Political Stress May Curtail Risk-Asset Rally, El-Erian Says

Pacific Investment Management Co.’s Mohamed El-Erian said investors who took advantage of the rally in risk markets should reduce their exposure in favor of safer assets amid domestic economic weakness and global political stresses.

“This is an unusually uncertain time,” El-Erian, the chief executive officer of the world’s largest manager of bond funds, said on Bloomberg Radio’s “Hays Advantage” with Kathleen Hays. “It’s not just Europe. Let’s not forget there is a fiscal cliff in the U.S. Let’s not forget geopolitics is heating up in Iran again.”

Treasury yields remain close to lowest ever amid a slowing economy, global financial turmoil and U.S. unemployment above 8 percent for more than three years. The year-end “fiscal cliff” of higher taxes and reductions in spending on defense and other government programs that will take effect unless Congress acts also clouds the economic outlook, he said.

Investors have to retain the ability to invest with “a high level of agility,” El-Erian said, reflecting the so-called new normal, Pimco’s view that the global economy has entered a period of slow growth and historically lower investment returns.

Pimco began offering equity funds to investors in April 2010. The firm moved into stocks to allow customers to diversify their holdings and as areas such as emerging markets started to outperform developed regions.

Europe Plans

Poorly designed rescue plans for Europe have been ineffective at stemming outflows of capital from troubled European sovereign countries as concern European leaders are failing to make progress toward resolving the region’s financial crisis, El-Erian said.

Benchmark Treasury 10-year note yields sank to a record low 1.379 percent on July 25 amid concern the European debt crisis was slowing the global economy while the Standard & Poor’s 500 Index has risen 11.8 percent this year. Riskier assets are poised to fall out of favor amid the burden of the European debt crisis, El-Erian said.

“Ultimately, the test is, do you attract private capital back into these countries,” El-Erian said. “You have to go from private capital exiting to private capital being crowded in, and that only comes with a credible program, political support and significant official financing.”

Pimco’s $263 billion Total Return Fund (PTTRX) gained 7.55 percent during the past year, beating 87 percent of its peers, according to data compiled by Bloomberg. The fund gained 1.01 percent in the past month, beating 76 percent of its peers.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

Enlarge image

Political Stress May Curtail Risk-Asset Rally, El-Erian Says

T.J. Kirkpatrick/Bloomberg

Pacific Investment Management Co.’s Mohamed El-Erian said investors who took advantage of the rally in risk markets should reduce their exposure in favor of safer assets amid domestic economic weakness and global political stresses.

Pacific Investment Management Co.’s Mohamed El-Erian said investors who took advantage of the rally in risk markets should reduce their exposure in favor of safer assets amid domestic economic weakness and global political stresses. Photographer: T.J. Kirkpatrick/Bloomberg