Western nations can learn from developing countries' debt recovery

Advanced economies attempting to recover from the global financial crisis (GFC) could learn a lot from the way emerging economies navigated past financial crises, according to PIMCO chief executive Mohamed El-Erian.

Systemic crises such as the GFC tend to shock public finances in a consequential and protracted fashion, he said.

“Advanced economies currently face the challenge of dealing with a large and rapid increase in both budget deficits and the stock of public debt. As a result, sovereign risk issues are important drivers of market valuations and correlations, and will remain so in the period ahead,” El-Erian said.

Cyclical approaches would not be sufficient to solve deep structural issues such as a downturn in the real estate, finance and construction markets, he said. Western governments needed to act quickly to resolve these issues to secure long-term global growth, employment creation and financial stability, he said.

Australian investors also need to be aware that global policy measures affect the currency outlook, the relative risk-return characteristics of developed versus emerging market exposures and the approach to risk mitigation, El-Erian added.

The fluidity of the current environment and ongoing global paradigm shifts favoured an active approach to fixed income portfolio management, he said, warning investors against sitting in a passively managed global bond fund.