Non-financial storeholds of wealth could gain popularity
Based on his view expected return relative to risk is going to be bad in the foreseeable future, Ray Dalio has identified two investment avenues that he believes could become more attractive.
Dalio suggests that we may see non-financial storeholds of wealth gain popularity. More money may flow into non-financial assets such as gold, based on a low return on bonds and investors’ desire for safety. Investors may find gold more attractive than holding long-duration bonds as a lot of these (the sovereign type) are moving to negative yield, and with the currency war on, currency volatility has a direct bearing on the return from these bonds.
The gold-tracking SPDR Gold Shares ETF (GLD) and the iShares Gold Trust ETF (IAU) have returned around 18% each so far this year. The VanEck Vectors Gold Miners ETF (GDX) had risen by a whopping 70% YTD (year-to-date) as of October 17, whereas the silver-tracking iShares Silver Trust ETF (SLV) had returned 25.6%.
Riskier assets could win investor favor
Riskier assets may become more prominent than bonds and cash. Investors should bear in mind that, although riskier investments may not be cheap, the risk they carry may offer a commensurate return. That said, we may see more purchases of riskier assets going forward.
Riskier assets could include emerging market equity (EEM) or bonds, or high-yield (HYG) or junk (JNK) debt (EMB). A quick look at the performance of these asset classes and categories, as shown in the graph above, gives us a fair idea of investor preferences so far this year. Emerging market equity has had the best market performance, with a 14.5% YTD return as of October 17, followed by emerging market bonds at 9.3%, high-yield or junk debt at over 7%, and the US bond market, which has returned just 3.3% so far this year.