Bridgewater Associates founder Ray Dalio on Thursday shared his analysis of how the financial markets are likely to perform as a result of the novel Coronavirus outbreak.
The billionaire investor said he studied past pandemics, including the H1N1, SARS, and the Spanish Flu outbreaks, to search for a pattern.
Regarding the H1N1 flu pandemic of 2009 and the SARS virus outbreak of 2003, Dalio said that the market "acted in a risk-off way that is consistent with falling growth and [flight-to-quality.]"
"[Equities] declined, and gold and bonds rose [as] we've seen over the last couple days," Dalio said in a note on LinkedIn. "However, these reactions faded and there became no clear and big sustained market moves as other influences such as monetary policies and economic activities that weren't associated with the virus were much more important."
For the Spanish Flu, which coincided with World War I, Dalio said that it is hard to disentangle its impact from the war itself.
Nevertheless, any positive development from the war was likely "overshadowed by the pandemic," according to Dalio, "marking the end of an equity rally."
Coronavirus Follows Similar Pattern
The founder of the world's largest hedge fund noted that the market reaction to coronavirus is following a similar pattern to the H1N1 and SARS reactions.
"Over the last several days, the markets have seen strong falling growth and flight-to-quality market action," Dalio noted. "Equities have sold off globally, while bonds, gold, and the dollar versus the yuan have rallied."
The 70-year old noted that the stock market's performance in Hong Kong reversed when the pandemic peaked.
We can expect a similar reaction if the coronavirus remains concentrated in China, where it originated, according to Dalio.
"[We] would expect its effects to be greater on the Chinese and Hong Kong markets than on the world markets, and we would expect these effects to diminish as the number of new cases also starts to decline.
Diversification Is The Key
In such a situation, paying attention to "what's actually happening," and diversifying investments is the best option to hedge financial risks from the outbreak.
"What we don't know is much greater than what we do know. When you don't know, the best investment strategy is to be smartly diversified across geographic locations, across asset classes, and across currencies."
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