2026 Outlook: High Grading
The background for the global economy remains favorable heading into 2026, but we are now later in the credit cycle and more of the productivity miracle is now being properly reflected in capital market assumptions, we believe. In our view, this backdrop argues not for derisking, but for High Grading, or upgrading portfolios, capital structures, and counterparties to emphasize resilience, quality, and capital efficiency as the cycle matures. The good news is that the cost to High Grade one’s portfolio is extremely low today. Meanwhile (and consistent with prior years), we maintain a sharp focus on businesses and assets that can compound through what we believe is a Regime Change for investors, including higher-for-longer interest rates, ongoing geopolitical friction, and more discriminating credit markets. Overall, this new world order that we envision argues for a tilt towards quality and scale in Public Equities, and towards Private Market opportunities where we can underwrite targeted corporate carve-outs, collateral-based cash flows, operational improvement, and emerging capital light models across Private Equity, Real Assets, and Private Credit. We believe international markets offer increasingly attractive entry points as earnings momentum turns, corporate reforms accelerate, and valuations remain well below U.S. levels. Our bottom line for 2026: own less beta bets than in the past and favor more alpha in the form of portfolio resiliency, including the ability to make one’s own luck through structuring, governance, and active ownership.
Luck is what happens when preparation meets opportunity."
Most Important Things to Know
We are advocating the following tilts in 2026 as part of our desire to “High Grade” our portfolio:
1. Make Your Own Luck’ again in Private Markets
More operational improvement stories, especially those linked to capital heavy to capital light models. This desire to add alpha by controlling outcomes dovetails nicely with the more muted expected returns that we see over the next five years.
2. The ability to scale margins counts in a world where ‘Winners Take Most.’
We are seeing a historic expansion in margins that have built scale, including leveraging technology to drive automation and digitalization as well as AI.
3. The ability to take advantage of what we call ‘Relative Value Opportunities’ at KKR carries more weight than ever these days.
Key to our thinking is that relative value can be an important source of alpha in a world where we see expected returns being compressed.
4. We want to own more Asia at this point in the cycle.
Both the corporate reform stories as well as the consumption upgrade stories are gaining momentum.
5. Own more collateral-based cash flows that tie into our Regime Change thesis.
We still think that we are in a higher resting heart rate environment for inflation in large economies such as the U.S. and Japan, and as such, we want greater linkages to nominal GDP than in the past across our portfolios.
6. On the more cautious side, we want to refrain from buying apparently ‘cheap’ assets that face intense competitive pressures and/or shaky capital structures.
Using an education analogy, we think a B is an A in this environment, but a C could be an F.
What’s Changed in Our Thinking
| More Positive | |
| ⬤ | The cost to ‘High Grade’ one’s portfolio is now more attractive relative to history. Make this a priority in 2026. |
| ⬤ | Despite heightened global tensions, we notably raise 2026 GDP in 3 of 4 regions (and are above consensus in all three). |
| ⬤ | International earnings are accelerating above trend. Europe, Japan and EM countries should benefit further. |
| ⬤ | Stronger growth and higher inflation in the U.S., but the Fed balance sheet will start to grow again. |
| ⬤ | Our Regime Change thesis regarding the role of government bonds in portfolios is now playing out more internationally, including in Japan and the United Kingdom. |
| ⬤ | We further reduce our China inflation forecast to 0.3%, below consensus of 0.8%. |
| ⬤ | We see Credit losses continuing to normalize in 2026, especially around 2021 vintages and sub-scale businesses. |
| ⬤ | The productivity boom is gaining momentum, but more of this improvement is now in the price. |
| More Negative |
Key Themes and Asset Allocation
Download the report for full details, but we have even higher conviction in our key investing themes, including:
-
Corporate Reform: Capital Heavy to Capital LightWe are seeing a surge in corporate carve-outs, as multinationals seek to reduce their exposure to cyclical or low-return sectors so they can instead focus on more sustainable, higher margin opportunities.
-
Security of EverythingNational security concerns around AI infrastructure, energy, and critical minerals are rising. Security is now being defined far more broadly to encompass resiliency and to be viewed through a broader lens to include supply chains, energy, data, communications, transportation, and pharmaceuticals.
-
Productivity/Worker RetrainingWe expect companies to lean more on technology-driven productivity to offset labor shortages, with skills training and vocational programs growing in importance as supply chains reshore.
-
Intra-Asia TradeAs supply chains decouple from the West, trade is becoming increasingly localized within Asia. We think this remains one of the true structural investing stories in the region.
-
Consumption Upgrades in EMsOne of the most powerful forces reshaping the EM region is the rise of the consumption-upgrade cycle, with middle- and upper-income households driving growth and fueling demand for financial services, healthcare, education, and travel.
-
Global Services as an Investment ThemeWith goods trade more politicized and manufacturing harder to onshore at scale, Services are becoming a major source of economic resilience, increasingly driving productivity, trade balances, and market leadership.
Picks and Pans
We offer our updated asset allocation picks and pans for investors to consider.
Global / Regional Economic Forecasts
Despite heightened geopolitical tensions, economic momentum remains positive across all major regions where KKR operates. However, global growth is increasingly uneven and reliant on fiscal support, tech-driven capex, and household asset gains—tailwinds that could weaken together. We remain firmly above consensus on 2026 growth in the U.S., Japan, and China, supported by more constructive policy developments, including better-than-feared U.S.–China trade outcomes. At the same time, the global economy is becoming more K-shaped, with widening divergences across income groups, sectors, and corporate balance sheets. Coupled with more discriminating credit markets, these dynamics reinforce our High Grading thesis: investors should upgrade quality and strengthen portfolio and capital-structure resilience as potential headwinds emerge and the cycle matures.
United States
Euro Area
China
Japan
Frequently Asked Questions
-
How are you thinking about expected returns?
-
How should I think about productivity and worker retraining in the age of AI?
-
How are you thinking about Relative Value in Credit?
About the Authors
Henry H. McVey
Partner, Head of Global Macro and Asset Allocation and CIO of KKR‘s Balance Sheet Global Macro and Asset Allocation New York
David McNellis
Managing Director, Co-Head of Global Macro, and Head of Portfolio Construction and Multi-Asset Strategies for Private Markets Global Macro and Asset Allocation New York
Aidan T. Corcoran
Managing Director, Co-Head of Global Macro Global Macro and Asset Allocation Dublin
Changchun Hua
Managing Director Global Macro and Asset Allocation Hong KongAcknowledgements
Kristopher Novell, Brian Leung, Rebecca Ramsey, Tony Buckley, Richard Bullock, Christian Olinger, Bola Okunade, Rachel Li, Thibaud Monmirel, Yifan Zhao, Ezra Max, Asim Ali, Patrycja Koszykowska, Coco Qu, Miguel Montoya, Koontze Jang, Allen Liu, Alexandre Caduc, Wayne Shen, and Lucy Siegel
Sign up to subscribe to the latest insights from KKR
Please enter your business email.
Please enter a valid email address.
Please enter a professional email address.
