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Wed 12 Feb 2020 09:22 AM

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CEO of world's largest hedge fund says market impact of coronavirus is 'exaggerated'

Global equities have been in turmoil amid fears about the spread of the deadly coronavirus

CEO of world's largest hedge fund says market impact of coronavirus is 'exaggerated'

Dalio said that no one has any clue on where and to what extent the coronavirus will spread and how will it impact economies and markets. Image: Getty Images

Ray Dalio says the impact of the coronavirus outbreak on markets has been exaggerated and is likely to be short lived.

Investor concerns over the pandemic “probably had a bit of an exaggerated effect on the pricing of assets because of the temporary nature of that, so I would expect more of a rebound,” Dalio, the billionaire founder of Bridgewater Associates, said at a conference in Abu Dhabi on Tuesday.

“It most likely will be something that in another year or two will be well beyond what everyone will be talking about.”

Dalio leads the world’s biggest hedge fund, which manages $160 billion in assets. Bridgewater has made $58.5 billion for its clients since its beginning in 1975, the most by any hedge fund, according to estimates by LCH Investments, although last year its main fund suffered its first loss since 2000.

Global equities have been in turmoil amid fears about the spread of the deadly coronavirus. The death toll from the outbreak has climbed above 1,000, with cases still being confirmed globally and steps being taken to contain it continuing apace. Flights are still being cancelled, economic warnings remain bleak and companies are pulling out of events for employee safety.

So when considering the market impact of the coronavirus outbreak, the billionaire founder of hedge fund Bridgewater Associates plans to play safe and hedge his bets.

“When you don’t know, the best investment strategy is to be smartly diversified across geographic locations, across asset classes, and across currencies,” he wrote in a daily note to clients on Jan. 28.

As manager of the world’s biggest hedge fund, Dalio’s thoughts are worth listening to. Bridgewater has made $58.5 billion for its clients since its beginning in 1975, the most by any hedge fund, according to estimates by LCH Investments, although last year its main fund suffered its first loss since 2000.

The coronavirus outbreak has triggered what Dalio describes as “flight-to-quality market action,” with equities selling off globally, while bonds, gold and the dollar versus the yuan have rallied. Being able to understand how investors are reacting will be key, he says.

“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,” Dalio wrote.

JPMorgan Chase & Co. strategists say the turmoil in global equities brought about by the coronavirus outbreak could end up a buying opportunity. The sell-off in stocks could continue before the situation improves, but in the past such major outbreaks only led to a drop in share values of about 4.7% on average, they noted. The S&P 500 Index has fallen 2% since hitting a closing record on Jan. 17.

In a note documenting major pandemics dating back a century, Dalio said that no one has any clue on where and to what extent the coronavirus will spread and how will it impact economies and markets. He went on to discuss the economic impact of the Spanish flu that rocked the world in the early 20th century and killed more people than World War I.

Outbreak stabilising

Yet, stock markets are still hovering around record levels and a risk-on feel pervaded Asian stocks, which rose on Tuesday as investors try to decipher whether the outbreak is stabilising.

Dalio said investors should instead focus on issues such as wealth and political gaps, the emergence of China - and what that means for the competitive landscape -- technology and the environment.

“Each one will interact,” he said. “What concerns me most if you did have a downturn - we are now 11 years in expansion - whether that’s one, two, three years forward, with the larger polarity that exists, the wealth gap and the political gap. I would be more concerned about that.”

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