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Allianz chief warns diversification strategies may face threat

Mohamed El-Erian, who is also the former chief executive of Pimco, said as roughly 30% of government debt was now trading at negative yields, investors might be forced to take on too much risk.

He said: “Combine this with repressed financial volatility, another objective of unconventional central bank policy, and you could well end up with excessive risk-taking on the part of too big a portion of the investor base.

“In the process, market valuations decouple meaningfully from underlying economic and corporate fundamentals.”

That said, as low and negative interest rates also reduce the effectiveness of portfolio diversification as a strategy against market volatility, investors would also be attracted to holding larger allocation to cash as part of their risk management approach.

Writing in the October issue of Gold Investor, published by the World Gold Council, he suggested a 5% allocation to the precious metal would be appropriate for many portfolios.

He said especially if investors were looking to increase their cash weighting, gold could play an important role in mitigating overall portfolio risk.

“It can also provide a notable upside should the enormous amount of central bank liquidity injection gain traction and result in higher inflation, be it actual or expected;” he said.

“Having said that, investors should size their gold allocation in a manner that enables them to stomach considerable mark-to-market price fluctuations. Otherwise, they run the risk of doing the wrong thing during periods of unsettling market volatility. A 5% strategic allocation is appropriate.”

Meanwhile, like many economists, he said the three biggest risks to sustained economic growth were: increasingly polarised politics in the developed world – distracting from more comprehensive, aligned, and pro-growth structural reforms; the threat of the inequality of income, wealth and opportunity – in turn fuelling anti-globalisation rhetoric; and third, an economic and financial system that has borrowed growth and financial returns excessively from the future.

Part of the Mark Allen Group.