- Bridgewater Associates, L.P. Co-Chief Investment Officer & Co-Chairman Ray Dalio has explained how the coronavirus outbreak affects his investment strategy
Bridgewater Associates, L.P. Co-Chief Investment Officer & Co-Chairman Ray Dalio recently published a post on LinkedIn explaining his early thinking on the coronavirus outbreak and pandemics in general. Dalio acknowledged that he does know much about pandemics nor does he know where it will spread or what the economic impacts will be. But in response to the coronavirus, Dalio decided to follow his usual approach by studying a bunch of pandemics and make sure that the firm’s portfolios are either well diversified or hedged so that there are no “inadvertent big bets that we don’t have a good likelihood of betting on well.”
“As for the spreading of this virus, as with any sort of unknown, there are 1) actual events and 2) the expectations of events that get reflected in market pricing. Generally speaking these once-in-a-lifetime big bad things initially are under-worried about and continue to progress until they become over-worried about, until the fundamentals for the reversal happen (e.g., the virus switches from accelerating to diminishing). So we want to pay attention to what’s actually happening, what people believe is happening that is reflected in pricing (relative to what’s likely), and what indicators that will indicate the reversal,” wrote Dalio. “Regarding diversification to protect us against the unknowns, the outbreak of the coronavirus and its effect on markets highlight its importance. China’s stock market is down nearly 10% since the virus took off. Terrible, unimaginable things could happen anywhere. What we don’t know is much greater than what we do know. When you don’t know, the best investment strategy is to be smartly diversified across geographic locations, across asset classes, and across currencies.”
During the SARS outbreak, the stock market in Hong Kong declined and reversed as the number of cases started slowing down and declined. This is likely to happen again in the case of the coronavirus outbreak.
In the past several days, the markets saw falling growth and flight-to-quality market action (equities decline). And bonds, gold, and the dollar versus the yuan rallied. This is similar to what happened to the H1N1 flu (swine flu) pandemic of 2009 and the SARS virus outbreak of 2003.
“So far, China’s response is much more transparent and decisive compared to the SARS outbreak, which affects both the statistical comparison and the rate of dealing with the problem. Because the Chinese government reported the disease faster to the WHO, it imposed quarantine and other prevention measures earlier. The WHO has praised China’s swift response because of its beneficial effects on containment,” Dalio pointed out.
