Ray Dalio is the founder of the world’s largest hedge fund, Bridgwater Associates, so when he comes out with an investment idea, you’d be smart to pay attention.
In a video posted to YouTube on Tuesday, Dalio said investors have an historic opportunity to buy into China as it opens its markets to foreign investors, even despite the ongoing trade war with the U.S.
The trade war between the U.S. and China has intensified over the past week after President Donald Trump issued a new tariff threat on $300 billion worth of Chinese goods to go into effect on September 1. China retaliated by allowing its currency, the yuan, to fall below the psychological level of 7 per dollar on Monday, while also halting all purchases of U.S. agricultural products.
The markets reacted with wild swings this week starting off on Monday with the Dow and S&P 500 both dropping nearly -3%, before recovering Tuesday, only to fall to week-lows on Wednesday. On Thursday, stocks then rebounded to erase most of the steep losses from earlier in the week.
Dalio says that the tension between the two countries is a “natural development” and reminiscent of periods throughout history where a world power at the head of the global order has been challenged by a rising power. He also likened China’s current trajectory to the rise of the Dutch, British, and more recently, American, periods of economic growth.
“Think about it. Would you have not wanted to invest with the Dutch in the Dutch empire? Would you have not wanted to invest in the industrial revolution and the British empire? Would you not want to invest in the United States and the United States empire? I think [China is] comparable,” Dalio said in the video.
Dalio believes that, in the current context of the trade war, despite the perceived risk of investing in China, going where the growth is is the right thing to do.
“I believe China is a competitor of the United States. Chinese businesses will be competitors of American businesses and other business around the world,” Dalio said. “You want to be, if you’re diversified, having bets on both horses in the race.”
He said that investors tend to shy away and “not to do the new things,” but China has seen enormous growth in its equity and debt markets over the last ten years, and now could be the right time to take on the risk of exposure to Chinese companies.
“[China is] going to have the largest economy in the world, the most trade in the world, the most market capitalization in the world,” Dalio said. He also noted that China already accounts for 34% of the world’s unicorns, or privately held companies valued at more than $1 billion.
While it’s always riskier to chase growth, Dalio says that the equity market always discounts timing. He also dismissed the concern that China is riskier than the U.S., Europe, or other emerging markets since each have their own set of risks.
Dalio also identified “three big forces” investors should watch out for: the point at which there’s an economic downturn and central banks can’t cut interest rates any further and their asset purchases cease being effective; when rising inequality sparks “extreme” conflicts between the rich and the poor; the battle for global dominion between the rising power of China and the incumbent world power, the U.S.
And when asked about taking on exposure to Chinese equities in the current climate, Dalio said the real question is whether the trade war will evolve into a real war.
“I think the real question is are we going to go to war? If we go to war, we are in a different world,” Dalio said. “I don’t think we’re going to go to ‘classic war.’ I think there is going to be a restructuring of the world order in terms of changes in supply chains. There will be changes in who’s making what technologies, important changes in those sorts of things.”
The ultimate scale of what the trade war turns into is the key determinant of Dalio’s investment stance.
“If there’s no big war, I’m bullish on China, and if there’s a big war, I’m bearish on both the U.S. and China,” he said.
But with China increasingly opening its markets to foreign investors, Dalio said “it is better to be early than it is to be late” to this party.