“I am increasingly investing in niche strategies”

Mohamed A. El-Erian’s presentation focused on “regret minimisation” – not having to regret being unprepared. In an anecdote, he confessed that he did not anticipate the financial crisis. At Pimco, they believed there was an 85% probability that Lehman Brothers would be snapped up by a bank with a healthier balance sheet amid relatively little fanfare. They rated the risk of a major financial crisis caused by a disorderly insolvency as just 3%. “Nevertheless, we had a detailed action plan in a drawer that told us what to do in this scenario,” El-Erian pointed out.

 

His key message for the assembled investors was this: “You can only successfully navigate through uncertain times if you look at things from different angles.” He added that everyone must answer for themselves the question of what to do if the “normal scenario” does not occur. El-Erian painted a picture of the current “85% expectation”: a soft landing for the economy based on market consensus, central bank monetary policy that continues to effectively support asset valuations, and fiscal stimulus from governments. The expectation is that while politics remains loud, populist and nationalistic, this will have little impact on the markets, where prices are expected to continue rising, and that nothing dramatic will happen.

 

According to El-Erian, it would be much more inconvenient if things turn out differently. He outlined this scenario as follows: “At some point, politics will weaken the markets, and central banks will be less able and willing to protect the markets and decouple them from a weakening global economy.” He added that it is now time to look out for signals from the system, and highlighted one such unsettling signal: “The USA has begun to use economic instruments as weapons – and it will be difficult to move away from that again.” El-Erian observed that although trade is a cooperative game, we have now entered a world of uncooperative play, as the USA is convinced that it has greater staying power than other nations.

 

He said that in a world like this, it is impossible to follow a clear strategy, “and I haven’t even talked about technology, climate change or demographics yet.” Finally, a guest asked El-Erian how he would personally invest, to which he responded: “I prefer to invest in niche strategies and not only in broad stock market indices.”