Few investors would dare say Ray Dalio (Trades, Portfolio) does not know what he is talking about when it comes to global macro trading and investing strategies. After all, he has built the world’s largest hedge fund, Bridgewater Associates, using those very strategies.
Decades spent beating the market are all the proof most observers need, yet it is still surprising Dalio remains so bullish on China. Despite the mounting storm clouds of trade war escalation, and even global recession, the guru still thinks investors should be getting into China.
Is it possible that too much focus on the long-term trajectory of Chinese capital markets has clouded the vision of the world’s preeminent macro investor?
Don’t mention the (trade) war
As much as Dalio is keen to focus on China’s bright future as a source of investing alpha, he is also sanguine about the current tensions. Indeed, he acknowledged as much in a LinkedIn post the day following China’s decision to let the yuan float:
"Unfortunately, the war with China is spreading. Yesterday it spread to a currency war that will affect all currencies. It could spread to a capital war and/or an embargo war. In a worst case, it could go beyond that. We need to watch it closely. If there's no big war, I'm bullish on China, and if there's a big war, I'm bearish on both the US and China.”
This recognition is very important. There is hardly any doubt now that the trade war is not going away anytime soon.
Fragile markets, weakened defenses
As much as Dalio is a fan of China’s long-term growth prospects, the trade war simply cannot be ignored. And the guru is not ignoring the short-term problems facing China as the trade war continues to escalate. While he remains focused on the long-term growth story of the world’s second-largest economy, he is well aware of the short-term dangers.
The long-term trajectory of China may be favorable, but it is hard to be particularly bullish in light of the increasing economic and political crisis. Adding in the fact the Federal Reserve and other central banks have precious little firepower to combat a recession, a point Dalio has readily admitted, there is a real risk of a serious downturn in the relative short term. That is hardly a recipe for bullishness on China.
Wall Street is certainly spooked by the latest escalations, with many analysts now certain that no meaningful deal will be reached before the 2020 U.S. presidential election.
Verdict
China’s capital markets still retain many risks that do not prevail in the established exchanges elsewhere in the world. While China has cracked down on corruption and increased financial regulations, capital controls remain. Moreover, the overarching dominance of the authoritarian regime puts the rule of law, including securities law, on shakier footing than it is elsewhere.
China should definitely be on all investors’ radars, whether they have direct exposure to domestic assets or not. Over time, it will likely prove prudent to build some direct exposure. Investors, however, must remain sanguine about the risks that will continue to prevail, even if the short-term trade war worries dissipate in the next few months or years.
Disclosure: No positions.
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