Mohammed El-Erian: We’re Going To See Bankruptcies. Sell Names That Could Go Bankrupt

Mohammed El-Erian: We’re Going To See Bankruptcies. Sell Names That Could Go Bankrupt

Mohammed El-Erian on America’s economy due to coronavirus: We’re going to see bankruptcies. Sell names that could go bankrupt. PIMCO CEO and Co-Chief Investment Officer Mohamed El-Erian speaks during a session at the Buttonwood Gathering on Fixing Finance in New York, Oct. 25, 2010. (AP Photo/Kathy Willens)

The economic outlook isn’t pretty for America due to the coronavirus pandemic. Bankruptcies are on the way in corporate America, says Mohamed El-Erian, chief economic advisor at Allianz, the parent of global investment management firm Pimco.

The recent behavior of the stock market is an omen and should be seen as a “loud wake-up call for policymakers,” El-Erian said, according to a Seeking Alpha report.

It’s difficult, he said, to make a solid argument for either “the bottom’s already in” or “dead-cat bounce,” due to the uncertainty about the severity and duration of the pandemic. But he said he fears the recent bounce Wall Street experienced “is more likely to prove a temporary exception to what, unfortunately, is still an outlook for high stock-market volatility around a still-downward trend.”

El-Erian’s comments came after a strong week for stocks. The Dow Jones Industrial Average posted its best weekly gain since 1938, rising more than 12 percent. The Nasdaq and S&P 500 posted gains of 9.1 percent and 10.3 percent respectively, for their best weeks since 2009, CNBC reported.

Moving forward, El-Erian said, bankruptcies are inevitable.

“We’re going to have bankruptcies, and bankruptcies, unfortunately, destroy the capital structure completely,” he told CNBC’s Squawk Box.  

Despite this, El-Erian said there are stocks he is still “comfortable” buying, even as all three major U.S. indexes remain more than 20 percent below their all-time highs in February. 

These companies “have rock-solid balance sheets. They have a ton of cash. Their cash drain is very limited, some of them are still accumulating cash,” he said. “These are not only going to survive. They’re going to emerge to a landscape that speaks to their strengths.”  

He advised that investors should buy individual stocks, not indexes, because more coronavirus-driven volatility is still ahead.

“If you feel it’s the all-clear, go out and buy the index…I don’t think we’re there yet,” the chief economic advisor at Allianz said on.

He urged that investors dump companies that could go bankrupt and buy those with “rock-solid balance sheets.”

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The financial expert said it’s going to take a major effort and good planning to restart the economy.

“Economic sudden stops are very different. They sneak up on you. Dealing with the underlying source is very difficult. In this case, it’s a health issue. So, stimulus policy, which is the equivalent of the central bank intervention in the case of financial sudden stops, does not work.

“You can help with the balance sheets. You can protect people that way. But unfortunately, you cannot reactivate economic activity until the health issue is addressed. People put health in front of everything else,” El-Erian said on Morningstar newspaper’s podcast, “The Long View.”

When asked on “The Long View” how the market could be stabilized, El-Erian replied, “The key issue is health. That is what stabilizes it in a sustainable, long-term manner. In the short term, there’s potentially two stabilizers, one that is good and one that is less good. The good one is that the central banks and other financial regulators are able to pinpoint where the stress is and are able to provide ample emergency interventions. The less desirable way of stabilizing this (is) market overshoots, that you get very sharp reduction in market values, so sharp that people with cash available — and there are many people on the sidelines with cash available — see that the balance of risk is clearly on the upside because prices have overshoots.”