Investor El-Erian warns of risks in ‘distorted’ stock market

Risks in public markets ‘enormous’ because of central banks’ intervention, says investor

Mohamed El-Erian has said he is favouring cash as well as the riskiest investments, such as venture capital, in his portfolio.

El-Erian is less bullish on publicly-traded securities such as stocks and bonds because global central banks have pushed their prices to “distorted” levels, he said in an interview in Singapore. Cash comprises about 30 per cent of his portfolio, which is more than most people have, according to El-Erian.

"There's enormous risk in public markets because that's the one that central banks have distorted to the greatest extent," said El-Erian, chief economic adviser at Allianz SE and a Bloomberg View columnist. "It's very hard to say I'm going to buy a basket of public equities and go to sleep for the next five to 10 years and feel good about the returns. Similarly with bonds."

Central banks in the United States, Japan and Europe have used unprecedented asset purchases to try to support their economies. Now the US Federal Reserve is contemplating raising interest rates for the second time in a year. The Bank of Japan abandoned plans to push down benchmark 10-year yields, fuelling speculation policymakers are pondering limits to their stimulus measures.

'Barbell' strategy

El-Erian described his investment approach as a “barbell” strategy, favouring assets at both ends of the risk spectrum while holding fewer in the middle such as government and corporate bonds, stocks and emerging-market assets.

Benchmark 10-year US treasury note yields dropped to an all-time low in July, and the S&P 500 Index rallied to a record high in August.

A "moderate" investor may have 5 per cent in cash, while a "conservative" portfolio would allocate 30 per cent, based on asset allocation models compiled by Charles Schwab Corp.

Prior to moving to Allianz in 2014, El-Erian was chief executive and co-chief investment officer along with Bill Gross at Pacific Investment Management. The Pimco Total Return Fund grew into the world's biggest mutual fund during their tenure. It was as large as $293 billion in 2013 and is now $84.4 billion. Allianz is Pimco's parent. Gross is now at Janus Capital.

Financial markets have “decoupled” from the economic problems of the world, such as the British vote in June to leave the European Union, El-Erian said.

“They’ve been conditioned to believe, over and over again, that central banks can shield them,” he said.While there’s a chance that economic fundamentals will improve and validate asset prices, a more likely scenario is that valuations will decline and lead to financial instability, he said.

“The probabilities are now starting to tip in the likelihood of a bad outlook,” El-Erian said. “They’re starting to tip in favour of low growth, giving way to periods of recession. This is a better time to be a seller of stocks than a buyer.” – (Bloomberg)