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E.g., 26-03-2017
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    Gavekal Research

    Europe: Ready To Be Reborn From Its Own Ashes?

    Over the past decade, global investors would have been wise to largely ignore eurozone equities. Their underperformance has not been constant, but intermittent policy-driven rallies have become weaker and shallower. Eurozone stocks outperformed for two years after Mario Draghi’s 2012 promise to do “whatever it takes” to save the euro, yet by the time the European Central Bank got around to launching its asset-buying program in 2015 the benefit...

    1
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    Gavekal Research

    Tax Receipts And US Recessions

    When kicking-off two days of Congressional testimony yesterday, Janet Yellen acted to sooth market nerves by declaring the US economy to be in reasonable health, while sounding sufficiently concerned about apparent labor market weakness to hose down worries of an imminent rate raise. To my mind, this is all noise for the simple reason that the question is no longer whether the US faces a recession in the future but more precisely if such a...

    4
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    Gavekal Dragonomics

    Household Savings: A Permanently High Plateau?

    China’s famously high household savings rate is still stuck in the stratosphere: it has hovered around 37-38% of income since 2008. So have the drivers of savings not changed at all in recent years? Far from it. High savings were mainly caused by China’s massive housing boom, and now that the boom is over, savings rates will be grinding lower.

    0
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    Gavekal Research

    Never Mind The Brexit, Look At Eurozone Mid-Caps

    Recent releases of hard and soft macro-economic data point to a cyclical eurozone recovery whose domestic drivers are increasingly robust. On the back of stronger consumption and investment, GDP growth was just revised up to 0.6% QoQ for 1Q16. Unemployment continues to fall and, after a weak start to the year, economic sentiment indicators have rebounded—the ZEW released yesterday for June leapt to 20.2 from 16.8 in May. This improvement is...

    3
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    Gavekal Research

    Brexit Tail Wags The Dog

    If anyone still doubted the claim expressed here on May 25 that politics is now driving global financial markets far more than economics (see The Brexit Vote As Harbinger Of A Populist Age, Or Not), those doubts should have been dispelled by Monday’s trading. From the moment that currency trading started in the New Zealand morning, through the Nikkei and Hang Seng openings in Asia, to the main forex business in London and finally the stock...

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    Gavekal Research

    What Does China’s Propaganda Ministry Do All Day?

    When asked to speak about China at big investment conferences, I often kick-off by asking the audience “who here trusts Chinese data?” When no one raises their hand, my follow-up is generally “OK: 0 out of 250! That’s more than usual”. Beyond getting a cheap laugh, the point is to highlight how most foreign investors are suspicious, and often downright fearful, of China. Such distrust may stem from China being one of the few major economies to...

    1
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    Gavekal Dragonomics

    CEQ: The State Sector’s New Clothes

    In this issue of the CEQ, we take a close look at state-owned enterprises, which lie at the heart of Xi Jinping's strategy for restoring China to greatness. The goal of Xi’s recent policies is clear: to strengthen SOEs and make them more effective instruments of macro management at home, and more powerful agents of national interests abroad.

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    Gavekal Dragonomics

    Villains Or Victims? The Role Of SOEs In China’s Economy

    State-owned enterprises are often blamed for China’s excess capacity, but private firms are the bigger culprits. The real problem is that the government now forces SOEs to act as economic stabilizers, at high cost. This makes them an ever-growing liability to the state.

    0
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    Gavekal Dragonomics

    State Enterprise Reform: Missing In Action

    In 2013, the Third Plenum Decision promised bold reform of the SOEs, to diversify their shareholding and improve their financial performance. Nearly three years on, little remains of that agenda beyond a conflicting jumble of vague directives.

    0
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    Gavekal Dragonomics

    Return Of The Line Ministries

    In the 1990s, Zhu Rongji broke up state-owned conglomerates, to spur efficiency through competition. Now Xi Jinping’s SOE reform aims to bring those conglomerates back to life. The effort will be spearheaded by Xiao Yaqing, whose ambition to turn the state aluminum company into a global metals giant foundered, but who is now the bureaucrat in charge of all central SOEs.

    0
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    Gavekal Dragonomics

    Stability Above All

    The government seeks to keep both GDP growth and the exchange rate as steady as possible ahead of the Communist Party Congress scheduled for the fall of 2017. It may succeed, but probably at the cost of further delaying its structural reform program.

    0
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    Gavekal Dragonomics

    The Future Of China’s Oil Demand

    China’s demand for oil—unlike its need for other commodities—will continue to grow, thanks mainly to greater use of automobiles. Imports, though, will be more volatile, and determined largely by how fast the country tries to fill its strategic reserves, and how quickly refiners adapt to changing consumption patterns.

    0
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    Gavekal Dragonomics

    The Long March To Europe

    China’s investment in Europe is surging, as Chinese firms step up their M&A efforts and put more money into infrastructure ventures. European authorities must do a more active job of weighing the economic benefits of this investment against the political risks.

    0
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    Gavekal Dragonomics

    Hope And Hard Work On A Shanghai Street

    Accounts of economies are often bloodless affairs, so it is a relief when a writer comes along who can bring to life the people buried beneath the GDP statistics. Rob Schmitz has done just this in a small gem of a book that illuminates China’s economic transformations through portraits of the residents of his neighborhood.

    0
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    Gavekal Dragonomics

    Making Sense Of The Economic Policy Mess

    Xi Jinping’s economic policy seems like a mass of confusion. This is only because he has been coy about stating his true aim: to make the state sector as strong as possible.

    0
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    Gavekal Research

    India’s Reform Agenda After Rajan

    Over the weekend, Reserve Bank of India governor Raghuram Rajan announced he will not seek an extension of his three-year term, which ends in September. His unexpected decision will dampen sentiment in the near term, as it follows—and was perhaps even precipitated by—a high decibel campaign seeking his ouster by members of India’s ruling BJP. However, fears that the hard-won credibility of the RBI under Rajan will be undermined by the...

    2
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    Gavekal Research

    Japan As Safe Haven

    Global markets are in a risk-off mood as investors scramble to find a sure thing in an uncertain world. The populist surge in Europe and the US is ending long held “certainties” about the developed democracies, while next week’s Brexit vote could set in train the European Union’s break-up. Ironically, as investors scramble for stable ground, Japan is proving an island of calm, at least for those with an eye to capital preservation. The yen has...

    0
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    Gavekal Research

    Beyond Brexit, A More Hawkish Fed

    After the Federal Open Market Committee yesterday revised down both its growth forecast and its projection for the future trajectory of US interest rates, market expectations of rate hikes have collapsed. Fed fund futures are now pricing the probability of a July rate hike at just 6%, down from 16% immediately before the FOMC’s meeting. In reaction, the yield on 10-year treasuries has dipped further below the 1.6% mark to 1.56%, the lowest since...

    0
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    Gavekal Research

    Populism And A New Financial Crisis

    The febrile behavior of financial markets ahead of Britain’s EU referendum shows that the voting on June 23 will influence economic and political conditions around the world far more profoundly than Britain’s share of 4% in global GDP might suggest. This outsize impact has at least three explanations.

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    Gavekal Research

    A-Shares: The Food Is Terrible, And Such Small Portions

    The decision by MSCI not to include China’s onshore A-share market in its Emerging Markets index should have come as no surprise. Despite real progress, there are still regulatory roadblocks to inclusion that have yet to be dismantled. In any case, the resulting fund flows into the A-share market would be smaller than many observers expect.

    0
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    Gavekal Research

    Never Do On Monday What You Wish You’d Done On Friday

    The first rule of bear markets is never to do on Monday what you wish you had done on Friday. During bear markets, the constant stream of negative stories from the media leads to a build-up of anxiety among investors, anxiety that pours out first thing on Monday morning on trading floors everywhere.

    1
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    Gavekal Research

    Boomerang Kids Won’t Come Back To Hurt US Housing

    Hand-wringing features about “boomerang kids” have become a staple of the US media in recent years. Invariably they tell of a generation that left college with record student debts, only to find themselves looking for work in a depressed post-crisis employment market with little demand for newly-minted graduates. Unable to find jobs matching their qualifications, many ended up serving coffee in Starbucks, or doing other menial work on near-...

    0
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    Gavekal Research

    Fear Not Brexit

    The UK political class is all in a flutter as the latest European Union referendum polls show an apparent rising tide of support for “Leave”. Having orchestrated the great and good into warning of catastrophe should a Brexit materialize, it would seem that “project fear” is not cutting through. I tend to have strong political convictions and perhaps for this reason I have a lousy record of guesstimating election outcomes. Since the UK referendum...

    8
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    Gavekal Dragonomics

    Capex Lacks All Conviction

    China’s latest debt-driven stimulus has stabilized growth, but the benefits have been narrow: outside infrastructure and real estate, private investment has not picked up at all. Total investment growth will be higher in 2016, but a renewed slowdown of capital spending in 2017 is very likely, as companies adjust to the end of the housing boom.

    0
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    Gavekal Research

    The ECB Embraces Total QE

    The European Central Bank pushed further into uncharted territory this week, when it made its first foray into the corporate bond market. Three months after announcing its new initiative, the ECB added the Corporate Sector Purchase Program, or CSPP, to its alphabet soup of monetary operations. Under the CSPP, the central bank will make purchases of investment grade non-bank corporate debt, to go with the sovereign debt, covered bonds and asset-...

    0
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    Gavekal Research

    The French Investment Pick-Up

    France may be racked by strikes and edgy about terrorist threats as a major soccer tournament it is hosting kicks off today, but the eurozone’s second biggest economy has a decent story to tell. Consumer confidence is at a post-2007 high, recent GDP readings have surprised on the upside and even jobless claims hint at an improvement in the labor market (see Is France Getting Better?). All of this perhaps explains why French investment for 1Q16...

    2
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    Gavekal Research

    South China Sea Risks

    In the next few weeks the Permanent Court of Arbitration in The Hague will likely rule in favor of the Philippines in its dispute with China over territorial claims in the South China Sea. Beijing’s reaction will show to what extent China is prepared to defy international law to defend what it claims are “core interests”.

    5
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    Gavekal Research

    The Outlook For The US$ Vs The Euro

    When coming to investment decisions in the financial markets, I always try to be as “rules-based” as I possibly can. By that, I mean that I look as closely as I can at the available evidence to determine what has worked in the past—and what has not. This is difficult enough when analyzing the US bond market or the French stock market, but when it comes to exchange rates, the task reaches a whole new level of complexity. It is necessary to look...

    5
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    Gavekal Research

    Another Take On The Payrolls

    The last two days have seen my colleagues offer erudite commentary on the meaning of the US non-farm payroll report for May (see Thinking Dark Thoughts and The Dissonance In Jobs). I would simply observe that things take time to properly coalesce and the message from the US labor market is consistent with recessionary signals dating back to the 1960s.

    0
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    Gavekal Dragonomics

    The Housing Cycle Is Aging Rapidly

    The latest up-cycle in China’s housing sales has probably reached its peak. Major cities saw a marked step-down in sales growth in May, and absent major new stimulus national data will follow suit. Housing sales are still on pace for full-year growth of over 10%, but will slow to single digits later in 2016, and 2017 will see a deeper correction.

    0
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    Gavekal Research

    The Dissonance In Jobs

    This week has seen Gavekal senior partners reach a rare consensus of sorts, with Anatole acknowledging that May’s “pig ugly” US payrolls report upped the chances of Charles’s US recession scenario playing out (see Thinking Dark Thoughts). For me, the report offers a classic mixed signal: on the one hand the slowdown in US employment growth could stem from firms dialing back hiring in anticipation of trouble ahead, or alternatively it could be...

    0
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    Gavekal Research

    The New Material

    The US$1.8trn global aviation sector shows no sign of slowing—last year passenger numbers rose by 6.5%. The race is on to deliver cheaper, more efficient aircraft. The big winners from this trend may be makers of composite carbon fiber. The market for carbon fiber used in aircraft is set to grow from US$17.3bn in 2014 to US$34.2bn by 2020.

    1
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    Gavekal Dragonomics

    How Fast Is China’s Debt Really Growing?

    The latest debate about Chinese statistics centers on debt: are the figures capturing the size of the latest stimulus? Official credit growth is now 12-13%, but total credit is actually rising by 16-18% due to government debt and new forms of shadow finance. Yet regardless of the exact measure, China’s national leverage is still rising rapidly.

    14
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    Gavekal Research

    Thinking Dark Thoughts

    You can put lipstick on a pig, but there is no way of disguising that the US payrolls last Friday were pig-ugly. For those of us of the bullish persuasion, May’s job growth of only 38,000, the weakest monthly figure since the post-recession employment recovery began in October 2010, sent the first credible signal that Charles’s call for a US recession and full-scale equity bear market could be right after all.

    1
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    Gavekal Research

    On Populism

    The ruling class, which over the last 20 years has done so much to manage our decline, has found a new enemy in the shape of political “populism.” While acknowledging that times have been tough, what so annoys this elite is the realization that “we the people” do not recognize that a complicated world is being run in our own best interests. For this reason it is no great surprise that such ingrates have been labelled populists.

    7
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    Gavekal Research

    Japan: Twice Bitten, Thrice Shy

    It was a case of twice bitten, thrice shy. This week Shinzo Abe announced he will postpone next April’s planned 2pp increase in Japan’s sales tax until October 2019—a step the prime minister had previously sworn he would only take in a Lehman-scale crisis. Despite Abe’s protestations to the contrary at last weekend’s G-7 meeting, the world economy is facing no such meltdown. Nevertheless, deferring the tax hike makes sense. Previous increases in...

    0
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    Gavekal Research

    A Backdoor Resolution For Greece, And The Eurozone

    A Greek crisis was avoided last week after European creditors agreed to a €10.3bn disbursement to Athens without the International Monetary Fund contributing funds. The idea is for the Europeans and the IMF to thrash out a compromise that grants Greece sufficient debt relief to make its program sustainable. On one level this mucky deal seemed just another case of the can being kicked down the road, yet on another there is now a “back door”...

    2
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    Gavekal Research

    Reduced Chance Of Renminbi Storms

    The recent strength of the dollar has pushed the renminbi back down to the lows of January. And the renminbi could make new lows if Fed rate hikes trigger a run-up in the dollar—a big if, with the dollar still stuck in a trading range. But such moves are unlikely to trigger anything like the global volatility caused by previous depreciations.

    2
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    Gavekal Research

    The Gavekal Monthly: Risks For Equities—Populism And The Dollar

    Even as markets nudge higher, investors are unnerved by a rising tide of populist politics whose tangible expression will be tested on June 23, when UK voters must choose between Brexit or a less than perfect status quo inside the European Union. Investors are also concerned that the US dollar will strengthen further as the Federal Reserve mulls the question of whether to raise interest rates. In this monthly our writers weigh these big issues...

    0
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    Gavekal Dragonomics

    The Risk In The Service Sector's Rise

    The rising share of services in China’s GDP is often touted as a positive change to a more sustainable structure. But this change is less positive than it appears, since the fastest-growing part of the service sector in recent years has been finance. The rapid financialization of the economy is a process that increases rather than reduces risk.

    0
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    Gavekal Research

    Much Ado About Nothing Much

    A quick glance through the financial media would lead the casual observer to conclude that the US currency has been, and remains, in a bull market. After all, with the Federal Reserve now supposedly back on a tightening track, how can the US dollar fail to rise? This almost universal belief makes the recent price action all the more interesting for, let’s face it, everything that could have gone right for the US dollar in the past year has gone...

    3
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    Gavekal Research

    Wicksell’s Portfolio

    Will has spent much of the last year developing a return-on-capital theory of US economic cycles with a particular focus on recession turning points. The logical extension of this work is to apply it to the task of portfolio construction and more particularly to the current US market situation.

    8
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    Gavekal Research

    The Death Knell For The French Left

    To outside observers the latest round of strikes and demonstrations to sweep France must seem a case of déja vu all over again. For the fourth time in a little over 20 years, left wing trade unions have called mass walk-outs to protest against proposed government reforms of France’s notoriously rigid labor market. As before, the transport system has been thrown into chaos, with air traffic controllers en grève, and blockades of the country’s oil...

    2
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    Gavekal Research

    How Much Geopolitical Risk In Asia?

    With the global economy in the doldrums and most asset markets stuck in neutral, the last thing that is needed is a trade war or an armed confrontation in the world’s most vibrant region, East Asia. The risk of either is low, but inching up.

    3
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    Gavekal Dragonomics

    Despite The Bounce, Housing Has Peaked

    The rebound in China’s housing sales early this year raises the obvious question of whether we were too quick to proclaim the peak in housing demand. Housing sales in 2016 are indeed on track to surpass 2013, but this is a stimulus-driven bounce. The long-term trend still points to a 10-20% decline in annual construction volume by 2025.

    0
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    Gavekal Research

    Waiting For Another Tantrum

    One of the most powerful phenomena to hit markets can be the counter-trend reversal, especially when it is fueled by surprise and a big dollop of anxiety. Given the focus on the Fed’s upcoming policy decision, coming at a time when global bond yields are stuck at ultra-low levels, is another hissy fit possible?

    0
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    Gavekal Research

    The Next Move In US High-Yield

    At the nadir of the market sell-off in February, the Federal Reserve offered more dovish than expected guidance on its monetary policy intentions and so backstopped the crumbling US high-yield bond market. Since then, high-yield bond prices have rallied back to their early-2015 level with the last month seeing a consolidation. Yet with the chances of a Fed rate hike in June on the up and the fundamentals of the US economy looking less than...

    0
  • Gavekal Research

    The Brexit Vote As Harbinger Of A Populist Age, Or Not

    The biggest threat to the world economy is no longer slumping industry in China, failing banks in Italy, unpredictable monetary policies or seesawing oil prices. All these familiar economic problems now pale compared with the political risks of Brexit, a Trump presidency and resurgent nationalism in Germany. Given the common underlying tensions driving political populism in the big advanced economies, Anatole argues that Britons will on June 23...

    9
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    Gavekal Research

    When Rules Are There To be Broken

    It has become an article of faith for Europe-watchers that the one thing holding together the single currency area is super easy monetary policy. Yet in light of Brussels deficit policing bureaucracy having recently been revealed as a toothless tiger, expansionary fiscal policy can perhaps be added to the list. It is hardly news that Europe is back-tracking from German-dictated austerity, but for the first time officials are openly admitting...

    3
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    Gavekal Dragonomics

    The Migrant Housing Solution

    In hundreds of smaller cities around China, rows of apartment blocks lie unsold. Can this inventory ever be absorbed? The government hopes migrant workers, long too poor to urban property, will be part of the solution. On a recent trip to southwest China, I did find signs that migrants are becoming a factor at the low end of the housing market.

    0
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