In the face of extraordinary risks over the course of 2020 due to Covid-19, U.S. stocks soared 15% higher amid a rally driven by large capitalization technology companies that surprised even the most bullish investors. With a new year and a new presidential administration looming, private equity giant KKR & Co. is telling investors to expect even more positive surprises as trillions in federal stimulus and a coordinated global recovery helps prompt an almost unprecedented upswing in the world’s economic growth rate. 

In its annual global macroeconomic trends report published Thursday morning, a team of KKR economists led by Henry McVey, head of global macro and asset allocation, foresees a favorable cocktail of economic factors unlike anything seen in decades. As the world becomes inoculated from the Coronavirus and many businesses reopen and recover, KKR expects governments and central banks around the world to remain committed to stimulus measures. Put together, the firm predicts a post-pandemic recovery that could dramatically outperform its disappointing 2008 counterpart.

“Unlike the aftermath of the Global Financial Crisis, there will be no debates about austerity. There will be no rogue bankers or traders taken to task for their association with COVID-19 – only consideration of the human tragedies,” says KKR’s McVey in the firm’s report. “[E]lected officials will feel emboldened to spend more than normal when and where they can find any agreement.”

Initiatives to focus on include those in broadband infrastructure, supply chain resilience, health care coverage and traditional infrastructure. The incoming Biden administration is bound to shake things up, too. Investors should expect fiscal policy that supports the clean energy transition and climate goals. ESG investments will be all the rage. KKR suggests digging into related sectors that enjoy less limelight, like decarbonization, energy storage and water quality.

The eager consumer will help supplement government efforts. Says KKR: “We think the potential magnitude of this spending power could be underestimated, as consumers at the high end have benefitted from increased rates of savings while those at the low end have been supported by generous government transfers.” 

It’s a thesis well-articulated by Federal Reserve vice chair Richard Clarida, who noted last month during a virtual discussion hosted by the Brookings Institution: “This was the only downturn in my professional career in which disposable income actually went up in a deep recession.”

Beyond pent-up spenders and globetrotters yearning to resume travel, KKR points out lasting fundamental positives beyond the initial liberation from a largely uncontrolled virus. 

Demographics worldwide look more favorable entering 2021 than at any point during the 2008 recession, KKR points out. Members of the U.S.’s millennial cohort—those born between 1980 and 1994—are blossoming into peak consumers as they buy homes, settle down and earn more money. Europe even has a good demographic story. And conditions across Asia, where KKR is one of the world’s leading investors after raising $13 billion so far for its fourth Asia-focused buyout fund in October, look phenomenal. 

“We think that we are at an inflection point for the global millennial,” says KKR in the report. It adds: “[T]here are now 822 million Asian millennials, 12 times more than in the U.S. In most Asian countries, millennials are also the cohort just now entering middle income status in such key markets as China, India, and Indonesia, which suggests important shifts in buyer behavior patterns over the next 5-15 years.”

One statistic KKR offers sums up its bullishness. As an unusually homebound, tech-reliant year wraps up, Facebook, Apple, Amazon, Microsoft MSFT+0.1% and Google GOOG-0.9% (the so-called FAAMG stocks) will see their shares rise 15% in 2020, while overall S&P 500 Index earnings will record a 17% plunge, by KKR’s estimates. Tech gains helped propel the S&P 500 to even territory by June and double digit increases entering the holidays. In 2021, FAAMG earnings will accelerate further according to KKR’s projections, rising by another 20%. Yet, non-FAAMG stocks will dwarf that performance with an anticipated 23% earnings growth.

“The market will no longer be as dependent on the FAAMG stocks for success,” the report adds.

The good trades of 2020 should continue, per KKR’s calculus, but increased breadth of winners might be next year’s big story. “[W]ithin the United States, we have high conviction that the performance of the Russell 2000 relative to the S&P 500 over the next five years will improve substantially,” says KKR.

It further recommends small-cap equities, commodities like copper and inflation-sensitive investments such as infrastructure, real estate and logistics that could see their cash flows track with higher-than-expected nominal gross domestic product growth. In foreign exchange markets, the firm also suggests overweighting currencies such as the Japanese Yen while the U.S. Dollar weakens following heavy federal stimulus.

Investors should also pay attention to global trade—or an increasing lack thereof. Nationalist politics have already begun pushing the U.S., China and a slew of European nations towards a “domestication” of supply and demand. Coupled with a post-Covid-19 focus on reliable supply chains, KKR sees this phenomenon giving an extra boost to domestically led firms in technology, industrials and healthcare. 

There’s always a caveat. Throw some of these predictions out the window if a “black swan” event (like, say, a pandemic) takes place next year. Some possible contenders included in the report: a structural increase in interest rates in late 2021, deteriorating U.S.-China relations, recently issued debt crushing companies and countries and the dollar weakening even more than anticipated. 

But all things considered, there’s plenty of reason for optimism. 

“We think the punch line for the next 12 to 24 months is that the growth environment is going to feel quite good,” says KKR’s McVey. “If we are right, it suggests a substantial opportunity for certain investors.”