By HENRY H. MCVEY Jan 09, 2014
We believe that we are now entering the global synchronous phase of a long but bumpy recovery process that started in 2009. However, unlike many other synchronized global recoveries, developed market central banks are—in aggregate—likely to remain accommodative in an attempt to offset some of the inherent volatility that accompanies de-leveraging cycles. Against this macro backdrop, our asset allocation view for 2014 is that investors should “Stay the Course,” retaining key overweight positions in global equities and alternatives, including private credit, special situations and real assets. To fund these risk buckets, we continue to target a massive underweight to government bonds and investment grade debt. However, 2014 will not be a repeat of 2013, and as we detail below, there are some important new macro influences that investors must now consider. In particular, the “drag” from government austerity should decline in 2014, which has important implications for earnings, interest rates, currencies—and ultimately—global asset allocation.
Well it’s again that time of year when all investors, including pensions, sovereign wealth funds, endowments and individual investors, have the opportunity to “open the book” and uncover the big, new ideas that could materially affect the performance trajectory of their investment portfolios in 2014. We too have embarked on a similar exercise again this year.
However, before we outline our views on where we see “Opportunity” in 2014, we think it is also important to review where we have been. So at the risk of oversimplification, our macro framework over the past few years has largely been as follows:
- First was the decision upon our arrival at KKR in 2011 to overweight “spicy” liquid credit in an attempt to get equity-like returns but with lower volatility.
- Second, we reduced our outsized preference for liquid credit in our January Insights piece, Outlook for 2013: A Changing Playbook. Specifically, we said that with interest rates low and credit spreads tight, we would rotate 500 basis points towards global equities (55% from 50%) and three hundred basis points to more illiquid credit (9% from 6%).
So what are the big sweeping changes we are making this year? Well, after a lot of deep reflection about what the current macro backdrop might mean for our asset allocation framework, we think our view for 2014 is actually to “Stay the Course” by retaining overweight positions in global public equities and alternatives, real assets and private credit in particular.
To fund these overweight positions, we are again maintaining our our massive 1700 basis point underweight to government bonds and our 500 basis point underweight to investment grade bonds. Central to our thinking is our strong belief that traditionally “safe” fixed income investments can no longer fulfill their long-held role as either income producers or shock absorbers in a diversified, multi-asset class portfolio.
No doubt our viewpoint to maintain such a massive underweight to these two asset classes runs counter to what many would consider traditional asset allocation theory. However, if we are right in our observation about the changing role of traditional fixed income (and we think we are), we believe this high conviction viewpoint may have major implications for how any portfolio manager, CIO or individual investor thinks about returns, risks and diversification.
That said, 2014 will certainly not be an exact repeat of 2013, and we do think that there are some important macro themes and tactical asset allocation opportunities worthy of investor attention. They are as follows:
- Remain Overweight Developed Equities: Developed Market Equities May Enjoy Another Decent Year. While we do not expect public equities to be as strong in 2014, we think that the equity markets in the U.S., Japan and Europe can all provide high single-digit or better returns. As such, our equity allocation remains above benchmark at 55%, with overweight positions in Asia and Europe. However, 2014 will likely be a bumpier ride as our research shows that we should brace for a correction along the way in 2014. Key to our thinking is that P/E multiple expansion for this cycle is now notably ahead of schedule. Details below.
- Many Emerging Markets (EM) May Lag Again in 2014, But Look For Some Differentiation Within Emerging Market Equities in 2014. Overall, we think many EM economies are likely to lag relative to potential growth again in 2014. This viewpoint likely means that their currencies are fully valued, particularly as it relates to current account deficit countries like Turkey, Indonesia, South Africa and Brazil. However, we finally expect some differentiation in EM equities, which we believe could allow asset allocators to gain a performance edge. This was not the case in 2013 as essentially all EM currencies and equities generally lagged across the board. Looking ahead, we expect countries like Korea (both currency and equity) and Mexico (currency and mid-cap equity index in particular) to perform well. We also think China could perform better in 2014, which represents a notable change in thinking. Not surprisingly, none of these three countries have big current account or fiscal deficits.
- Fixed Income: Stay Overweight Illiquid Credit as It Remains Attractive at This Point in the Economic Cycle; Avoid Potential Duration “Hangover” in High Grade Credit and Government Bonds. Similar to prior years, we remain convinced that asset-based lending in the 3-5 year duration private credit market remains a sweet spot at this point in the economic cycle. Central to our thinking is that the relative yield pick-up from the private markets relative to the public credit markets, investment grade debt in particular, represents a substantial arbitrage, particularly with regard to specific hurdle rates or payout ratios. By comparison, we continue to believe that long-duration debt, particularly government-linked, may lead to another performance “hangover” in 2014.
- Fixed Income: We Are Further Reducing Emerging Market Debt (EMD) to Zero. We are further reducing our EMD exposure to zero from two percent previously and a peak of five percent at the beginning of 2013. Our travels around the globe during 2013 increasingly lead us to believe that the Sharpe ratio on EMD is now in cyclical decline. Moreover, as U.S. rates increase and the economy gains momentum, we expect additional bumpiness in the EMD asset class again in 2014.
- Fixed Income: To Gain More Flexibility, We Are Switching Bank Loans and High Yield Into Liquid Opportunistic Credit; Also, Add Lower Volatility Fixed Income Hedge Funds. Last year we spent time rotating our tactical asset allocation between high yield and bank loans. While we had some success with a tactical approach last year, our view in 2014 is to allocate to what we call Opportunistic Credit, a mandate that we envision having ongoing capacity to toggle among bank loans, high yield and other credit products as relative under-valuations and overvaluations occur. In addition, we are allocating three percent to fixed income hedge funds. See below for details, but our proprietary research leads us to believe that—at this point in the cycle—this asset class can now offer better yield and lower volatility than many traditional long-only fixed income instruments. Moreover, they can often do so with less duration and correlation risks, particularly in a rising rate environment.
- Real Assets: We Are Selling More Gold and Avoiding Traditional Commodity Notes and Swaps With No Yield; Staying Overweight Income-Producing Real Assets. We continue to stay away from liquid commodity swaps/notes again in 2014 and now suggest selling gold short as an asset class (last year we went from overweight to neutral on gold). By comparison, we think that there is still a substantial opportunity to own both hard assets in the form of real estate, pipelines, and even drilling wells. In so doing, we theoretically create a real asset “bond in the ground” that produces yield, growth and inflation hedging. Given the gold short in 2014, our net real assets overweight falls to 8% from 10% in 2013 and a benchmark of 5%, though our gross long exposure remains at 10% again this year.
- Overweight Traditional Alternatives: Adding a Little More to Distressed/Special Situations. We retain our 5% allocation to traditional private equity and 5% to growth capital/EM private equity, but we are adding another 2% to the distressed/special situations arena in 2014. All told, this position goes to 7% from 5% last year, bringing our traditional alternatives weighting to 17% from 15% versus a benchmark of 10%. Our frequent trips to Europe lead us to conclude that there are growing opportunities to refinance or recapitalize corporations in Europe that have already been hard hit by the crisis. See below for further details.
- Dollar Rally May Continue, But With Greater Differentiation. During the spring of 2013, we turned more positive on the U.S. dollar. While the U.S. dollar rallied against Asian, Latin American and commodity currencies, it failed to strengthen against the European block. But with stronger U.S. growth ahead of us—and government shutdowns behind us—we think that the dollar rally will now likely include various European currencies. At the same time, we expect it could continue to appreciate against EM currencies as well as the Australian dollar, though less violently than in 2013. Separately, we continue to favor the Mexican peso paired against the Brazilian real. Details below.
- Hedges: Volatility May Increase in 2014. Overall, we expect equity and fixed income volatility to go up, so we think hedging makes more sense in 2014. See below for details, but we like trades that take advantage of a steeper yield curve. In addition, certain credit default swaps (CDS) in emerging markets look interesting to us. Finally, if we are right that there is a tradable correction in equities in 2014, then we think some type of put spread may make sense.
KKR GMAA’s* Asset Allocation Strategy
KKR GMAA January 2014 Target (%)
Strategy Benchmark (%)
September 2013 Target (%)
Total Fixed Income
Emerging Market Debt
Actively Managed Opportunistic Credit
Energy / Infrastructure
Distressed / Special Situation
Growth Capital/EM PE/Other
Overall we retain a favorable outlook for the global economy in 2014, including rising but still relatively low inflation and accelerating growth in many instances. In particular we expect economic growth in Europe and the U.S. to further rebound as we expect both to enjoy less of a drag from government austerity.
Given our outlook for stronger global growth, we think it likely means more upward pressure on longer-term rates, as the backdrop of an extraordinarily accommodative policy begins—on the margin—to wane in the U.S. Consistent with this view, we expect U.S. 10-year rates could reach 3.1% by the end of 2014 and 3.8% by the end of 2016 (see Section II: Fixed Income for further details).
Separately, we expect many of the large emerging market economies, Brazil in particular, may remain sluggish relative to potential on the growth front again in 2014. To this end, we are using a 2.1% GDP forecast for Brazil versus a 2.3% consensus forecast (Exhibit 2). While we believe export volumes will recover as global growth improves, the government’s ability to execute large-scale investment programs will likely be constrained by its need to maintain a two percent primary surplus.
Our GDP and Inflation Outlook by Region Seems to Suggest Stronger Growth in 2014
2014 Growth & Inflation Base Case Estimates
GMAA Target Real GDP Growth
Bloomberg Consensus Real GDP Growth
KKR GMAA Target Inflation
Bloomberg Consensus Inflation
7.4% to 7.6%
3.0 to 3.5%
Even a Decelerating China Still Makes Up Almost a Third of Global Growth in 2014
Implicit in our global forecasts are two important considerations. First is that we expect more positive follow-through legislation in what we consider to be the four key reform markets: Mexico (e.g., energy), Japan (e.g., base wages increase in March), Europe (e.g., bank stress test is credible) and China (e.g., state-owned enterprise reform). Second, we are not expecting any major confrontations amid U.S. midterm elections nor do we expect any major political discord following elections in Turkey, Brazil, India and Indonesia.
Against our favorable macroeconomic backdrop however, we do want to caution that our research leads us to believe that we are now ahead of schedule on multiple expansion in public equities at this point in the macroeconomic cycle. As such, we think that certain stock markets, including the U.S., could bounce around a lot in the first half of the year before rallying to hit our 2000 target return by year-end (see Section II: Equities for further details).
Separately, we also think that corporate creditworthiness in the emerging markets will start to surface as an issue during 2014. Already, we think that non-performing bank loans in China are beginning to fray, while India must now deal more forcefully with deteriorating loans that have previously been listed as merely “restructured.” Finally, as we discuss in our hedging section, we think that countries with sizable or growing twin deficits will continue to see their currencies and CDS under pressure in 2014 as Fed tapering gains momentum.
A Snapshot of KKR GMAA’s Views for 2014
S&P 500 EPS
S&P 500 LTM P/E
U.S. 10-Year Treasuries 2014e Year-end Target Yield
U.S. 10-year Treasury Total Return
U.S. High Yield Total Return
Our 2014 Asset Allocation Strategy
- Overweight U.S., Europe and Asia (particularly Japan) equities
- Key reform markets to watch: Mexico, Japan, China, European banks
- Upside risk to both economic growth and 10-year interest rates; avoid duration and government bonds
- Gold underperforms; focus on real assets with yield growth, and inflation hedging
- Private credit has another banner year; liquid credit less interesting
- Dollar bull market continues
SECTION I: Key Macro Trends We See Unfolding in 2014
Economic Expansion Continues in 2014—But With Less Government Drag
Overall, we still believe that we are in a deleveraging environment in the United States, which we call Phase III (see our October 2011 Insights note, Phase III: The Last Stage of a Bumpy Journey for details). After corporate deleveraging and financial deleveraging, the third and final phase of deleveraging centers on the volatility caused by government deleveraging and austerity. Importantly, as Exhibit 6 shows, the U.S. government has been a significant drag on overall GDP growth in recent years as it has been forced to shrink deficits at almost every level of government. In 2013, for example, our research leads us to estimate that the government drag on GDP growth was a sizeable 125 basis points.
As we look ahead, however, the good news is twofold, we believe. First, as Exhibit 7 shows, the U.S.’s structural deficit has closed by an average of 140 basis points per year over the past three years, culminating with 2013’s sizeable 200 basis point belt-tightening escapade. As a result, we think that the U.S. government deficit may be less than 3.5% in 2014 versus over 9.0% in 2010. From almost any vantage point, this sizeable reduction is constructive for investor confidence in the United States, its government, and its economy. Second, the absolute level of government belt-tightening—and hence, its corresponding fiscal drag—are expected to be much smaller in 2014 and beyond, which is clearly bullish for long-term growth expectations.
U.S. Headline GDP Has Masked Notably Stronger Private Sector Growth This Cycle
Significantly Less U.S. Austerity in 2014 vs. 2013
Austerity has also generated many headlines in Europe, so it might surprise some to learn that the Eurozone has actually implemented less fiscal consolidation than the U.S. Indeed, Exhibit 8 shows that Europe’s structural budget deficit closed by just 100 basis points in 2013 vs. 200 basis points in the U.S. Importantly, though, those headline numbers mask the fact that European austerity has had much more economic bite, as it has taken place amidst a strong currency and without as much offsetting monetary stimulus for the hardest hit countries. All told, we estimate that every percentage point of fiscal consolidation has equated to a 1.5% GDP drag in Europe recently (Exhibit 9), which is far above the 0.5-0.75% GDP drag we would expect from the same austerity impulse in the U.S.
European Austerity Also Slowing in 2014…
…Which Is Critical, as Austerity Has Taken a Big Economic Bite in the Eurozone
However, as we peer around the corner at the economy in 2014, we see some important positives worth considering. First, unlike in prior years, we actually expect less government drag on the economy in 2014. Specifically, our U.S. forecast assumes just 70 basis points of fiscal consolidation in 2014 (Exhibit 7), which we estimate will be just a 30 basis point drag on GDP growth versus a full 125 basis points in 2013 (Exhibit 10). Meanwhile, our Eurozone forecast assumes just 50 basis points of fiscal consolidation (Exhibit 8), which we estimate will be a 50-75 basis point drag on GDP (Exhibit 10). Importantly, the easier fiscal backdrop may be particularly helpful for some countries that have been worst hit by the Eurozone crisis (Exhibit 11), including Spain, Italy, Ireland and Portugal.
Less Government Drag on GDP Growth in 2014
U.S. Government Drag on Growth
Europe Government Drag on Growth
Peripheral Europe Set For Meaningful Austerity Relief
Change in Rate of Fiscal Consol., 2014e vs. 2013e (% of GDP)
In terms of private sector growth, our thesis is unchanged. Specifically, we look for the same four cyclical pillars we have been highlighting for some time to continue to drive the U.S. economy1. They are as follows:
- Housing. U.S. private residential construction is now just 3.2% of GDP compared to a historical average of 5.7% (dating back to 1952).
- Autos. Auto sales are still running at around a 15.3 million seasonally adjusted annual rate (SAAR), compared to an average of 16.6 million in 2006. In our view, there is more upside potential, especially as the average age of U.S. passenger cars has risen to 11.4 years from 10.3 years in 2006 and 8.4 years in 1995.
- Energy. We view the shale boom as strong and sustainable. This view is important as the number of active oil rigs in the U.S. has risen to 1,391 from just 325 at the end of 2007. Meanwhile, the sector has added 146,000 jobs, a 20% increase over the same period at a time when the U.S. job market is still 0.7% or 1.0 million jobs below 2007 levels.
- char-style-override-2Parts of Manufacturing. For the first time since China joined the WTO, we are actually seeing manufacturing jobs in the U.S. expand. All told, manufacturing has gained 554,000 jobs since 2010, an annualized increase of 1.3% compared to an annual decrease of 1.7% since 1980.
From a timing perspective, we also think that the aforementioned four cyclical sectors have more room to run. Specifically, as Exhibit 12 shows, we are only 54 months into this economic expansion versus 95 for the last three recoveries. We also gain confidence that the expansion can be long-tailed in nature by measuring its duration through the lens of monetary expansion. One can see our analysis in Exhibit 13. Specifically, given that the monetary base has already increased over 100% since the end of the last recession in June 2009, our work shows that the current period of economic expansion should last at least 95 months or so, which is in line with our fundamental forecasts.
We do note that some folks have questioned why we retain the 1938 to 1945 outlier period in our analysis. Key to our thinking is that we believe that it actually helps to incorporate another period of extreme expansion of the monetary base. Indeed, excluding the 1938 to 1945 point, our statistical work would suggest the current expansion cycle would last 150 months or more, which seems unrealistic given the current backdrop of government deleveraging.
We Are Now in the 54th Month of Economic Expansion Versus an Average of 95 Months for the Prior Three Cycles
If Past Relationships Hold True, This Economic Cycle Has More Room to Run
Emerging Markets: Many Currencies May Lag Again; Within EM Equities However, There Is Finally Some Differentiation in 2014
For the fourth year running, we think that there will be more investor disappointment again in emerging markets in 2014. Key to our thinking is the following:
- First, as Exhibit 14 shows, the significant tailwind from EM currency from 2002 to 2012 is not likely to be repeated as local currencies have appreciated significantly over the past decade as U.S. interest rates were falling. We now expect the U.S. dollar to take a leadership position amid stronger growth and a less accommodative monetary policy.
- Second, while we are not expecting a major interest rate cycle boost in the U.S. in the near term, we do think that tapering represents a change in Fed policy. This viewpoint is significant because, as Exhibit 15 shows, there is a tight performance relationship between many DM and EM equities when the Fed is being less accommodative.
- Third, many of the easy EM productivity gains are now starting to moderate. Urbanization comparisons are getting tougher in many countries, while lack of infrastructure investments, particularly in Brazil and India, is now starting to reveal notable economic bottlenecks.
- Finally—and potentially most important of all—the overall health of EM countries has deteriorated meaningfully. True, valuations are down, but so are returns—despite significantly higher leverage. As Exhibits 16 and 17 show, leverage for EM private sector companies has ballooned by a full 32% on average since 2007 (with China up 49%). Meanwhile, ROEs for EM countries have fallen somewhere between 4%-46% with Brazil declining the most (46%) and China the least (4%).
Emerging Market Currencies Are No Longer a Tailwind
The Cycle Has Turned: Developed Markets Tend to Outperform When Rates are Rising
Pre-crisis Return on Equity in Emerging Markets Was High with Low Leverage
LTM Net Margin
However, Post-Crisis Return on Equity is Now Lower on Much Higher Leverage
LTM Net Margin
However, given the severity of the underperformance of equities in recent years, we think the overall performance gap between DM and EM will likely be less substantial in 2014 than the 26% underperformance (30% in USD terms) recorded in 2013. Key to our thinking is, as Exhibit 18 shows, the gap in trading multiples increased substantially in 2013.
Multiple Compression in EM, Despite Positive Earnings Growth
Large Twin Deficits Countries Likely Still Challenged in 2014
So, we think a key theme for 2014 may be the year of differentiation within EM equities. On the one hand, we look for twin deficits countries like Brazil, Indonesia and Turkey to remain under pressure. On the other, we expect to see fiscally sound countries that are working to improve long-term productivity like Peru, Mexico (mid-cap stocks in particular) and Korea enjoy solid, if not spectacular rebound years. Among the large-cap EM countries, we do think that China could be an outperformer in 2014. Importantly, this more positive viewpoint represents a notable change in our long-term thinking. Influencing our outlook for China was our early December visit to Beijing, which reinforced our strong belief that the new Chinese government actually seems to understand the severity of the issues facing its economy. In particular, we expect reforms of its state-owned enterprises (SOEs) and financial institutions to be major undertakings by the Chinese government in 2014, both of which could be notable positive influences on the local equity market.
Our Emerging Market Framework Takes the View of Avoiding Twin Deficits Countries At This Point in the Cycle
We believe 2014 will also be an important year on the electoral front, with Turkey, India, Indonesia and Brazil all facing the potential for new leadership—and potentially a new direction. So while the current headwinds in EM remain significant, we do think that there is the opportunity for certain countries to inflect positively if more market-friendly leadership assumes power.
We Believe Capital Management Will Reach Center Stage in 2014, Including More M&A
With the stock market having moved up sharply in recent months, we hear some folks complaining that there must not be much value left. We disagree. In fact, there are several things from a macro standpoint we like about this market. First, as we discuss in more detail below in the Equity section, we expect earnings could be stronger than the consensus in 2014. Second, the market is not being driven by one sector or just one area. As Exhibit 21 shows, dispersions across sectors are actually at or near a historic low. In the past this type of balance in the market was generally a healthy sign.
U.S. Sector Valuation Spreads Are Tight, Suggesting Little Differentiation for Growth By Investors
Total Payout Ratio on S&P 500 Now 80-90% of Total Earnings
Third and most important, we believe aggressive capital management by Corporate America is now acting as a major driver of growth and returns. All told, S&P 500 buybacks will likely have reached $458 billion in 2013, which would represent more than a 10% year-over-year growth rate and account for nearly 25-35% of total gross earnings growth (Exhibit 22). Separately, we now estimate that S&P 500 dividends could total about $312B for full-year 2013, which would also represent 10% year-over-year growth (Exhibit 23). So if we add total buybacks and dividends together, we estimate that S&P 500 companies will likely have returned over $770 billion in capital in 2013 versus estimated operating earnings of around $950 billion, a payout ratio of 80-90% (Exhibit 22). Moreover, if we translate that into yield, we calculate a total payout yield of around 5%, which compares favorably against a U.S. 10-year Treasury yield of just 3% (Exhibit 24).
The good news is that we expect more of the same on the capital management front in 2014. Specifically, in terms of dividends, we expect a similar payout ratio on a bigger earnings base in 2014. Meanwhile, our research shows that buybacks could represent nearly 15-20% of our nine percent forecasted EPS growth for the S&P 500 in 2014.
Dividends and Buybacks Are Still Accelerating
S&P 500 Dividend and Buyback Yield Combined Now Offers Much More Yield Than 10-Year Treasury
We also think that there is another important catalyst that both investors and CEOs should consider: shareholder activism. With debt levels low and cash levels high, U.S. corporations are—in many instances—now operating with a cost structure where cost of capital is essentially their cost of equity. Not surprisingly, activist shareholders have taken note of this potential opportunity to right size balance sheet and return profiles. Indeed, as Exhibits 25-26 show, the pace of activism and its success rate are gaining momentum, both trends we expect to gain further force in 2014.
Activism Has Been On The Rise. We Expect This Trend to Continue…
…While the Rate of Success Stands At Decade-High Levels
Finally, we see corporate M&A starting to increase at this point in the cycle. There are three catalysts we believe worth considering. The first is that we expect fewer macro shocks in 2014, which should allow CEOs to gain more confidence. Second, with margins near peak levels, corporate America will likely find it increasingly difficult to grow, so acquisition-driven growth may be helpful. Third is the low level of yields, which we believe allows all but the highest priced acquisitions to be accretive at this point in the interest rate cycle.
U.S. M&A Activity Has Dramatically Declined Since the Great Recession
We Think M&A Volume Could Finally Rebound in 2014
…But We Are Ahead of Schedule for Multiple Expansion, So Some Bumpiness Is Likely in Order
“If we open a quarrel between the past and present, we shall find that we have lost the future.”—Winston Churchill
Given the S&P 500’s 32.4% total return in 2013, our guess is that many folks are not going to “quarrel” about the present or recent past. Simply stated, it was a tremendous year for equities, with both high returns and low volatility. But as we look ahead, we think that investors should spend time thinking about the future, particularly as it relates to multiple expansion. In particular, while the duration of the current economic cycle still remains intact, monetary policy may finally be changing in the months and quarters ahead. To this end I tasked my colleague Dave McNellis with figuring out where we are in the multiple expansion cycle. And what we found is that we seem to be ahead of schedule. Here’s our thinking:
If we are correct that the current economic cycle begins to wane around 4Q16, then 2014 would only represent the 19th to 22nd quarters of a 30-quarter cycle (Exhibit 29). Yet, as Exhibit 29 also shows, the market has already enjoyed above average multiple expansion relative to history at this point in the economic cycle. By comparison, many of the other big macro factors we track, including rising real yields, positive but moderating bank loan growth and low inflation, are all more in line with the patterns of prior cycles (Exhibit 30).
Using Past Cycles as a Guide, Multiple Expansion Now Appears Ahead of Schedule
Similar to Past Cycles, Real Rates Are Now Rising
So, as we look ahead, we do think that the performance of equities in 1H14 could be slow and potentially even bumpy as the earnings catch up with the multiple expansion that has already occurred. However, as we describe in more detail in our section on equities, we think that the overall total return for public equities in 2014 could approach 10% or better.
High Conviction Thesis Remains in Fixed Income: Focus on the Illiquidity Premium
Given that the illiquidity premium has been a big theme of the KKR Global Macro & Asset Allocation team since our arrival, we are not going to spend a lot of time describing its evolution (interested parties can read our earlier pieces, Financial Services: The Road Ahead, Outlook for 2013: A Changing Playbook and Asset Allocation in a Low Rate Environment for further details). Rather, we think the questions investors should be asking today are 1) is the illiquidity premium still sizeable enough to generate attractive returns; and 2) is there regulation or other macro forces that could unexpectedly shrink the premium?
In terms of whether the premium is still significant, our work suggests the answer is yes. Indeed, as one can see in Exhibit 31 we calculate the spread between private loans and traded high yield/mezzanine to be 5.9%, down from 7% in 2012, but still way up from the late 2000s period. Meanwhile, Exhibit 32 underscores that even in the loan market, the yield differential between originated senior private and traded loans is still a sizeable 340 bps. So while private credit plays are not going to double or triple an investor’s money overnight, we do think that the return profile is attractive, particularly when one considers that the current illiquidity premium is often more than 50% of the target return for many pensions and 100% of the annual payout ratio for many endowments.
Yield Comparisons—Originated vs. Traded High Yield / Mezzanine
Yield Comparisons—Originated vs. Traded Leveraged Loans
Beyond the opportunity set we see in the illiquidity premium, we also think that the default premium appears somewhat outsized too. As we show in Exhibit 33, the current implied default premium is around 4.6%, which still offers an attractive cushion versus prior peak-cycle default premiums of around 3.0-3.25% in both 1996/97 and 2006/07. Moreover, if we use the 2007-2011 Great Recession period as a proxy (which was a pretty tough time in the economic cycle), credit losses on high yield bonds actually only averaged about 3% per year. So even if we assume a credit cycle on the magnitude of 2007-2011 lies ahead of us, junk bonds seem priced to deliver roughly 150-175 basis points excess return over Treasuries. Moreover, as we detailed earlier, we believe that we are still in the early to middle stages of the cyclical part of this economic recovery, and as such we just do not see the credit cycle turning in 2014 (Exhibit 34).
Our Analysis Suggests That Both the Illiquidity Premium and the Default Premium Still Appear Outsized
Even With Credit Default Cycles Getting Shorter, We Still Do Not Think 2014 Represents the Turn
European Stress Test: A Credible Chance to Begin to Unclog the Financial Plumbing in 2014
Unlike the prior two stress tests in Europe since the crisis unfolded, we are actually optimistic about the 2014 event. Key to our thinking is that we have more confidence in the central bank head, Mario Draghi, who will be overseeing the stress test versus the consortium of European officials who did the prior two. Importantly, because details on the stress test are still being worked out, sentiment remains somewhat skeptical around the prospect for success, so we think this important transition towards credible oversight is potentially underappreciated by the market.
Also, we think a successful stress test will help to unlock trapped liquidity pools in several parts of the European lending market. In particular, as we show in Exhibits 35 and 36, both cross-border lending and lack of available credit for small-to-medium-sized business remain major issues across Europe. So if there is some improvement in unlocking available credit in these areas, we think it would be supportive for both confidence and growth.
Cross-Border Lending in the Eurozone Has Collapsed and Is Now In Need of Repair
Spread Between SME Loans In Spain and Germany Remain at an All-Time High
Importantly, we think the potential for the market to be truly shocked by the magnitude of required capital raises is now quite low. A full 52 months have passed since the original stress test in 2009, and as such, our base view is that Mario Draghi knows that—to steal a Rolling Stones phrase—“time is on my side.” As a result, reserve bases are now much bigger, funding is stronger, and asset values are generally higher.
Including An Additional €75 Billion in Capital, Eurozone Banks Have Received €325 Billion Since 2007
European Bank Leverage Is Double That of the U.S.
SECTION II: Asset Class Review
Since the market bottomed in March 2009, U.S. stocks have rebounded 173% in aggregate, while Europe and Japan are up 86% and 130%, respectively.2 Meanwhile, emerging market equities have appreciated 88% in local currency terms.3 And with such strong returns in 2013, we took the opportunity—using the S&P 500 as a proxy for overall equities—to see whether history suggests more upside is possible. See below for details (Exhibit 44 in particular), but the short answer is yes4.
- At 1848, the S&P 500 price return for 2013 was 29.6%, the 12th strongest year on record since 1900. Importantly, nearly 80% of this performance came from multiple expansion, not earnings growth.
- Since 1900, the S&P has appreciated by 20% or more 30 times. Twenty of those instances were P/E-led (including this year), while just 10 were EPS-led.
- On average, the market has rallied 7.6% the year after a 20%+ year, which is slightly above average compared to the 5.1% CAGR for all years since 1900.
- Importantly, the equity market has done better following P/E-led years (+9.8% avg. the next year) than EPS-led years (+3.2% on avg.). From what we can tell, it seems P/E expansion has more of a momentum-sustaining tendency.
- For what it is worth, the worst set-up for performance is following 0-20% years, as it appears such middle of the road performances have tended to be followed by lackluster years (just 3.4% on average). The best years, not surprisingly, were when the market was down in the prior year (clearly not the case in 2013!). As an aside, we also show average market performance following lesser-performance years. On average, the S&P 500 subsequently rallied 10.8%.
So as the data bear out, our base is that 2014 may be another solid year for equities. Specifically, we expect around nine percent of EPS growth, zero percent in multiple expansion, and 2.1% dividend income for a total return approaching 10% or better in the U.S.
At the moment, we are using “only” nine percent for EPS growth in 2014, but we do note that our quantitative model has inflected notably upward (Exhibit 39), suggesting our fundamental forecast of nine percent could prove conservative. Last year, by comparison, the same model did a very good job of accurately predicting slower than consensus growth in 1H13. Key inputs to the model’s optimism for 2014 now include higher home values, lower gas prices, and tight credit spreads (Exhibit 40).
Our Quantitative Earnings Model Suggests Faster Growth in 2014
A Key Input to 2014e Growth Is Recovering Home Prices
On the multiple front, we are using just north of 16.5x to reflect our view that real rates are likely to remain positive over the remainder of this economic cycle. Indeed, as Exhibit 41 shows, investors tend to place a significantly higher multiple on stocks when real rates turn positive as they have just done. Moreover, given that we expect slightly higher GDP growth on a go-forward basis in the 2014-2016 period, we gain comfort that some additional multiple expansion may be warranted. That said, we think the 17.9x projected multiple that typically accompanies a 2-3% 5-year trailing GDP environment may be too ambitious (Exhibit 42) given the sizeable risk premium associated with exiting the historic amount of Fed-driven liquidity in the system.
Multiples Tend to Expand in a Positive Real Rate Environment
Similarly, Real GDP Growth of 2-3% Implies a Higher P/E Multiple
Pulling All the Pieces Together: 2014 S&P 500 Price Target Suggests a Level Around 2000
S&P 500 Trailing P/E
Approximate YE 2013 Range
YE 2014, Assuming 9% EPS Growth and No P/E Expansion
In terms of dividend yield, we expect S&P 500 companies to deliver around $343 billion in dividends to their shareholders in 20145. This total should represent about a 10% increase versus 2013, and in percentage terms it should keep the dividend yield around two percent if our base case year-end 2014 target of around 2000 on the S&P 500 is accurate (Exhibit 43).
Years With S&P 500 Price Performance > 20% (1900-2013)
Price Change Next Year
Average Following Year Post 0-20% Perf.
Average Following Year Post < 0% Perf.
From a regional perspective, our view for 2014 is to have overweight positions in Asia and in Europe, while we are equal-weighted the U.S. and Latin America in our target asset allocation. Key to our thinking is that, despite the strong increase in Japan during 2013, the stock market has actually gotten cheaper in absolute terms (i.e., EPS has increased more than prices; meanwhile, consensus annual EPS growth for 2014 is a solid 19%).6 We are also now more constructive on China (consensus EPS is for growth of 14%)7. In the Euro area, we expect earnings to grow a full 21% year-over-year. By comparison, in the U.S. and Latin America, we expect earnings to grow 9% and 13-15%, respectively.
Our ROE DuPont Analysis Shows That Returns in Japan Are Now Improving, While Europe Still Has More Work to Do to Boost Returns
In terms of sectors and styles, we are quite constructive on global financials, particularly in the U.S. and Europe. In the U.S. the story is more about return of capital, while we actually see capital-raising prior to the upcoming stress test in Europe actually unfolding as a positive event. Separately, from a style perspective, we remain bullish on stocks that have rising payout ratio and solid growth (see our note titled Brave New World: The Yearning For Yield Across Asset Classes for more details).
Fixed Income Outlook: A Grind Higher for Rates
Similar to 2013, we enter the year with a 1700 basis point underweight to government bonds and a 500 basis point underweight to investment grade credit. From our vantage point, there are several strong macro and asset implications embedded in these outsized targets. First, we believe that rates are structurally bottoming and headed higher over time. Not surprisingly, given this forecast we no longer believe that more conservative fixed income instruments like government bonds and investment grade credit can fulfill their traditional roles as both a shock absorber and an income producer in our asset allocation matrix. While this point may seem like a subtle one, we think it is an important one that all investors, particularly those who use leverage or embrace longer-duration risk parity models, must consider.
Looking ahead our base case is that the markets may endure a slow grind higher in terms of both real and nominal rates in the months, quarters, and years ahead. This view is consistent with the outlook we provided in our September 2013 Insights note, Asset Allocation in a Low Rate Environment, though we have made some slight tweaks to our Treasury yield forecasts since then. Specifically, we have lowered our year-end 2014 10-year forecast to 3.1% from 3.2% previously, based on our growing conviction that the next Fed tightening cycle will likely be unusually mild relative to history (and our earlier projections). At the same time, we have raised our year-end 2016 10-year forecast to 3.8% from 3.7%, based on our view that dovish Fed policy may ultimately create long-term inflation concerns that will be reflected in the long end of the curve. Exhibit 46 compares our new yield forecasts versus market expectations, and as one can see, market rates are now much closer to our estimates across many maturities than in the past.
Interest Rates: Current Market Expectations Are Now Closer to Our Forecasted Outlook
Memo: Prior Forecast
Memo: Prior Forecast
Real 10yr Yield
Memo: Prior Forecast
Real 5yr Yield
Memo: Prior Forecast
Separately, we look for the Federal Reserve in 2014 to continue working to drive a substantial wedge between investor perception about tapering versus its true intent to actually increase rates. As one can see in Exhibit 47, even though the Fed started tapering in December 2013, we do not expect it to actually begin to raise rates until the last meeting of 2015. This assumes the FOMC will not start hiking until unemployment hits roughly 6.0% (below the Fed’s ‘official’ target of 6.5%), and we even see some risk that the threshold could fall to 5.5%, which would push the first hike into 2016.
Once rate hikes begin, we now think they will likely proceed at a pace of approximately 150 basis points per year, which assumes that the Fed hikes rates by 25bp at only 75% of all FOMC meetings during the tightening cycle versus our previous expectation of 100%. This pace is an unusually slow rate of change compared both to (1) our prior assumption of 200 basis points per year (Exhibit 47); and (2) to the historical average of 204bp per year (Exhibit 48). Not surprisingly, what has caused us to reevaluate our thinking is a series of recent well-publicized Fed staff research papers that seem to suggest the FOMC is looking for ways to anchor expectations about the next tightening cycle8.
KKR GMAA Fed Forecast vs. Market Expectations
We Believe Next Interest Rate Hike Cycle Will Be Historically Mild Relative to History
Rate of Change (bps/yr)
CPI y/y at Peak
Real Fed Rate at Peak
Against this backdrop, we still feel comfortable allocating money to not only private credit, which we discussed in detail earlier (see Section I: High Conviction Thesis Remains in Fixed Income: Focus on the Illiquidity Premium), but also to opportunistic liquid credit, including high yield, bank loans, and fallen angel credits. Importantly, if we are right that periodic bouts of volatility are likely to persist during a Phase III de-leveraging (largely government related), then we want to champion fixed income mandates with maximum flexibility to buy periodic dislocations across a broad array of higher coupon credit related investments. By comparison, we expect both emerging market debt and duration-oriented government bonds to again consistently underperform in our base case scenario (Exhibit 49).
If We Are Right That Rates Are Rising, This Has Implications for All Asset Allocation Decisions, Particularly in Fixed Income
Asset Class Selection Matters More Today, So the Flexibility to Again Toggle Between Fixed Income Asset Classes Is Required
We fully acknowledge that the risks in high yield and bank loans have increased. That said, we do not yet see a catalyst for the bear case, particularly given our economic outlook for the next few years. In general, interest coverage ratios remain high; moreover, operating leverage should improve as the economy continues to strengthen. Finally, we again expect net issuance to remain modest. Also, for strong credit underwriters, we still think that there can be significant opportunities to benefit from the tail end of the 2008/2009 distressed cycle as well as the continued deleveraging of financial institutions and need for corporate restructurings.
Separately, given our view that rates are structurally bottoming, we like the idea of using a hedge fund approach in the fixed income arena at this point in the cycle, including investments in relative value, convertible arbitrage, etc., to deliver a return that is 1) more than competitive with government bonds and investment grade debt; 2) more diversified; and 3) has less duration risks. As such, we have dedicated three percent to this type of allocation in 2014. As Exhibit 52 shows, rising rate environments have historically been opportunity-rich periods for fixed income hedge funds. In fact, since 1993, relative value corporate, convertible arbitrage, and asset-backed strategies have all posted their strongest average performances in years when the 10-year yield increased 50 basis points or more.
In 2014 We Again Expect Leveraged Loans and High Yield to Outperform Versus Many Other Parts of Fixed Income
Fixed Income Hedge Funds Have Shown Strongest Absolute and Relative Performance in Rising Rate Environments
Our view on real assets is largely unchanged. Specifically, we continue to eschew traditional real assets with no yield, including standard commodity swaps/notes. Besides being compositionally flawed, we think that these instruments face significant challenges in a rising real rate environment. We are also again cautious on gold as we think positive real rates mean that gold will continue to underperform. In fact, we have actually moved to a 2% short position on gold. As one can see in Exhibit 54, gold tends to underperform when real rates rise, which is what we are predicting for the future (Exhibit 46).
GSCI Total Return Swap Has Not Created Much Value for Investors Since 2004
Gold Faces Significant Challenges in a Rising Real Rate Environment
While we maintain a decidedly negative outlook for gold and commodity swaps/notes, we do believe that now is the still the time to be overweight certain parts of the real asset sector. Specifically, we remain bullish on private real estate and energy that provide both yield and growth while an investor waits for potential inflation down the road.
Why do we think investors may want to pay for some long-term inflation protection? Key to our thinking that an overweight position is warranted is our strong view that central bank policy is directed towards lifting long-term inflation expectations. Specifically, by running nominal GDP above artificially depressed interest rate levels, history shows that central banks have typically been quite successful at raising not only inflation expectations but also actual Inflation. Indeed, as John Maynard Keynes once said, “by a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” While he wrote this in 1919 in response to post-World War I economic policies, we think his comment remains valid today, given that the developed world is again awash in indebtedness—much of it government-related—and it appears that a measure of inflation could be needed to lower the debt burden at some point. Implementing an inflation hedge that protects against Keynes’ alleged “confiscation of wealth” would therefore make sense, we believe.
History Shows That Pinning Fed Funds Below GDP Growth Leads to Rising Inflation Rates
We Believe Inflation Is Running Too Low Today and Will Increase As the Economy Accelerates
Traditional Alternatives: Adding More to Distressed/Special Situations
Similar to last year, we continue to focus our alternatives exposure on a combination of traditional private equity, growth PE (including emerging market PE), and distressed/special situations. Overall, in a low rate environment where asset allocators increasingly need to generate positive returns with low correlation, we think alternatives can play a meaningful role. As Exhibits 57-58 show, there have been benefits to adding alternatives, private equity in particular, to an overall portfolio, a trend we expect to continue throughout this economic cycle.
From a regional perspective, we are particularly bullish on EM private equity as we believe it is a superior asset class to public EM equities, many of which are plagued with large state-affiliated—and often underperforming—companies. Meanwhile, we still see some good value opportunities in the traditional buyout space in both Europe and the U.S., though having some ability to improve value beyond the capital structure is likely a prerequisite for success at this point in the cycle.
Our Work Shows Many Pensions Are Still Not Efficiently Positioned in Terms of Allocations
Pension Funds With Higher Non-Liquid Alternative Asset Classes Have Delivered Higher Returns
Separately, we believe that alternatives remain an elegant way to gain exposure to beneficiaries of the ongoing deleveraging that we expect throughout this economic cycle. So, to further reflect our conviction in this macro theme, we have boosted our allocation to distressed/special situations in 2014. Our travels to Europe lead us to believe that the much-hyped deleveraging cycle has accelerated ahead of the ECB-commissioned bank stress test. However, a specific skill set will be required as many of the larger transactions in Europe now are focused on recaps, restructuring and credit extensions by private lenders in the alternative space—not by traditional, pure-play distressed firms that often buy loans wholesale in the market.
European Banks Are Finally Beginning to Delever…
…But There Is Still Much Work to Be Done
“Pressure makes diamonds.”—George S. Patton, Jr.
In our humble opinion, pressure does a lot more than make diamonds. In the currency arena, for example, pressure on fiscal and current deficits makes exchange rates a logical “release valve.” Importantly, as we look ahead we think investors should think about the currency market in several buckets. On the one hand, we think the potential for the dollar to continue to appreciate against many of these currencies is quite significant. Indeed, similar to the 1978 and 1995 dollar bull markets that we highlight in Exhibit 61, we expect strong returns over the next few years as the Fed reigns in its balance sheet and the government’s fiscal drag shrinks. On the other hand, several central banks, including those in Australia, Thailand, and Sweden, are now actually beginning interest rate reduction cycles that have the potential to further lower the value of their currencies.
Another key macro trend we are watching is which non-U.S. countries are running at or above potential GDP. At the moment, both the U.K. and New Zealand are enjoying this profile, which we believe could lead to tightening cycles, particularly relative to more sluggish places like the Euro area, Sweden, and Australia.
In terms of emerging market countries, we like the stronger northern Asia countries like Taiwan, Korea, and—to a certain extent—China, all of which are levered to the global recovery and have current account surpluses. In addition, we favor a country like Mexico, which is pushing through the painful reforms required to boost growth and productivity.
By comparison, we are more cautious on the currencies of countries like Brazil and Indonesia, both of which are still struggling with twin deficits. Moreover, because of capital outflows, leading EM countries like India are now being forced to raise rates, despite slower growth. If there is good news, it is that many EM currencies are now not as over-valued relative to the fundamentals as they were at the beginning of 2013.
We Think a Dollar Bull Market Has Begun
Within Latin America, We Think Mexico Is More Attractive than Brazil
While our macroeconomic backdrop is again favorable for 2014, we think that there are risks worth considering. First is that we do expect a correction in the S&P 500 during 2014. To this end, we think some form of downside protection might make sense, particularly if a correction of 5% to 10% in the S&P 500 occurs as P/E multiples are likely to fluctuate more in 2014 than in 2013. Moreover, because volatility has remained well anchored, we think index puts and/or put spreads appear affordable, particularly when S&P implied volatility compresses to or around the 10% level.
Second, as U.S. growth begins to accelerate and the Fed continues to taper, we recognize a U.S. rate selloff is an important risk to our constructive stance towards risk assets. Importantly, though, we feel that the Fed will likely remain aggressive in its forward guidance in an attempt to keep short- and medium-term rates from backing up too quickly, but that 10-year bonds (and further) are at risk of a more significant back-up. As such, my colleague Brett Tucker believes there are hedge opportunities in the forward swaption market that combine bets on lower 2-year rates with higher 10-year rates (i.e., steeper curves) that have high payouts on modest investment of premium. Moreover, these hedges now appear attractive, given 1) the levels of implied volatility; 2) and the high correlation over the last year between bonds of all tenors; 3) our view that the market will not repeat last May’s broad-based sell off along the curve (i.e., there will be some differentiation this time around as the Fed helps to anchor the short-end of the curve).
Third, we are not ignoring the apparent deterioration in the quality of leveraged loans issued in recent quarters. As seen in Exhibit 63, “covenant lite” loan issuance recently breached 2007’s notional amount by a healthy margin. While we see little opportunity at current prices, we suggest that—over time—investors begin to look towards rounding out a hedge portfolio with some corporate CDS that could accrete value in the event that the most speculative credits begin to deteriorate.
Fourth, if the pace of tapering is harsher than the consensus now thinks, then the creditworthiness of many emerging market countries will appear overstated at some point during 2014. As such, we think that some form of hedging, including buying CDS of countries like Brazil and Indonesia may again make sense in 2014.
The Quality of Loans Issued Is Deteriorating…
…Because It’s Still Worthwhile for Companies to Lever Up
“Nothing pains some people more than having to think.”
—Martin Luther King, Jr.
No doubt we have felt some intellectual pain as we had to do a lot of “thinking” related to our 2014 outlook. Overall, though, we feel good about where we have come out in terms of our global macro world view, including our asset allocation suggestions for 2014. Specifically, we believe that we may now be entering the global synchronous phase of a long but bumpy recovery that started in 2009, and as such, a broad-based allocation towards risk assets is likely to continue to outperform again in 2014. As Exhibit 65 shows, an examination of the historical relationship between the yield on bonds and stocks (as measured by the earnings yield) points towards a similar conclusion.
The Relationship Between Stocks vs. Bonds Still Suggests an Overweight to Risk Assets
The Euro Area Monetary Base Has Shrunk 27% Year Over Year; This Needs to Change in Our View
However, we must also consider that, unlike many other synchronized global recoveries, central banks are—in aggregate—likely to remain accommodative. This more dovish stance is being reflected now in Europe and Japan, and even the U.S.’s version of tapering is the equivalent of slowing the positive rate of change versus outright contraction of monetary policy.
Given this viewpoint, we think our key overweight positions in global equities, private credit, special situations, and real assets are likely to continue to serve us well in 2014. We also remain supportive of private equity, flexible credit mandates, and growth equity.
However, with a 1700 basis point underweight to government fixed income bonds and a 500 basis point underweight to investment grade debt, the major risk to our world view is that government bonds and investment grade debt can—in fact—still both act as effective shock absorbers and/or income producers in a portfolio. We certainly acknowledge the risk to our approach, but with 1) many bonds trading above par/the yield on these instruments just off record lows; and 2) the global economy gaining, not losing momentum, we maintain a high degree of conviction in our current asset allocation framework.
Review of KKR GMAA Target Asset Allocation Performance
Return / Risk
Overall, though, we still feel good about what lies ahead for risk assets, global equities, private credit and special situations, in particular. Indeed, as we have detailed in this outlook piece, we think that we are only at the mid-cycle of this economic recovery, it is becoming more synchronous in nature, and liquidity conditions remain quite favorable. So, against this backdrop, our simple catch phrase for 2014 is to “Stay the Course.”
1 Data as at November 30, 2013. Source: Bureau of Economic Analysis, U.S. Department of Transportation, Bureau of Labor Statistics, Haver Analytics, Bloomberg, Baker Hughes.
2 Market bottomed March 9, 2013. Data as at December 31, 2013. Source: S&P 500 (SPX), Euro Stoxx (SXXE), Nikkei 225 (NKY), and MSCI Emerging Markets (MSELEGF) price returns, Bloomberg.
3 Data as at December 31, 2013. Source: Bloomberg.
4 Data for all bullets as at December 31, 2013. Source: Bloomberg.
5 Data as at December 31, 2013. Source: KKR Global Macro & Asset Allocation estimate.
6 Data as at December 31, 2013. Source: Factset Aggregates.
7 Data as at December 31, 2013. Source: Factset Aggregates.
8 2013 FEDS Working Papers December 2013,
Assumptions: Benchmark Indices Used for KKR GMAA Target Returns
S&P 500 Total Return
MSCI Europe Gross USD
MSCI AC Asia Pacific Gross USD
MSCI EM Latin America Gross USD
Total Fixed Income
Barclays GlobalAgg Total Return Index Value Unhedged USD
LPX Mezzanine Listed Private Equity Index (TR)
BarCap Global High Yield Corporate Total Return Unhedged USD
S&P/LSTA Leveraged Loan Total Return Index
JACI Global (USD) - Investment Grade
JPMorgan EMBI Global Total Return Index
Actively Managed Opportunistic Credit
50% High Yield + 50% Bank Loans Returns
Fixed Income Hedge Funds
HFRX Fixed Income - Credit Index
65% S&P/LSTA Leveraged Loans + 35% BofAML CCC & Lower US High Yield
Dow Jones Equity REIT Total Return Index
S&P MLP Total Return Index
S&P GSCI Non-Energy Total Return Index
Traditional Private Equity
Cambridge Associates Global Private Equity Quarter Pooled Return
Distressed & Special Situation
HFRX ED: Distressed Restructuring Index
Cambridge Associates Global Private Equity Quarter Pooled Return
Barclays US Treasury Bills 3-6 Months Total Return Unhedged USD