At Bridgewater, we look for opportunities in over 200 markets across 45 economies. Each market is a distinct building block—combine them well, and you can build a portfolio that is well balanced to the ways the world might surprise us, without playing defense or sacrificing upside. Today, investors are mostly making use of one type of building block: the US equity market, and the handful of companies that dominate it. As strong a building block as this is, we see a wealth of opportunity in other economies and asset classes that investors—especially individuals—have hardly begun to tap. These investments are both attractive on their own and are great complements to what investors already hold. Below I’m sharing some of our recent research that walks through the opportunities we see today. I hope you find it useful.
Karen Karniol-Tambour
Co-Chief Investment Officer, Bridgewater Associates
The content of this newsletter includes an abridged excerpt from the Bridgewater Daily Observations.
A Wealth of Opportunity
As investors have reaped the benefits of the incredible run-up in US stocks, they’re left with more exposure to them than ever before. At the same time, when we scan across global markets, we see a wealth of opportunity for investors to complement these holdings with other assets. Besides being attractive on their own, these assets offer valuable downside protection, which is itself another kind of opportunity (e.g., giving you maneuvering room to buy dips).
For example:
- Foreign companies offer cheaper valuations, at the same time as the fundamentals are becoming more supportive in several important economies.
- Bonds (once 40% of a standard portfolio) came to play a smaller and smaller role in portfolios as yields hovered near zero throughout the 2010s. Now, they are once again offering much more competitive yields, allowing investors to gain downside protection while still earning meaningful returns.
- Gold is supported by secular tailwinds, from lingering inflation concerns, to worries about unsustainable government borrowing, to rising geopolitical tensions, that are just beginning to play out.
A bit of perspective on investors’ starting point today: coming out of the financial crisis, households held about half their financial investments in equities; today, it has risen to about 80%. The only time it’s ever approached this level before was at the height of the dot-com bubble. Almost all of that is in the US. For better or worse, households’ financial fates have become more and more tied to the S&P.
So far, that has been a fantastic bet, and we still see the US equity market as having many attractive qualities, particularly within the tech sector. At the same time, there’s plenty of room for investors to make their portfolios more resilient without going on the defensive, by adding exposure to other economies and assets that present attractive opportunities. Such moves position investors to prosper across a wide range of possible futures by putting some of their investments into assets that can do well in different economic environments, and across different economies facing different pressures.
Even incremental shifts can be quite impactful. Below, we take a closer look at some of the opportunities we see today.
Equities Outside the US
You’ll get no disagreement from us that the US is home to some of the world’s most exceptional companies, and that’s part of what has made the US equity market such a standout performer compared to global peers. However, when you look beyond the Magnificent 7 to the “S&P 493,” they’ve produced very similar earnings growth to companies abroad. And yet, so much money has flowed into the US that these “other 493” now trade at a substantial premium. This is why more and more companies have started to list in the US, knowing that they’ll trade at a higher valuation just by being listed here. The flip side of this, you might say, is that companies abroad are effectively on sale—you can buy a comparable stream of earnings for less. In the context of a US-oriented portfolio, allocating some capital to these companies also increases resilience to a potential slowdown emanating from the US.
Besides the more attractive valuations, the fundamentals are becoming stronger in important pockets of Europe and Asia, which are starting to see some of the drivers of past strong US performance. For example, Germany has lifted its self-imposed constraints on fiscal support in order to fund a transformational expansion in defense and infrastructure. Meanwhile, foreign investors had traditionally avoided Japan and Korea given concerns about insufficient focus on maximizing shareholder returns, but these markets have begun to see strong inflows in recent months thanks to aggressive pushes for stronger corporate governance and capital efficiency.
Government Bonds
It used to be that bonds played a core role as the “40” in a standard 60/40 allocation. But as yields ground down toward zero throughout the 2010s, that threatened their traditional role as a steady source of return that could also offer a cushion in a slowdown. Investors gradually shifted away from fixed income, and within their fixed income allocations, shifted away from the safety of government debt toward riskier credit markets that offered more yield but at the cost of downside protection. Now, conditions have fundamentally shifted, and the economy can sustain more normal bond yields, so bonds can once again play their pivotal role. Investors are responding, beginning to rebuild their bond allocations.
Bonds can be especially attractive to individual investors with a long-term focus, because the return for holding them all the way to maturity is known in advance, so you don’t have to worry about fluctuations in yields along the way. While high government debts and deficits are certainly a risk worth noting, the risk can be mitigated by holding bonds across different economies, as well as holding gold (discussed below). Overall, bonds have a valuable place in a portfolio that we see as underrecognized in most portfolios today.
Gold
While gold has rallied materially, we still think it has value and provides downside protection for portfolios. It is notable that allocation shifts remain small, and secular pressures making gold more attractive seem unlikely to abate any time soon. Lingering inflation concerns, elevated public debts raising the prospect of future monetization, and rising geopolitical tensions have called the value of fiat money into question. Gold price action reflects a world where central banks and other investors are increasingly seeking to hedge monetary risk. In other words, there are large pools of capital that seem willing to buy gold at the current price and to accept the zero-yield opportunity cost of gold to buy down the risk of significant loss of capital from a geopolitical conflict or monetary debasement.
Putting It All Together
From foreign equity markets with cheap valuations and improving fundamentals, to bond markets that offer the opportunity to lock in yield and insulation from a slowdown, to a gold market whose rally thus far has been driven by forces that remain firmly in place, we see plenty of investments that are attractive on their own and can provide valuable downside protection. This offers investors the most important opportunity of all: creating a portfolio that is better balanced to different ways the world might play out, without playing defense or sacrificing upside.
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