Economist Mohamed A. El-Erian warned investors about the risk of rising bankruptcy rates in the US private sector.
In an interview with Bloomberg, he noted that while most investors are ignoring short-term market risks in the hope that 2021 will see a rapid rollout in the wake of the vaccine and economic recovery, the time frame until the deployment of the vaccine is very relevant.
“People have to be very careful, especially in high-yield loans, and in emerging markets,” said the 62-year-old New York-born economist who serves as Allianz’s chief economist and was CEO and chief investment officer of PIMCO.
In this regard, while many investors have chosen to look beyond short-term market risks in the hope that the year 2021 will be clearly more optimistic, he warned investors that the provisional “trip” to the vaccine will be a long one. a difficult time, in particular for investors in high-yield and therefore high-risk loans.
Credit is deteriorating, more bankruptcies are going to occur, and recovery rates are going to drop, El-Erian warned.
Allianz’s chief economic advisor said that the November industrial production number for tomorrow (PMI) will be a major test for the health of the corporate sector. In this sense, he considered that there is a high probability that the number is below 50, a level not seen since May. Not only would this low number indicate a staggering economy, but it would also signal a potential increase in corporate bankruptcies, El-Erian clarified.
The renowned analyst considered that the transition between the current moment and when a large part of the population is vaccinated against the coronavirus will be very important, particularly for investors in higher-risk markets.
“I think most people expect it to be all about the destination, regardless of the journey, but if you invest in a higher default risk role, then the journey really does matter,” El-Erian said.
People need to be very careful, especially in high-yield assets and emerging markets, he warned.
In this regard, he predicted that he foresees lower economic growth on the horizon due to inefficiencies in supply and demand.
On the supply side, “we see more concentration, we are going to see less competitiveness, and we are going to see a certain degree of de-globalization. And that is going to cause a decrease in productivity in the short term, ”he explained.
On the demand side, “it is likely that we will see greater economic insecurity in households; that is the scar that economists talk about ”, he clarified.
In any case, he considered that the United States has the tools to fix this weakness, but he believed that political leaders should act quickly, precisely at the beginning of the presidential transition.
On the supply side, the United States can modernize infrastructure and transform workers. On the demand side, they can focus on boosting the economic security of the most vulnerable households, he said.
“It is not a question of whether we have the tools, we have them. The political will shall come soon enough, and I mean in the coming months, to avoid the fate of even lower trend growth, ”El Erian concluded.
