Is the US-Iran war a "bottom-fishing opportunity"? Allianz's Chief: Demand shocks haven't started yet. Stay away from stocks!

After researching firm Ned Davis Research and Deutsche Bank both warned that the S&P 500 index “hasn’t finished falling,” another Wall Street heavyweight has issued a warning to bargain-hunters in the stock market.

In the latest interview, Allianz Chief Economic Adviser and former PIMCO Chief Investment Officer Mohamed El-Erian (Mohamed El-Erian) said that because the Iran-Iraq war has entered its second month, he is currently avoiding the stock market, especially broad stock indices.

He further noted that the rise in oil prices has triggered a series of economic consequences, and said the market now has to confront the risk that demand shocks may begin to spread throughout the economy.

Speaking about potential demand shocks, El-Erian said: “This is another turning point for the global economy. My risk tolerance has shifted from lowering to fully avoiding risk, and now, although some stocks look attractive, I’m not entering the market at this time, or buying the index.”

Over the past month, you could say it’s been chaos out there, with fighting raging on. U.S. stocks have been falling relentlessly. By last Friday, both the Nasdaq and the Dow had fallen again into their respective technical correction ranges. Until this Tuesday, after Trump and Iran exchanged “de-escalation signals” with each other, the three major U.S. stock indexes surged sharply together.

But according to El-Erian, even factoring in the prior selloff, investors may still be underestimating the economic risks brought by the Iran-Iraq war.

“For the stock market, we still hold this view that this situation is temporary. Although it may have some impact in the short term, we should ignore it.” He added.

The Iran-Iraq war has sparked a series of concerns in economic and financial markets, starting with the recent surge in oil prices. El-Erian further explained that people worry that rising crude oil prices could intensify inflation, increase the burden on consumers, and ultimately they will reduce consumption of oil products.

He emphasized that suppressing demand is a necessary tool to lower oil prices unless supply increases. But this could further slow economic growth at a time when the U.S. economy is already weak, leading more people on Wall Street to warn that a recession may be coming.

El-Erian said that in other areas of the global economy, demand contraction has already begun to show. He pointed out that Asian countries that are most affected by the closure of the Strait of Hormuz are currently facing a situation of critical shortages of key goods. In the U.S., a demand shock may take the form of Americans cutting back on spending, especially in low-income households.

He also noted that this could trigger knock-on effects across the broader financial system.

“First an energy shock, then an interest-rate shock, followed by a broader inflation shock, and finally a demand shock. If this continues—though I hope it doesn’t—we will face financial instability. That’s the whole process. I hope we don’t get to that point,” he said when discussing the war’s consequences.

In recent weeks, El-Erian has repeatedly spoken publicly about the cumulative economic losses caused since the outbreak of the Iran-Iraq war. In mid-March, in an interview, he said he believes the likelihood of a U.S. recession has risen to 35% due to the war, and that steadily rising inflation has also increased the risk of a “financial crisis.”

(Source: Caixin Leju / 财联社)