Why Mohamed El-Erian favours cash over equities for now

Mohamed El-Erian, a leading economist, has said he feels “uncomfortable” investing his personal wealth in the stock market and has diversified away from equities as central banks battle to tame inflation.

In an interview with the FT’s Money Clinic podcast, El-Erian said he had adopted a “barbell approach”, allocating more of his personal portfolio to low-risk cash and cash equivalents paying decent rates of interest, while at the same time increasing his exposure to much higher risk distressed debt situations to balance this out.

“If you are uncomfortable in the stock market — as I am, by the way — then there’s a really good place to park your money where you can get paid 4 to 5 per cent on your money and that will compound,” he said, extolling the virtues of top interest-paying cash savings accounts.

“And then on the other side, there’s a lot of opportunities in what’s called distressed investing in private credit and things like that.”

He stressed that he was able to take this position as an experienced investor, cautioning that the barbell approach would not be suitable for novice investors.

El-Erian is chief economic adviser at Allianz, the parent company of Pimco, a big provider of bonds and fixed income investments, where he formerly served as chief executive. He is a contributing editor to the Financial Times.

“The time will come when I’ll be much more comfortable increasing my equity exposure, but I’ve been quite cautious,” he added, referring to volatility in both the equity and bond markets as rates are expected to stay higher for longer.

“Slowly, over the next few years, we’re going to go back to something more normal where traditional correlations and therefore traditional risk mitigation come back . . . I can tell you about the destination, but the journey is really painful.”

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Given the current outlook, he said, the three qualities investors needed the most were resilience, optionality and agility.

“Resilience, meaning you can absorb a mistake. Optionality, an open mind. You need to recognise that there are certain things you don’t know. You need to think differently. Finally, agility; the ability to move quickly, and just to be clear, this is not just for investing. I think both governments and CEOs have to ask themselves every day. How’s my resilience? How’s my optionality? How’s my agility?”

El-Erian also spoke about the themes of his latest co-authored book Permacrisis: A plan to fix a fractured world, and revealed that his earliest money memory was playing games of blackjack with his uncle growing up in Egypt as a young boy of five or six. “He had, compared to me, an infinite amount of money, so ultimately he always prevailed,” he said.

To listen to the full episode, click on the podcast player above or search for “Money Clinic” wherever you get your podcasts.