Will Last Week’s Selloff Wake Up Investors to the Overvalued Market? El-Erian Asks

Allianz sage spells out the difference between lowered fundamentals, like earnings, and the current rally.


At long last, now is the time that momentum-besotted investors may pay attention to corporate America’s wobbly fundamentals, proclaims Mohamed El-Erian, the chief economic adviser at Allianz.

Looking at the market slide late last week, El-Erian wrote in a Bloomberg opinion piece that stocks “were poised for a pullback after five consecutive monthly gains.” As we start a new week, the issue is whether investors will do what they’ve done in previous pullbacks and buy the dip—or start to evaluate stocks by their fundamentals.

The S&P 500 suffered a 2.3% drop last week, while the tech-heavy Nasdaq Composite went down 3.3%. Even mighty Apple, the world’s most highly valued company by market cap, pulled back 6.5%.

To be sure, earnings are expected to be deeply down for the third quarter, with FactSet estimating a 22.4% shrinkage (versus the second period’s 31.7% fall). The fourth period is projected to post a 14% loss. The larger question, which El-Erian is asking, is: How long can the disconnect between economic reality and market behavior persist?

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To El-Erian, two forces have propelled the market’s steady ascent since its pandemic-panic low point in March: Federal Reserve policy and derivatives trading.

The Fed, of course, has lowered short-term rates to near zero and propped up the bond market by buying, not just mortgage-backed securities and Treasuries as it has in the past, but corporate bonds, too. These actions have made bonds across the board generate lower yields. That in turn has led to TINA: the acronym for “there is no alternative” other than stocks.

As El-Erian put it: “Years of ample and reliable liquidity injections by central banks and their strong signaling of continued and exceptionally loose monetary policy have conditioned investors to buy on the dip.”

On the lesser-discussed derivatives front, the trend has been toward ever-rising prices, a phenomenon that has fed on itself. In mid-August, the volume of stocks sold short—meaning a bet they would decline—was around a third of what it was in March, according to Nasdaq.

El-Erian pointed out that call buying has burgeoned. In other words, more investors have expected stocks to go up, and put in orders to buy them as they rose. What’s more, he said, volatility lately has been increasing, which is more often seen in a falling market than a climbing one.

On top of that is the difference between the market, with the S&P 500 recently hitting a new high, and the economic picture. While unemployment has come down since the scary days of the first quarter, it still is elevated. Consumer confidence is low.

El-Erian observed that “the pace of improvement has moderated and hopeful expectations for a V-shaped recovery” have evaporated. Instead, he wrote, we are left with “both less upbeat short-term projections and greater concerns about longer-term damage to the vitality of supply and demand.”

At some point, though, investors will turn to fundamentals and see that the current rally has spiraled too high, he said. “If that doesn’t happen now because of residual central bank conditioning, it will” later, and the result may be more painful. That, he went on, will “involve an even larger downturn.”

Higher anticipated junk bond defaults and dropping sales are large burdens to overcome, he cautioned. Eerily, he stated, “investors are not being rewarded enough to underwrite the risks associated with continued pressure on corporate revenues and higher chances of default.”

“Where investors end up in this tug-of-war” between undue investor optimism and poor corporate performance, he wrote, “will depend largely on their investing DNA — do fundamentals influence their behavior, or have years of liquidity conditioning obliterated what was once almost canonized for them?”

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Ontario Teachers’ Pension Invests $350 Million in Indian Private Credit 

The fund is teaming up with Indian private debt manager Edelweiss Group.


The Ontario Teachers’ Pension Plan Board (OTTPB) is investing $350 million in US dollars into performing and distressed private credit in India. 

The pension plan hired alternative asset manager Edelweiss Alternate Asset Advisors (EAAA), a subsidiary under Edelweiss Group, to oversee the investment, the fund said last week. EAAA is India’s largest private debt manager with $3 billion in assets under management.

“This partnership will further expand our presence in, and provide additional insights on, the important Indian market,” Gillian Brown, senior managing director of capital markets at Ontario Teachers’, said in a statement. 

The US$156.7 billion Ontario Teachers’ pension fund is building credit exposure and betting on India’s long-term growth trajectory. As of fiscal year 2019, the pension plan invested roughly US$11.5 billion into the Asia-Pacific region. 

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India is looking to position itself as a global manufacturing hub under Prime Minister Narendra Modi’s “Atmanirbhar Bharat” campaign. That’s an economic policy unveiled as part of its coronavirus fiscal package for the nation to become self-reliant. The country wants to be a bigger part of the global economy. Right now, it is the world’s fifth largest economy, behind the US, China, Japan, and Germany. 

Investment firm Edelweiss Group has attracted investments in the past from other institutional investors, including pension fund Caisse de dépôt et placement du Québec (CDPQ) and Allianz Investment Management, the investment management arm of Allianz Group. 

OTTPB has earned a 9.5% annualized return in the nearly three decades since the fund’s founding. 

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