The CEO of Bridgewater Associates, the world's biggest hedge fund, is hardly the only China bull, but he has been talking up the opportunities in the world's second-largest economy for some time. Indeed, even as other global macro strategists, traders and fund managers have grown increasingly fretful in recent months in light of mounting trade war tensions, Dalio's enthusiasm remains largely undimmed.
According to Dalio, China represents the future of capital market growth. He thinks investors who miss the boat will soon regret it.
Ignore the controversy
On Aug. 6, Bridgewater uploaded an interview with Dalio on the subject of China and its growth trajectory. The guru was unabashedly bullish, though he readily admitted this opinion has become increasingly controversial:
"People say, 'Why are you so bullish on China?' And I know it's very controversial, particularly at this tim e, to be very bullish on China. I really admire what is being done and I want to be a part of it and I think our investors should be a part of it...Not investing in China is very risky."
According to Dalio, China is still on the rise, irrespective of the present tensions. Failing to invest in the next great economy would be a mistake:
"Would you not have wanted to invest with the Dutch in the Dutch empire? Would you have not wanted to have invested in the industrial revolution and the British Empire? Would you have not wanted to have invested in the United States. I think [China is] comparable...You want to be, if you're diversified, having bets on both horses in the race."
Dalio contends that, rather than a bet against the United States, a bet on China is a bet on global economic expansion, as well as an opportunity to diversify one's assets. American securities are not the only ones out there. In the past decade alone, China's equity markets have grown four-fold, while bond markets have expanded seven-fold. That long-term growth trajectory is hard to pass up, in Dalio's estimation.
Stop living in the past
In a July interview for Goldman Sachs' ( NYSE:GS ) " Top of Mind " global macro newsletter, Dalio argued that trade tensions are not the only reason investors have consistently been underweighted in Chinese assets:
"Most investors are also significantly underweighted in Chinese stock and bond markets, which has left prices of these assets lower than they otherwise would be. Such investments are controversial at the moment given the geopolitical tensions. But, even beyond that, investors are generally uncomfortable gaining exposure to markets they haven't been in before, and tend to put too much weight on cap-weighted approaches. In my experience, that's been a mistake. I have repeatedly seen investors get comfortable with new markets once they finally dip their toes in; I even remember when pension funds thought it was too risky to go into equities from bonds. I think investors are showing a similar hesitancy toward China today. I believe that will change. China's markets are now big. Their equity and bond market caps are second to the U.S.; they are growing fast and will be increasing in size in the benchmark indices, so foreign investments in them will pick up."
According to Dalio, many asset managers and investors have failed to appreciate the sheer growth of China's capital markets in both size and sophistication. The Chinese equity and bond markets are not merely larger, they are better regulated, managed and mature. Dalio believes that, once more investors shake off their old biases, there will be a flood into Chinese assets. Thus, his advice is to get in now:
"I'd rather be ahead of these flows than behind them. And, from a diversification perspective, if any competitor is likely to erode U.S. market share, it will be China. I think if investors look back on this moment one day in the distant future and see that they didn't have any exposure to China at the beginning of the 21st century--when China is already the second-largest economy, and it and its markets are growing fast--they'll regret it."
Dalio is probably right about China, in the long term anyway. The country's economy continues to expand, while also taking on many of the characteristics necessary for a functional capital market to thrive. As a consequence, the attractiveness of its asset market will likely expand over time.
Still, investors should move with great care. The trade war is far from over.
Disclosure: No positions.
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