A “meaningful deleveraging for an extended period of time” is now priced into the market, Bridgewater said. With this pricing at a “midpoint of discounted expectations,” individual markets have an equal probability of outperforming or underperforming.
“The breadth of this slowdown creates a dangerous dynamic because, given the inter-connectedness of economies and capital flows, one country’s decline tends to reinforce another’s, making a self-reinforcing global decline more likely and a reversal more difficult to produce,” Bridgewater said in the report.
Bridgewater, which had three of the industry’s 12 best- performing funds last year, said Europe is in the “most critical” stage of a global deleveraging process, as deteriorating finances in France and differences with Germany make it less likely that the region’s strongest economies will pick up the tab to solve the region’s debt crisis.