At the World Economic Forum in Davos, Switzerland, Greg Jensen, co-chief investment officer of Bridgewater Associates, the world’s biggest hedge fund, recently gave an interview in which he emphasized growth expectations in the U.S. are still excessively bullish. In an environment where leading investment banks are still forecasting equities to end the year up as much as 20%, hearing a major fund manager making such comments should give investors reason to pause.
Why investors and policymakers are not ready for lower growth
“Right now our expectation is that while people have certainly diminished their growth expectations and you’re hearing all about that at Davos, we don’t think they’ve done it enough, and that earnings expectations, particularly in the US, are too high and that generally the Fed and other policymakers are still expecting stronger growth than we see.
So basically what we expect to play out is weaker growth and a movement to easing, which means probably lower interest rates, particularly on the short end, and a movement towards places that have struggled the most because they lack dollar liquidity, which will benefit from the shift to easing.
We think that there are some emerging markets that have already suffered a major cycle and have really suffered from a lack of dollar liquidity, that as the Fed shifts towards easing those places will benefit, whereas the places that still have reasonably high growth priced in will suffer”.
In short, Jensen thinks U.S. equities are due for a rough ride in 2019. Conversely, emerging markets that have been punished in recent quarters are due for a rebound. More adventurous investors could look further abroad for opportunities in these markets, whereas more conservative value investors should hold their fire until valuations come down.
What will happen with interest rates?
Clearly, the Bridgewater co-CIO thinks central banks will step in to support the market. When asked about his view on whether the Federal Reserve will cut rates once or twice, Jensen said:
“I think that’s going to be the discussion, that probably around the third or fourth quarter there’s going to be discussion around how they ease. First of all they’ll stop quantitative tightening, and then move towards lowering interest rates and that will play out over a period of time...And when you look at that in Europe, they’re starting from a worse level, in terms of the economy. Lower inflation, close to deflation in many places, and already have negative interest rates...so their movement is going to be a leading indicator because they’re going to struggle a lot more with easing”.
Bear in mind that based on the official Fed guidance, the central bank is expected to hike rates two more times. The market, however, does not think this will come to pass - the federal funds futures market is currently pricing in a 70.3% probability that rates will remain unchanged. What is interesting is the same market is not pricing in a high probability of lower rates either, which makes Bridgewater’s position somewhat contrarian. Furthermore, Jensen thinks the eurozone will be the first to act in this direction and could be the canary in the coal mine for other developed economies.
Summary
The message coming from the world’s biggest hedge fund is clear: do not expect the kind of growth being forecast by the bulls. Granted, this is just one opinion. But Bridgewater has a strong track record of being able to make money on both the long and short side of the market. Bridgewater’s flagship Pure Alpha fund posted positive returns of 14.6% in 2018, amid a decline of almost 7% in the S&P 500. They could well be right about this too.
Disclaimer: The author owns no stocks mentioned.
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