The co-founder of Bridgewater Associates published his thoughts on the corona virus and warned of serious consequences for some market players. Dalio also has important advice for average investors.
• Corona virus is “disaster event that occurs only once in 100 years”
• Fearful consequences for insurers and option traders feared
• The overall economy is likely to recover quickly
A few weeks ago, hedge fund manager Ray Dalio described the fear of the effects of the corona virus on the capital market as “probably somewhat exaggerated”, but this has now apparently changed somewhat: Dalio published a detailed text on “LinkedIn” last week, in which he presented his thoughts on the corona virus. He warned that the developments around lung disease could prove devastating for some market participants and companies.
Corona virus as a centuries-old event with potential for destruction
The co-founder of Bridgewater Associates described the lung disease and its effects in his text as “one of those disaster events that occur once in 100 years”. As such an event of the century, it has the potential to “destroy” those who offer insurance against it as well as those who “do not take out insurance to protect themselves because they treat it as the unprotected bet they can make, because it hardly ever happens, “wrote Dalio. Specifically, he has insurance companies in mind that would have offered insurance against the consequences that were imminent, as the hedge fund manager goes on to say. But such market players are also threatened with destruction, who sold options that were “deep-out-of-money” because they wanted to collect the money for them, and who only wanted to hedge their risks if and when the exercise price Dalio believes the option approaches the price of the underlying. However, he did not give any specific names as to which market players are now at risk of destruction.
No long-term negative effect for the overall economy
Despite this very bleak picture for some market participants, Ray Dalio is rather relaxed about the entire economy. In his opinion, the reactions to the virus would cause a large short-term economic downturn, but in the long term no negative effects are to be expected. “History has shown that even high casualties were more of an emotional issue than a sustainable thing for the economy and the market,” said Dalio’s LinkedIn text. For most companies, he therefore expects that there will initially be a decline in earnings, which will soon be followed by a recovery. Overall, according to him, the development is likely to be V-shaped or U-shaped.
At the same time, however, the experienced investor warned that actually solid companies could unjustifiably get underpowered in the course of the market downturn. “My guess is that the Financial markets “It’s likely that it’s not going to make a good distinction between companies that can withstand the occasional shock and those that don’t,” said Dalio. He believes, therefore, that the prices of companies are particularly affected by the tense economic environment resulting from the corona virus are badly hit, especially hard to get under the wheel – even if the companies themselves have enough money, but he believes that the stock market should rather punish companies whose sales would not give in so clearly, but which would have high short-term debt.
This is what Dalio recommends to investors
For all investors, Ray Dalio also has a clear piece of advice at the end of his article: “The most important assets that you need to be careful of are you and your family. As with investing, I hope that you understand the worst-case scenario introduce and protect yourself against it, “said the co-founder of Bridgewater Associates. He also prefers to think about how to protect himself against big unknowns like the corona virus instead of how he can bet on them.
Editorial office finanzen.ch
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