At Davos, Inequality and Africa in Focus

Global CIO Commentary by Scott Minerd

As the 2014 World Economic Forum gathers this week in Davos, the focus of discussions has shifted significantly from last year. Then, the dialogue was almost exclusively around the developing consensus that the global financial crisis was finally ending. Financial assets were again safe for widows and orphans and financial market returns for 2013 proved the consensus correct.

Now, the focus has shifted to two new topics: growing income inequality as a risk to economic growth and social stability and the emergence of Africa as an economic force. Neither of these is a big surprise as neither is new. But the fact that these are the primary focus this year tells us that these topics will likely become more prominent in 2014.

The issue of income inequality will likely be prominent in U.S. Congressional mid-term elections in November. Republican Paul Ryan has already been criticizing the failure of Obama administration policies, saying the manner in which it tackled the 2008 financial crisis exacerbated the problem. Republicans and Democrats will both make the issue central as they seek to win over swing voters. Strap in! The debate on inequality will likely shape economic policy and the structural forces that will determine long-term economic growth and investment returns.

As for Africa, the cat is out of the bag that the opportunity there is huge. Sub-Saharan African nations are working together and making significant political and structural progress which will allow rapid economic growth in the coming decades. My meetings here with leaders from Rwanda and with a delegation from Nigeria on Monday in London remind me of experiences I had on my first trip to China in 1988. It is no longer prudent for investors to ignore Africa. It is becoming the greatest growth opportunity in the world. The good news is that if you invest now you are early!

Rising Capacity Utilization Suggests More U.S. Corporate CapEx Spending

Historically, a meaningful increase in capacity utilization is followed by acceleration in capital expenditure (CapEx). As the U.S. industrial capacity utilization rate in December increased to the highest level since June 2008, we should expect CapEx, measured by the U.S. private non-residential investments, to grow strongly in the next few quarters, adding further momentum to the U.S. economic expansion.

U.S. REAL PRIVATE NON-RESIDENTIAL INVESTMENTS YOY% VS. U.S. CAPACITY UTILIZATION RATE YOY%

Source: Haver, Guggenheim Investments. Data of 12/31/2013 for capacity utilization and as of 9/30/2013 for real private non-residential investment.

Economic Data Releases

Industrial Output Continues Gains While Housing Market Cools

• Industrial production increased for a fifth straight month in December, growing 0.3%.
• Housing starts fell 9.8% to an annualized pace of 999,000 in December following November’s surge in starts.
• Building permits decreased more than expected, down 3.0% to 986,000. The decrease comes after December’s 2.1% drop.
• The NAHB Housing Market Index unexpectedly fell in January, ticking down from 57 to 56.
• Initial jobless claims declined modestly for the week ended January 11th, falling 2,000 to 326,000.
• University of Michigan consumer confidence surprised to the downside in January, dropping from 82.5 to 80.4.
• The Philadelphia Fed Business Outlook Index increased to 9.4 in January after falling the previous three months.
• The CPI rose 0.3% from November to December, pushing the year-over-year reading up to 1.5%, the highest in four months.

German Investor Confidence Falters, Chinese Growth Edges Down

• Germany’s ZEW survey of investor expectations unexpectedly fell in January, down to 61.7 from 62.0, the first decrease in six months.
• U.K. retail sales, excluding autos, jumped 2.8% in December. Sales ended the year 6.1% higher than a year earlier.
• China’s fourth quarter GDP grew 7.7% year-over-year, ticking down from 7.8% the previous quarter.
• Chinese industrial production slowed in December, declining from 10.0% year-over-year to 9.7%.
• Retail sales in China inched down to 13.6% year-over-year from 13.7% in November.

Important Notices and Disclosures

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. ©2014, 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.

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