Money and Markets

Mohamed El-Erian sounds the alarm on brewing bond-market risks that could plunge the most vulnerable companies into bankruptcy

Business Insider US
Mohamed El-Erian
Mohamed El-Erian (Getty Images)
  • Economist Mohamed El-Erian cautioned investors about the risk of rising corporate bankruptcy rates in an interview with Bloomberg TV on Friday.
  • While many investors are ignoring short-term market risks in the hopes that 2021 will be met with a swift vaccine deployment and economic recovery, El-Erian said the time between now and a rollout of the vaccine matters.
  • "People have got to be very careful, especially in high-yield credit, and in emerging markets," he said.
  • Visit Business Insider's homepage for more stories.

Many investors have chosen to look past short-term market risks in the hopes that 2021 will be markedly more upbeat. Yet, Mohamed El-Erian warned investors that the interim journey to the vaccine will be a difficult time, particularly for investors in high-yield credit. He told Bloomberg TV on Friday that deteriorating credit conditions could lead to a swath of bankruptcies before the recovery.

"Credit is deteriorating, more bankruptcies are going to occur, recovery rates are going to come down," said the economist. "The big how much damage do we have to the corporate sector in this journey to the vaccine?"

The Allianz chief economic adviser said next Tuesday's November PMI number will be a "big test" for the health of the corporate sector. He said there's a high probability the number will be below 50, a level not seen since May. This low number wouldn't just indicate a staggering economy, but would signal a potential increase in corporate bankruptcies,  El-Erian said.

El-Erian added that the economic "journey" between now and the time when a large portion of the population is vaccinated against the coronavirus will be highly important, particularly for investors in higher-risk markets.

"I think most people expect that it's all about the destination, regardless of the journey, but if you are investing in higher default risk paper, then the journey really matters,"said El-Erian. "People have got to be very careful especially in high-yield credit, and in emerging markets."

The economist said he expects lower economic growth on the horizon because of supply and demand inefficiencies.

The supply side we see more concentration, we are going to see less competitiveness, and we're going to see a certain degree of de-globalization. And that's going to cause a decline in productivity short term," El Erian said. "On the demand side, we are likely to see higher household economic insecurity, that's the scarring that economists talk about."

He said the US has tools to fix this, but policymakers need to act fast. On the supply side, the US can modernize infrastructure and retrain workers. On the demand side, the US can focus on boosting the economic security of the most vulnerable households.

"It's not a question of do we have the tools—we do. Its will the political will happen early enough, and I mean within the next few months, in order to avoid the destination that's even lower trend growth?" he asked.

Rand - Dollar
Rand - Pound
Rand - Euro
Rand - Aus dollar
Rand - Yen
Brent Crude
Top 40
All Share
Resource 10
Industrial 25
Financial 15
All JSE data delayed by at least 15 minutes Iress logo