El-Erian: The Outbreak Isn't Over

(Business Insider) In a Financial Times op-ed, famed economist Mohamed El-Erian warned that the financial stress from Covid-19 is not even close to being over.

"The financial stress caused by COVID-19 is far from over," he wrote.

El-Erian wrote that investors should ready themselves for defaults that will "spread far beyond the most vulnerable corporate and sovereign borrowers."

He advised that instead of buying assets which have "stunningly decoupled" values from their underlying fundamentals, investors should adjust their portfolios to focus on the recovery potential of their assets.

So far, El-Erian wrote, defaults have only been limited to certain hard-hit sectors over the past few months of financial pain on both corporate and public balance sheets, but that could change, he warned.

"The sense that the worst did not come to pass has fed complacency among investors of all stripes," he said. 

A sense of complacency has risen among all types of investors and a glaring example of that, he wrote, is the emergence of retail investors - who roughly make up 25% of stock market activity amid recent volatility.

"A new generation of retail investors has emerged, helping stocks on their relentless march higher," he said.

A rise in business vigilance has been propelled by a resurgence in coronavirus cases around the world, he said while pointing out that some states in the US have reversed their reopening policies. 

This scenario "reduces borrowers' willingness and ability to meet contractual obligations" especially in hospitality, retail, and in developing countries, El-Erian wrote.

Other concerns for investors include: a record speed of bankruptcies, job losses across all types of companies, deferrals in commercial real estate and credit card payments, and some developing countries defaulting on debt payments, he said.

Despite several points of worry, investors are displaying "insufficient concern" as they continue to expect a sharp V-shaped recovery helped by development of a vaccine.

On the other end, safeguards from governments and international organizations have managed to boost sentiment, El-Erian said. But he cautioned that such measures will not save investors from sharing some capital losses. 

"Many have already made it clear that they expect 'private sector involvement'. That is likely to mean, at the minimum, the short-term suspension of interest and principal payments."

"This time, retail investors are front and centre. But it is the next stage that we should already be thinking about. That requires much more careful scrutiny from investors than the past few months have demanded," El-Erian concluded.


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