We have obtained the second quarter letter from Ray Dalio’s Bridgewater Associates, the world’s largest hedge fund, with over $120 billion under management. We reported earlier that the fund is down 3% year to date.
The second quarter report of Bridgewater Associates emphasizes on the following key areas of trade and economy:
- Global Bonds have deteriorated and yields have fallen 49 basis points. The overall growth of economy has stalled and is now at its weakest since 2009. Europe is the most severely affected of all, due to austerity measures.
- Bonds rallied in second quarter for all major markets. The Australian market, which had the highest interest rates, showed the highest percent yield change of all in second quarter, while Japan had the lowest bond yield change. On average bond yields fell 49bps in the second quarter. We mentioned earlier, that Dalio is more bullish on Australia than most hedge fund managers.
- With slow global growth of economy, inflation-linked bonds showed positive returns. In this sector, Australia outperformed the others again, while US showed strong yields as well. In Europe, yields in France fell, while Germany rallied.
- A total of $55 billion of inflation-linked bonds were sold by governments worldwide. As governments are focusing to reduce debts and borrowing costs, it’s likely that the same trend will continue.
- Inflation rates declined all over the developed countries, again due to slow economic growth, and falling commodity prices, especially for oil. Break even inflation has remained the same over the past decade.
- Global equity market sold off in this quarter, due to the deleveraging strategies applied by companies, and the absence of monetary stimulus. The UK and US have continued to outperform due to flexible exchange rates and consistent growth stimulus. By the same comparison, Japan has not performed well, and ranked among the worst of equity markets for this quarter. The European countries, like Italy and Spain, have also under-performed in world equity, and will continue to do so as long as there is a lack of the required stimulus.
- The markets of the developed world are displaying the lowest of growth rates in earnings seen in a century. This is evident when higher dividend yields are seen with non-financial companies, rather than those by the government.
- The area of Commodities showed both rise and fall, but it more or less sold off, due to the drastic decline in prices of oil and raw metal that were seen in this quarter. The oil industry saw a significant spell of high prices in the previous years, and this led to a rise in investments in the oil business, which caused an imbalance between supply and demand. Increased oil supply, and reduced demand of oil contributed to the fall in oil prices. Oil prices fell 19% in this quarter as opposed to natural gas prices which increased more than 20%.
- The increase in oil supply is because Saudi Arabia is pumping out oil to its maximum limit, and Libya has recovered its standing in the oil market. The future of the oil market is still sketchy due to Iranian sanctions.
- In this quarter, Gold fell modestly, with a 4% fall in prices. The upside of Gold is that you cannot produce it yourself like money can be printed, the downside is the lack of any interest payment on it. As economies are undergoing cost cuts, theoretically it supports the shift of assets into gold etc, but it will take a longer period for gold to become a major holding. In recent years, interest in gold market has led to short term passage of cash, which is unlikely to sustain.
- The prices of other commodities like, wheat, corn, and soybean also increased.
- Metals like Zinc, Nickel, Copper, and Aluminum suffered a decrease in prices for this quarter. Among metals, the least decline in prices was seen in Gold.
Most of the European companies are undergoing downsizing, or deleveraging (A company’s attempt to decrease its financial leverage). In such times, the prediction of events on highly-indebted systems becomes very difficult. Transition to a better Europe will require acceptable mix of default, redistribution, and monetization. The increase of imbalance in euro markets has caused divergence of views among the big guns of EU over the extent of rescue measures that should be implemented. As major revenues are not created from the global private sector, the reliance on government aid stumps development. China is a major contributing factor in the slower growth worldwide, as it contributes to 12% of world GDP. The weaker commodity imports in China have hurt the whole economy. The US also faces similar problems with the private sector contributing minimal credit growth.