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    Gavekal Research

    The Quandary Of Rising Yields

    Imagine that you had been told at the start of this year that equity markets in the likes of Argentina, Turkey and South Africa would fall by as much as half, that the renminbi would slide by -10% against the US dollar and that Chinese and Hong Kong stocks would be back in a bear market. You would probably have assumed that long-dated treasuries would make a great investment. Yet, here we are, with 30-year treasury yields up about 50bp this year...

    3
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    Gavekal Research

    Heads I Win, Tails I Don’t Lose In Japan

    A glance at the headlines suggests the story in Japan is still “stasis as usual”. As expected, on Wednesday the Bank of Japan reaffirmed its intention to keep interest rates low indefinitely. And later on Thursday, Shinzo Abe is all but sure to fend off a leadership challenge from within his ruling Liberal Democratic Party, setting him on course to become the country’s longest-serving prime minister. In tune with this “no change” refrain,...

    0
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    Gavekal Dragonomics

    The China Inc. Annual Report 2018

    In this chartbook, Thomas outlines the key trends in the fundamentals of China’s corporate sector. Growth in sales and profits has stayed stronger for longer, but is driven mainly by high materials prices. A rebound in capex is starting to fade. Deleveraging continues but more slowly, and may not last much longer as profits cool and debt rises.

    0
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    Gavekal Research

    The Message From US Housing Construction

    Wednesday saw a soft US housing data release for August, pointing to a coming weakening in residential construction. With the Fed raising rates and 10-year treasury yields well above 3%, equity investors may sniff late-cycle decay. KX shares such concerns, but advises investors to hold their noses for a while longer.

    0
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    Gavekal Dragonomics

    Pragmatism Will Prevail On Iranian Oil

    The US is preparing to re-impose sanctions on Iran, threatening to punish any country that continues to buy its oil. China has struck a defiant tone, and many analysts expect Chinese oil companies to ignore the US sanctions. But in this piece, Yanmei argues that Chinese importers have little choice but to sharply reduce their purchases from Iran.

    0
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    Gavekal Research

    When To Buy UK Stocks

    “Deal or no deal” is the question blurring all UK investment decisions. Britain’s exit from the European Union should be settled before the end of the year, but the run-in will be nerve-wracking. Since Prime Minister Theresa May released her halfway-house “Chequers” plan in early July, investors have fretted that the UK may crash out of the EU next March with no new trading relationship in place. My colleague Anatole has consistently downplayed...

    1
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    Gavekal Research

    Digging In For A War Of Attrition

    Donald Trump’s administration has upped the ante in its trade war with China, imposing tariffs on an additional US$200bn of Chinese imports. The tariffs will take effect on September 24 at a rate of 10%, rising to 25% at the beginning of 2019 unless some kind of a deal can be worked out with Beijing. The chances of a deal are vanishingly small.

    3
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    Gavekal Research

    Towards US Goods Price Deflation

    Emerging economies have spent the last three or four months squirming under the weight of a strong dollar. The effect of such currency strength is now showing up in the US itself, with the price of both consumer goods and imports softening. This deflationary pressure may end up impacting real interest rates, and hence the relative attractiveness of US bonds and equities.

    0
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    Gavekal Dragonomics

    The Economy On The Eve Of Trade War

    The number eight is traditionally a lucky number for Chinese. Exporters could be forgiven for not believing in that tradition: 2018 looks like it will join 1998 and 2008 as a year in which exports suffer a major shock. In this piece, Andrew evaluates the state of the economy as the US prepares more tariffs, and how China can manage the impact.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call September 2018

    In this month’s research call, Will Denyer explains why he is still recommending a 75% equity exposure in a dedicated US portfolio. His call is based on an asset allocation method with three key components, namely, Wicksellian spreads, relative valuation tools, and a duration tool which shows how to divide a fixed income portfolio between bonds and cash.

    0
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    Gavekal Research

    Why You Should Buy Indonesia

    There are reasons to think that a 2% rise in the broad emerging market index over the last two days may be more than just a relief rally. For those investors who are minded to seek out EM equities, one of the more interesting options is Indonesia, which has unfairly been treated by investors as a sort of Asian Turkey.

    0
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    Gavekal Dragonomics

    A New Tool For Infrastructure Funding

    China’s government is worried about slowing growth, but also does not want to give up on financial de-risking. To balance these priorities, it has devised a new tool: “special-purpose” bonds issued by local governments. In this piece, Chen Long explains how this new way of funding infrastructure will work, and how much stimulus it can deliver.

    0
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    Gavekal Research

    Asia And The Emergence Of A New Monetary Zone

    Having broadly developed as an integrated whole over the last 30 years, Charles thinks the world economy is now splitting into three big groups—North America, Europe and Asia. In this piece he considers Asia whose economies are increasingly coalescing around the renminbi and suggests a new-fangled balanced portfolio approach for maximizing risk-adjusted returns.

    3
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    Gavekal Research

    The Near Term Direction Of The US Dollar

    The US dollar is trading bang on its 50-day moving average, and roughly where it was a year ago. Hence, it is tempting to conclude that it has not done much over the past 12 months. That would, of course, be wrong for the post-April rebound in the dollar explains the summer meltdown in emerging markets. And every investor today stands ready to increase or decrease risk in their portfolios depending on the next tick in the US dollar.

    17
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    Gavekal Research

    Why The US Cannot Win A Trade War

    The US has made a fundamental policy mistake in pursuing a trade war against China. A Keynesian macroeconomic analysis shows that the US will likely be worst affected by the conflict, while China should escape unscathed and several other emerging markets could be clear gainers. This sell-off may be an ideal opportunity to "buy the dip" in EMs

    7
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    Gavekal Research

    An Irresistible Trade Policy Meets Immovable Interests

    The US-China trade war is coming, and it will not be a short one. The reason, Arthur writes, is that the Trump Administration is waging war not just on China, but on American multinational companies. The goal is to “decouple” the world’s two largest economies by encouraging US firms to invest less in China and more back home.

    0
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    Gavekal Research

    Europe’s Populist Wave Peaks

    Since the migration crisis of 2015, nationalist-populist movements have been on a tear across Western Europe. Sunday saw the anti-immigrant Sweden Democrats boost their ranking, and even claim to be the election’s real winner. Yet look closer and what stands out over the last two years has been such parties’ failure to fully break through.

    2
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    Gavekal Dragonomics

    The Drive For Affordable Drugs

    China’s healthcare reforms have created new opportunities for global pharmaceutical firms and made healthcare a favored sector for many investors. But as Ernan explains, the government’s top priority these days is controlling healthcare costs, especially drug prices. That trend makes it trickier to profit from China’s healthcare growth story.

    0
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    Gavekal Research

    The Exit From A Liquidity Squeeze

    If it walks like a duck and quacks like a duck, then it probably is a duck. By the same token, if central bank reserves are shrinking, the US dollar is rising, and emerging market currencies are cratering, we probably face a liquidity squeeze. None of this should be surprising, as the drains on US dollar liquidity have come from all directions this year.

    7
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    Gavekal Research

    The Case Against Eurozone Stocks

    The eurozone may not face the kind of liquidity crunch roiling US dollar-based emerging economies, but its equity markets remain on a grinding downward trajectory. The MSCI EMU index is within 1.0% of this year’s low and a range of technical indicators make for ugly reading. I would advise global investors to generally avoid the single currency area, but for those who must be there I will slightly surprise myself by arguing that the eurozone’s...

    0
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    Gavekal Dragonomics

    The Property Slowdown That Wasn't

    While China’s government is talking tough about containing its frothy property market, the market does not appear to be listening. Housing sales are still growing, price rises are accelerating and construction activity is robust. In this piece, Rosealea explains why property has outperformed, and updates her outlook for the rest of 2018.

    0
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    Gavekal Research

    The Signaling From US Autos

    Even as the US economy fires up on tax cuts and government spending, interest rate-sensitive sectors show signs of rolling over. First it was housing, and now auto sales have slid to the lower end of their range after steadily softening this year. Over the next year, the question is less whether autos can boost growth, as how much they will detract from it. The fact that the Trump administration is still considering significant tariffs on...

    2
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    Gavekal Research

    On Getting It Wrong

    Louis went into 2018 with a set of assumptions about how growth and markets around the world would play out. It hasn’t exactly worked out as expected and in this mea culpa he seeks to understand how he got it wrong and what comes next. He concludes that a key driver of the changed investment environment was not so much the strength of the US dollar but China’s decision to allow a renminbi devaluation.

    10
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    Gavekal Research

    The Korean Advantage

    Yesterday was another bad day for weak-link emerging markets battling a rising US dollar. Still, my contention during this year’s EM sell-off has been that investors should sort the wheat from the chaff. With a current account surplus of 5% of GDP and forex reserves of US$400bn, exhibit-A is South Korea.

    0
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    Gavekal Dragonomics

    Choosing The Trajectory For Household Debt

    Regulators and investors are getting more concerned about China’s household debt after its sharp rise in recent years. In this piece, Chen Long breaks down the rise in leverage and explores the policy options. It would be plausible and prudent for China to now slow the buildup of household debt—but this may not mesh with the easing of policy.

    2
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    Gavekal Research

    Strategy Monthly: A Simple Guide To US Asset Allocation

    We synthesize four years of work on asset allocation and present a model portfolio built around analysis of the cost of and return on capital; the real rate of return on equities, bonds and cash; and the ideal duration of fixed-income holdings. Today we recommend that US portfolios hold 75% in equities, 25% in cash, and shun bonds.

    0
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    Gavekal Research

    Italy’s Chaotic Tendency To Stabilize

    Italian debt holders have been spooked by a leading figure in the country’s populist government threatening a fiscal blowout. The spread between 10-year BTPs and bunds has widened to 282bp, exceeding the May 30 level when the latest coalition was formed in chaotic circumstances. Such rhetoric threatens the relatively benign scenario that I advocated in July and has investors fretting about another eurozone crisis. While Italian politics will...

    2
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    Gavekal Dragonomics

    An Overdue Tax Cut For Households

    Facing trade conflict with the US and a slowdown in credit growth, China is under pressure to use fiscal policy more aggressively to support the economy. On Friday, the National People’s Congress delivered on at least part of the solution, passing a large cut in personal income taxes. In this piece, Ernan explains the impact of this tax cut.

    0
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    Gavekal Research

    Video: An Unexpected Investment Environment

    With the exception of US equities, about the only other way most investors could have achieved a positive return this year was to have held US dollar cash. That has made for a very strange investment environment that few people saw coming. In this video interview, Louis reviews the experience of the last eight months and outlines potential scenarios for the remainder of 2018.

    0
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    Gavekal Research

    Europe’s Whimpering Economic Cycle

    As with most of the developed world, the eurozone has seen a breakdown of the Phillips Curve link between inflation and unemployment. The 2008 crisis and ensuing double-dip recession created a sclerotic environment where labor market dynamics had little impact on general prices. This is another way of saying that Europe’s economy has remained stuck a in low-growth funk. Last year that seemed to have finally changed, with cyclical forces driving...

    0
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    Gavekal Research

    Disentangling The EM Mess

    It has been tough reconciling weak emerging market performance this year with their generally decent macro fundamentals. Charles pins the blame on a US dollar squeeze and will publish an update later today. By contrast, Anatole reckons that markets have made a mistake in assuming that EMs are especially vulnerable to a strong US dollar. I see merit in both positions, but do not buy the fact that there is a catch-all explanation for what is going...

    0
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    Gavekal Research

    An Update On The Dollar Liquidity Crisis

    Yesterday saw a worsening of the US dollar squeeze faced by weak links such as Argentina and Turkey. For much of this year, Charles has been on the lookout for market dislocations due to vulnerable economies having too few readily available dollars. One of his key tools has been the “world monetary base” and that is now sending worrying signals.

    15
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    Gavekal Dragonomics

    The True Value Of SOE Interest Rate Subsidies

    There is a widespread belief that implicit government guarantees allow Chinese state-owned enterprises to command preferential access to credit at below-market interest rates. In this paper, Thomas digs deeply into the corporate data to determine the true magnitude of this interest rate subsidy, and its importance to SOE profitability.

    0
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    Gavekal Research

    Tail Risks That Worry Me

    Yesterday I made the case that emerging markets should be superior performers in a global bull market, which I characterized as the most hated in history. What that analysis left out was the relative prospects of the other big blocks in the global equity universe; namely, Europe and Japan. My core point yesterday was that trade wars do more harm to economies that close their markets than those countries which supply them, and on this score...

    1
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    Gavekal Research

    India Macro Update: A Mixed Masala

    As public spending is cranked up ahead of an election that is expected to be held next spring, India should be able to sustain its current level of economic growth for a while yet. However, the rate of expansion has likely passed the high water mark for this cycle, argue Udith and Tom in this quarterly update.

    0
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    Gavekal Research

    Misunderstanding Today’s EMs

    Suppose that, like me, you think the global equity bull market has a few more years to run and hence the sell-off which culminated with Turkish debt being downgraded two weeks ago was a merely a correction. Where are the best opportunities to “buy the dip”? The answer depends on whether you also share my view about the underlying causes of this year’s market setbacks.

    4
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    Gavekal Research

    The State Of The US Consumer

    Despite cyclical headwinds and the threat of a welfare-sapping trade war, the US consumer has stayed fairly upbeat. The worry has been that rising tariffs change that situation and hit growth. Hence, news of a trade deal between the US and Mexico is to be welcomed (Justin Trudeau may feel differently). Still, at the end of the day the effect will still be to push up costs that someone must cover. For this reason, as the economic cycle matures...

    0
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    Gavekal Dragonomics

    The Consumer Soldiers On

    Consumer spending has been the ballast of China's economy over the past six years. But this year its resilience has been questioned, thanks to a sharp fall-off in automobile sales and reported growth rates in retail sales that appeared to bear no relationship to the underlying data. Ernan finds that household spending is actually holding up well.

    0
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    Gavekal Dragonomics

    The Retail Sales Data Enigma, Explained

    This technical note explains why the retail sales growth numbers reported by the National Bureau of Statistics are so much higher than the growth rates one can calculate by comparing this year's sales values with last year's. This is not an effort to cover up bad economic performance by fudging statistics, but the opposite.

    0
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    Gavekal Research

    Last Place In The FX Beauty Contest

    In mid-August, the US dollar hit a 12-month high against developed country currencies, and a multi-year high against emerging market currencies. Two weeks on, the burning question for investors is whether those highs represent a turning point, whether the dollar strength that prevailed from mid-April to mid-August has now played out, and whether the US currency is about to resume the softening trend that predominated through 2017. As always,...

    8
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    Gavekal Research

    Misery Loves Company

    These days you are about as likely to encounter a happy active manager as a flying unicorn. Between the massive outperformance of a few, highly priced, stocks (Amazon, Netflix, Microsoft etc.), the continued compression of fees, the increased burden of regulations, front-running by algos and dark-pools, the fact that fewer and fewer marketmakers actually make markets... pick any topic, and the chances are it will be a sore point.

    2
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    Gavekal Dragonomics

    The Winter Air Pollution War (Part 2)

    North China is gearing up for big cuts in heavy industry output this winter, in a repeat effort to clean up the skies over Beijing. This campaign will, by constraining supply and raising costs, exert steady upward pressure on metals prices. In the long run, it will encourage producers to move to other regions, redrawing China’s industrial map.

    4
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    Gavekal Research

    Teflon Don Or Teflon Dow?

    US equities have undeniably been the place to be in the post-2008 decade. As that divergence has gone into hyper-drive in the last three months, one might have expected events roiling the Trump presidency this week to spark a correction. Yet yesterday saw US equities end broadly flat for the day. So is this a case of Teflon Don or Teflon Dow?

    6
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    Gavekal Research

    The Most Hated Bull Market In History

    Anatole reviews the state of the US bull market and concludes that it still has legs. He does, however, warn that portfolio strategies which worked well during the disinflationary era since the mid-1980s are unlikely to play well in this bull market’s later stage.

    2
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    Gavekal Dragonomics

    Clogging China’s Cash Pipeline To Silicon Valley

    In the past years, billions of dollars of Chinese venture capital have poured into US tech firms. This is alarming to the US Defense Department, which believes these investments could lead to a flow of critical technology back to China, eroding the American advantage in fields such as artificial intelligence, robotics, and autonomous vehicles.

    0
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    Gavekal Research

    Sound, Fury, Fear And Markets

    Regardless of political affiliation, there seems to be a consensus that yesterday was a bad day for the Trump administration. It is almost impossible to predict the chain of events that will unfold in the coming days and weeks, but the political fallout from Paul Manafort’s fraud conviction and Michael Cohen’s guilty plea will be unabashedly ugly. Whether this latest twist in the drama gripping Washington has broader ramifications for markets is...

    6
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    Gavekal Research

    Trouble With Monopsonies II: Joan Robinson Versus David Ricardo

    Among the discussion topics at this week’s Jackson Hole meeting of world central bankers will be whether the market power of giant corporations is so great it allows them to hold down workers’ wages at the global level. Charles has no doubt, arguing in this paper that the development of platform companies into labor monopsonies accounts for what has been misunderstood as “secular stagnation”.

    5
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    Gavekal Research

    A Step Back From War On All Fronts

    Events of the past few weeks have lowered the risk of the worst-case scenario of a trade-war-on-all-fronts that Arthur laid out earlier this summer. But although officials in both the US and China are eyeing a truce, no bilateral deal can be nailed down until the two countries’ presidents meet in November, after the US midterm elections. That leaves time for the Trump administration’s trade hawks to regain the upper hand.

    6
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    Gavekal Research

    A Benign View Of US Inflation

    With US inflation now running above the Federal Reserve’s long term target rate, and the US labor market almost as tight as at any time since the turn of the century, the question for investors is not whether inflation will continue to push higher, but how fast it will rise. The distinction is important. Headline CPI inflation came in at a six-and-a-half-year high of 2.9% in July. And in June the overall and core PCE measures that the Fed...

    0
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    Gavekal Research

    The Meaning Of A Flat Yield Curve

    Every US recession since the mid-1950s has been preceded by a flat or inverted yield curve. The fact that the curve is now fairly pancake-like in form and the Federal Reserve is ratcheting up interest rates has investors on edge. On balance, I conclude that the time is right to get out of US banks, but not to be rushing the exits of the US equity market.

    4
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