Mohamed El-Erian, chief economic advisor of Allianz SE and chairman of President Obama’s Global Development Council, says “[f]inancial markets are now transitioning . . . to a new operating regime.” He contends that this means “volatility bouts will be more frequent and, in some cases, more violent than in the last few years.” Further, he suggests that that “challenge will be in monitoring carefully the tipping points for various market segments, along with related price overshoots and undue asset-class contagion.” El-Erian points to nine aspects of the change:
- “Bouts of volatility are to be expected;”
- They will be “amplified by fragile market liquidity;”
- “Excessive volatility . . . is detrimental to the real economy;”
- “Concerns about excessive volatility are a lot greater when markets approach tipping points,” which is reflected in energy, high-yield bond, and emerging-market currencies;
- “[S]tabilization has repeatedly fallen to liquidity injections from . . . central banks . . . and companies;”
- With volatility apparent, “some market participants are quick to call for the central bank to step in and restore calm;”
- “The Fed is in no hurry to reverse course” after its recent rate hike, and “[a]s a result, more of the burden of stabilization will fall to the deployment of corporate liquidity;”
- “This configuration is a lot less supportive of financial markets;” and
- “[W]e should not expect economic and corporate fundamentals to play a sufficiently deterministic stabilizer role for asset markets.”
Mohamed El-Erian, says to expect major volatility in the coming months — volatility that will create some great opportunities.
“We have a bumpy road ahead of us, but I keep on stressing, it will create a lot of attractive opportunities,” he told CNBC. El-Erian said the global market may experiencing a shift to a “higher volatility regime,” meaning that asset allocations will become aggressive and price multiples will begin “looking high.” That’s when markets overshoot and act with too much correlation, creating the opportunity is, he says.
He also says that opportunities may well be occurring in emerging markets and oil, but he advises caution. “If you already have exposure, wait a little bit, there are going to be even more attractive positions—there are still people stuck in those markets looking to get out,” he said. “We’re going to look back on this, and this is going to be a very attractive stage. … It’s one of these things that happens once a decade… but be careful because it’s going to be incredibly volatile in the next few months.”
El-Erian also says investors would be wise to stop obsessing so much over potential interest rate hikes. He says the tightening cycle, if and when it occurs, will likely be the “loosest tightening in the history of the Fed”.
Mohamed El-Erian says we are seeing a “classic overshoot” to the downside in emerging markets right now, which should lead to more pain in the near term but opportunity over the longer term.
Investors have been bullish for some time on areas in which central banks have opened the liquidity spigot. But Mohamed El-Erian says it’s time to focus on other opportunities, including tech start-ups and private equity.
Mohamed El-Erian says he expects volatility to increase in the stock market, and says it’s not a time to be buying broad index funds.
Mohamed El-Erian says that while the latest jobs report isn’t perfect, it is “wow”-worthy — and that could actually mean US stocks will lag European equities in the short term.
Mohamed El-Erian says January’s jobs data was “very strong”, and may lead the Federal Reserve to start raising interest rates sooner than previously thought.