NEW YORK — Mohamed El-Erian, the chief economic adviser at Allianz SE, warned that global markets do not fully appreciate the risk posed by the Ukrainian crisis, a conflict which could push Europe into recession.
He saw few options to de-escalate tensions between Ukraine, its Western supporters and Russia, which has been accused of backing an insurgency led by ethnic Russian separatists.
In an interview at Reuters' New York headquarters on Monday, El-Erian, a respected investor who once ran Harvard University's endowment, said just "one or at most two" more rounds of sanctions and counter sanctions between Russia and the West would likely push Europe into recession. That's especially true if Russia cuts energy supplies during the coming winter heating season.
"I think markets are underestimating Ukraine," El-Erian said. "It is very hard to find a solution that reconciles the three parties involved — Ukraine, the West and Russia."
El-Erian said markets also were placing "enormous faith" in the world's Central Banks, such as the U.S. Federal Reserve and the European Central Bank. Through a series of experimental policy actions since the 2008 financial crisis, the world's largest central banks have gotten deeply into the "business of divorcing" asset valuations from fundamentals.
The space between what El-Erian sees as lofty valuations and more earthly fundamentals is "an air pocket" at risk of rapid collapse if markets are confronted with a jarring catalyst, such as Ukraine.
"I worry that the marketplace is paying very little attention to geopolitical issues, but they've done so for good reasons so far," he said. To date, investors have largely succeeded in navigating numerous brief bouts of market choppiness in the face of "geopolitical shock."
An endemic hazard arising from that is that investors want unambiguous evidence that "the turn" has occurred before they opt for a more defensive allocation, El-Erian said.
"The problem with that is that once you get that, everyone wants to get out. And at that point, you get the air pocket."
The Standard & Poor's 500 Index and the Dow Jones industrial average have both hit records in recent weeks, gains he contends are emblematic of the disconnect between valuation and fundamentals.
Their performance is largely fueled by the Fed's actions, which have made other assets such as bonds even pricier by comparison, as well as financial maneuvering by corporations, which are spending cash buying their own shares or on mergers and acquisitions, he said.
A Message from The Moscow Times:
Dear readers,
We are facing unprecedented challenges. Russia's Prosecutor General's Office has designated The Moscow Times as an "undesirable" organization, criminalizing our work and putting our staff at risk of prosecution. This follows our earlier unjust labeling as a "foreign agent."
These actions are direct attempts to silence independent journalism in Russia. The authorities claim our work "discredits the decisions of the Russian leadership." We see things differently: we strive to provide accurate, unbiased reporting on Russia.
We, the journalists of The Moscow Times, refuse to be silenced. But to continue our work, we need your help.
Your support, no matter how small, makes a world of difference. If you can, please support us monthly starting from just $2. It's quick to set up, and every contribution makes a significant impact.
By supporting The Moscow Times, you're defending open, independent journalism in the face of repression. Thank you for standing with us.
Remind me later.
