Bridgewater’s China Bet: A Closer Look at Ray Dalio’s Investment Strategy

Ray Dalio made headlines in October with his bold statement regarding the escalating odds of World War III (WW3). He pointed to global tensions, particularly in the Israel/Gaza situation and China’s actions regarding Taiwan, as key factors driving this increase in probability. Dalio’s assessment that the likelihood of a “hot” world war had surged to 50% within two years caught the attention of investors and geopolitical analysts alike.

Bridgewater’s Indirect Revelation

While Ray Dalio didn’t disclose the exact methodology behind his WW3 prediction, Bridgewater Associates, the investment firm he founded, indirectly revealed a significant aspect of its strategy: a bet on China’s emergence in the changing world order. Bridgewater’s most recent 13F filing showed that its largest position, alongside IVV, was the iShares Emerging Markets ETF (IEMG), constituting 5.5% of its total portfolio. This investment effectively places a substantial wager on China, given that Chinese stocks account for five of the top 10 holdings within the IEMG fund.

Dalio’s Continued Influence

Though Ray Dalio no longer manages Bridgewater’s portfolios, he remains at the firm as its director and CIO mentor (Chief Investment Officer). This influential role suggests that he may still exert some influence over the firm’s investment decisions, including its preference for emerging markets and, more specifically, China.

China’s Role in the Global Landscape

Dalio has previously expressed his belief that the United States and China are on a collision course, potentially leading to conflict. His recent forecast of a 50% chance of WW3 reinforces the idea that such a conflict could be imminent, with the U.S. and China potentially on opposing sides. Bridgewater’s significant investment in emerging markets, particularly China, suggests the firm’s confidence that China may weather such a conflict better than other major players, if not emerge relatively unscathed.

Managing Risk: IEMG vs. Individual Chinese Stocks

Bridgewater’s approach to investing in China involves a level of risk management. A direct investment in individual Chinese stocks could expose investors to significant tail risks, such as supply chain disruptions and potential delisting from U.S. stock exchanges during a WW3 scenario. These risks are underscored by past instances, including the delisting of Chinese companies during the Trump administration, even in the absence of a war. As a result, Bridgewater has opted for a diversified approach through IEMG, offering exposure to China and 2,700 other stocks while keeping fees low at just 0.09%.

The Case for Foreign Stocks

The investment landscape extends beyond Dalio’s WW3 prediction, with the relative valuations of U.S. and foreign stocks indicating a potential shift in performance. U.S. stocks, particularly U.S. tech stocks, currently trade at steep valuations, with the S&P 500 trading at 24 times earnings. In contrast, the rest of the world stands at 11.8 times earnings, making U.S. stocks twice as expensive as their global counterparts.

Global Earnings Growth and Valuations

Despite Dalio’s cautious outlook, many investors and analysts believe that foreign stocks are poised to outperform U.S. stocks. They argue that foreign stocks offer better value, with similar or even superior earnings growth prospects. JPMorgan forecasts global equities to grow at 7.8%, while U.S. equities are expected to grow at 7%, reflecting the sentiment that foreign stocks can deliver competitive returns.

Ray Dalio’s prediction of a 50% probability of WW3 has thrust Bridgewater Associates’ investment strategy into the spotlight, particularly its bet on emerging markets, with China at the forefront. The valuation gap between U.S. and foreign stocks suggests that the latter may outperform in the coming years. While global tensions and uncertainties loom, history and multiples both argue that foreign stocks have the potential to shine.

Bottom-line: Ray Dalio’s WW3 prediction and Bridgewater Associates’ investment in emerging markets, particularly China, have sparked discussions about the changing world order. While global uncertainties persist, the valuation gap between U.S. and foreign stocks suggests that foreign stocks may offer compelling opportunities for investors.

FAQ