In August, US consumer prices rose 8.3% over the past year, down from a June peak of 9.1%, but still alarmingly high.
And that doesn’t bode well for investors, according to Ray Dalio, founder of the world’s largest hedge fund, Bridgewater Associates.
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“You fight inflation with economic pain,” he says at MarketWatch’s Money Festival.
Dalio explains that when the Fed raises interest rates to curb inflation, the discount rate goes up.
“When you make an investment, you deposit a lump sum for future cash flows. And then to say what they’re worth, we’ll take their present value, which you’ll use a discount rate… and that’s what makes all the boats go up and down together.”
So where should investors hide?
Cash is clearly not optimal if inflation affects its purchasing power. Dalio previously said that “cash is trash” and he still believes that.
“Cash will still be a negative real return. It will still be a worthless investment, depending on how it compares to the others.”
Let’s take a look at what Dalio’s hedge fund has instead.
Procter & Gamble (PG)
According to Bridgewater’s latest 13F filing with the SEC, the fund owned 6.75 million shares of Procter & Gamble at the end of June. With a market value of approximately $970 million at the time, it was the largest holding in Dalio’s portfolio.
This shouldn’t come as a surprise. P&G is a defensive stock that can bring cash to investors in a variety of economic environments.
In April, P&G’s board of directors announced a 5% dividend increase, marking the 66th consecutive annual increase in distributions. The stock currently offers an annual dividend yield of 2.7%.
It’s easy to see why the company is able to maintain such a streak.
P&G is a consumer goods giant with a portfolio of trusted brands such as Bounty paper towels, Crest toothpaste, Gillette razors and Tide laundry detergent. These are products that households regularly buy, regardless of what the economy is doing.
Johnson & Johnson (JNJ)
With deep-rooted positions in the consumer health, pharmaceutical and medical device markets, healthcare giant Johnson & Johnson has delivered consistent returns to investors during economic cycles.
Many of the company’s health brands — such as Tylenol, Band-Aid, and Listerine — are household names. In total, JNJ has 29 products, each of which can generate annual sales of more than $1 billion.
In addition to posting recurring annual profits, Johnson & Johnson is growing consistently: Over the past 20 years, Johnson & Johnson’s adjusted revenues have grown at an average annual rate of 8%.
JNJ announced its 60th consecutive annual dividend increase in April and is now yielding 2.7%.
As of June 30, Bridgewater owned 4.33 million shares of JNJ, worth approximately $769 million at the time, making the healthcare giant its second largest stake.
iShares Core MSCI Emerging Markets ETF (IEMG)
Bridgewater’s third largest holding is the iShares Core MSCI Emerging Markets ETF.
IEMG tracks the MSCI Emerging Markets Investable Market Index and offers investors easy exposure to stocks in emerging markets such as China, India and Brazil.
The ETF owns more than 2,600 stocks. Top positions include industrial heavyweights such as chip maker Taiwan Semiconductor Manufacturing, Chinese tech giant Tencent Holdings and Indian multinational conglomerate Reliance Industries.
Speaking to another investment legend, Jeremy Grantham, earlier this year, Dalio said he’s looking at countries with good income statements and balance sheets that can weather the storm.
“Emerging Asia is very interesting. India is interesting,” he says.
Bridgewater owned 15.31 million shares of IEMG worth $751 million at the end of the second quarter.
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