Bridgewater Turns Bearish on China?
The world’s biggest hedge fund has turned on the world’s fastest-growing economy.Bridgewater Associates later clarified its stance on China in an email to CNBC, saying too much had been made of the shift in its thinking:
Bridgewater Associates LP, one of Wall Street’s more outspoken bulls on China, told investors this week that the country’s recent stock-market rout will likely have broad, far-reaching repercussions.
The fund’s executives once had been vocal advocates of China’s potential. But that was before panic in the country’s stock markets shaved a third of the value off Shanghai’s main index, battering hordes of mom-and-pop investors and hedge funds alike, before partially rebounding.
“Our views about China have changed,” Bridgewater’s billionaire founder, Raymond Dalio, wrote with colleagues in a note sent to clients earlier this week. “There are now no safe places to invest.”
Bridgewater, which has $169 billion under management, is renowned for its ability to navigate global economic trends—including the profit it turned in 2008, when most of its peers lost big. The company’s flagship fund reported its worst month in nearly a year in June, trimming its gains for 2015 to about 10%, a person familiar with the matter said.
A spokeswoman declined to elaborate on the fund’s changing views on China.
The move adds Mr. Dalio and Bridgewater to a growing chorus of high-profile investors who are challenging the long-held view that China’s rise will provide a ballast to a whole host of investments, from commodities to bonds to shares in multinational firms. For a generation, bets on China’s rising middle class have been commonplace on Wall Street and beyond as investors have looked to diversify their holdings.
But with the country’s stocks on a roller-coaster ride this summer, those beliefs are being tested. The world’s second-largest economy faces renewed questions about the sustainability of its growth and the government’s commitment to loosening its grip on the country’s heavily controlled markets.
Kingdon Capital Management LLC, a nearly $3 billion New York hedge-fund firm, told clients this week it had sold all its shares in Chinese companies listed on the Hong Kong exchange. It said it was spooked by the fallout from a surge in China in the use of borrowed money to purchase stocks, particularly after authorities cracked down on the practice, helping drag down Kingdon’s investments.
The firm said it would wait until the level of such borrowing in the market drops further before going in anew.
The shifts by Kingdon and Bridgewater follow a series of concerns raised publicly last week about China by other high-profile hedge-fund managers, including Elliott Management Corp. founder Paul Singer, Perry Capital LLC founder Richard Perry and Pershing Square Capital Management LP founder William Ackman. In China, few traders dare cross regulators by publicly expressing their concerns.
“It looks worse to me than 2007 in the United States,” Mr. Ackman said during an investment conference in New York, pointing to the unreliability of the government’s economic statistics. “Much worse.”
Mr. Ackman has a long-running bet against nutritional-products maker Herbalife Ltd., partly based on his belief that the firm’s fast-growing Chinese business is illegal and part of a global pyramid scheme.
Herbalife has denied the allegations.
The shifts are also a blow to Chinese leaders who have sought to woo international investors into their tightly controlled market. Even before the selloff, global investors from hedge funds to big mutual-fund firms had been reluctant to invest directly in the country, despite the Chinese government’s efforts to make it easier for foreign investors to buy mainland-listed stocks, known as A-shares. Aggressive measures to stem the rout underscored concerns about China’s unpredictable government and lack of transparency, investors say.
Overseas investors have pulled cash out of Chinese stocks via a trading link between Hong Kong and Shanghai for 12 of the past 13 trading days, according to Hong Kong stock-exchange data.
At its trough on July 8, the Shanghai Composite Index was off 32% from its June highs. Even days after the market began to climb back, about half of the 2,800 stocks listed on the Shanghai and Shenzhen markets remained suspended from trading, though many have since resumed.
The Shanghai Composite edged up 0.2% Wednesday but remains down 22% from its high in June. The smaller Shenzhen market, where nearly a quarter of stocks remain suspended from trading, rose 1% Wednesday.
The stock-market rout adds to a growing list of hurdles China faces. While its economy expanded at a 7% annual rate in the second quarter—a level many economists thought would be hard to reach—many areas, such as building and infrastructure investment, showed weakness even after a succession of recent interest-rate cuts. China’s political leaders are also pushing to reduce the dependence of its slowing economy on export-driven growth and to lessen the heavy debt load of state-owned firms.
Some big investors in the region still see a chance to pounce. Eashwar Krishnan, who runs the $3 billion Hong Kong-based Tybourne Capital Management (HK) Ltd., said in a note to investors earlier this month that he has been heartened by regulators’ efforts to clean up the market and is “now looking through the rubble for other diamonds in the rough” to bolster Tybourne’s sole A-shares position.
Mr. Krishnan, formerly the Asia head of Lone Pine Capital LLC, had previously steered clear of Chinese shares as Shanghai stocks doubled in a year due to Mr. Krishnan’s concerns over what he called “clear” market manipulation and a worrying surge in individual investors borrowing money to buy stocks. A firm spokesman didn’t respond to requests for comment.
The change by Bridgewater is a particularly sharp reversal. Mr. Dalio has gone out of his way in the past to praise Chinese President Xi Jinping and has compared the country’s economic environment to a patient undergoing a heart transplant by a skilled surgeon.
In a note to clients in June, Mr. Dalio said China’s problems “represent opportunities” because they give policy makers a chance to make positive reforms. As recently as earlier this month, Mr. Dalio wrote that the stock-market move was “not significantly reflective of, or influential on, the Chinese economy, Chinese investors, or foreign investors,” with the market still largely driven by a small pool of speculative investors in China.
But this week, Mr. Dalio said he was particularly alarmed about the psychological damage of the stock-market decline. While prices remain above their levels from two years ago, many ordinary investors are sitting on losses because they piled in more recently, he said.
“Even those who haven’t lost money in stocks will be affected psychologically by events, and those effects will have a depressive effect on economic activity,” Mr. Dalio wrote.
"The observations that were made simply noted that falling stock prices have a negative wealth and negative psychological effect. When a classic stock market bubble (supported by unsophisticated investors buying stocks on a lot of margin) bursts there are negative growth effects. When combined with the debt and economic restructurings underway, that will most likely result in slower growth, and more stimulative [sic] government policies to offset these downward pressures," Bridgewater said in a statement.At the end of March, I warned my readers the China bubble was set to burst but nobody was paying attention back then. Now that the great Ray Dalio is sounding the alarm on China, everyone is paying attention.
"Bridgewater's view that China faces debt and economic restructuring challenges, and that it has the resources and the capable leaders to manage these challenges, remains the same."
The problem with institutional investors is they're mesmerized by these hedge fund titans and are incapable of challenging their views. I went head to head with Ray Dalio back in 2004 telling him global deflation is coming and the U.S. housing/ credit bubble will burst wreaking havoc on financial markets. Ray looked at me and blurted: "Son, what's your track record?!?". Gordon Fyfe, the former president and CEO of PSP Investments, got a real kick out of Dalio's response and kept teasing me all the way home.
Admittedly, Dalio wasn't being rude or arrogant (just being feisty old "Ray") but he was definitely ticked off that some young analyst from a public pension fund dared challenge his views. It is worth noting, however, that since then Bridgewater has made a pile of dough playing the global deflation/ deleveraging theme. And under the watch of Mr. Fyfe, bcIMC has now allocated funds to Brdgewater's All-Weather strategy, breaking from that pension fund's tradition of not investing in hedge funds.
Anyways, back to the topic at hand, China's bubble trouble and its effects on the global economy. Reuters reports that China has enlisted $800 billion worth of public and private money to prop up its wobbly stock markets but the impact of the unprecedented government-orchestrated rescue has so far been modest.
No kidding?!? A couple of weeks ago I wrote a comment, China's Pension Fund to the Rescue?, where I expressed serious reservations on all these government interventions and think Chinese authorities are making matters much worse with their "kitchen sink" approach.
This week, I wrote a comment on a tale of two markets, going over why I believe the rout in energy (XLE), commodities (GSG and XME) and commodity currencies is far from over and why I'm still bullish on tech (QQQ) and biotech (IBB and XBI) in particular.
In that comment, I referred to misguided expectations that the Fed will start raising rates this year, driving the mighty greenback higher and how this is negatively impacting commodities. The bursting of the China bubble just adds fuel to the fire.
On Tuesday, the day I wrote that comment, I had lunch at Milos (love their lunch special) with Frederic Lecoq, who worked with me at PSP Investments and now trades these schizoid markets, and Martin Roberge, chief strategist at Canaccord Genuity.
These are my two favorite guys to talk markets with. Fred has become an incredible trader (but has to learn to cut his losses faster and buy those big biotech dips!!) and Martin is one of the best under the radar strategists in North America.
In fact, I would tell all my institutional readers to ask Martin Roberge to visit your offices and go over our lunch at Milos where he discussed the equity risk premium and why real rates in emerging markets remain too high relative to the developed world.
According to Martin, the Fed can't risk raising rates this year because it will send the U.S. dollar index (DXY) higher and risk another emerging market crisis as real rates there are too high relative to the developed world. He also stated that an equity risk premium below 3% will send global asset allocators scurrying into bonds (TLT).
But Martin also told us the next quarters of global growth will be stronger than anticipated and there could be another rally in cyclicals as the level of cyclicals relative to non-cyclicals is back to 2001 levels after the tech crash. "This would be the last leg up before a bear market develops."
If Martin is right, expect to see nice countertrend rallies in Chinese (FXI), emerging markets (EEM), energy (XLE), commodities (GSG), metals and mining (XME), and gold (GLD) shares in the next few months. I remain skeptical for now and keep steering clear of these sectors in favor of tech (QQQ) and biotech (IBB and XBI).
Still, I value Martin Roberge's work a lot and recommend you all start reading his research and meeting him to gain important insights other strategists don't have (his email is MRoberge@canaccordgenuity.com). He's also an amazing individual who once told me something I never forgot: "They can take away your job and title but they can never take away what you have between your ears."
Below, Mohamed El-Erian said Thursday he believes China can engineer a soft landing to its recent stock market woes, but the country's economic slowdown is raising a multitude of issues.
And Bridgewater's Ray Dalio discusses how the economic machine works. Smart man with a great mind and obsessive passion for markets. His life story from bedroom to billionaire is a true testament to his grit and unequivocal desire to always better himself and his fund.
On that note, I ask all my institutional readers to kindly subscribe to my blog on the top right-hand side. Also, a final word for Ray Dalio, the world's most powerful hedge fund manager. My track record is nowhere near as impressive as yours but it's improving every day. I'm very proud of my blog, my trading and my life given the serious health and personal challenges I dealt with and still deal with every day.
The next time you're in Montreal, I'd love to get together with you and tell you all about my track record and the personal struggles that have made me a much better thinker, trader and person. Till then, I wish you the best of luck managing that well-known behemoth called Bridgewater Associates.
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