Mohamed El-Erian Explains Portfolio Structuring Before The Fed's Rate Hike

According to most policy makers, a rate hike seems imminent as the economy continues to show signs of good health. However, market participants are worried that raising rates could put the brakes on the bull market that began after the financial crisis.

Mohamed El-Erian, Chief Economic Advisor at Allianz, was on CNBC recently to discuss how he is structuring his portfolio in preparation for a possible shock from the Fed.

Barbell Portfolio

"First, I don't think the market is going to have a major problem," El-Erian said. "My portfolio is much more barbell. What does that mean? It's that I am taking some exposures out of the public markets, which are heavily trafficked, because that's where the Fed has been pushing everybody. And I have taken some in cash, some in higher-risk, less-liquid exposure."

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He continued, "So, more barbelled in order not to chase the Fed, because I think there's a genuine question mark as to whether the Fed will be able to deliver better economic fundamentals, and as long as we don't get the better economic fundamentals, we are at risk of not validating the high asset prices."

Longer-Term Handoff

El-Erian was asked why he thinks taking money out from the stock market at this stage is a good strategy, especially when a lot of companies are going for buybacks. He replied, "This market is getting wonderful support from two things. One, central banks, not just the Fed, but central banks including China. [China] is the latest that's going to join this QE party.

"And secondly, a ton of cash that is being deployed back into the market. So, that's good news, but that has a limit," El-Erian cautioned.

"At some point, you need a handoff. You need a handoff investment in plant, equipment, hiring. You need a handoff from central banks to more holistic policy response. So, I have no problem saying that in the short-term, the market will continue to get support. I just wonder about the longer-term handoff," El-Erian concluded.