Investors are wrong about the Federal Reserve Bank's expected rate hikes to come by the end of 2019, according to one longstanding private equity firm. New York City-based KKR warned Thursday that the market should be pricing in five increases by the end of next year rather than the 2.5 it is anticipating now. The central bank is expected to impose three rate hikes in 2018, after last lifting rates in December from 1.25% to 1.5%. (See also: The Biggest Corporate Winners From Trump Tax Deal.)

Henry McVey, KKR's head of global and macro asset allocation team, interviewed recently by CNBC, said he see the Fed  moving "a little more quickly than expected" in the second half of the year due to "earnings coming in stronger," while "President Trump's tax cut actually leads to more spending." He recommended investors take advantage of central bank normalization via picking stocks of companies that have "complexity" or have been "left behind." Meanwhile, McVey advises staying away from growth plays. 

Too Much Growth?

"We've been most struck by what's going on in the growth part of the market. If you look at the Russell Growth, it's now back to '99's levels," said the KKR executive, speaking to the index commonly quoted as a valuable indicator of trends in growth companies. The iShares Russell 1000 Growth ETF is up 5.6% within the first few weeks of the new year after rising nearly 30% in 2017. On the other hand, assets such as master limited partnerships (MLPs) have been "left for dead," added McVey, suggesting that "they're the only instrument right now that has a yield above average." He also likes mortgage servicing and financials. (See also: A 10%-15% Correction Is Unavoidable: Blackstone.)

Also this week, the Swiss bank UBS lifted its estimates on the Fed's rate plan from two increases to three this year, followed by two hikes in 2019. 

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