(February 22, 2011) — Mohamed El-Erian, CEO and co-CIO of the Pacific Investment Management Co. (PIMCO), asserts that global markets paid minimal attention to the Egyptian and Tunisian revolutions, as they were viewed as lacking both “systematic and financial significance.” Yet, he claims that mounting protests over the weekend have the potential to be the tipping point to trigger shock in the Middle East.

In an article featured in the Financial Times, El-Erian writes that while both Egypt and Tunisia are by no means economic powers, they are both catalysts for global demand and price dynamics. He writes in the FT: “In the short run, regional developments will be stagflationary for the global economy due to three main factors – First, higher oil prices will increase production costs and act as a tax on consumers. Second, greater precautionary stockpiling around the world will intensify pressures on commodities as a whole, aggravating the impact of demand-supply imbalances and large injections of liquidity. Third, the region will be a smaller market for other countries’ exports.”

Thus, he warns that “there is little that western countries can do to offset short-term stagflationary winds.” Over time, he says, market apprehension is likely to give way as the impact of greater long-term stability becomes stronger.

In regards to unrest in the Middle East, the situation in Egypt has raised a red flag for institutional investors in that they must become more aware of the issue of sovereign debt, according to Cynthia Steer, managing director of investment strategy at Russell Investments. “Conflict within emerging markets in the Middle East is part of a natural evolution,” she told aiCIO earlier this month, noting that the strife puts a spotlight on the need for institutional investors to transition from focusing on asset allocation to focusing on country-risk. “This crisis is reflective of the fact that we, as institutional investors, need to move faster in understanding this.”

Matt Stroud, a member of Towers Watson Investment’s Global Investment Committee, responsible for the firm’s views on the economy and markets, says that while Towers Watson Investment has taken a more cautious approach to emerging markets with the recent issues in Egypt, he hasn’t witnessed a noticeable difference in regards to his clients voicing heightened concern about further turmoil in emerging markets. The concern, he explains, has been more focused on emerging equity market valuations after a strong run in 2010 not adequately discounting the heightened political risks investors face relative to developed markets. “The perceived comfort with developed market relative to emerging market equities in the current environment may be dominated by the broad sense that the economies in the developed world are improving and developed world equity markets look to us to be around fair value, with the global economy set to grow in 2011 as well,” he says. “We’re keeping our eyes wide open in regard to the situation in Egypt, looking to see if it takes a turn toward more violence, and certainly the picture could change, but so far clients are anticipating good economic activity and equity returns within expectations.” He adds: “To address potential worries, Towers Watson Investment would want to make sure we understood whether client fears stem from something specific in regards to Egypt, such as a spike in the price of certain commodities like oil, or whether it stems from something broader, such as geopolitical risk.”