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“The investment challenge could well change in the coming months from going through an exceptional wave of liquidity, which raised virtually all asset prices, to going through a general price correction and complex individual defaults.”
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That is Mohamed El-Erian, Allianz’s chief economic adviser, speaking about what investors should expect in the future, as “the financial stress caused by COVID-19 is far from over.”
El-Erian, the former CEO of Pimco, pointed to several “troubling signs”, including a record pace for corporate bankruptcies, job losses moving from small and medium-sized companies to larger companies, and more households staying back in rentals, to name a few.
Investors show insufficient concern. Some continue to expect an acute, V-shaped recovery in which a vaccine, or a build-up of immunity in the population, enables a rapid resumption of normal economic activity, “he wrote in the Financial Times.” Others rely on more endorsements from governments, central banks and international organizations. “
He explained in the op-ed that investors still have time to prepare for the tough times ahead and follow the lead of Wall Street professionals by adjusting their portfolios accordingly.
“Instead of buying assets at decoupled valuations of the underlying corporate and economic fundamentals, investors should think much more about the recovery value of their assets,” he said, pointing to a “new generation” of traders who drive stocks endlessly. . “The sense that the worst did not happen has fueled complacency among investors of all stripes.”
While retail investors remain risky, El-Erian says smart money has been raising cash in hopes of implementing a “dual investment strategy”; this includes keeping some dry powder for solid companies to correct for price negotiations as well as being ready to step up with “well-structured bailout financing” when bankrupt companies seek to reorganize and recover.
“Liquidity-driven rallies are deceptively attractive and tend to lead to excessive risk taking. This time, retail investors are front and center, “he wrote, adding that the” next stage “of the market will require” much more careful scrutiny by investors than the past few months have demanded. “
Investors were still in the risk mindset on Tuesday, with the DIA Jones Industrial Average DJIA,
up to over 300 points, while the S&P 500 SPX,
and Nasdaq Composite COMP, heavy on technology,
It also marks higher.
.
