Mohamed El-Erian was CEO of PIMCO, the $1.5-trillion (U.S.) bond-investing behemoth, from 2007 to 2014, and authored the 2008 bestseller When Markets Collide. He's now chief economic adviser at Allianz and chairman of Barack Obama's Global Development Council.
Growth seems sluggish in just about every major economy. What does this mean for investors?
The quest for higher and more inclusive growth means the fundamental drivers of sustainable returns are being challenged, increasing investors' dependence on exceptional liquidity injections from central banks and cash-rich companies. Markets are coming from a period in which such repeated liquidity injections have delivered three gifts to investors: high returns, low volatility and favourable correlations. As the Fed starts its interest-rate hiking cycle—albeit a very gradual one that I call the "loosest tightening" in its modern history—this source of liquidity support and volatility repression will become less uniform. This is likely to place an even heavier burden on corporate cash injections, be they stock buybacks, dividends and/or M&As. It will also intensify the tug of war between liquidity support and sluggish fundamentals, leading to more frequent bouts of greater volatility. Investors will need to focus more on fundamentally driven investment.
Now that the Fed has started to raise rates, what should Canadian investors keep in mind?
Absent adjustments in other policies, the divergence in the monetary policy of the world's most systemically important central bank will lead to greater currency and interest rate volatility. The impact will be felt in other market segments, including commodities and equities.
How can individual investors protect themselves?
Investors need to be able to stomach greater volatility in their holdings of risk assets, and they need to have a larger cash cushion—both to enhance portfolio resilience and to provide opportunities for new investments in the likely event of adverse price overshoots. Also, be careful when it comes to liquidity give-ups and insist on sufficient remuneration up front.
Are continued low prices for oil and other commodities a good thing for investors or not?
It depends on where they're invested. On one hand, lower commodity prices have helped contribute to the unhinging of three market segments already: oil, high-yield bonds and foreign exchange in emerging markets. The consequences have included sharp losses and harrowing volatility. On the other hand, these lower prices have delivered windfalls to consumers and input-heavy companies, thereby providing opportunities for investment outperformance for certain segments.