Ray Dalio Issues Warning! Major Changes Coming?

Recently, Bridgewater founder Ray Dalio posted a lengthy article on social media stating that the current struggle between the U.S. and Iran over the Strait of Hormuz will be an “ultimate showdown,” with the final outcome depending on who controls the Strait of Hormuz.

At this point in time, many institutions have also shared their views on the future market. From the flow of funds into oil and gas-themed ETFs, there has been a net inflow of over 7 billion yuan since last week.

Dalio’s Warning

Dalio stated that the contest between the U.S. and Iran over the Strait of Hormuz will be an “ultimate showdown.” “If this conflict around Iran and the Strait of Hormuz escalates into a costly war, it could further weaken the U.S.-led global order. If the U.S. can ensure safe navigation through the Strait, it will strengthen global capital confidence in the U.S. financial system and dollar assets.”

In Dalio’s view, the impact of this conflict extends far beyond the Middle East, affecting global trade and energy flows, and could also change the direction of capital allocation worldwide.

Dalio mentioned that he is not a politician but, through studying the rise and fall of empires and their reserve currencies over the past 500 years, he identified five major interconnected forces driving changes in monetary, political, and geopolitical orders. These five factors are long-term debt cycles, political order and chaos cycles, international geopolitical order and chaos cycles, technological progress—both improving and destroying lives—and natural forces. “Everything happening in the Middle East now is just a small part of this larger cycle at this moment.”

What do institutions think?

Regarding recent developments in the Middle East, WanJia Fund manager Ye Yong believes that Iran can now gain an asymmetric advantage in the conflict: by using drones, missiles, and other low-cost methods to block the strait and influence oil prices. Once Iran has tasted success, it will be difficult to stop in the short term. The market may be underestimating the long-term impact of high oil prices on risk assets.

“The Strait of Hormuz is a pivot point in the dollar cycle. Any problem there, and the disruption of the dollar cycle itself presents huge opportunities for emerging markets. Even if things are eventually resolved, once Pandora’s box is opened, oil prices will be hard to return to previous supply-demand levels,” said Zhang Wenlong, fund manager at Huashang Fund.

The tense situation in the Middle East has pushed oil prices close to their 2022 peak levels. Allianz Investment states that it is monitoring four key areas where pressure is most evident. First, the Strait of Hormuz has always been considered the world’s most critical oil shipping route, accounting for about one-fifth of global oil supply, or roughly 20 million barrels per day. Currently, despite the U.S. planning to escort oil tankers and establish emergency insurance mechanisms, the passage has effectively become paralyzed.

Second, unlike previous shocks where energy infrastructure was mostly spared, the current conflict has directly impacted several core assets. The situation has moved from “disruption risk” to “ongoing operational losses,” with many key facilities in Iraq, Qatar, and the Gulf region experiencing temporary shutdowns. The key risk now is that escalation could involve these critical facilities, leading to more sustained damage.

Third, if oil cannot be exported through the Strait of Hormuz, storage facilities will soon fill up, forcing oil-producing countries to gradually cut production. If the blockade lasts three weeks, many countries will have to cease production entirely.

Fourth, as a countermeasure, the international community is considering releasing emergency oil reserves. If Middle Eastern supply disruptions persist, strategic reserves can only mitigate short-term volatility; although important, these reserves are limited. Additionally, any released reserves will need to be replenished later, which could increase future oil demand.

Flow of Funds Out of Oil & Gas ETFs

Amid oil price fluctuations, oil and gas-themed ETFs have experienced volatile movements.

From the flow of funds perspective, after a significant influx earlier, funds are now withdrawing from oil and gas ETFs. Specifically, according to Choice data, from March 1 to 6, net inflows into oil and gas ETFs totaled 20.669 billion yuan, but from March 9 to 16, there was a net outflow of over 7 billion yuan.

How to view asset allocation opportunities? Allianz Investment believes that if supply shortages continue, overall inflation may stay high, prompting central banks to delay easing policies. In the current environment, commodities like gold and copper remain attractive. Moreover, given the risk premiums brought by the conflict, there is still a positive outlook on global equities.

According to Morgan Asset Management, A-shares have shown some resilience compared to other emerging markets, with the Shanghai Composite Index demonstrating strong support at key levels and no signs of systemic risk. In the short term, geopolitical tensions remain a key variable, and markets may continue to experience high volatility and reduced trading volume. It is advisable to focus on genuine opportunities supported by economic fundamentals.

Morgan Asset Management suggests that, on one hand, investors should track geopolitically sensitive sectors, such as new energy (energy storage, wind power, etc.) and supply-side industries like aluminum and fertilizers that are directly affected. On the other hand, focus on less affected or undervalued sectors: AI and power/compute collaborations supported by domestic policies and overseas demand; core drivers include domestic capital expenditure with a domestically controlled supply chain, and future industries like commercial aerospace driven by GTC conferences and domestic policy support.

Author: Zhao Mingchao