Mohamed El-Erian says the global economy is at a crossroads. ‘Investors cannot rely on correlations as a risk mitigator,’ he says Investors shouldn’t underestimate the role of cash in their portfolios said Mohamed El-Erian, chief economic adviser at Allianz Global Investors. At a breakfast meeting with reporters on Monday, the former Pacific Investment Management Company chief executive said central bank asset purchases have successfully decoupled asset prices from fundamentals and distorted traditional correlations. Indeed, the S&P 500 SPX, -3.59% climbed to record levels in 2014 and the first half of 2015 even as commodity prices, notably energy, plunged. “Investors cannot rely on correlations as a risk mitigator, making cash a very valuable thing to have,” he said. “It can give your portfolio resilience during stressful times, optionality—whether you use it for tactical or strategic purposes and flexibility to deploy it when necessary,” he said. El-Erian also said years of unconventional monetary policy, including asset purchases, and a lack of fiscal stimulus are making developed economies less stable.
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Mohamed El-Erian says the global economy is at a crossroads.
‘Investors cannot rely on correlations as a risk mitigator,’ he says
Investors shouldn’t underestimate the role of cash in their portfolios said Mohamed El-Erian, chief economic adviser at Allianz Global Investors.
At a breakfast meeting with reporters on Monday, the former Pacific Investment Management Company chief executive said central bank asset purchases have successfully decoupled asset prices from fundamentals and distorted traditional correlations.
Indeed, the S&P 500 SPX, -3.59% climbed to record levels in 2014 and the first half of 2015 even as commodity prices, notably energy, plunged.
“Investors cannot rely on correlations as a risk mitigator, making cash a very valuable thing to have,” he said.
“It can give your portfolio resilience during stressful times, optionality—whether you use it for tactical or strategic purposes and flexibility to deploy it when necessary,” he said.
El-Erian also said years of unconventional monetary policy, including asset purchases, and a lack of fiscal stimulus are making developed economies less stable.
“Central banks are finding it harder and harder to repress volatility in financial markets, and any jolts, such as currency devaluation in China or political events, such as Brexit, result in wild swings in the markets,” El-Erian said.
Meanwhile, developed economies are at a crucial point where small developments could either tip them into a recession or allow them to continue toward a higher-growth recovery:
“We are at a T-junction and the outcome is wide open, though I will not make a prediction because I simply don’t know,” he said. The primacy of central banks and the notion of a global economy at a crossroads are both themes of El-Erian’s recent book, “The Only Game In Town: Central Banks, Instability, and Avoiding the Next Collapse.”
El-Erian talked of optimistic and pessimistic view of the outcome:
The optimistic view hinges on three positives:
Most economies know what’s needed—massive fiscal spending on infrastructure to stimulate the economy, even though there is a lack of political leadership to implement such policies.
The private sector is cash-rich and will start spending their cash on wages or capital expenditures
Innovation that will disrupt the world of finance and how our economies operate.
The pessimists will see the negative that are equally valid:
Politics are becoming really messy and may hinder the recovery by implementing disastrous policies (Brexit, Trump)
Central banks will follow the Bank of Japan in becoming ineffective or counterproductive
Financial assets have decoupled from fundamentals and heightened volatility will mean they will overshoot on the way up and undershoot on the way down, triggering an economic recession
Speaking about the Federal Reserve, he disagreed with critics who say the central bank has been inconsistent in its outlook.
“The Fed is data-dependent and data have been all over the place. Data have been moving so quickly and signaling different things that the Fed has no choice but to react to it. And this has a huge implication on financial management.”