Two of the world's most respected and influential investors have expressed confidence in the durability of China's economy, boosting hopes Australia's largest trading partner will underpin global growth and asset prices for years to come.
Legendary bond market guru Howard Marks and vaunted macro investor Ray Dalio told an audience of top investors in Sydney on Friday they remain optimistic about the world's second biggest economy.
“There is no competitor in the world in terms of new technologies and innovation like China. Europe is dead in the water, there is no competition,” Mr Dalio said at the Sohn Hearts & Minds conference at the Sydney Opera House. “If you look at the opening up of China’s financial markets, like the Hong Kong Connect, they’re fast changes, and they’re basically good changes.”
Mr Dalio helps oversee $US150 billion ($220 billion) of investments for Connecticut-based Bridgewater Associates, while Mr Marks helps manage $US122 billion for Los Angeles based Oaktree Capital.
Mr Marks said he believed China was only in the early stages of a sustained economic expansion.
“What I tell people is that Europe and Japan are economic senior citizens, the US is a mature adult and China is a teenager” he said. “If anyone has ever had a teenager in their house you know it can be chaotic and tempestuous, and there are lots of good days and bad days, but you also know the teenager’s best decades lie ahead. I think the analogy holds.”
He said investors could not afford to ignore China. “Will China continue to grow faster than the rest of the world, and will China have the largest economy within the next 10 to 15 years? You can’t say for sure, but it would be silly to say not,” he said. “There’s a non-zero probability that China’s going to grow very strongly and so, over the long term, you probably want to have some significant investments there.”
Mr Dalio said various indicators contributed to his bullish view on the country. “When I look at leading indicators for growth over the next ten years, the biggest relate to education levels, infrastructure, the ability of people to work together in a cohesive way and levels of indebtedness,” he said.
Golden difference
While there was little disagreement between the two superstar investors on China, they differed on an asset class that has a knack of dividing opinion: gold.
“I’ve never invested in gold and I don’t believe it,” Mr Marks said. “I’m a value investor, so I look at something and figure out the intrinsic value – usually based on cash flows – and see if you can buy it for less.”
Mr Marks said that while assets such as stocks, bonds, private companies and physical buildings are investable on that basis, gold did not share this characteristic.
“Gold doesn’t produce cash flow, so you can’t say what the fair price is,” he said. “The believers can’t convince the sceptics and the sceptics can’t convince the believers.”
But Mr Dalio said gold should be part of an investment portfolio in the current era of ultra-low or even-negative interest rates.
“You have to view gold as an alternative to cash,” he said.
“Would you rather have cash with a negative interest rate? We’re going to print a lot more of that cash. And what is a bond? It’s a promise to receive all that cash that they have a printing press on. So how does gold compare with a negative-yielding bond, or how does it compare to cash, now we’re in a different world?
“So I think gold works from a diversification perspective.”
Mr Dalio warned that a traditional 60/40 portfolio, where 60 per cent of funds are invested in stocks and 40 per cent in bonds is dangerous in today's environment of low interest rates and high share prices "without adequate diversification in currencies”.
Yet while he liked gold on diversification grounds, he said investor should not "go crazy for it".
This article was originally posted on The Sydney Morning Herald here.
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