Macro View: Make Way for the MIPS

Global CIO Commentary by Scott Minerd

“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 BRICs vs. The MIPS

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

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.

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.

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.