets. Smaller deficits and higher real rates give us additional With EM having appreciated 38% in 20172, we highlighted in our confidence that the EM tailwind can withstand macro shocks, includ- January 2018 piece that a mid-cycle slowdown might occur in 2018, ing a tactical rebound in the dollar, along the way. Finally, after particularly if we got a tactical dollar rally (which we have). Well, such strong dollar-based returns in the U.S. during recent years, that back-filling is now occurring, and we would advocate using any we still think that investors are now under-invested in EM. If we are further weakness to add to positions in higher quality EM markets, right, then this tailwind should continue to attract flows as retail and particularly in Asia. Indeed, though it is not fully flashing an ‘All In’ institutional investors reposition their portfolios towards key growth signal, our proprietary EM model, which we detail in Exhibit 93, con- markets like China, India, and Vietnam in the coming years. tinues to deliver mostly positive signals. We note the following: EXHIBIT 92 • When we do a simple DuPont analysis to decompose return on We Some Risk that EM Ultimately Experiences a ‘Double equity, our work shows that operating margins are now solidly Bottom’ Similar to What Happened in 1999-2001 improving across much of EM after a five-year bear market, which is now boosting return on equity. This notable improve- Relative Total Return, MSCI EMDM (Feb87 = 0%) ment, particularly in the Technology, Energy, Materials, and Sep-10 Industrials sectors, has led the ROE factor in our dashboard to 300% 279.8% finally send a a ‘buy’ signal. Sep-94 81 276.4% 250% months • Another positive for Emerging Markets these days is the ongoing 108 64 improvement in commodity prices. Historically, a strong commod- months months ities backdrop has provided an uplift not only for EM commodity 200% 84 exporting countries, but also an incremental uplift for commod- months ity importers such as India and Turkey, which actually stand to 150% benefit from improved inbound investment from the commodity exporting countries with whom they do business. As a result, 100% higher commodity prices often help to sustain the current account Jun-18 123.8% deficits of the importing countries. Jan-16 29 50% Jan-99 Sep-01 100.3%months • In terms of emerging complications to the EM story, valuations 2.1% 11.6% are now just neutral, no longer cheap. In fact, EM now trades at 0% a 4.7 point discount to DM, which is attractive, but definitely less EM "Double Bottom in 1999 2001 compelling than the 7.3 point discount that prevailed at the end of -50% 2015 when this factor triggered a buy signal in our work. 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

• Another consideration is that our signal ‘EM FX Follows EM Equities’ has turned back to neutral again, compared to a positive Data as at June 12, 2018. Source: MSCI, Bloomberg, Factset, KKR Global Macro & Asset Allocation analysis. reading in January 2018. The underperformance of EM currencies has been led by a ‘fat tail’ of currencies that run significant current account and/or fiscal deficits such as Argentina, Brazil, and Turkey. Despite the sell-off, we are finding it difficult these days to make the case for sustained upside in EM FX, as real interest rates in much of the region are not yet at compelling levels (Exhibit 96), and real effective exchange rates look only average relative to history.

Bottom line: Despite the recent weakness in EM, we think that Emerging Markets outperformance still has three to five years more “ of running room. To be sure, we could face a double bottom situation for the overall group, which is similar to what happened during Despite the recent weakness the 1999-2001 period, and we do expect a narrower ascent for EM in Phase II of this bull market. in EM, we think that Emerging Markets outperformance still However, our longer-term conviction is undeterred for several reasons. For starters, as we detailed in the GDP outlook section, has three to five years more of we believe that China has already bottomed. This viewpoint is key running room. to not only our overweight to Asia but also to our central thesis that “ 2 Data as at June 15, 2018. Source: Bloomberg.

38 KKR INSIGHTS: GLOBAL MACRO TRENDS EXHIBIT 93 EXHIBIT 95 EM Is Now Entering the ‘Mid-Cycle’ Phase of Its For Our EM Call to Work, We Need to Be Right that the Recovery. While Relative Valuation Is No Longer As Dollar Has Peaked

Compelling, Return on Equity Is Rising Nicely and Real MajorTrade-Weighted US Dollar REER: Higher Commodity Prices Are Helpful % Over (Under) Valued

‘RULE OF THE MAY JAN AUG MAY SEP JUN ROAD’ ’15 ’16 ’16 ’17 ’17 ’18 ASEAN Commodity 40.8% Producer Crisis 40% Crisis, Buy When ROE Is 1 ↔ ↔ ↔    Russian Stable or Rising Latam 30% Default24.8% Crisis Valuation: It’s Not 2 ↔    ↔ ↔ 20% 16.6% Different This Time +1σ EM FX Follows EM 10% 3   ↔ ↔  ↔ Equities Avg 0% Commodities Correla- 4 ↔ ↔ ↔ ↔ ↔  1σ tion in EM Is High -10%

Momentum Matters in 5    ↔  ↔ -20% EM Equities -11.8% -15.9% -16.9% -30% Overall: EM now seems to be entering a more ‘mid-cycle’ phase of its recovery, wherein country performance will be more differentiated. Valua- Data as at May 31, 2018. Source: Federal Reserve, Bloomberg. tion is no longer compellingly cheap, but fundamentals are improving. This is particularly true for domestically-focused economies where debt and deficits are under control, and local companies are moving up the value chain, helping to sustainably raise standards of living. A firmer commodity backdrop recently EXHIBIT 96 also helps bolster our conviction in a tradeable EM cycle. Real Rates Have Improved in Some Asian Countries, But Data as at June 12, 2018. Source: KKR Global Macro & Asset Allocation They Have Also Fallen in Other Ones analysis. Change in Real 10-Year Yields: Current vs. Pre-Taper, PPT

India 3.8 EXHIBIT 94 Margins in the Consumer Discretionary Sector in EM Are Indonesia 3.4 Falling, Despite Stronger Global Growth Singapore 2.6 MSCI EM Consumer Discretionary Sector Margins Philippines 0.9

8.0 China 0.7 7.5 Australia 0.2 7.0 6.5 Thailand 0.1 6.0 Korea -0.2 5.5 5.0 Taiwan -0.8

4.5 Japan -1.9 4.0 Vietnam -2.1 Jul-15 Jul-16 Jul-17 Jul-11 Jul-12 Jul-13 Jul-14 Jul-10 Jan-16 Jan-17 Jan-18 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Data as at June 15, 2018. Source: Bloomberg. Data as at May 31, 2018. Source: MSCI, Factset.

KKR INSIGHTS: GLOBAL MACRO TRENDS 39 If we do have areas of concern in EM, it is really around countries that EXHIBIT 98 are aggressively using other people’s money to finance their growth. As Liquidity Dries Up, Large Fiscal and Current Account To date, the market has largely agreed with our line of thinking. To Deficits Are Becoming Headwinds this end, we note that the some of the largest declines in local currencies have coincided with those countries that are running the largest Fiscal Deficits as a % of GDP current account deficits and fiscal account deficits. One can see this graphically in Exhibits 97 and 98, respectively, which shows the vul- -10.0 -8.0 -6.0 -4.0 -2.0 0.0 nerability of countries like Turkey and Argentina. In our view, the is- -1.0 sues that many of these countries are facing are likely to increase, not decrease, as the adverse impact of global quantitative easing becomes Indonesia more recognizable in the second half of 2018 and beyond. Brazil -2.0 Mexico EXHIBIT 97 -3.0 Countries That Rely on Foreigners to Finance Themselves Are Likely to Stay Under Pressure -4.0 Select EM Currency Performance, %

Turkey Current Account as a % of GDP -5.0 1-Month Change 3-Month Change Argentina 1-Year Change 3-Year Change 10 -6.0 0 0 Data as at April 8, 2018. Source: IMF, Haver Analytics. -1 -10 -5 -6 -6 -5

-20 -16 Section III: Risks to Consider -30 -24 -23 In the following section we detail many of the key risks on which we -40 think investors should focus. -39 -42 -50 #1: Input Costs Rising/Margin Degradation Likely Means Avoid -60 Price Takers

-70 -66 Indonesia Turkey Argentina Given our strong views that fiscal policy is supplanting monetary policy in many instances and that nominal GDP is now running well Data as at June 13, 2018. Source: Bloomberg. in excess of nominal interest rates in several key economies, we think that the risk to margins across multiple sectors, particularly companies that lack pricing power, is quite significant in the new regime that we are envisioning. Surge buying ahead of tariff implementa- “ tions is also creating headwinds in key industrial markets such as steel and aluminum. Already, our channel checks suggest that input Given our strong views that fiscal costs, including steel, aluminum, and compensation, are creating policy is supplanting monetary headwinds. To this end, we note the following quotes from the last policy in many instances and that three ISM reports in the U.S3: nominal GDP is now running well “Much concern in the industry regarding the steel and aluminum tariffs recently [imposed]. This is causing panic buying, driving the near-term in excess of nominal interest rates prices higher and [leading to] inventory shortages for non-contract in several key economies, we think customers.” (Machinery) that the risk to margins across “Significant price increases in the steel commodity due to 232 [the tariffs]. The price increases will begin to impact our company’s perfor- multiple sectors, particularly com- mance.” (Primary Metals) panies that lack pricing power, “The recent steel tariffs have made it difficult to source material, and we is quite significant in the new re- have had to eliminate two products due to availability and cost of raw gime that we are envisioning. material.” (Fabricated Metal Products)

“ 3 March, April and May 2018 ISM Reports on Business. Source: Institute for Supply Management.

40 KKR INSIGHTS: GLOBAL MACRO TRENDS Importantly, these trends are occurring at a time when operating Meanwhile, in the United States, the savings rate has come under margins are already quite high. One can see this in Exhibit 100. significant pressure, despite a near record low unemployment rate and improved wage growth. Moreover, as we show in Exhibit 101, EXHIBIT 99 many consumers are running in place as faster wage growth is being Rising Commodity Input Costs Could Be a Drag on offset by higher costs in many critical areas, including healthcare and Operating Margins… shelter.

Commodity Input Costs EXHIBIT 101 Trailing 12-month Price Return U.S. Consumers Are Spending Rather than Saving

+72.3% U.S. Personal Savings as a % of Personal Disposable Income +60.7% 9 +51.6% 8 Oct-15 Jul-03 7 6.3 5.5 6 +20.5% +19.8% 5 4

3 Apr-18 Nickel Steel Brent Crude Copper Aluminum 2 Nov-07 2.8 2.5 Data as at May 31, 2018. Source: KKR Global Macro & Asset Allocation 1 analysis, Bloomberg. 0 Jul-02 Jul-07 Jul-12 Jul-17 Jan-00 Jan-05 Jan-10 Jan-15 Oct-03 Oct-13 Oct-08 Apr-06 Apr-11 Apr-01 EXHIBIT 100 Apr-16 Data as at April 30, 2018. Source: BLS, Haver Analytics. …Which Are Already Quite High For Sectors Like Technology, Consumer Discretionary and Industrials EXHIBIT 102 S&P 500 Sector Operating Margins Relative to History Despite Stronger Economic Growth, the U.S. Consumer Is 30 25y MaxMin Range Latest Still Facing Headwinds 25 U.S. Wage Growth vs. Healthcare and Shelter 20 Inﬂation, Y/y % Change 15 4.0% 10 3.5% 3.5% 5 3.0% 2.8% 0 2.5% 2.5% 2.3% Tech Telcos

Energy 2.0% Utilities S&P 500 Materials Cons Disc Industrials Healthcare 1.5%

Data as at May 31, 2018. Source: KKR Global Macro & Asset Allocation 1.0% analysis, Bloomberg. 0.5%

0.0% Somewhat surprisingly against a backdrop of strong employment Wage growth Healthcare Shelter Headline CPI growth, we are also seeing higher input costs adversely impact the inﬂation inﬂation global consumer. For example, in Indonesia, the local consumers are Data as at June 12, 2018. Source: Bureau of Labor Statistics, Haver now facing the difficult consequences of higher interest rates, higher Analytics. input costs, and a weaker rupiah. On a real basis, home prices are negative, so there is no boost from a housing wealth effect. Con- sumer concern over finances has also risen, which could partly be In sum, we think we are late enough in the earnings cycle that rising due to higher fuel and electricity prices as well as fear of yet higher input costs could begin to dent momentum by third quarter 2018 prices to come. reporting season. Moreover, if President Trump pushes harder on the trade front, international tariffs could be an issue across the Ameri- cas, Europe, and Asia. Meanwhile, the global consumer is not in as great a shape as one might expect, given where unemployment levels

KKR INSIGHTS: GLOBAL MACRO TRENDS 41 are. So, if input costs do remain high and employment trends slow, regime’ limiting Chinese investment into the U.S. on June 30, 2018. we believe investors could be surprised by the downward operating leverage that consumer results display this cycle relative to prior What was not expected was President Trump’s decision to escalate ones. tensions further with the threat of up to $450 billion in tariffs, if China does not back down. The situation obviously remains fluid, but #2: Rising Geopolitical and Socioeconomic Tensions our base case is that the U.S. is not looking to start a major trade war, though it will remain vigilant around key areas such as intellec- Without question, my colleagues Ken Mehlman and Travers Garvin tual property. expect that economic and nationalist populist movements will continue to gain strength ― trends that will lead to even stronger anti- EXHIBIT 103 establishment sentiment. If they are right, then market participants A Large Percentage of the U.S. Trade Deficit Can Be should brace for more frequent periodic market shocks in the coming Explained by Auto and Computer Imports From China months. Already, we have seen this type of ‘shock’ play out in the and Transportation Imports From Mexico Italian bond market, as investors initially underestimated the strength of the populist movement. Meanwhile, the surprise electoral defeat BALANCE OF GOODS IN 2017, BY TRADING PARTNER, US$ BILLIONS on May 9, 2018 of Malaysia’s Barisan Nasional which had ruled for over 61 years demonstrates that Asia is not immune from its own CANADA MEXICO CHINA ALL COUN- versions of political populism. TRIES

Agriculture 0.2 -6.0 15.6 17.0 Investors should pay attention to the upcoming elections in Mexico and the U.S. Congress later this year as important bellwethers. Oil, Gas, Minerals -48.6 -4.0 8.4 -85.8 Over the second half of the year, we expect that major geopolitical risks including the uncertainty around the Iran nuclear agreement Food -2.0 2.8 -0.5 3.2 and Iran’s regional malfeasance, U.S.-China tensions, Venezuela’s Beverages, Tobacco 1.6 -4.4 0.1 -15.7 economic implosion, and North Korean nuclear talks will continue, unresolved, and with continuing undulation in political rhetoric and Textile 1.4 2.6 -13.5 -17.3 speculation. Apparel 2.3 -4.1 -49.4 -113.0 We also expect trade to remain a major headline issue. As expected, Paper -10.4 4.3 -2.7 -7.7 the Trump administration announced recently that it will proceed with 25% tariffs on roughly $50 billion in Chinese goods. There were Petroleum -1.6 20.1 0.6 34.5 revisions to the tariffs announced in April 2018, with roughly $16 billion of previously announced tariff goods being removed from the Chemical 6.2 17.9 -3.0 -24.9 list and replaced with new items. The $16 billion of ‘new’ replace- Plastics 1.9 5.2 -15.6 -20.0 ment tariff goods are subject to a comment period in coming weeks, while the $34 billion of previously announced items will go into effect Nonmetallic Minerals 1.5 -1.1 -7.0 -11.2 on July 6, 2018. China responded with its own tariffs/duties of ‘equal strength’ starting July 6, 2018 as well. Furthermore, as a reminder, Primary Metals -10.7 1.6 -2.2 -35.6 the Treasury is expected to announce its ‘investment reciprocity Fabricated Metals 5.2 2.3 -20.3 -24.4 “ Machinery 12.7 2.3 -25.7 -35.4 Without question, we expect that Computer 18.7 -17.1 -167.3 -192.7 economic and nationalist populist Electrical Equipment 8.3 -11.5 -40.0 -54.0 movements will continue to gain Transportation -0.4 -76.0 10.5 -107.3 strength ― trends that will lead to Furniture -0.5 -2.1 -23.4 -36.4 even stronger anti-establishment Misc. Manufacturing 5.7 -3.5 -38.6 -41.6 sentiment. If we are right, then All Goods -8.9 -70.6 -373.7 -768.3 market participants should brace Note: Limited to top 30 trading partner of each country. Data as at for more frequent periodic market December 31, 2017. Source: Goldman Sachs. shocks in the coming months. “

42 KKR INSIGHTS: GLOBAL MACRO TRENDS EXHIBIT 104 EXHIBIT 106 We Believe Global Trade Momentum Actually Peaked …While Increasing Its Focus on High-Tech Capital Goods in 2008 Change in Exposure, US Billions Global Merchandise Exports as a % of Global GDP Electronic Circuits Sep-08 28 26.5 Electronic Machines

Feb-18 IronSteel Structures 22.3 24 Diodes, Consisters

Semiconductor Machines 20 MotorsGenerators

Other Machine Parts 16 Electric Circuit Machines

Plastics, Not Reinforced 12 80 85 90 95 00 05 10 15 20 Plastics Data as at February 28, 2018. Source: IMFWEO, Haver Analytics. - 1 2 3 Calculated as difference between the amounts of products within each category targeted in the final versus initial tariff product lists. Based on EXHIBIT 105 2017 imports. Data as at June 15, 2018. Source: USITC, USTR, Nomura. The Most Recent Trade Announcement by the U.S. Government Dialed Back its Emphasis on Consumer Goods… So, with respect to China in particular, investors should not expect a return to the ‘strategic partners’ approach any time soon. Critics Change in Exposure, US Billions across the U.S. political spectrum and in many European and Asian nations are skeptical of China’s economic and regional ambitions, TVsProjectors technological theft, and the uneven playing field for non-Chinese companies. While negotiations may produce some ‘deals’, a world Printing Machines where technological know-how and data are strategic assets and Aluminum PlatesSheets where China’s continued rise will inevitably produce more systematic and consistent trade tensions. Further, China has land and maritime Air Conditioners disputes with multiple countries on its periphery which, along with Medical Equipment heighted tensions over North Korea and the East and South China Seas, creates the risk of a geopolitical event that could unsettle Asian Orthopedic Equipment and global markets. Medicines There are also technological shocks to consider. For example, as Eu- Medical Appliances rope imposes the GDPR to protect privacy, calls for more oversight of technology companies in the U.S. have grown—particularly following Seats the Facebook/Cambridge Analytica scandal. Yet, new regulation in the Screws, Bolts, Nuts U.S. is far from certain, in part because the same populist forces that generate unprecedented distrust of business and government also sty- -6 -4 -2 0 mie policy change. Furthermore, millions of consumers/voters simply Based on 2017 imports. Calculated as difference between the amounts appear willing to trade their privacy for convenience and connection. of products within each category targeted in the final versus initial tariff product lists. Data as at June 15, 2018. Source: USITC, USTR, Nomura. The NFL and Starbucks have learned the hard way that a world where everyone has a smart phone is also one in which everyone is a journalist and potential activist. The radical transparency of the Internet exposes all and creates a new consciousness focused on whether companies ‘do the right thing’ not just whether they do things right. Against this backdrop, it is critical for investors to understand the underlying cultures of the companies in which they invest and whether these companies are prepared for this new world of radical transparency.

KKR INSIGHTS: GLOBAL MACRO TRENDS 43 EXHIBIT 107 shift more inward. To date, politicians have not yet interfered in the Global Populism Is Now Close to Highs Not Seen Since capital markets, but if history is any guide, it is not unthinkable, given Right Before the Second World War the heightened trade tensions of late. Global Populism Index % of Vote Share, Unweighted #3: Growing Credit Market Concerns

Without question, many CIOs feel that there has been a notable Global Populism Index, Unweighted Average decline in the quality of the Investment Grade Debt market. Indeed, 40 as we show below in Exhibit 109, the BBB segment of the market 35 has grown ten times to USD three trillion since 1998, and it now represents almost half of the entire Investment Grade market versus 30 a more modest 30% in 1998. In our view, this dramatic increase in 25 size of the total market is notable not only in absolute terms but also 20 relative to history (when BBBs were a much smaller part of a much smaller overall market). 15

10 EXHIBIT 109 5 The Investment Grade Market Has Also Grown Rapidly 0 with BBB Now Nearly 48% of Investment Grade Composition and Size of the IG Market 1901 1907 1913 1919 1925 1979 1985 1991 1997 2003 1931 2009 2015 1937 1943 1949 1955 1961 1967 1973 Data as at May 2018. Source: Deutsche Bank. BBB Par Amount % of IG 60% 4,500,000

4,000,000 EXHIBIT 108 50% 3,500,000 Technology Stocks Are Now 26% of the S&P 500 Market Cap, the Highest Proportion Since October 2000 40% 3,000,000 2,500,000 Technology as of SP 500 Market Cap 30% 2,000,000 Recession % of IG Market

Technology as of SP 500 Mcap 20% 1,500,000 PAR Outstanding Current 1,000,000 35 Aug00 10% 336 500,000 32 0% - 29 May18 260 26 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 May-18 23 Data as at May 31, 2018. Source: ML Corporate Index, Bloomberg. 20 17 14 “ 11 Our call to action is to structure 8 95 98 01 04 07 10 13 16 19 portfolios that are overweight Data as at May 31, 2018. Source: KKR Global Macro & Asset Allocation upfront yield relative to duration, analysis, Bloomberg. have enough flexibility to add

So, our bottom line is that the combination of income equality, tech- capital into market weakness, and nological transparency, and migratory tensions are creating an unset- provide enough idiosyncratic cash tled backdrop that is likely to persist for some time. As such, our call to action is to structure portfolios that are overweight upfront yield flow streams to endure periods relative to duration, have enough flexibility to add capital into market weakness, and provide enough idiosyncratic cash flow streams to en- when asset class correlations are dure periods when asset class correlations are likely to spike. As we likely to spike. mentioned earlier, we are also prone to underweight geopolitical ‘hot spots’ where capital could be impaired if local government policies “

44 KKR INSIGHTS: GLOBAL MACRO TRENDS EXHIBIT 110 comparison, as we showed earlier in Exhibit 109, the most speculative Spreads Are Now Extraordinarily Tight in the BBB Market part of the Investment Grade market is now the largest at just under On Both an Absolute and Relative Basis 50% of what is a much larger market in absolute dollars ($6.4 trillion in size for Investment Grade Debt versus $1.3 trillion in size for High Historical BBB Option Adjusted Spread, OAS Yield).

BBB 5 yr Average EXHIBIT 111 900 10 yr Average 20 yr Average The Implied Default Rate for High Yield, Which We View 800 as a Proxy for Credit Conditions, Is Suggesting that We 700 Are Now Back to Levels Not Seen Since Just Before the 600 Global Financial Crisis 500 High Yield Implied Default Rate, % 400 Implied Default Rate (%) Avg (4.4%) 300 10 200 100 8 0 6

May-98 May-00 May-02 May-04 May-06 May-08 May-10 May-12 May-14 May-16 May-18 4 Data as at May 31, 2018. Source: ML Corp Index, Bloomberg. 2

Meanwhile, as we show in Exhibit 110, BBB spreads relative to Trea- 0 Jun-18 suries are just 154 basis points, which is extraordinarily tight relative 0.2% to history. Potentially more concerning is that, with spreads this tight, -2 duration has actually been extended to 7.2 years, compared to around 2011 1997 1999 1995 1998 1996 1994 2017 2013 2015 2018 2016 2014 2012 2010 2001 2007 2003 2009 2005 2008 2006 2004 2002 5.8 years in 2009, according to my colleague Kris Novell in our Liq- 2000 uid Credit team. Importantly, this duration extension comes at a time Data as at June 12, 2018. Source: Bloomberg, KKR Global Macro & Asset Allocation analysis. when the interest, or coupon on BBB securities, has essentially been cut in half during the same period.

So, our bottom line with the BBB market is that we agree with our CIOs: Things are not necessarily as they seem. In particular, there is a growing risk that the traditional IG market, the BBB segment in par- “ ticular, will prove to be a weak link during the next market downturn. If we are right, then the current size and breadth of this market could There is a growing risk that the serve as a major headwind to most investors if they do not remain extremely vigilant around credit quality in this now sizeable part of traditional IG market, the BBB the credit markets. We note that of the 10% of the total Investment segment in particular, will prove Grade market on negative watch from Moody’s, 83% were given negative watch in 2017 and into 2018. to be a weak link during the next market downturn. If we are right, Yet, when we updated our favorite measures for quantifying potential over-optimism in the credit markets, they still appear quite optimistic. then the current size and breadth Indeed, see Exhibit 111 for details, but our model is currently suggest- of this market could serve as a ing an implied default rate of 0.2%, well below the historical average of 4.4% and a far cry from levels seen as recently as the first quarter major headwind to most investors of 2016 (i.e., around eight percent). if they do not remain extremely Importantly, we do not think this optimistic implied default rate is vigilant around credit quality isolated to the High Yield market. In fact, our colleagues in Credit are actually more concerned about the BBB market than the ‘traditional’ in this now sizeable part of the High Yield market (as measured by the BB market, which is the high- credit markets. est quality segment of the High Yield market). Indeed, as we show below, the BB segment of the High Yield is now 46.6% (i.e., the high- “ est rated bonds now represent the largest portion of the index). By

KKR INSIGHTS: GLOBAL MACRO TRENDS 45 EXHIBIT 112 end of 2017 was 10.8%, a full 250 basis points above the long-term However, Unlike the Investment Grade Market, the historical average. Composition of the High Yield Has Been Improving, Not EXHIBIT 113 Deteriorating Stock and Bond Volatilities Are Now on Par. This Composition of the High Yield Market Relationship Does Not Make Sense to Us

BB Par in US Trillions, LHS BB % of HY Market, RHS Annualized Standard Deviation CCC % of HY Market, RHS of Past 36 Month Returns,% 700,000 60% Stocks Bonds 24 600,000 50% 20 500,000 40% 16 400,000 30% 300,000 12 20% 200,000 8

100,000 10% 4 Stock and bond volatilities are - 0% now on par 0 2015 2016 2017 2018 2006 2007 2008 2009 2014 2010 2011 2012 2013 55 60 65 70 75 80 85 90 95 00 05 10 15 Data as at March 31, 2018. Source: Bloomberg, KKR Global Macro & Data as at May 31, 2018. Source: Morgan Stanley Research, Bloomberg. Asset Allocation analysis.

EXHIBIT 114 Perhaps more importantly, though, is that we think that this optimism towards the credit cycle has extended into the Private Credit markets We Find Stocks and Bonds Have Similar Sensitivity to as well. In fact, similar to several CIOs with whom we have spoken, Real Inflation-Adjusted Policy Rates and Inflation we have more consternation about the underwriting standards that 36-Month Correlation: Stocks vs. Bonds we see in the small segment of the Private Lending market than we currently see in the High Yield market. Until the tech bubble peak, stock bond correlations were positive To hedge these concerns, my colleague Phil Kim suggests options on 75% Are negative stock the IG Credit Default Swap Index. Key to his thinking is that, with 1) 50% bond correlations a full 69% of IG CDX 30 composed of BBB bonds; 2) the low level of normal? implied volatility; and 3) the historical success of these structures in 25% 2015/early 2016, we believe both outright payers and payer spreads 0% are effective and tactically attractive at current levels. In fact, in many -25% instances the upfront cost is less than 20 basis points. -50% The downside of these structures is that CDX does not incorporate -75% interest rate movements, and liquidity in the CDX options market is limited to six months, so incremental duration would need to be man- -100% aged by a rolling hedge program. Or one can underweight longer- 1970 1980 1990 2000 2010 duration government bonds, as we previously suggested. Data as at May 31, 2018. Source: Morgan Stanley Research, Bloomberg.

#4: Regime Change for Stocks and Bonds? Too often in the past, these types of regime changes have not tran- As we mentioned earlier, we believe that we recently entered an sitioned smoothly. So, consistent with this concern, we still suggest important regime change, with many governments now targeting a substantial underweight position in government bonds, particularly reflation via fiscal impulses versus simply more monetary stimulus. those of longer duration. We also believe that global financial stocks, This shift in policy focus is a big deal for asset allocation profession- many of which have been chronic underperformers in recent years, als. Hopefully it means that stocks and bonds may no longer be as could continue to stage a significant multi-year rally. Finally, we con- positively correlated in the future, which could meaningfully dent, or tinue to advocate locking in low-cost liabilities, which helps to ensure even reverse, some of the outsized positive risk adjusted returns that a lower cost of capital relative to one’s peer group amidst what could a traditional 60-40 fund (60% stocks and 40% bonds) has enjoyed in be a notable shift in the relationship between stocks and bonds. recent years. To put this outperformance in perspective, just consider the five-year rolling return for a traditional 60/40 portfolio at the

46 KKR INSIGHTS: GLOBAL MACRO TRENDS Conclusion: New Playbook Required That said, we should all acknowledge that portfolio risks are rising. The financial markets, Investment Grade Credit in particular, looks We feel confident that a ‘new playbook’ is now required in today’s more stretched than the current economic cycle might indicate, and investment environment. Key to our thinking is that the developed we see the shift away from monetary stimulus beginning to restrict markets are leading the charge towards fiscal stimulus – stimulus financial conditions more than the consensus may believe over the that will be required to not only offset the slowdown in money supply next 12- to 24-months. As such, corporate earnings must continue to that QE withdrawals are creating but also to help pacify the increas- be solid for 2018 to support our current asset allocation strategy. ingly disgruntled voters who are calling for nationalistic agendas. No doubt, fiscal stimulus can come in many forms that extend beyond Looking at the big picture, our decision to run a largely pro-risk traditional tax cuts; for example, within EM countries like Indonesia portfolio at the expense of government bonds for the past few years we are now seeing a visible push by politicians to provide enhanced have served us well. We have also benefitted from consistently subsidies, particularly around rising fuel costs, to their core voting overweighting Alternatives as well as taking advantage of periodic base. Against this backdrop, our ‘call to arms’ is clear: Macro inves- dislocations across the various regions in which we invest. tors and asset allocators should shorten duration, focus more on upfront yield, and own more assets linked to nominal GDP. However, by the end of fourth quarter 2018, we do want to foreshad- ow to our investors that we are likely to take a more conservative Beyond the macroeconomic and geopolitical trends identified in approach heading into 2019. Key to our thinking is that we are quite this paper, we also have high conviction around our major invest- far along in capital markets cycle, valuations appear largely full, and ment themes. In particular, our preference for Deconglomeratization, our growth models seem to indicate that overall growth will peak in Experiences Over Things, and Asset-Based Lending in the private credit the next 12-24 months. markets all represent compelling opportunities for asset allocators to generate additional alpha during what we believe will be more modest returns on a go-forward basis.

Important Information

The views expressed reflect the current views of Mr. ing provided merely to provide a framework to assist in cantly different from that shown here. The information in McVey as of the date hereof and neither Mr. McVey nor the implementation of an investor’s own analysis and an this document, including statements concerning financial KKR undertakes to advise you of any changes in the investor’s own views on the topic discussed herein. market trends, is based on current market conditions, views expressed herein. Opinions or statements regard- which will fluctuate and may be superseded by subse- ing financial market trends are based on current market This publication has been prepared solely for informa- quent market events or for other reasons. Performance conditions and are subject to change without notice. tional purposes. The information contained herein is of all cited indices is calculated on a total return basis References to a target portfolio and allocations of such only as current as of the date indicated, and may be with dividends reinvested. The indices do not include superseded by subsequent market events or for other a portfolio refer to a hypothetical allocation of assets any expenses, fees or charges and are unmanaged and reasons. Charts and graphs provided herein are for and not an actual portfolio. The views expressed herein should not be considered investments. and discussion of any target portfolio or allocations may illustrative purposes only. The information in this docu- not be reflected in the strategies and products that KKR ment has been developed internally and/or obtained The investment strategy and themes discussed herein offers or invests, including strategies and products to from sources believed to be reliable; however, neither may be unsuitable for investors depending on their spe- which Mr. McVey provides investment advice to or on KKR nor Mr. McVey guarantees the accuracy, adequacy cific investment objectives and financial situation. Please or completeness of such information. Nothing contained behalf of KKR. It should not be assumed that Mr. McVey note that changes in the rate of exchange of a currency herein constitutes investment, legal, tax or other advice has made or will make investment recommendations in may affect the value, price or income of an investment nor is it to be relied on in making an investment or other the future that are consistent with the views expressed adversely. decision. herein, or use any or all of the techniques or methods Neither KKR nor Mr. McVey assumes any duty to, nor of analysis described herein in managing client or pro- There can be no assurance that an investment strategy undertakes to update forward looking statements. No prietary accounts. Further, Mr. McVey may make invest- will be successful. Historic market trends are not reliable representation or warranty, express or implied, is made ment recommendations and KKR and its affiliates may indicators of actual future market behavior or future per- or given by or on behalf of KKR, Mr. McVey or any other have positions (long or short) or engage in securities formance of any particular investment which may differ transactions that are not consistent with the information materially, and should not be relied upon as such. Target person as to the accuracy and completeness or fairness and views expressed in this document. allocations contained herein are subject to change. of the information contained in this publication and There is no assurance that the target allocations will no responsibility or liability is accepted for any such The views expressed in this publication are the personal be achieved, and actual allocations may be significantly information. By accepting this document, the recipient views of Henry McVey of Kohlberg Kravis Roberts & Co. different than that shown here. This publication should acknowledges its understanding and acceptance of the L.P. (together with its affiliates, “KKR”) and do not nec- not be viewed as a current or past recommendation or a foregoing statement. essarily reflect the views of KKR itself or any investment solicitation of an offer to buy or sell any securities or to professional at KKR. This document is not research and adopt any investment strategy. The MSCI sourced information in this document is the should not be treated as research. This document does exclusive property of MSCI Inc. (MSCI). MSCI makes no not represent valuation judgments with respect to any The information in this publication may contain projec- express or implied warranties or representations and financial instrument, issuer, security or sector that may tions or other forward‐looking statements regarding shall have no liability whatsoever with respect to any be described or referenced herein and does not repre- future events, targets, forecasts or expectations regard- MSCI data contained herein. The MSCI data may not be sent a formal or official view of KKR. This document is ing the strategies described herein, and is only current further redistributed or used as a basis for other indices not intended to, and does not, relate specifically to any as of the date indicated. There is no assurance that such or any securities or financial products. This report is not investment strategy or product that KKR offers. It is be- events or targets will be achieved, and may be signifi- approved, reviewed or produced by MSCI..

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