Top economist Mohamed El-Erian has warned those who think financial stress from Covid-19 is coming to a close any time soon, they are sadly mistaken. He cautioned investors to tread cautiously in the current financial climate in an op-ed published in the Financial Times.
“The financial stress caused by Covid-19 is far from over. Investors should brace for non-payments to spread far beyond the most vulnerable corporate and sovereign borrowers, in a reckoning that threatens to drag prices lower,” El-Erian wrote in the opening paragraph of the article.
He advised there were things investors could do to avoid being hit so hard by the downward trend.
“There is still time to get ahead of this trend. Rather than buying assets at valuations stunningly decoupled from underlying corporate and economic fundamentals, investors should think a lot more about the recovery value of their assets and adjust their portfolios accordingly,” he added.
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The signs that the economy will not recover anytime soon are evident according to El-Erian.
“There are already plenty of worrying signs: a record-breaking pace for corporate bankruptcies; job losses moving from small and medium-sized firms to larger ones; lengthening delays in commercial real estate payments; more households falling behind on rents and continuing to defer credit card payments; and a handful of developing countries delaying debt payments,” El-Erian continued.
Noting recovery won’t be quick and stating “potential damage is limited to finance,” El-Erian said Covid-19’s fallout will cause consumers to be more frugal and companies will be less likely to invest as they usually would. He advised investors to be wise and strategically examine the moves they will make.
“Liquidity-driven rallies are deceptively attractive and tend to result in excessive risk-taking. This time, retail investors are front and centre. But it is the next stage that we should already be thinking about,” El-Erian concluded. “That requires much more careful scrutiny from investors than the past few months have demanded.”
