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With stock and bond valuations falling concurrently, investors should be looking to get out of “distorted markets” and seeking alternatives, according to Mohamed El-Erian, chief economic adviser to Allianz . El-Erian has long encouraged investors searching for safe-haven assets to avoid sovereign bonds, which he deemed too highly valued. Indeed, many long-duration bonds across Europe were offering negative real yields. Although prices have come off in recent months — and the likes of German and Italian government bonds are now yielding positive returns — El-Erian told CNBC on Friday that sovereign bonds were not yet at a sufficiently attractive level to be reintroduced into portfolios. Bond yields move inversely to prices and ordinarily, bond prices decrease as demand for risk assets — such as stocks — increase, and investors move away from traditional “safe haven” assets. However, in recent years this correlation has become distorted. “There was a time when all asset prices went up — stocks and bonds — and we forgot about correlations. Why care about correlations when you’re being paid for holding both risk assets and risk mitigating assets? It’s a lovely world,” he told CNBC’s Steve Sedgwick Friday on the sidelines of the Ambrosetti Forum. During the economic recovery from the Covid-19 pandemic and against a backdrop of unprecedented fiscal and monetary stimulus from governments and central banks, both stock and bond prices rose. “But the first half taught us, and what we have again learned since the middle of August, [is] that they can both go down at the same time. In a world like that, you have to look at short-dated fixed income and you have to look at cash, as an alternative,” El-Erian, who’s also president of Queens’ College, Cambridge, U.K., said. ‘Distorted markets’ He suggested that the repricing of sovereign bond markets was a “good thing” and that investors “need to get out of these distorted markets that have created a lot of damage,” adding that while the repricing was the right move, valuations were “not quite there yet.” Some market commentators have expressed caution about the spread between real yields – interest rates adjusted for inflation – and inflation prints, which are coming in at multi-decade or all-time highs in many major economies. El-Erian said it was right to debate this, but stressed that the “real issue” was which inflation metric should be taken into account — including year-on-year versus month-on-month increases. “Life is getting complicated because these measures are going to start diverging, and I bet you that if we’re sitting here in six months’ time, we’re going to be talking not about common shocks, but about dispersion, among economic performance, among different segments of the market. We’re going to see a lot more dispersion going forward than we’ve seen so far,” he said.
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