Aug 4 (Reuters) - U.S. equities will not revisit the lows
hit in March 2020, but the next big correction in stock markets
could be triggered by corporate defaults, Mohamed El-Erian,
chief economic adviser at Allianz SE, said on Tuesday.
"I do not expect U.S. equities to revisit the March lows,"
El-Erian told the Reuters Global Markets Forum chat room.
"I suspect the next big correction will likely be one
triggered by corporate defaults and other capital impairment
events that central banks cannot shield against," he said.
The S&P 500 index bottomed at an intraday trough of
2,191.86 on March 23 after tumbling from February's all-time
high as the spread of coronavirus shut down economies around the
world. It has rallied back to within 3% of the record.
El-Erian said he expected the lowest tiers of the capital
structure to be most at risk, including "CCC-rated high yield
corporate bonds and the like, as well as their equities, also
some emerging markets."
Asked about his positioning ahead of the U.S. presidential
election on Nov. 3, El-Erian said he had become defensive ahead
of the rally from the March lows.
"I have gotten more defensive in my positioning and, as it
turns out, prematurely," he said.
The one-time PIMCO chief executive said the entire U.S.
yield curve could sink below 1% in nominal terms, if
"the U.S. is unable to re-initiate a country-wide process of
healthy re-openings during this period of living with COVID-19."
U.S. corporate junk bonds have broadly provided
holders with negative returns this year, despite a wave of
central bank liquidity, which has supported corporate investment
grade bond prices, lifting them from their March lows.
El-Erian said it was unlikely the Federal Reserve would take
policy rates into negative territory. "Having said that, I did
not expect them to be buying high yield bonds."
"The sequence is likely to be stronger forward guidance and
more QE (quantitative easing), with the related adoption of a
more symmetrical inflation target," El-Erian said, adding the
Fed will stay near zero for "a long time!"
(This interview was conducted in the Reuters Global Markets
Forum, a chat room hosted on the Refinitiv Messenger platform.
Sign up here to join GMF: refini.tv/2LbSKPl)
(Reporting by Divya Chowdhury in Mumbai and Aaron Saldanha in
Bengaluru; Editing by Alden Bentley and Sonya Hepinstall)