Mohamed El-Erian discusses the need for investors to recognize increased uncertainty in the global political and economic landscape. He advises building portfolio resilience through scenario analysis of multiple possible outcomes, increased liquidity, and recognizing the limitations of traditional risk mitigation strategies given new political risks. El-Erian also emphasizes the importance of pension funds assessing what risks they can and cannot afford given current underfunding levels.

1. Interview with: Mohamed A. El-
Erian, Chief Economic Adviser,
Allianz, Former CEO & Co-CIO of
PIMCO
“Investors must recognise that their
mindset, beliefs and historical experi-
ences will be challenged by unusual
fluidity in the political, economic,
financial and institutional areas,” says
Mohamed A. El-Erian, Chief Economic
Adviser, Allianz, Former CEO & Co-CIO
of PIMCO. “Investors should not just
target one likely outcome, but recognise
there is “unusual uncertainty” and build
portfolio resilience and agility,” he
continues.
El-Erian is a keynote speaker at the
marcus evans European Pensions &
Investments Summit 2017, taking
place in Montreux, Switzerland, 15 – 17
May.
What are some of the recent
changes to the global economic
system that investors and pension
funds should be aware of?
The biggest changes come from the
political side and the implications for
economics, finance, institutions and the
markets. It is the unusual uncertainty
associated with political developments,
particularly in the US and Europe. In the
US, it is the election of Donald Trump
and the wider set of two-sided risks he
brings to investors. On the one side, he
may unlock the gridlock in policies and
help promote economic growth, push
asset prices higher and allow the Fed to
normalise in an orderly fashion. On the
other side, more worrying is the
possibility of trade wars as economic
nationalism and populism picks up fuel.
In Europe economic nationalism is also
fuelling anti-establishment movements
and raising questions not just about
economic growth and markets, but also
on how institutions and regional
economic arrangements are set up.
The bottom line is, investors have to
consider political risk in a manner that
they did not have to do before, and the
extent to which that can impact the
economy, institutions, markets and,
therefore, the trifecta that is most
important to their portfolios: expected
return, asset volatility and asset
correlation.
How should they change the way
they construct their portfolio?
A lot depends on which Trump
administration we get. There are two
possibilities. One is a supportive Trump
administration that passes tax reform,
deregulates in a prudent fashion, and
embarks on infrastructure spending,
which would raise not just actual growth
but also the future growth potential of
the US. That would be beneficial for
long-term investors as fundamentals
ultimately drive portfolio returns. But
there is also the possibility of protec-
tionism consistent with campaign talk to
dismantle NAFTA, impose high tariffs on
China and Mexico, end bilateral trade
agreements with countries such as
Korea, which would result in stagflation.
This would promote the risk of a trade
war, undermine global growth and raise
consumer prices around the world. That
would not be good for investors, who
would lose both from low growth and
their fixed income exposure would
suffer from inflation.
It is too early to tell which side will
prevail. If I were forced to make a call
today, I would say we are more likely to
get the first Trump administration than
the second, but the extent of uncer-
tainty is quite high.
How can they build portfolio
resilience and agility?
Investors must get used to running
multiple scenario analyses, to explicitly
realize that many outcomes are possible
and to have detailed plans for what to
do as more information becomes
available. This is a mindset shift from
targeting just one asset allocation to
recognising there are many alternatives,
and they have to think about them
during the calm days.
The second is to be much more
selective in allocating to sectors and
giving up on liquidity. Liquidity has
become even more important as it gives
investors the ability to respond quickly.
The third element is to recognise that
traditional endogenous risk mitigation
based on traditional correlations is going
to be challenged in a world of political
risk.
Any final advice on risk mitigation?
Pension funds, especially if they are
underfunded, need to ask themselves
what mistakes they can afford to make
and what mistakes they cannot afford.
That is not an easy discussion to have.
But it is a very important one given the
unusual degree of uncertainty.
Investors
must get
used to
running
multiple
scenario
analyses
Achieving Investment Portfolio Resilience
& Agility in Today’s Uncertain Landscape

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About the European Pensions & Investments Summit 2017
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Taking place at the Fairmont Le Montreux Palace, Montreux, Switzerland, 15 - 17
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