Investment landscape according to El-Erian
Mohamed El-Erian, CEO of PIMCO, the world’s biggest investor of bond funds, is considered an expert on emerging markets and is a recognized thought leader when it comes to matters concerning the global economy.
He recently had several opeds published that express his views on how world events, such as the uprisings in the Middle East and Africa and the nuclear crisis in Japan, will impact the global economy and the investment landscape.
The CBOE Volatility Index, what Wall Street calls the “fear-gauge”, shot up 30 percent last week after officials delivered confusing statements on the Middle East and Japan. The disaster in Japan and the uprisings in the Middle East have caused even more anxiety amongst investors who make moves according to news headlines.
Here are some of the predictions El-Erian made for what he sees as the outcome of what’s happening in the Middle East and North African countries (MENA) and Japan.
El-Erian predicted the events unfolding in MENA will lead to a “period of much greater differentiation among MENA countries“. He wrote, “the world should prepare for a dual challenge — understanding and dealing with what may well be four distinct groups of countries within MENA; and comprehending a new set of regional dynamics which involves different interactions among countries.”
He expressed his concerns about how western countries will have a hard time offsetting short-term inflationary pressures in the Middle East. He noted that although countries like Egypt and Tunisia are not considered economic powers, they are important for global demand, such as oil, and price dynamics.
As for the disaster in Japan, El-Erian wrote in this piece about his skepticism of the Federal Open Market Committee’s upgraded outlook for both U.S. growth and inflation in their March 15th statement, which excluded comments on Japan. El-Erian believes the FOMC may have lacked enough information to make a comment on the global economic impact of the Japan disaster to take it into account.
The world’s third largest economy, Japan is still reeling after a devastating earthquake and tsunami, which crippled several nuclear power reactors. Officials are still unsure as to how and when Japan will fully restore electricity to the country as fears of health risks from radiation escalate.
While Japan is trying to assess the true magnitude of the damage and figure out how it will rebuild itself, El-Erian points out three factors of why it is too early to predict whether the events in Japan will have a transitory impact on the global economy or not:
1. Nuclear Power and when or how power will be restored as the crisis at the Fukushima nuclear reactor continues
2. Japan’s reconstruction program and how it will be financed
3. Japan disaster adds to the supply shock caused by the tensions in the Middle East and its impact on oil prices
The FOMC gave the U.S. an upgraded outlook because policy-makers truly believe the disaster in Japan will be transitory.
El-Erian, though, warns investors to not assume that the catastrophic event in Japan will be temporary or reversible, as they thought would be the case after the 1995 Kobe earthquake. Uncertainty often follows after such disasters. How Japan, with it’s added debt load, will recover physically and financially is still unclear.