Ray Dalio Predicts A New World Order: Our Top Pick

Ray Dalio – head of the world’s largest hedge fund – recently predicted that a new world order is coming. Along with predicting increasing confrontation and even conflict between the existing dominant power (the United States) and the rising great power (Communist China), his analysis concludes that we are in a period where burdensome sovereign debt, massive money printing, and large wealth gaps will likely become further exacerbated.

In this article, we will discuss our top investment theme for profiting from this trend – Infrastructure (IFRA) – as well as our top pick in the sector at the moment.

Why Infrastructure Stocks Are Poised To Outperform In The New World Order

The bull case for infrastructure in the “new world order” that Ray Dalio speaks of really boils down to five things:

1. Negative real interest rates are likely to persist for the foreseeable future

In a macroeconomic setting with high inflation and negative real interest rates, Bonds (BND) are particularly poor investments because the purchasing power of the principal and fixed coupon interest payments deteriorates.

Meanwhile, large index funds – which have been so popular and have done so well over the past decade – like the SPDR S&P 500 Trust ETF (SPY) and the Vanguard S&P 500 ETF (VOO) are also unlikely to thrive in the current environment as inflation hurts many of the index’s constituents and the historically-high valuation of the S&P 500 has set it up to suffer with any increase in nominal interest rates.

In contrast, infrastructure benefits from negative real interest rates because rising inflation increases its replacement cost. This, in turn, increases the competitive positioning of existing infrastructure assets. Negative real interest rates add a further tailwind to real assets by incentivizing investment as they mean that real asset investors are essentially being paid to borrow money (since the rate of replacement cost increase is greater than the prevailing interest rate in such an environment) and the higher yields offered by real assets relative to interest rates motivates income investors to allocate their capital to the sector.

As a result of these factors, we are seeing a tidal wave of capital pouring into infrastructure investments as evidenced by the enormous fundraising momentum seen in alternative asset managers like Brookfield Asset Management (BAM), Blackstone (BX), KKR (KKR), and Carlyle (CG), and we expect infrastructure assets to see strong appreciation in the years to come.

2. Heavy sovereign debt and a desire to combat inflation will push governments to privatize more infrastructure

As Ray Dalio’s vision for a new world order prescribes, burdensome sovereign debt is forcing governments to ramp up the printing presses to meet ballooning obligations. However, this move is now being curtailed as the highest inflation levels in four decades are being experienced in the U.S. economy.

Forced to find other ways to handle budget deficits and a massive debt burden beyond printing trillions of dollars, it is quite possible that governments will increasingly sell off infrastructure assets to large private institutional investors to raise funds.

3. The enormous wealth gap and growing geopolitical competition will pressure governments and companies to prioritize addressing the massive infrastructure deficit

With rising power China making massive infrastructure investments both in its domestic economy as well as internationally via its “Belt and Road” initiative, the U.S. and its allies are facing pressures to modernize and upgrade their own infrastructure capabilities as well as pursue more of an infrastructure-focused foreign policy as well. This shift in focus is already being seen through the massive infrastructure bill that just passed the U.S. Congress with bipartisan support this past year.

The opportunity to “buy” support from developing economies in competition with China is also rich. Recent research suggests that there is a massive shortfall of essential infrastructure in developing countries, a problem that recent health emergencies like the Ebola virus outbreak in West Africa and of course the global COVID-19 outbreak have exacerbated. By leveraging its superior resources and know-how, both the Chinese and Western governments will likely increasingly invest in developing countries across Africa, Latin America, and Asia to improve their quality of life in exchange for geopolitical support.

On top of the geopolitical component is the simple fact that the yawning wealth gap in the United States and the growing popularity of socialist politicians put a stronger incentive on corporations and politicians to provide better public infrastructure and services in order to improve the general standard of living.

Both of these factors should provide a major growth catalyst to global infrastructure companies by opening up a vast runway for growth projects.

4. Inflationary pressures and geopolitical rivalry will incentivize heavy investment in the fourth industrial revolution

Finally, Communist China and the United States are locked in an extremely competitive and intense technology competition, particularly in the areas of artificial intelligence, data analytics, and other fourth industrial revolution technologies that will result in “smart” cities consisting of smart factories, buildings, transportation systems, and other technologically advanced infrastructure. However, for companies and government organizations to truly harness these technologies, significant infrastructure investments will be needed to facilitate the flow of data and electricity.

This all bodes very well for continued explosive growth for innovative property and infrastructure technology companies like Trimble (TRMB) and Matterport (MTTR) as well as large telecommunications giants like American Tower (AMT) and AT&T (T), as they stand to benefit from the digitization of real assets.

Our Top “New World Order” Pick

In addition to the aforementioned blue-chip alternative asset managers and some of the 4th Industrial Revolution stocks, we think that Latin American-focused alternative asset manager Patria Investments (PAX) is particularly compelling.

PAX offers an attractive dividend yield that is over 5% on a trailing twelve-month basis, trades at a steep discount to its blue-chip global peers and has a debt-free balance sheet with a lot of cash.

Furthermore, its growth potential is phenomenal. It is rapidly capturing market space in the severely underpenetrated Latin American alternative investment space via acquisitions and organic growth in its businesses and has ambitious plans to continue growing at a rapid pace for many years to come as it strives to become the “Blackstone” of Latin America. It already possesses a leading local position in the space, a competitive advantage that it plans to leverage to further consolidate the space and grow its positioning even more.

We think that PAX will experience outsized growth as the combination of macroeconomic factors and growing developing economy geopolitical competition in the “new world order” of which Ray Dalio speaks is tailor-made for PAX.

We recently interviewed the company and had our investment thesis strengthened considerably; in fact, we believe that it could very well be a multi-bagger several times over in the coming 5-10 years all while paying out a very attractive dividend yield.

Investor Takeaway

Given Ray Dalio’s prediction that we are headed for a “new world order” in which we will see a yawning wealth gap, runaway inflation, and soaring geopolitical tensions with China, investing in developing market infrastructure is one of the most attractive opportunities at the moment.

By investing in companies like PAX at High Yield Investor, we combine attractive current income yields with the potential for substantial long-term returns and, ultimately, market outperformance.