Bridgewater Associates, the world’s biggest hedge fund, is bracing for a long stretch of underperformance by U.S. stocks and bonds.
“U.S. markets are not in long-term equilibrium,” Greg Jensen, Bridgewater’s co-chief investment officer, said in a telephone interview this week. “We believe the next move is into cash, as we believe stocks and bonds are going to perform poorly over the next 18 months.”
Jensen, who helps oversee roughly $160 billion in assets, said his outlook follows a decade when central bank policies bolstering market liquidity and keeping interest rates low have driven investors to seek out higher returns where they could.
While prolonged easy money policies and economic expansion have bolstered returns from riskier assets, Jensen said they have resulted in lowered current total return prospects.
“It almost looks like in U.S. asset markets that the riskier the asset, the lower the expected return,” he said.
Jensen said cash, whose yield moves in sympathy with U.S. Federal Reserve interest rate hikes, looks attractive for the first time in years as the central bank pursues quantitative tightening.
“Cash has become a viable alternative to (financial) assets on an expected return basis,” he said. “While there is still a lot of cash globally, it is on corporate and bank balance sheets preventing a financial cascade, but U.S. investors have very low cash levels.”
Last month’s rate increase was the second this year and the seventh since the end of the Great Recession and brings the Fed’s benchmark rate to a range of 1.75 to 2 per cent. The last time the rate topped 2 per cent was in late summer 2008, when the economy was contracting and the Fed was cutting rates toward zero, where they would remain for years after the financial crisis.
As cash yields rise, money is gradually being pulled in the risk curve, Jensen said.
“Global market action in 2018 is consistent with early signs of a reversal in the decade-long trend,” with some of the more vulnerable entities at the fringes of the financial system having already been squeezed, he added.