El-Erian and Pimco Say to Build Cash After Latest Market Gains

(Bloomberg) -- Mohamed El-Erian and his former colleagues at Pacific Investment Management Co. say now’s a good time to take advantage of the latest rallies in global financial markets and scale back from risk.

After the Dow Jones Industrial Average rose to a record, fueled by bets on the incoming U.S. administration spurring reflation in the world’s largest economy, some investors are starting to voice concern. The question: can President-elect Donald Trump deliver on fiscal stimulus and job growth after taking office next month in the face of a fractious American Congress?

“It makes total sense to take some money off the table,” El-Erian, the chief economic adviser at Allianz SE and a Bloomberg View columnist, said Tuesday. “We’ve priced in no policy mistakes. We’ve priced in no market accidents, and we’ve ignored all sorts of political issues,” he said on Bloomberg TV. In October, El-Erian said that he held about 30 percent of his own money in cash.

Pimco has been trimming its holdings of high-yield bonds, said Mark Kiesel, chief investment officer for global credit at the company. Pimco, based in Newport Beach, California, is owned by Munich-based Allianz.

“We have actually been de-risking,” Kiesel said Tuesday on Bloomberg TV. “We actually like holding, in the credit markets, a little more cash.”

The president-elect’s pledges of tax cuts and spending increases are driving expectations for faster growth and inflation in the world’s biggest economy. Trump has also blamed China and Mexico for American job losses and threatened tariffs on imports.

Dividend Yields

The Dow has returned 18 percent including reinvested dividends in this year’s stock rally, according to data compiled by Bloomberg. The result is a decline in the index dividend yield to 2.39 percent, below the Treasury 10-year yield around 2.57 percent. 

U.S. high yield bonds have returned almost 17 percent this year, based on the Bloomberg Barclays indexes. They pay about 4 percentage points more than Treasuries, the narrowest spread in more than two years.

Goldman Sachs Group Inc. analysts are among those suggesting caution about stocks at this point. Any large fiscal stimulus risks stoking inflation more than growth, and in turn boosting interest rates that then hurt shares, according to their rationale. The move would be a risk to “the equity market party,” Goldman analysts wrote in a report.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net. To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Garfield Reynolds