Global CIO Commentary by Scott Minerd
Investment themes tend to last for long periods and often take longer to play out than many investors expect. Nowhere is that more apparent than in bond markets, where there has been much concern about rising interest rates. While U.S. interest rates should rise over the long-term, it is not a major risk in the near-term and will likely make for a benign investment environment. The strong equity returns and rising rates in 2013 were welcome news for pension funds and helped to erase some of their underfunding. Now, they appear ready to rotate back into debt, which should provide solid support for fixed income and subdue the risk of long-term U.S. interest rates rising significantly in the near-term.
Broadly speaking, the ongoing trend of rising stock prices in the United States points to risk-taking that should translate into further spread tightening in credit. On a relative value basis, two appealing pockets within fixed income are likely to be asset-backed securities and municipal bonds.
U.S. economic data has been strong so far this year – a trend that looks promising and which I expect will continue. The strength in the U.S. economy during the fourth quarter of 2013 could translate into GDP growth of about 3 percent and has given the economy and equities a lot of momentum coming into the first quarter of this year. Heavy discounting during the holiday shopping season was a positive for U.S. GDP growth. After several years of tepid growth, there are now powerful forces driving output in the United States and it appears as though the strength will continue through the year. Indeed, economic growth for the full year could reach 3.5 percent, or even higher.
Now, in the United States, Europe, and Asia, most of the macro risks and headwinds that caused volatility in 2013 are behind us. The political gridlock in Washington will ease with mid-term elections looming in November, and the fiscal drag of sequester has been replaced by a lower deficit and expectations of higher tax revenues. Prospects in Europe have improved as periphery economies have become competitive once again and the prospect of a renewed crisis appears to be past. European equities, especially in Italy and Spain, appear undervalued and should be well placed to outperform. In Asia, Japan is pressing ahead with its expansionary Abenomics policies, while China is taking the necessary steps to reform into a consumer-driven economy.
On balance, it appears we are in the best of all worlds for equity and fixed-income investors for the first three to six months of 2014.
Recovery Ahead for Emerging Market Exports
Over the past year and a half, emerging market (EM) export growth has slowed dramatically, hovering near low single digits. Although some of this slowdown may be structural in nature, due to factors such as lost competitiveness and shifting composition of goods traded, the largest factor is probably lackluster external demand from developed countries. Strengthening activity in the United States, which directly accounts for 15 percent of EM exports and a much larger share of finished goods exports, bodes particularly well for EM countries, which could see exports accelerate significantly during 2014.
ESTIMATED FISCAL DRAG ON REAL GDP GROWTH
Source: Haver, Guggenheim Investments. Data as of 12/31/2013. *Note: Emerging markets include all countries in the IMF grouping.
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*Assets under management is as of 12.31.2018 and includes leverage of $12.4bn. Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"), which includes Security Investors, LLC ("SI"), Guggenheim Funds Investment Advisors, LLC, ("GFIA") and Guggenheim Partners Investment Management ("GPIM") the investment advisers to the referenced funds. Securities offered through Guggenheim Funds Distributors, LLC, an affiliate of Guggenheim, SI, GFIA and GPIM.
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