Investors should resist the temptation to let volatility stemming from the Japanese earthquake and high oil push them away from equities and into cash or Treasurys, says Mohamed El-Erian, co-head of Pimco, the world's largest bond fund.
If Mideast turmoil should send oil well above $120 a barrel — about $7 over current levels — investors may want to take on a gloomier outlook, but for now, markets should be able to navigate volatility.
"I am cautiously optimistic at this point that the world can withstand these recent shocks," El-Erian tells Bottom Line.
"It's a major positive that economies such as those of the U.S. and Germany continue to heal and grow stronger. Investors would be shortsighted to run back to the safety of cash or U.S. Treasurys now."
Looking abroad, investors need to be picky.
Japan will take longer to recover from the recent earthquake than it did from the Kobe quake back in 1995, although that will mean oil producers will be good plays, as global recovery coupled with reduced energy capacity from disabled Japanese nuclear reactors will boost crude demand.
China and Brazil will grow this year, but many European countries bear watching.
"Differentiation among foreign markets is key. In contrast to Brazil and China, investors in European nations such as Greece, Ireland and Portugal could be even worse off than they were during last year's panic over insolvency," El-Erian says.
"These countries have only postponed their problems for a few years, piling a lot more debt onto existing debt that they could pay on their own. Their economies will shrink in 2011."
While the world may be celebrating the slaying of terrorist mastermind Osama bin-Laden, market optimism was short-lived, with oil prices brushing off early knee-jerk declines.
"It's very difficult to see how this event will fundamentally change supply or demand for crude oil," says James Williams, an energy economist at the oil and gas consultancy WTRG Economics, according to CNNMoney.
"A lot of times we see markets move on happy news that in reality has nothing to do with the market, and I think this is one of them."
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