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Market experts focused on political risks

Raymond T. Dalio, chairman and CIO, Bridgewater As
Raymond T. Dalio says ‘emerging risks appear more political than economic.’

Investment industry pundits are sounding alarm bells about market conditions and providing insight into their firms' responses in blog posts, client letters, white papers and reports.

Of the opinion that "emerging risks appear more political than economic," Bridgewater Associates LLC, Westport, Conn., is remaining "neutral" to possible market impacts arising from hostility between the U.S. and North Korea and strong odds that the U.S. Congress will not extend the country's debt ceiling by the end of September, said Raymond T. Dalio, chairman and chief investment officer in an Aug. 10 LinkedIn post.

"We know that we don't have a unique insight that we'd choose to bet on. Most importantly, we aim to stay liquid, stay diversified and not be overly exposed to any particular economic outcomes. We like to hedge our bets, though we are never completely hedged. We can also say that if the above things go badly, it would seem that gold (more than other safe-haven assets like the dollar, yen and Treasuries) would benefit, so if you don't have 5%-10% of your assets in gold as a hedge, we'd suggest that you relook at this."

Bridgewater manages $162 billion in hedge funds and other alternative strategies.

Howard S. Marks, founder and co-chairman of Oaktree Capital Management (OAK) LP (OAK), Los Angeles, a self-described "born worrier," said in a late July memo posted on the firm's website that "it's essential to take note when sentiment (and thus market behavior) crosses into too-bullish territory, even though we know rising trends may well roll on for some time and that such warnings are premature. I think it's better to turn cautious too soon (and thus perhaps underperform for a while) rather than too late, after the downslide has begun, making it hard to trim risk, achieve exists and cut losses."

Mr. Marks said the four most noteworthy components of current conditions are:

the unusually high number of uncertainties including secular economic growth, the impact of central banks, interest rates and inflation, political dysfunctionality, geopolitical problems and the long-term impact of technology;

prospective returns are "just about the lowest they're ever been" for nearly all asset classes;

asset prices are high across the spectrum of securities and "almost nothing can be bought below its intrinsic value; and

pro-risk behavior is "commonplace" as investors accept higher risk to achieve the returns they seek.

Oaktree Capital manages $99 billion in a variety of alternative investment strategies.

Hedge fund manager Michael Hintze, CEO and chief investment officer of CQS (UK) LLP, London, believes interest rates will "edge higher. I am constructive both for equity and credit markets, notwithstanding that in aggregate they are at the richer end of the valuation spectrum. As always, I am mindful of potholes, however, I do not see any black holes on the horizon. Nevertheless, we remain vigilant," according to the firm's midyear review.

Mr. Hintze noted "moderate global economic growth, combined with low default rates, is positive for credit and to me this is likely to remain intact for the time being, although I reassess this view frequently."

CQS has repositioned its portfolios to increase exposure to credit, favoring floating-rate and short-duration assets such as asset-backed securities, loans, convertibles and short-maturity structured credit in the short- to medium-term period, Mr. Hintze said.

CQS manages $13.6 billion in hedge fund and long-only credit strategies.

The specter of central banks around the world tapering quantitative easing programs haunts economist Diana J. Joseph, managing director and CIO of Barrington Strategic Wealth Management Group LLC, Chicago.

"We are circumspect about slow global growth but we are gravely concerned by the imminent prospect of global central banks tightening their balance sheets. We have long contended that global central bank money printing constituted the driving force behind the post-crisis bull markets," Ms. Joseph said in Barrington's second-quarter financial markets commentary.

Ms. Joseph noted that the Federal Reserve's tightening and announcement of the impending reduction of its balance sheet had "little impact because it (the global economy) has been overwhelmed by the still-continuing oceans of liquidity spewing from the other central banks." She added that central banks in the U.K. and Canada have hinted at tightening policy and the European Central Bank likely will reduce its stimulus program in coming months.

"We suspect that these shifts and their consequences will pose increased risks for financial assets. Markets have appreciated blithely, riding the torrent of liquidity and are likely to become more unsettled as it ebbs," Ms. Joseph said.

Barrington Strategic Wealth manages $350 million in manager-of-managers strategies.