The first three-quarters of Mohamed El-Erian's regular FT column are devoted to how terrible things are in the markets. In the last part, however, he addresses where he thinks the opportunities lie:
So much for the summary characterisation of today's highly dualistic
investment outlook. How about the implications for investment
strategies? Interestingly, they differ significantly depending on where
your investible capital stands with respect to some key structural
attributes - an insight that also speaks to why we are likely to see
more market volatility.
The answer lies in a phased,
multi-quarter approach by investors that benefit from the following
structural attributes: a high degree of capital permanency that steers
clear of the need to finance sudden withdrawals; a willingness to take
long-term views that can be sustained through wild market swings; and a
process that accommodates opportunities that, in some cases, do not fit
well into traditional classifications of asset classes.
If you
possess these structural attributes, today's markets offer
opportunities that are high up in the capital structure and that, in a
few years, will be looked on as having constituted incredible bargains.
If you don't, you are well advised to stay on the sidelines, focused on
the probability that these same markets will also be treacherous for at
least the remainder of this year.
El-Erian used to manage the Harvard University Endowment, an entity that fits perfectly his description of the kind of investor that can profit greatly from today's turmoil. The fundamental attributes are
a) The ability to invest with a long-term outlook and endure interim volatility
b) Permanent capital not subject to lender calls or temporary asset value declines
c) The ability to look at things that don't fit neatly into one investment category
I believe that family offices also fit this description. It's a good time for them to take advantage of the structural advantages they and university endowments and Berkshire Hathaway have, and which the vast majority of investors--those currently setting market prices at the margin--lack.
Given you have these structural advantages, where should you look? El-Erian states the opportunities are "high up in the capital structure" so I don't think he means equities. More likely he means corporate senior debt which offers the best combination of high near-term misery and volatility and low risk of permanent capital loss--in other words, they either won't default or are well-covered in the event of default. To find the first, go where the most trouble is--companies exposed to housing, high oil prices, weak consumer spending. To find the second you just have to do some credit analysis homework. I've got a company in mind right now that I'm doing some work on. Stay tuned.
Another possibility is to honor the late John Templeton, who made a lot of money by buying 104 of the lowest-priced stocks he could find on the eve of WWII and just holding them for a few years. Look for the most beaten-up sectors or asset classes, maybe even the more esoteric ones like CLOs and CDOs tied to subprime housing, hold your nose and close your eyes, buy them without any leverage, and wait five years.