In terms of focus areas, oil is not the only variable that matters, but it has become a focal point in the near term as it is the fastest channel through which geopolitics can alter the path for inflation, growth, and central bank policy. Interestingly, though, as we show in Exhibit 1, Equities and Credit have been much slower to react to recent news than during either ‘Liberation Day’ or the Russia/Ukraine war.
Amid these crosscurrents, it has been helpful to be on the road, building a clearer mosaic of both global opportunities and global concerns. Over the last several weeks I have spent time in Tokyo, Paris, Washington, DC, and San Francisco, comparing notes with policymakers, CEOs, CIOs, and KKR colleagues. While each conversation was different, the same issues kept resurfacing. What AI disrupts versus what it enables. How Private Credit behaves as the cycle normalizes. The length and severity of the Iran conflict, and what it means for supply chains, energy, investor confidence.
Against this backdrop, we are updating our forecasts and scenarios, guided by the KKR Global Institute’s latest thoughtful assessment of developments in the Middle East. As we detail below in Exhibit 12, our base case reflects no significant further destruction of Middle East energy infrastructure, but we do assume the re-opening of the Strait takes weeks or months, not days. We also incorporate a faster transmission into growth headwinds, particularly in Asia, than typical models would ordinarily imply and a higher path for headline inflation than we expected previously.
At the same time, however, we are not building a ‘Fed hikes into the shock’ narrative. The more likely outcome, we believe, is delayed easing. Inflation uncertainty forces patience, but softer growth and a subdued labor backdrop keep the medium-term bias towards modest cuts, especially if the job market weakens further under AI anxieties.
EXHIBIT 1: Our Market Pricing Table Suggests That Investors Are Not Yet Assigning the Same Risk Premium to the Current Set of Macro Crosscurrents Relative to Past Ones
Comparison of Ongoing Iran Conflict With Other Recent Market Dislocations