By Henry H. McVey Nov 08, 2017

Earlier this year, we released our 2017 Outlook and Mid-Year Update, and highlighted several key themes and trends for the global macro landscape. Specifically, as noted in our most recent publication Asia: Leaning In, in which we partnered with KKR’s Global Institute to produce, we see Asia as a direct and compelling play on three of these global macro themes.

  1. Asia Is a Direct Play on Our De-Conglomeratization Thesis. As we mentioned in both our 2017 Outlook as well as our 2017 Mid-Year Update, we are seeing a notable acceleration in divestitures and carve-outs from the multinational community. In our view, this idea is a big one; it is global, and it has duration. It also reflects a push by more activist investors for management teams to optimize their global footprints, particularly as domestic agendas take precedence over global ones. At the moment, Japan has emerged as one of the most compelling pure play examples on our thesis about corporations shedding non-core assets and subsidiaries. This continues to be a key theme for KKR’s private equity team in Japan, notably the carve-out of Panasonic Healthcare from Panasonic Corporation and Pioneer DJ from Pioneer, and more recent investments in automotive components manufacturer, Calsonic Kansei, and power tool and life science equipment manufacturer, Hitachi Koki, where one of the main focuses is expansion to new markets outside of Japan.
  2. Experiences Over Things Is Also Playing Out in Asia. While this theme is not a new one for us, the pace of implementation appears to have accelerated in recent months in Asia. Not surprisingly, the biggest and fastest growing bucket in the experiences market within Emerging Market Asia is services. Indeed, as one can see in the Exhibit below, Chinese millennials allocate three times more of their income to leisure activities than the average Chinese consumer.

    Chinese Millennials Not Only Save Less But Also Allocate More of Their Income to Leisure

    Data as at December 31, 2016. Source: Goldman Sachs Global Investment Research.

    In 2015, KKR announced a partnership with The Chernin Group’s CA Media to create Emerald Media, a platform designed to capitalize on fast-growing opportunities in the media and entertainment in Asia. In September, KKR invested in a Series C funding round for a personal finance management platform in China, Shenzhen Suishou Technology. Both of these opportunities were identified as a result of discretionary income rising from the middle class in the region, and a preference for experiences over things.
  3. Asia Is Also an Emerging Play on Our Private Credit/Illiquidity Premium Thesis. We also see an emerging trend – no pun intended – in many of the emerging markets that we have visited in recent quarters. Specifically, as we show below, more and more corporates in places like India and Indonesia are shifting from traditional financial intermediaries in favor of complex solutions that can be underwritten by leading private credit players.

    Emerging Market Private Credit Is Increasingly Another Interesting Play on Our Illiquidity Premium Thesis

    Data as at September 30, 2017. Source: Bloomberg, KKR Estimates.

    In 2015, with an investment in GIC, Singapore’s sovereign wealth fund, KKR established a non-banking financial company to provide structured credit solutions to the real estate sector in India. This enables KKR to bring financial solutions to support good management teams and help their companies grow.

Not surprisingly, having three of our highest conviction global investment themes playing out strongly across the region underscores our confidence in our macro outlook. Importantly, we think the lens through which we are looking extends across equities and debt, including both private and public securities, and it includes large, fast-growing industries such as healthcare, technology, consumer financial services, wellness, and leisure.

References to “we”, “us,” and “our” refer to Mr. McVey and/or KKR’s Global Macro and Asset Allocation team, as context requires, and not of KKR.

The views expressed reflect the current views of the writer as of the date hereof and neither the writer nor KKR undertakes to advise you of any changes in the views expressed herein. Opinions or statements regarding current events or trends are based on current conditions and are subject to change without notice. The views expressed herein may not be reflected in the strategies and products that KKR offers or invests, including strategies and products to which the writer provides assistance with or on behalf of KKR. It should not be assumed that the writer has made or will make recommendations in the future that are consistent with the views expressed herein, or use any or all of the analyses described herein. Further, KKR and its affiliates may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this document.