Mohamed El-Erian, chief economic advisor at Allianz. (Photo: AP)

Given different monetary and economic policies in the world’s major economies, investors and financial firms alike should expect more divergence and volatility in the fourth quarter and next year, says Mohamed El-Erian, chief economic advisor of Allianz and former CEO of PIMCO.

These conditions, the economist said on Fox News early Sunday, should give investors pause and prompt them to sell some equity holdings.  

“I would say given the very strong rally we’ve had, take some money off the table here — have some optionality. There will be bumps down the road. There will be lots of volatility. You want to have dry powder at this point,” El-Erian explained during an appearance on “Sunday Morning Futures.”

“Be ready for greater volatility, and be ready for picking up good companies at cheap prices,” he added.

In terms of what Allianz-owned PIMCO is thinking about its portfolio holdings, El-Erian says dealing with divergence is the name of the game for the bond shop, as well as for others managing money.

“In general, we are going into a world where asset managers are going to have to offer more than products. They are going to have to offer solutions to their clients,” El-Erian said.

“Why?” he asked, “because correlations are changing. Look at commodities — commodities have been coming down while equities have been going up. That is a very strange correlation historically. It reflects the fact that we have the interference of central banks with the functioning of markets.”

This interference, along with weak growth in China, Japan and Europe, means the United States — while doing better than the rest of the world — “is facing headwinds,” the economist notes.

“Over there, central banks are being forced to do even more,” El-Erian said. “There’s a growing divergence in growth [and] monetary policy around the world, which is causing quite a bit of issues for us.”

Unlike the United States, other countries are cutting interest rates. This divergence is causing the U.S. dollar to strengthen.

Plus, El-Erian points out, equity markets “are getting artificially boosted by central bank liquidity and need to be validated by economic fundamentals,” he said. “That’s a really critical issue going forward.” 

Global Imbalances

The U.S. currency is at a seven-year high with tighter monetary policy and stronger economic indicators than other countries.

“In theory, this helps to rebalance the global economy,” the expert said. “In reality, [U.S.] exports do less well, and the volatility of foreign-exchange markets translates into other markets. It’s not great, but it is understandable news given policy divergence, and divergence is a key word in 2015.”

Lower oil prices “undoubtedly are going to help consumers,” especially those in lower-income segments, El-Erian said. For consumers, it’s a net positive.”

For countries that export oil like Russia, which has seen some $130 billion in capital flight so far this year, “It’s a mess,” he said. “Their economy is being impacted by sanctions… lower oil prices, its currency has fallen a lot, and capital is fleeing.”

There are multiple risks to investing in Russia, El-Erian states, including inflation. “Russia has traded off adventure in Ukraine for domestic, economic and financial instability,” he said.  

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