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    Gavekal Research

    Macron Is Muddling Through

    As the economy weakens, yellow-vested agitators show no sign of giving up on their campaign to block President Emmanuel Macron’s effort to change the way France works. I have argued against the increasingly mainstream view that Macron is a busted flush whose efforts to reform an unreformable France are doomed to fail and am sticking with that position.

    0
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    Gavekal Research

    A Good News Story From The US

    As the record government shutdown denies Americans vital services and federal workers paychecks, the US has hardly been putting its best foot forward. While we don't expect this political impasse to change the growth trajectory, it does weigh on the market mood. Against such a dour backdrop, we think a good news story from the US economy can be easily missed.

    0
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    Gavekal Dragonomics

    It's Not All Bad News In Property

    China’s property market keeps delivering bad news: declines in housing sales, land sales and prices have deepened in recent months. But Rosealea sees some positive signs in easing local government policies, lower bank funding costs, and strong momentum in construction. In this piece, she explains why she is not joining the property-market bears.

    0
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    Gavekal Dragonomics

    Video: China In 2019

    Washington and Beijing will likely find some kind of accommodation on trade and China’s economy will suffer a tough first quarter that sees the authorities adopt a range of counter-cyclical measures. In this video interview, Arthur outlines our key China views for 2019 and offers investment recommendations for the renminbi, bonds and the Chinese equity market.

    0
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    Gavekal Research

    A Silly Recommendation

    The euro just celebrated its 20th anniversary to scant fanfare. Hardly surprising, given that it caused a Greek depression, decline in Italy’s private sector GDP and a German current account surplus that has exported deflationary pressure to Europe and beyond. Against this grim backdrop, today’s note will consider whether now is the time to buy eurozone financials.

    0
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    Gavekal Research

    The Big Questions For 2019

    The last quarter of 2018 proved to be something of a horror show for most investors and despite this year starting with a firmer tone, the investment landscape looks to have changed in a fairly profound way. In this report, Louis considers the major shifts in the investment environment and asks whether these conditions will persist through 2019.

    0
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    Gavekal Research

    Awaiting India's Electoral Boost

    Two recent events have changed the calculus for investors in India. First, the ruling BJP took an electoral battering in three heartland states, imperiling its bid for general re-election. Second, in December the government appointed a new RBI governor. Investors can expect looser fiscal and monetary policies as the BJP pulls out the stops to ensure victory.

    3
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    Gavekal Research

    Beyond The US Dollar-Yen Flash Crash

    The consensus is that last Wednesday’s “flash crash” in the US dollar-yen exchange rate was sparked by a flight to safety in extremely thin trading while Japanese markets were closed for a holiday. Fair enough—but it does not explain why the yen has still strengthened 5% against the US dollar since early October.

    0
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    Gavekal Dragonomics

    A Cold Winter In China's Job Market

    China’s job market was an early casualty of the US-China trade conflict, with industrial layoffs accelerating to a pace last seen in 2015-6. But Ernan argues that the situation is worse this time, as service-sector employers are being squeezed by tighter regulations. The weaker job market means a worsening outlook for household spending in 2019.

    0
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    Gavekal Research

    Strategy Monthly: The Hope-Vs-Despair Smackdown Of 2019

    The massive sell-off in December left global equities on the precipice of a real bear market. Hope and despair are finely poised, but we find a bit more reason for hope. The US and China will both slow, but the US should avoid recession and Chinese growth should stay above 6%. Political and trade-war risk is lower, and liquidity pressures will ease. US equities and EM assets, especially local-currency bonds, both promise positive returns.

    0
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    Gavekal Research

    What To Watch In Chinese A-Shares

    Chinese A-shares were the world’s worst-performing major equity market in 2018. For the market to rally in 2019, three factors will need to show signs of clarity and improvement: China’s macro policy direction, liquidity squeezes in the bond and equity markets, and the trade war with the US.

    0
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    Gavekal Dragonomics

    More Than RRR Cuts Needed To Stabilize Growth

    After the central bank's latest cut in bank reserve requirements, the key question is not whether Beijing will continue to loosen policy, but when its measures will begin to have a visible impact. In this piece, Chen Long argues that it will take several more months of easing before the economy and stock market begin to feel the benefit.

    0
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    Gavekal Research

    Searching For A European Catalyst

    With 2019 not yet a week old, the eurozone is already looking uncomfortably like the odd man out. With the world’s big three economies heading more deeply into a synchronous slowdown, policymakers in the US and China are showing their readiness to alter course. European policymakers have displayed no comparable flexibility.

    0
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    Gavekal Research

    This Century's Suez Crisis

    China’s “Belt and Road” initiative is a clear bid by Beijing to challenge the incumbent imperial power: the US. And in an age when the highest-value commodities are not physical goods, but the binary digits zipping around the world at the speed of light, the battleground of this struggle for dominance will be telecommunication networks.

    5
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    Gavekal Research

    Rollover In The US, Not Recession

    This week’s revenue forecast downgrades from Apple and Delta Air Lines and Thursday’s steep dive in the ISM manufacturing PMI only appeared to confirm what market participants already knew: US growth is rolling over. Yet despite the recent sell-off in equities and the further flattening of the US yield curve, we see no recession on the horizon.

    0
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    Gavekal Dragonomics

    China And The US Still Hold The Keys To Markets' Fate

    In 2018 liquidity tightening in the US and China combined with trade war fears to make a miserable year for markets. In 2019 the same forces will be at work but the outcomes may differ. The key questions are: can the US and China work out a trade deal? How bad is the Chinese slowdown and how will Beijing respond? And how much will the Fed tighten?

    4
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    Gavekal Research

    The Market Weighing-Machine

    If there is one useful conclusion for investors from the crazy year that has just ended, maybe it is this: as they say in Hollywood, “Nobody knows anything.” The equity market predicted a boom while the bond market predicted recession, and then reversed positions. The consolation for investors should be that the market is a voting machine in the short term, but a weighing machine in the long term.

    2
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    Gavekal Research

    A Future For Value Investing

    Financial theory teaches that, in order to determine the price of an asset, we should take its foreseeable future cash-flows, discount them by a risk-free rate to which we can add a risk premium, and then beyond these cash-flows ascribe a “residual value” to the business. So it’s an easy game—we only need to determine four things: the future cash-flows, the direction of the risk-free rate, the level of the risk premium, and the residual value....

    1
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    Gavekal Research

    A Sober End To The Year

    For investors around the world, 2018 proved to be “challenging”. Yet to Gavekal’s clients, hopefully the year’s difficulties did not come as a surprise. Just over 12 months ago, early in December 2017, I published a paper entitled From A Ferrari To A Jeep advising investors to reduce the volatility of their portfolios.

    2
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    Gavekal Research

    More Half Full Than Half Empty

    Despite dovish comments from the Federal Reserve about the future trajectory of interest rates, US equities fell further on Wednesday. The S&P 500 has now fallen -14% since early October. Meanwhile, 10-year treasury prices have risen almost 5%. Momentum traders will therefore find good reason to shun equities and add exposure to long-dated treasuries. We suggest doing the opposite.

    0
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    Gavekal Dragonomics

    Why China Can Succeed In Tech

    Technology is at the heart of the US-China trade conflict. The US fears that China will challenge its technological leadership, and those fears are not without foundation. In this piece, Dan argues that China is in fact likely to succeed in many of its technological goals—but because of successful companies rather than big government plans.

    0
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    Gavekal Research

    A New Engine Needed

    As the European Central Bank halts net new asset purchases and ends its balance sheet expansion, European equities are back at almost exactly the same level as in December 2014, on the eve of the ECB’s announcement of quantitative easing. Clearly, with extraordinary monetary stimulus no longer in the mix, European stocks will need a different driver if they are to make gains in 2019.

    2
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    Gavekal Research

    Getting Out Of The Liquidity Squeeze

    With the Trump-Xi summit, compromise between Rome and Brussels, and the oil price down, all the ingredients should have been in the mix for a Santa Claus rally. Instead it's been an ugly few weeks in the markets, which strongly suggests no let up yet in this year's liquidity squeeze. In this detailed report, Louis looks back at recent history to determine what forces might bring the squeeze to an end next year, and therefore what asset...

    0
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    Gavekal Research

    A New Risk-Reward Equation In EMs

    US markets have come back to earth with a bump on a reassessment of risk and growth prospects. As a result, investors are betting on a less hawkish Federal Reserve and a weaker US dollar, both of which are a boon to hard-pressed emerging markets. The question is: do investors gain more from a more favorable US dollar liquidity environment than they lose from a growth picture clouded by a slowing China and unresolved trade tensions?

    2
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    Gavekal Research

    Perhaps The Most Important Chart I have Ever Published

    In my Wicksellian world, when the “market rate of interest” (cost of capital) moves above the “natural rate of interest” (return on capital) a recession usually follows. Italy offers an interesting case in point as it has spent so much time since the euro’s launch operating below this critical threshold.

    5
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    Gavekal Dragonomics

    2019 Will Get Off To A Rocky Start

    China’s growth data continue to disappoint, as Beijing’s easing policies have not still gotten traction. In this piece, Chen Long explains his outlook for 2019: more easing is coming, but it will take a while for those policy changes to deliver a stabilization in growth. That means there will likely be more bad economic news through early 2019.

    8
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    Gavekal Research

    Our 2018 Holiday Reading List

    “Books,” wrote Anthony Powell, “do furnish a room.” As author of the million-word, 12-volume A Dance To The Music of Time, Powell was something of an authority on the subject. But it is unlikely even his library was as eclectically furnished as Gavekal’s. If anything, our 2018 holiday reading list is even more varied than those of recent years. Sure, we’ve read and reviewed the economic and financial heavyweights: Barry Eichengreen on currencies...

    1
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    Gavekal Research

    Europe's Changed Policy Mix

    Until last week it was possible to make the case that the EU could still push ahead with major structural reform under the current political configuration. After a continuity candidate took over as head of Germany’s governing party and Macron turned on the fiscal spigots in France to buy off political dissent, that is no longer the case.

    4
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call December 2018

    In the final Gavekal Research Conference Call of the year, Louis-Vincent Gave, Anatole Kaletsky and Charles Gave shared their perspectives on a year which has been challenging for all asset classes, and offered their thoughts on what could be in store for investors in 2019.

    0
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    Gavekal Research

    Understanding The Next Bear Market

    My career in financial markets began in January 1971, which means I’ve seen a few bull and bear markets. A common trait of bear markets is that as the big decline starts, most investors have no idea why asset prices are falling. At some point, perhaps much later, the root cause of the marauding bear becomes clear and this revelation triggers the final phase of the sell-off. Hence, in light of the recent pull-backs, readers may like to consider...

    6
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    Gavekal Dragonomics

    The Supply-Chain Migration Begins

    The US-China trade conflict has changed the equation for multinational companies’ supply chains in China. Higher tariffs and increased uncertainty are pushing some firms to invest more in other locations. But Dan argues that most firms have strong reasons to stay in China, so the shift in supply chains will be more of a trickle than a flood.

    0
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    Gavekal Research

    Drinking Red Wine And Buying Italy

    A Gavekal rule of thumb has it that investors can safely invest in economies where the “working class” mostly drink beer but should be careful in places where theymostly drink red wine. I make this observation as investors face a quandary among the wine drinkers: France versus Italy. The assumption in the spring was that holding Italian bonds was crazy, while French paper offered safety. But is that the case?

    1
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    Gavekal Research

    The Brexit Game Of Chicken

    The Brexit roller coaster seemed to come off the rails on Monday with Theresa May’s effort to prevent parliament voting on what looked like her doomed plan to leave the European Union. May’s decision, which had been denied by her most trusted senior ministers right up to the moment it was leaked to the BBC, initially looked like a typical case of the can being kicked down the road. Yet by the time she had finished her parliamentary statement,...

    4
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    Gavekal Research

    A Careless Loss Of Indian Central Bankers

    To lose one central bank governor may be regarded as a misfortune. To lose a second one, as India did yesterday, looks like carelessness bordering on recklessness. Urjit Patel’s resignation, after resisting months of pressure from the ruling BJP to ease credit conditions and hand over some of its cash reserves, is another black mark against the government.

    2
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    Gavekal Research

    Opportunities Beyond The Death Cross

    November’s payroll report gave investors in US equities reason to cheer on Friday as it suggested reduced inflationary pressure, yet they chose to focus on an escalating row over the fate of a top Chinese telecom executive that is intensifying trade tensions with China. A -2.3% fall in the S&P 500 had the technically-inclined scrambling to glean meaning from a “death cross” as the 50-day moving average fell below the 200-day level. We remain...

    2
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    Gavekal Dragonomics

    Steel Prices Have Overshot

    Chinese steel prices suffered their biggest decline in two years in November, falling about 20% over the course of the month. That correction was driven by a combination of a big increase in supply along with worries about future demand. In this piece, Rosealea argues that both problems will be short-lived, and that steel prices can rebound.

    0
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    Gavekal Research

    What Huawei To Go

    The arrest last Saturday in Vancouver airport of the CFO of Chinese telecoms giant Huawei at the request of US prosecutors will have major consequences for investors beyond the short term market volatility it contributed to this week. Reaching a permanent US-China agreement is now much more complicated, and the arrest shows the US can use more than tariffs against China.

    0
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    Gavekal Research

    Strategy Monthly: Three Questions For The Year Ahead

    This has been a miserable year across most asset classes, with markets roiled by tighter US dollar liquidity. Looking into 2019, Louis sees the investment environment being dictated by whether the US dollar liquidity situation really is easing, the overall US policy and the possibility for the “Chimerica” relationship to rupture.

    0
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    Gavekal Research

    The Evolving Trade War

    There is little doubt that the US president is surrounded by advisers who see China as a genuine threat to the long term economic health and geopolitical strength of the United States. But, it is likely that Donald Trump’s most immediate concerns are more down to earth. Specifically, in order to be re-elected in 2020, Trump needs once again to carry states such as Ohio, Michigan and Wisconsin. And it is unlikely that he will be able to win the...

    5
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    Gavekal Research

    Trade, Earnings And The Chinese Equity Market

    Yesterday’s plunge in US equities was partly attributed to fears that the trade war with China is far from settled. A similar mood is taking hold in China: news of the trade truce spurred a rally in Chinese equities on Monday, but gains softened on Tuesday. However, other factors are also weighing on investors in the Shanghai and Shenzhen markets.

    0
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    Gavekal Research

    The Real Gilets Jaunes

    France’s yellow vest protest movement may have been the first since 1789 not to stem from left-wing origins, argues Charles. Instead, it reflected a great uprising by the forgotten people of middle France who have had enough of being the piggy bank that funds the lives of an urban elite which has rigged the system to its favor.

    4
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    Gavekal Research

    Macron’s Reform Program Lives On

    At first sight, the French government’s decision to postpone its proposed fuel tax increases in the face of popular gilet jaune street protests looks a lot like the climb-downs of 1996, 2006 and 2016, all of which saw attempts at economic reform derailed by mass opposition. Cedric argues such a conclusion would be overly hasty.

    1
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    Gavekal Dragonomics

    Paying For Industrial Policy

    China’s ambitious goals to lead in the technologies of the future are backed by huge resources. Since late 2014, there has been an explosion in state-backed funds targeting high technology. Our latest in-depth DeepChina report digs into these government guidance funds to find out how they work, and how successful they will be.

    0
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    Gavekal Research

    Don’t Sweat About The Yield Curve

    At least as interesting as the 1.1% rise in US equities on Monday, following the weekend’s news of a three-month US-China tariff truce, was the day’s decline in long-dated US treasury yields and the concomitant flattening of the US yield curve. But was this bond market action good news or bad for investors?

    5
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    Gavekal Research

    The Next Target Of Trump’s Firepower

    In today’s Daily, Arthur Kroeber offered his analysis of the weekend’s Trump-Xi summit in Buenos Aires. In this short report, Louis takes a slightly different tack, reviewing the series of tumultuous events in recent weeks. His conclusion is that few investors’ portfolios are well positioned for the probable outcome.

    0
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    Gavekal Research

    The Durability Of The Trump-Xi Rally

    The Trump-Xi showdown at the G-20 has produced a truce, and Asian equity markets rallied in response. But Arthur is skeptical of the durability of the rally, as the structural nature of the US-China rivalry was not addressed by the deal, and hardliners in Washington are likely to keep ratcheting up the pressure on Beijing.

    0
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    Gavekal Research

    Winter For Eurozone Credit Growth

    A depressing autumn is turning into a dismal winter in the eurozone, as November’s deteriorating PMIs follow weak third quarter growth—and even a quarter-on-quarter contraction in Germany. Much of the softness can be attributed to poor external demand, especially from China and the emerging markets, and to the ongoing disruption to car sales caused by the introduction of new emissions tests. Together these have hammered European manufacturing,...

    0
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    Gavekal Research

    Christmas Comes Early

    The most cherished gifts often come in small packets, and investors duly cheered just two small words yesterday by the Federal Reserve chairman. In a speech, Jerome Powell said policy rates were “just below” the neutral level. That was a big change from a month earlier when he said they were “a long way from” the not-too-hot-not-too-cold level. This suggests that the pace of interest rate hikes may lessen, while on the same day data was released...

    0
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    Gavekal Dragonomics

    Germany Is Rethinking But Not Rejecting China

    As the US-China trade conflict drags on, both sides are looking to Europe, particularly Germany, for support. Germany does share US concerns about China’s protectionism and expansionism. But it still sees China as an economic boon and is committed to engagement. Berlin is therefore unlikely to fully take the side of either Beijing or Washington.

    0
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    Gavekal Research

    What If Oil Stays At US$50?

    Since early October, oil prices have plunged more than -30%, while the US equity benchmark is down -8%. You don’t have to be Inspector Clouseau to wonder if these moves are related. Since this oil sell-off has unfolded at a time when US economic growth is slowing, my bet is for a negative short-term effect, but a medium term outlook that is fairly cheery.

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