How To Play "The New Normal"

March 17, 2010

by The TopStock Team

As we’ve mentioned a time or two in the past, one of the keys to success in the investment game for individual investors is to know who to listen to when it comes to market guidance (and in turn, who to not listen to). With technology and communication that way they are today, investors can literally find hundreds of ideas and views on the markets at any point of the day. The problem is this can actually be more confusing than helpful. For example, if one visits some of the really big market news sites such as TheStreet.com or CNBC, you will often find conflicting market views on the very same page (this is due to the fact that these are news-oriented publishing sites that are not guidance driven). Thus, it is easy for investors to become overwhelmed and confused when trying to read everything and/or listen to everyone.

While we make no claims as to who is going to be right or wrong on any particular issue, we have learned over the years that there are some market professionals who tend to “get it right” the vast majority of the time. And getting to the point of this report, Mohamed El-Erian of PIMCO is one of the folks that tends to get it right more often than not.

Mr. El-Erian was on CNBC’s Squawk Box on Monday and talked about his view of what PIMCO has dubbed “the new normal” in the investing world. In short, El-Erian’s view is that we are seeing a “paradigm shift” in growth from the advanced economies of the world such as the U.S. and the UK to the emerging countries such as China, India, Brazil, and the like.

“We will see a continuous migration of wealth and growth dynamics from advanced economies to the rest of the world,” El-Erian told the CNBC audience.

The Co-CEO of PIMCO said he expects to see "a multi-speed world" where "part of the world is going to grow and grow robustly. There's going to be another part, the US and UK, that is going to have difficulty once all the stimulus and inventory cycle goes through."

So, should one run out and dump their U.S. holdings and start buying the emerging markets? Although Mr. El-Erian tends to offer suggestions in a manner that would make a Fed Governor proud, the answer is no.

El-Erian believes that there are still “cyclical tailwinds that, for now, will overcome the structural headwinds.” In English, we take this to mean that the stock market in the U.S. is enjoying a nice run and may continue to do so as the economies of the advanced countries continue to rebound. However, looking longer-term, the gang at PIMCO expects that the established economies will struggle due to excessive debt and structural issues.

Looking at how to play this landscape, El-Erian suggested, "This is a wonderful time to be an active manager, with all these things moving."

The co-manager of the world’s largest bond fund reminded viewers that markets tend to “overshoot” and it is this process of traders taking things too far that presents opportunities.

As for specific portfolio ideas, El-Erian stayed with a big-picture approach. “You construct a portfolio and more importantly you retain optionality," which he said should entail "cash for very high-quality holdings that allow you to reposition as the future gets clearer."

In essence El-Erian is says that investors need to have the ability to react to events and that having a little cash on hand to take advantage of opportunities is a good idea in the “new normal.”

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How To Play "The New Normal"