Scott Minerd's  Instablog

It appears the BRICs (Brazil, Russia, India, and China) will not see the same rate of increases in output moving forward. These economies are quickly maturing, and with such a large annual nominal GDP as a denominator, growth is no longer possible at the same rate. With that said, there is still a great deal of room for exponential growth in other emerging markets.

One group of countries that looks particularly attractive from an investment standpoint is the MIPS, which includes Malaysia, Indonesia, the Philippines, and Singapore. These countries have favorable demographics, and with the exception of Singapore, which is more mature, their respective stages of development, infrastructure needs, and low labor costs bode well for the prospects for growth in the coming years. Singapore is uniquely positioned as a financial hub with a favorable political climate, and will continue to benefit from Asia's growth. If the trajectory these nations take is comparable to the rate at which the BRICs have grown over the past decade, their equity market returns are likely to be extremely robust, possibly in the order of several hundred percent between now and the middle of the next decade.

The equity markets in Brazil, Russia, India, and China (the BRICs) have experienced tremendous appreciation due to economic growth, increasing by over 600% over the decade following the Asian Financial Crisis. However, the potential economic growth rate in these countries appears to have slowed as their focus has shifted to fixing outstanding structural issues.

By contrast, southeastern Asian countries including Malaysia, Indonesia, the Philippines, and Singapore (the MIPS) could enjoy stronger growth over the next decade, owing to improved fundamentals and positive demographic trends. Since the end of the global financial crisis, equity markets in the MIPS have substantially outperformed the BRICs.

Normalized Equity Index Performance Following the End of Crisis

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Source: MSCI, Bloomberg, Guggenheim Investments. *Note: MIPS Index is the average of MSCI country index for Singapore, Malaysia, Indonesia, and Philippines, weighted by PPP-based USD GDP. All equity indices are nominal price indices, due to data availability for total return series. All equity indices are denominated in USD.

Economic Data Releases

• Non-Farm payrolls rose by 165,000 in April, with the prior two months revised up by 114,000.
• The unemployment rate fell for a third consecutive month to 7.5%.
• Hourly earnings rose 0.2% from March to April, while average weekly hours fell back to 34.4.
• Unemployment claims dropped to 324,000 for the week ended April 27th, the lowest amount since January 2008.
• Manufacturing activity slowed for the second consecutive month, according to the April ISM manufacturing PMI of 50.7.
• March factory orders fell by the most since August.
• The ISM non-manufacturing index decreased to 53.1 in April, the slowest pace of expansion in nine months.
• The trade deficit narrowed 11% in February to $38.8 billion, as imports fell 2.8%.

• Manufacturing PMIs in the eurozone and Germany were revised up slightly in the final April estimates, but remained in contraction.
• The eurozone composite PMI improved in April to 46.9 from 46.5. Services PMIs were better in France and Italy, with Germany slipping from expansion to contraction.
• Eurozone retail sales fell 0.1% in March, the second consecutive monthly decrease.
• German factory orders unexpectedly rose in March, the first back-to-back monthly increase in one year.
• French industrial production fell more than forecast in March, 0.9%.
• Manufacturing PMIs in China showed slower expansion in April, with the HSBC manufacturing PMI at 50.4 and the official PMI at 50.6.
• China's HSBC services PMI dropped to 51.1 in April, the lowest level since August 2011. The official services PMI also slowed.

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author's opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2013, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Europe's economy is in disarray and the European Union is not addressing its structural problems. It appears, though, that the situation there will improve as policymakers, and the European Central Bank in particular, continue to buy time.

One of the primary problems in Europe is the legacy that the core, namely France and Germany, is more productive than the periphery. This worsened after the formation of the common currency zone because wages grew faster in the periphery, making those countries even less competitive. This has been self-correcting since 2009, with unit labor costs in the periphery falling, while those in the core have risen. Given current projections, we could see unit labor costs between the periphery and the core converge in the next few years. There is still a chance that Europe's crisis could become more severe, but regulators are aware of this risk and appear willing to do what is necessary to prevent it. The longer Europe can cruise at minimum speed, the higher the chances become that we will see a favorable outcome.

Strong Market Sentiment Despite Weak Fundamentals

The yield on the eurozone high yield bond index reached a record low of 5.8% last week, and the spread over the corresponding German government bond yield has fallen to its lowest level since October 2007. Despite bullish sentiments in the eurozone high yield market, the eurozone PMI composite, which typically closely tracks the spread, has remained in contraction for 15 consecutive months. The rising divergence between bond spreads and economic fundamentals in the eurozone may reflect investors' increasing complacency, which is engendered by global central banks' accommodative policies.

EUROZONE HIGH YIELD BOND SPREAD* VS. EUROZONE PMI COMPOSITE

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Source: Barclays, Haver Analytics, Guggenheim Investments. Data as of 4/25/2013. *Note: The spread is the option-adjusted spread over the benchmark German government bond yields.

Economic Data Releases

• First quarter GDP rose 2.5%, weaker than the expected 3.0%. Government spending dropped 4.0%, while personal consumption was up 3.2%.
• Consumer spending rose 0.2% in March after forecasts saw no gain.
• Durable goods orders fell by the most in seven months in March, down 5.7%.
• The Chicago PMI fell in April to 49.0, the first contractionary reading since September 2009.
• University of Michigan consumer confidence in April was revised up to 76.4 in the final estimate, but was still at a three-month low.
• The Conference Board consumer confidence index rebounded to 68.1 in April, after falling to 61.9 in March.
• March pending home sales increased 1.5% after falling last month.
• The S&P/Case-Shiller 20 city home price index rose 9.3% in February from a year earlier, the best gain since 2006.
• Initial jobless claims decreased 16,000 to 339,000 for the week ended April 20th.

• The eurozone unemployment rate ticked up to 12.1% in March, a new record high.
• Consumer prices in the eurozone grew at the slowest yearly pace since 2010, with a CPI of just 1.2% in April.
• Eurozone economic confidence in April dropped to the lowest level since December.
• The German IFO business climate index fell for a second consecutive month during April.
• The CPI in Germany plunged 0.5% in April to the lowest level seen since August 2010.
• German retail sales fell for a second consecutive month, down 0.3% in March.
• U.K. first quarter GDP rose a better-than-expected 0.3% after contracting last quarter.

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author's opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2013, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Although economic fundamentals continue to strengthen, the run-up in asset prices that has unfolded over the past half-year appears to be at risk of a temporary set-back.

The U.S. economy continues to improve, and the housing market and construction spending in particular will make larger contributions to GDP than they have in years. Markets, though, have a tendency to occasionally fall out of line with fundamentals. In 2011, for instance, the economy was gaining strength, but a temporary pull-back in the markets put stocks off nearly 20%, and high yield and bank loan spreads exploded.

Today it appears that the rally that has been in place since the fall of 2012 is becoming frayed. From credits to stocks, there are indications of tiredness, with each advance posting less robust gains than the prior one. This does not portend a bear market, but it does appear increasingly likely that despite the favorable longer-term economic outlook, we will see some sort of correction or consolidation in the near-term.

Five years since the last recession started, payrolls in the U.S. private sector are still 2.9 million less than pre-recession levels. The construction sector, which usually employs only 6% of U.S. total jobs in the private sector, has lost 1.7 million jobs during the same period. With the recovery in the housing market accelerating, hiring in the construction sector is regaining momentum. Over the past three months, construction payrolls have increased by 111,000, accounting for approximately 18% of total job growth in the private sector.

U.S. CONSTRUCTION JOB GAINS AS A SHARE OF TOTAL PRIVATE SECTOR JOB GAINS

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Source: Bureau of Labor Statistics, Bloomberg, Guggenheim Investments. Data as of 2/28/2013.

Economic Data Releases

• Fourth quarter GDP was revised up to 0.4% in the third revision. Consumption was revised down to 1.8%, while investment and net exports were up.
• University of Michigan consumer confidence was revised sharply upward in March, contributing to four consecutive months of increases.
• Personal income grew 1.1% in February, a strong rebound from January's negative growth.
• Personal spending was up 0.7% in February, the highest since September.
• Initial jobless claims rose to 357,000, an increase of 16,000 since the previous week.
• The ISM Manufacturing Index dropped in March by the most since July 2011, from 54.2 to 51.3.
• Construction spending gained a more-than-expected 1.2% in February.
• Pending home sales fell 0.4% in February, after January's 3.8% gain.
• Factory orders grew 3.0% in February, the best in five months.

• Eurozone unemployment remained at 12.0% in February, the highest on record.
• The eurozone manufacturing PMI for March was revised up slightly, from 46.6 to 46.8. PMIs in France and Germany also ticked up after revision.
• German retail sales rose for the second consecutive month during February.
• German unemployment in March rose 13,000, while the unemployment rate remained at 6.9%.
• Retail sales in Italy fell 0.5% in January, the second consecutive month of negative growth.
• China's official manufacturing PMI rose to an 11-month high of 50.9 in March.
• Industrial production in Japan unexpectedly fell for the first time in three months in February.

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author's opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2013, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.