The wave of monetary printing is coming to an end and not only will it result in a less certain investment outcome, but it will also require a change in how investors think about their investment strategy, suggests Mohamed El-Erian, author of “The New Normal And It’s Consequential Morphing: How We Got Here, and How Investors Can Move Forward,” in the September/October 2013 Journal of Indexes.
El-Erian believes it will not be long until the stability we have become accustomed to in the last two years becomes volatile and disrupts what has become “the new normal”.
Key global economic and financial relationships will move in new directions. Consequently, PIMCO is focusing on the following investment strategies:
- Stop tracking the central bank’s printing of money
- Look at investments based on risk and reward
- Expect asset-class to move in more directions and become more volatile
- Include cost effective insurance against unexpected events
- Don’t rely on historical investment labels and benchmarks
Therefore, investors have to focus on the fundamentals and downplay central banks’ actions to print more money.
The global economies will react differently. In the U.S. there are two likelihoods. One, the political environment will become a tailwind, or two, it will create a greater hurdle to overcome for the economy and business environment.
Europe will have a much similar map, but the endpoints are far nearer. The union will become more business-friendly and support higher economic growth, or it will cause a headwall that brings economic growth to a halt.
China also faces two roads: adapt to growth from domestic consumer purchasing or slam to a halt as export partners die out.
There are five main causes for this instability:
- Over-dependence on central banks printing money
- Escalating stock and bond prices caused by the mass production of money
- Governments becoming lax in finding other solutions beyond increasing the amount of money printed
- Larger companies and more individuals holding larger cash quantities
- Emerging economies aren’t competing against the lower value of the dollar and the Euro
In actuality, there are numerous outcomes beyond what has been presented here. But the use of the suggested investment strategies provided by PIMCO in a balanced fashion may prove a better result than riding the wave of printing of money that the central banks have navigated.