Ray Dalio's stock tip: diversify portfolios to avoid getting caught in US-China rivalry

Billionaire investor Ray Dalio, founder of the world's largest hedge fund Bridgewater Associates, has warned that US and China will continue to "press up against the other's red lines" as the US election nears, and smart money should prepare for heightened volatility by diversifying investments.

The two great powers are "on the brink of a much worse economic or military war" but neither wants to cross that line, as a major deterioration from current conditions could be disastrous, Dalio said in exclusive comments made to the Post. This strained but contained rivalry is set to pose major risks for global investors, he added.

"I expect that there will continue to be a vicious competition," he said in an emailed response to the Post. "As a result they will both press up against the other's red lines, and they both have their own big domestic challenging circumstances that could cause instability."

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The domestic situations within each country, especially how the internal conflict in the US pans out over the next year, will have a greater impact on US-Chinese relations and what the new world order looks like than anything else, he added.

"Both countries and the world are in risky positions" amid the elevated debt burden, technology and climate changes, he said. "That makes diversification of investments in different asset classes and different countries more important than ever."

Ray Dalio, Founder of Bridgewater Associates, speaks at The Wall Street Journal's Future of Everything Festival in New York City, US, May 22, 2024. Photo: Reuters alt=Ray Dalio, Founder of Bridgewater Associates, speaks at The Wall Street Journal's Future of Everything Festival in New York City, US, May 22, 2024. Photo: Reuters>

In China, an unbalanced economic recovery since exiting Covid lockdowns, ballooning local government debt, and the ongoing property market downturn that Dalio describes as "a classic big real estate bubble that burst", have all spooked foreign and domestic investors, leading to a sell-off.

The CSI 300 Index tracking the biggest firms listed in Shanghai and Shenzhen has tumbled some 38 per cent since a peak in February 2021, while the Hang Seng Index, tracking the largest and most liquid stocks listed in Hong Kong, slipped over 42 per cent during the sell-off.

Bridgewater, which managed over US$171 billion in assets as of March, has also been offloading Chinese shares in recent months, to join the retreat of global investors. In some of its most recent moves, the Connecticut-based investor cut stakes in nearly all US-listed Chinese stocks it held including Pinduoduo, Yum China and Trip.com, by up to 78 per cent in the first three months of this year.

The total value of Bridgewater's Chinese stock holdings had plummeted to US$313 million at the end of the first quarter, an 86 per cent drop from a recent peak of some US$2.2 billion in early 2022, according to calculations made by the Post.

Yet Dalio, said he now sees opportunities in the market downturn as Chinese assets now look cheap after "unsustainable" selling by foreign and domestic investors. The markets now just need to see less selling to stage a rally, and "that is likely in this case" because the selling cannot continue at the furious pace that was seen in recent weeks.

"The combination of cheap prices and the momentum of selling tapering off is a dynamic that is consistent with price gains," he said.

International investors, especially those in the US, are worried about potential blowbacks from their own governments for investing in China, as anti-China policies are set to gain bipartisan support in the US election this year, he said at the Greenwich Economic Forum in Hong Kong earlier this month.

Still, diversification in the world's second largest economy is "desirable" as the assets are "attractively priced" and can balance the portfolio, he said.

"In my opinion, no exposure to any asset class or country should be more than 10 per cent of one's portfolio. And with one's limitations at that sort of level, one can operate without much risk in all of these markets."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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