Ray Dalio explains why you should avoid US stocks, and buy Mexico, Brazil, Japan and homebuilder ETFs

Feb. 23, 2021 8:58 AM ETSPDR Homebuilders ETF (XHB), ITB, EWW, MXF, MXE, EWZ, EWZS, FLBR, EWJ, FLJPXHB, ITB, EWW, MXF, MXE, EWZ, EWZS, FLBR, EWJ, FLJPBy: David Jackson, SA News Editor23 Comments
  • The 2021 Global Outlook, just published by Ray Dalio of Bridgewater Associates, explains why investors should avoid the dollar and US stocks, other than homebuilders. It recommends that investors buy non-dollar denominated assets, in particular Japanese, Mexican and Brazilian equities.
  • Here are some key quotes, with the addition of bold for mentions of asset classes and italics for key points:
  • "Most developed economies will be experiencing a coming decade of low productivity growth. They are also in the latter stages of their long-term debt cycles, characterized by high debts and near-zero interest rates."
  • "The net of where we are today is that globally there has been more than enough money and credit produced to offset incomes lost, producing a net surplus of income in relation to spending. That excess is now sitting in cash earning near zero nominal yields and negative real yields, looking for places to go. What happens with it will be an important influence on the near future."
  • "In this environment, we’d expect to see the devaluation of cash relative to well-diversified portfolios of assets."
  • "With respect to the economy in the near term, as the influence of the virus fades there will likely be some release of pent-up demand, particularly in those forms of spending that have been most impacted. And at a sector level, housing is an area that has plenty of potential after a decade of supply contraction, near-zero mortgage rates, extra money for down payments sitting in bank accounts, and an incrementally higher need/desire/capability to work from home."
  • "The biggest opportunities occur when unsustainable flows of money and credit form prices that discount future economic scenarios that are unlikely given the next round of money and credit conditions. Due to the extreme levels of money and credit flows recently produced, the big differences across countries, and the extreme impacts on spending, income, and prices, we see a number of cases where unsustainable flows have formed prices that are discounting unlikely future economic scenarios."
  • "Mexico is a country that experienced the full brunt of a declining economy and retraction of liquidity and did not offset the decline in the economy with fiscal stimulation or the printing of money. Their spending, income, and imports collapsed, and their fiscal and monetary balance sheets remained largely unchanged. As a result, their current account moved into big surplus at the same time that their currency and asset prices fell. Thus, their exchange rate and asset pricing are now implicitly discounting a continuation of the extreme flows that shaped them and the collapsed levels of income and spending that are consistent with those flows. Anything in the direction of a normalization of money and credit flows would produce an economic scenario much better than what is discounted and at the same time would relieve the liquidity squeeze that formed the current set of prices."
  • "These sorts of imbalances are leading to some of the largest opportunities we have seen in our decades of managing money. The number of markets where our signals (which represent the conviction of our views across markets) are near their maximums is large. Across a number of countries, the combination of prior currency declines, equity declines, and rising interest rate differentials has made their discounted future cash flows in USD terms very cheap (i.e., their unhedged assets)."
  • "In the developed world, Japanese stocks unhedged in USD terms are as undervalued as we’ve seen in decades. In the emerging world, Brazil is an example with similar dynamics to Mexico. And behind a lot of what is going on, you have the record amount of dollars and dollar debt being created relative to the long-term demand to hold dollars. Currency exposure is going to be a big deal."
  • Here are the ETFs for the asset classes mentioned. For US homebuilders, the ETFs include the SPDR Homebuilders ETF (NYSEARCA:XHB) (see also XHB's top holdings), and the iShares U.S. Home Construction ETF (BATS:ITB) (see also ITB's top holdings). For Mexico, the ETFs include the iShares MSCI Mexico Capped ETF (NYSEARCA:EWW), the Mexico Fund (NYSE:MXF), and the Mexico Equity & Income Fund (NYSE:MXE). For Brazil, ETFs include the iShares MSCI Brazil Capped ETF (NYSEARCA:EWZ), the iShares MSCI Brazil Small-Cap ETF (NASDAQ:EWZS), and the Franklin FTSE Brazil ETF (NYSEARCA:FLBR). For Japan, non-currency hedged ETFs include the iShares MSCI Japan ETF (NYSEARCA:EWJ), and the Franklin FTSE Japan ETF (NYSEARCA:FLJP).
  • The full article is a must-read for long term investors: Bridgewater's 2021 Global Outlook. See also Ray Dalio's other recent articles.
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