Bridgewater’s strategic portfolio shift in China

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In a surprising move indicative of the evolving landscape in global markets, Bridgewater Associates, the world’s largest hedge fund, has significantly adjusted its investment portfolio, slashing its exposure to Chinese stocks amidst a backdrop of economic challenges and geopolitical tensions.

Bridgewater’s latest 13F filing revealed a strategic pruning of its holdings in US-listed Chinese stocks during the third quarter, highlighting the fund’s exit from 10 key stocks, including prominent players like electric vehicle makers Xpeng and Li Auto, as well as biopharma companies HutchMed and BeiGene. This move comes as China grapples with a faltering economic recovery and increasing political risks.

The hedge fund, founded by China enthusiast Ray Dalio, also made notable reductions in its positions in 16 other stocks, encompassing various sectors such as electric vehicle maker Nio, e-commerce platform PDD Holdings, online lender Lufax Holdings, fast-food giant Yum China, hotel operator H Group, and travel operator Bridgewater’s decision to divest from Taiwan Semiconductor Manufacturing Company (TSMC) aligns with the ongoing US-China tech war, showcasing the fund’s strategic response to geopolitical tensions.

The shift in Bridgewater’s investment strategy appears to be rooted in a cautious outlook on China’s economic trajectory. In a September 30 report, the hedge fund expressed concerns about China’s ongoing deleveraging process, estimating that it could take years to unfold fully. The report also highlighted domestic and international political risks that have escalated, contributing to an overall weaker growth outlook.

This move marks an extension of Bridgewater’s retreat from China, a trend that commenced in June of the previous year as returns in the market began to wane. The divergence in monetary policies between the US Federal Reserve and China, coupled with concerns about the Chinese property sector’s debt overhang, likely contributed to Bridgewater’s decision to reduce exposure.

The broader market context reveals a larger trend of global funds withdrawing from China, with reports citing a record exodus of $10.9 billion from China’s onshore market in the third quarter. The unexpected contraction in China’s manufacturing sector and lackluster credit growth, coupled with an ongoing housing slump, have added to the uncertainties surrounding Chinese investments.

Bridgewater’s reshaping of its portfolio is evident in the numbers, with the hedge fund holding stakes in 19 companies valued at $525 million on September 30, compared to 29 stocks worth $474 million on June 30. Notably, the value of its China bets has contracted by 60% from the previous year, reflecting the fund’s reevaluation of risk and reward in the Chinese market.

However, amid the reduction in exposure to individual stocks, Bridgewater increased its positions in iSHARE China Large-Cap ETF and iShares MSCI China ETF during the same quarter. This move suggests a nuanced approach, reallocating investments to broader exchange-traded funds tracking big-cap equities in Hong Kong and the MSCI China Index, potentially signaling a more diversified strategy.

Ray Dalio, despite stepping down in October of the previous year, remains an influential figure within Bridgewater as the Chief Investment Officer-Mentor. In his recent commentary on the evolving US-China relationship, Dalio hinted at a significant shift, characterizing the tensions as a “behind-the-scenes, Cold War-style great power conflict,” reducing the likelihood of a military confrontation.

As Bridgewater adapts its investment strategy to navigate the intricate dynamics of the global market, the hedge fund’s moves reflect not only a response to specific challenges in China but also a broader recognition of the evolving geopolitical landscape that will shape investment decisions in the years to come.

(Source: Jiaxing Li | SCMP)

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