The world’s top investors say ‘‘free money’’ policies have reached their limits and they fear central banks and governments could resort to printing money to finance spending, triggering currency instability across the developed world.
“We are coming into an environment where the return of money is becoming more important than the return on money,” Ray Dalio, the billionaire founder of $235 billion US hedge fund Bridgewater told some of Australia's wealthiest and most powerful investors at a charity conference in Sydney.
Mr Dalio said the world was entering a "risky environment" as "mature, developed world" currencies, such as the US dollar, yen and euro, were at risk of devaluation while growing tensions between major economies raised the additional threat of capital being trapped.
"We'll have large deficits and then there will be more monetisation of that," Mr Dalio said.
He said investors had to be cautious and "diversify themselves well" from the major currencies, which were "at the end of their cycles".
Mr Dalio said it was time to consider investing in ‘‘different countries,’’ without specifying which ones. He later told Australia’s top fund manager, Hamish Douglass of Magellan, that gold had historically proved a reliable instrument of diversification.
Howard Marks, the co-founder of $122 billion debt fund Oaktree Capital and another of the world's most celebrated fund managers, said it was time for investors to "play defence" after a decade of falling interest rates had pushed up asset prices.
"We're living in an uncertain, risky, low-return world," Mr Marks said.
Miners could benefit
"I'm afraid to be invested of late but I'm also a little afraid not to be invested."
Australia’s top stock pickers told the Sohn Hearts & Minds Conference that the mining sector stood to benefit as governments turned to infrastructure spending to spur economic growth because low interest rates were losing their power.
A prolonged period of low interest rates is proving a challenge for investors who have been forced to take more risk to maintain their investment returns.
Mr Dalio said these policies had widened the wealth gap between those who had financial assets and those who did not. That, in turn, had resulted in increased populism and political instability.
‘‘Today we have the largest wealth gap, and the largest political gap,’’ Mr Dalio said.
Not all top investors delivered a cautious tale, however. Robert Kapito, co-founder of funds management titan Blackrock, said too many investors were out of the market sitting on cash.
‘‘We have investors scared to sit in cash and miss another year of good returns.’’
Mr Kapito said volatility was low, earnings were strong, unemployment was low and ‘‘fundamentals were good’’.
‘‘The case for expansion remains intact.’’
The Reserve Bank of Australia is expected to outline its blueprint for quantitative easing after cutting the cash rate to below 1 per cent for the first time.
While central banks have resorted to quantitative easing to buy bonds and other assets as a form of stimulus, they have yet to directly ‘‘print money’’ to finance government spending.
But the prospect has prompted Magellan’s Mr Douglass to explore gold as an alternative to cash being held in currencies such as the US dollar, which could be at risk of devaluation.
‘‘You have to look at the histories of currencies,’’ Mr Dalio told Mr Douglass during a panel discussion.
‘‘Then you have to look at what the marginal benefits of diversification are as you add gold to a portfolio relative to what you have.’’
Mr Marks said he was a ‘‘value investor’’ and had avoided gold because it did not produce any cash flows and it was therefore hard to determine whether an investment was cheap or expensive.
‘‘What’s good about gold? Well, it always has worked. It’s worked as a store of value and protection against chaos,’’ Mr Marks said.
While Mr Dalio and Mr Marks feared the risks to financial assets were increasing, local and international stockpickers were still finding opportunities in technology and through exposure to Chinese consumers.
Mr Marks likened China to a teenager in a world where Europe and Japan were economic senior citizens and the US was a mature adult.
"If you've ever had a teenager in the house, they're chaotic and tempestuous ... but you also know the teenager's best decades lie ahead."
The potential shift of policymakers away from lowering interest rates and towards increased spending is providing an opportunity for some of Australia’s shrewdest hedge fund managers.
Regal Funds Management’s Phil King told the conference mining stocks were the perfect hedge for investors because they would perform well if central banks succeed in engineering a breakout in inflation.
‘‘We think increased infrastructure spending around the world will be very positive for mining stocks,’’ he said.
Mining companies are not so much investing in new mines or expansions, they’re actually returning cash to shareholders,’’ Mr King said.
‘‘The demand side looks weak at the moment, but that’s the opportunity,’’ he said.
Mr King, who has a reputation as an astute short seller, said there was a bubble in the Australian biotech sector.
‘‘Mark Twain once said a mining company is a hole in the ground with a liar on top,’’ he said.
‘‘An Australian biotech is a medical lab with a good salesperson on top.’’
Airlie Funds Management’s Emma Fischer also pitched an investment in mining company Mineral Resources as her best investment idea.
This article was originally posted on The Australian Financial Review here.
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Concerns about Chinese influence in politics and universities may be at fever pitch, but the reality is that some of Australia’s retirement savings will help fuel a predicted $US600 billion ($885 billion) inflow into mainland stocks over the next decade.
Friday’s Sohn Hearts & Minds conference is barely in the rear view mirror, but already Hobart’s Federation Concert Hall is almost entirely booked solid for next year’s event, taking place on November 13 for the first time on the Apple Isle. At $3500 a ticket, that shows how popular the thing’s become.
The majority of investors who attend the Sohn Hearts & Minds conferences in Australia are there to learn about the dozen or so stock tips from leading fund managers as well as make very large donations to a range of medical research institutes.
Developed economies are not heading for another debt reckoning or recession, but are in a risky environment where governments are likely to print money to fund their spending, warns Ray Dalio, the founder of $180bn giant hedge fund Bridgewater Associates.
Veteran investor Howard Marks says the abandonment of the WeWork float, the poor performance of US IPOs in 2019 and the punishment of bad news in US debt markets are all early signs that discipline is starting to return to financial markets, and investors may no longer be rewarded for holding the riskiest assets.
Philip King might seem an unlikely ally for Reserve Bank governor Philip Lowe. The chief investment officer at Regal Funds Management has been knocking out returns in the teens to mid-30s for a growing roster of funds for the past 15 years.
The top-performing fund manager from last year's Sohn Hearts and Minds investment conference has criticised the buy now, pay later (BNPL) sector as operating in a "fuzzy" regulatory zone and engaging in a game of trying to be acquired before a regulatory crackdown.
Beeneet Kothari, the New York hedge fund manager who pitched the best-performing stock recommendation at the prestigious Sohn Hearts & Minds Conference in 2018 — has warned investors of the risks faced by one of Australia’s favourite tech stocks, Afterpay Touch.
Buy now pay later providers like Afterpay and Klarna are risky businesses operating in a "fuzzy legal area", and are likely to be regulated in coming years or be swamped by larger companies, says US fintech investor Beeneet Kothari.
Tribeca Investment Partners’ Jun Bei Liu provided one of the star performers for last year’s Sohn Hearts and Mind conference with China-based education group New Oriental Education and Technology, which has gained 81 per cent in the last year.
TDM Growth Partners' Hamish Corlett reckons the reversal of fortunes for the once high-flying WeWork may be a reality check for fast-growing private companies with complex ownership structures, and the torrent of money that has propelled valuations ever higher.
Rob Kapito, co-founder of $10 trillion investment giant BlackRock, says a global shortage of investable assets will help the sharemarket grind higher over the long term as dips in equity and bond markets are quickly met by investors hungry for returns.
Rob Kapito, the head of the world's largest money manager BlackRock, says there is more than $US50 trillion ($73 trillion) in cash sitting idle in portfolios around the world due to a lack of investment opportunities and weak returns.
Oaktree Capital’s Howard Marks has warned that it is time to take a defensive approach to investing, opting for bonds over stocks, investing in the US rather than emerging markets and choosing larger, more stable companies to invest in over smaller growth stocks.
When the founder and co-chairman of the world’s largest hedge fund likens the global environment to that of the 1930s and sees the current tensions between the US and China as something wider, more permanent and more threatening than a trade conflict it is disconcerting.
