Developed economies are not heading for another debt reckoning or recession, but are in a risky environment where governments are likely to print money to fund their spending, warns Ray Dalio, the founder of $180bn giant hedge fund Bridgewater Associates. Mr Dalio said that although the global economy had parallels with the period 1935-45 it was likely to avoid a shooting war, but there would be heightened financial conflicts between the economic powers, including a potential “capital war” between the US and China.
The New York-born hedge fund legend said the prospect of what he called a third phase of monetary policy featuring money printing to fund government spending posed dangers for investors because it could influence currency valuations.
“The supply of those currencies of those doing it will increase and I think more people will think about what is a good store of wealth,” Mr Dalio told The Weekend Australian.
Headlining the annual Sohn Hearts & Minds investment conference in Sydney on Friday, Mr Dalio said investors had focused on competing asset classes but were not sufficiently focused on the currency risks of likely monetary policy developments.
“We pay a lot of attention to stocks and bonds and private equity, venture capital or real estate and all those asset classes.
“But we don’t pay enough attention to currencies or capital flows.
“I think we’re coming into an environment in which the return of money is going to be even more important than the return on money.”
The billionaires, chief executives and fund managers among the 600 attendees at the Opera House were given a sombre big-picture view of the global economy and financial markets.
Oaktree Capital’s Howard Marks said markets were living through events many participants had not seen in their lifetimes and urged them to take a defensive approach. Mr Marks, whose $180bn alternative investment empire became a significant player in Australia with the loan-to-own takeover of Blue Sky Alternative Investments, said he was afraid to be in the market but also afraid to not be invested.
“We are full invested at the moment but with a heavy emphasis on caution,” Mr Marks said. “Today we should be putting more emphasis on the defensive and less emphasis on the offensive. We are in an uncertain, risky, low return world.
At a time when sharemarkets are at or approaching record highs and interest rates are falling, Mr Dalio said it was a risky environment for investors.
The US, Europe and Japan had largely exhausted conventional measures to stimulate their economies and there would not be a repeat of the interest rate and tax cuts and margin increases that had helped fuel the rise of markets.
“We know that liabilities, a lot of pension liabilities and other liabilities, require higher returns than are likely, and so we’re in an environment in which we’re selling dreams, right?
“It’s no longer selling earnings … you know, you gotta believe.”
Bridgewater, founded by Mr Dalio in 1975, boasts of having returned more money to investors than any other fund manager.
Its pure alpha strategy has delivered an average 12 per cent a year over the past 30 years.
But the hedge fund has also become famous for its unusual philosophy of radical honesty in management, with even junior analysts are encouraged to critique the ideas and approaches of senior executives, including Mr Dalio, to uncover the best investment ideas.
Mr Dalio said trade and geopolitical tensions had parallels to 1935-45 as the world moved out of the Great Depression and into rising conflicts that led to World War II.
“I don’t think a shooting war is likely,” he said.
“But there are four types of wars, or conflicts … that will exist or do exist.
“There’s a trade conflict, there’s a technology war, there’s a geopolitical war and there could be a capital war.”
Glimmers of a capital war have emerged in the US-China trade war, with calls for index funds to exclude Chinese stocks and for Chinese companies to be delisted from US exchanges.
Robert Kapito, founder of the $10 trillion fund manager Blackrock, said his big themes included the continuing shift to convenience, such as technology-enabled retail and delivery services, the rise of alternative investment assets and the continued expansion of exchange-traded funds.
“Everything that can be ETF-ed will be ETF-ed,” Mr Kapito said. “They are transparent, cheaper and liquid and a better wrapper for any investment.”
Mr Kapito also predicted the continued spread of environmental, social and governance-framed investing because “governments have been very slow to provide (answers) that address the pressing social and economic issues. People are looking to companies.
“ESG is here to say. It’s something that we’re going to increase our focus in, so get in early, and understand that companies that provide a better ESG are going to perform better in the long term.”
Billionaire Atlassian founder Mike Cannon-Brookes said ESG had grown from zero to covering $100 trillion of the $270 trillion of investible funds around the world.
He told the conference that he would welcome government support for the ambitious plan he is backing to build a giant solar farm at Tennant Creek that would supply up to a quarter of Singapore’s electricity demand via a 3700km cable.
The project, which is also backed by Fortescue Metals founder Andrew Forrest, has been pitched as a stimulus to regional jobs and the early stages of an effort to replace coal and gas exports that he says “are going to zero” in his lifetime.
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