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E.g., 20-11-2018
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    Gavekal Research

    GE Is More Fish Than Fowl

    There is suddenly a flood of commentary speculating that General Electric is a canary in the proverbial coal mine for the US corporate credit market. With investors focused on the troubled conglomerate’s underfunded pension scheme and ailing power business, GE has seen its credit rating downgraded and become a focal point for broader fears that US corporates have taken on too much debt and bought back too much equity. Without taking a view on GE...

    3
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    Gavekal Dragonomics

    Solving The Private Sector's Liquidity Crisis

    China’s leaders are now falling over themselves to show love for the private sector. This political rhetoric has a practical purpose: easing the financial stress on private firms that is freezing up the corporate bond market and driving down stock prices. In this piece, Thomas examines the tools for solving the private sector’s liquidity crisis.

    0
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    Gavekal Research

    The Winding Road To Vassalage

    No one much likes Theresa May’s compromise deal that would leave Britain as a rule-taking, semi-detached appendage to the European Union. That, however, is the most likely outcome after the UK cabinet yesterday approved an exit deal that sets up a November 25 summit, where EU leaders will be asked for their assent. Shortly afterwards, the UK parliament will have its say, and despite challenging math in the House of Commons a “national interest”...

    0
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    Gavekal Research

    China Data: Worse Before It Gets Better

    The latest round of data releases painted a mixed picture of Chinese economic activity in October. Most notably, credit growth was weak. Given that without an acceleration in credit growth there will be no broad pick-up in overall economic growth, this indicates that Beijing will loosen policy further over the coming months. But how far and how fast?

    2
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    Gavekal Research

    Credit Availability As An Asset Allocation Tool

    US analyst KX bases his equity calls largely on a Wicksellian model that compares the cost of capital with the returns earned by the corporate sector. We remain comfortable that this “spread” remains favorable for US firms, and so recommend a roughly 70% allocation to equities. Yet even if credit is reasonably priced, there is the question of its availability. For this reason, we watch lending standard measures closely, and just got a benign...

    2
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    Gavekal Research

    Video: The Battle For Chinese Tech

    China imports more semiconductors than it does crude oil, highlighting its dependence on foreign technology and know-how. The US recognizes this weakness and is intent on squeezing China’s tech sector before it is able to produce the most advanced chips at home and in scale. For this reason, tech sits at the heart of the US-China tensions.

    0
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    Gavekal Dragonomics

    The Next Wave Of SOE Consolidation

    Chinese officials are making another call to renew reform of state-owned enterprises. But a return to privatization is far away: the most concrete aspect of SOE reform is the guided restructuring of central-government-controlled firms. In this piece, Yanmei explains how big SOEs are using M&A in different ways to achieve consolidation.

    0
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    Gavekal Research

    The Doom Loop Tightens

    The stand-off between Rome and Brussels over Italy’s 2019 budget claimed its first casualty on Monday. Italy’s major banks were forced to club together to support an emergency bond issue by Banca Carige, after the rise in Italian government bond yields triggered by the budget battle eroded the mid-sized lender’s capital base, pushing it to the brink of collapse.

    0
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    Gavekal Research

    This Really May Be The Start Of A Year-End Rally

    Although this week started with a violent sell-off, Anatole argues that the stars are aligned for a year-end equity rally, especially in emerging markets. This is because EMs have sold off not on US interest rate worries but a combination of rising oil prices and heightened political risk. Those headwinds now seem to be abating and beaten up markets could surprise before year-end.

    6
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    Gavekal Research

    The True Story Of Eurozone Equities

    Since the financial crisis, European equities have proven serial duds compared to their transatlantic cousins. Cedric argues this divergence is simple reflection of the higher earnings-per-share achieved by US firms. Looking forward, however, he says it will be almost impossible for US firms to maintain this profits gap.

    1
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    Gavekal Research

    Germany, And Europe, After Merkel

    All political careers end in failure. Doubtless Angela Merkel is already feeling the sting. Even as the long-serving German chancellor stands up on Tuesday to address the European parliament in Strasbourg, political observers and investors are looking beyond Merkel’s term in office to the identity of her successor. That is likely to be decided on December 7, when Merkel’s Christian Democratic Union is set to elect a new party chairman, so...

    0
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    Gavekal Research

    London Seminar — October 2018

    At Gavekal’s seminar in London last month Charles Gave and Anatole Kaletsky presented on whether the world is breaking up into three different monetary zones, and whether this is a correction to, or an end to, the long-running global bull market. Micahel Clendenin of Gavekal RedTech explained how they conduct research on the Chinese technology and internet sector.

    0
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    Gavekal Research

    Hong Kong Seminar — November 2018

    At Gavekal’s seminar in Hong Kong this week, Yanmei Xie, Arthur Kroeber and Will Denyer presented their latest views on China's economy, trade war, and how to approach asset allocation in the US.

    0
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    Gavekal Research

    A More Timely Wicksellian Tool

    According to my Wicksellian analysis of the US, when the market rate of interest moves above the natural rate (essentially the structural growth rate of corporate profits), then a recession is coming, and investors should exit US equities and load up on treasuries. I now propose an updated and more timely proxy for the "Wicksellian market rate".

    3
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    Gavekal Dragonomics

    The Many Misjudgments Of Supply-Side Reform

    Supply-side reform, Xi Jinping’s signature policy of cutting excess capacity in steel, coal and other industries, is widely considered a success. Yet Rosealea’s extensive review finds that this campaign was marred by repeated misjudgments that caused undesired spikes in prices. The justifications for continuing the policy are now wearing thin.

    0
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    Gavekal Research

    What's Changed In The Oil Market

    “Sanctions are coming,” proclaimed Donald Trump in a tweet last week, three days before the imposition of the latest US embargo on Iranian oil exports. The oil market was not impressed. Since late September, when crude hit four-year highs, the Brent price has slumped -16.7% from US$86.29 to US$71.91, with WTI falling -19.1%.

    0
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    Gavekal Research

    Gridlock is Good

    The Democrats have wrested back control of the US House of Representatives, while Republicans have expanded their Senate majority. Hence, the US’s bicameral legislature is set for two years of gridlock. This was the most benign result possible from this midterm election. While largely expected, confirmation is probably positive for risk assets.

    0
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    Gavekal Research

    Handicapping The Trump-Xi Summit

    As the US prepares to wrap up its Congressional election season, Donald Trump’s administration is sending mixed signals on its China policy. The outcome of the upcoming G-20 meeting between Donald Trump and Xi Jinping is now basically a coin-flip. Either way, argues Arthur, US pressure on China’s technology sector is likely to intensify.

    1
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    Gavekal Dragonomics

    Pledged Shares Put Private Firms In Peril

    China’s bear market has created a crisis for hundreds of listed companies whose shareholders had pledged shares as collateral for bank loans, and now face the threat of margin calls. In this piece, Thomas explains the share-pledging crisis and how it is reshuffling corporate ownership, as state entities and others move to rescue distressed firms.

    0
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    Gavekal Research

    Hot, But Not Too Hot

    It remains unclear if the US is moderating its approach to trade war, but there are other factors to keep equity investors on edge. Friday’s US payroll report showed average hourly earnings rising to a cycle-high of 3.1%, confirming the picture of a tight labor market. Hence, with 10-year treasury yields just below their recent peak of 3.23%, the question is whether the US economy can weather a higher cost of capital. For now, I think the answer...

    0
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    Gavekal Research

    It's Finally Safe To Buy Sterling

    The pound rose 2% yesterday after a statement from the British government that a Brexit deal could be expected by late this month. That has since been rowed back. Nevertheless, the UK is moving into an endgame where the most plausible outcomes are either a "soft Brexit", or a new referendum which results in the UK remaining in the EU. Both would be good news for sterling.

    0
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    Gavekal Research

    No RMB Line In The Sand

    The renminbi has jumped over the last two days after the central bank signaled it would squeeze offshore liquidity. However, argue Long and Tom, it would be wrong to interpret this as a sign the PBOC will defend a line in the sand at 7. Embracing flexibility makes more sense as an exchange rate policy. The PBOC is just aiming to smooth volatility.

    0
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    Gavekal Research

    Strategy Monthly: Yes, We're Still In A Bull Market

    Anatole and Will believe that continued exposure to US equities makes sense, since underlying corporate profitability remains strong. So long as one avoids the most rate-sensitive sectors, US portfolios should be 70-75% in stocks, with the rest mainly in cash. Moreover, they argue that the period of EM underperformance is now done, and emerging markets are poised for a significant rally.

    0
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    Gavekal Research

    India's Soft Approach To Hard Money

    A key reason to hold Indian risk assets in recent years has been the presence of a strong government willing to incur short-term political pain in return for longer-term economic gain. Yet, with the Reserve Bank of India fighting the finance ministry over bank regulation policies that may crimp growth ahead of a national election, this premise looks shaky. The partially independent central bank has faced political attack before, but this is...

    2
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    Gavekal Research

    Has Oil Set Its High For This Cycle?

    With the price of WTI crude oil now back below its 200-day moving average, Louis puts himself in the shoes of Turkish president Recep Tayyip Erdogan and imagines what sort of leverage he could exert over Donald Trump, what this means for the enforcement of sanctions against Iran, and what that implies for the oil price going forward.

    4
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    Gavekal Research

    First Blood In The Long Tech War

    Washington has opened a new front in the US-China economic cold war by slapping controls on exports of all “commodities, software and technology” to Chinese chipmaker Fujian Jinhua Integrated Circuit. The breath of the national security justification cited for this action escalates the US-China confrontation over technology to a new level.

    5
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    Gavekal Research

    Another Weight On The Euro

    The bear flattening of the US yield curve while European short rates remain anchored in negative territory means that it no longer makes sense for euro-based investors to hedge the currency risk of US bond purchases. Their hedging costs have risen to a level that wipes out the yield they would get on a 10-year US treasury. For US dollar investors, the opposite is true.

    0
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    Gavekal Research

    Beijing Seminar — October 2018

    At Gavekal’s seminar in Beijing last week, Louis-Vincent Gave, Udith Sikand and Chen Long presented their latest views on the turn in global markets, the prospects for emerging markets in the quarters ahead, and on China's policy priorities as it faces down the US in a prolonged rivalry.

    0
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    Gavekal Dragonomics

    The Policy Constraint From Property

    The hot property market is one of the major constraints on Chinese policymakers’ freedom to stimulate: surging prices and construction do not need more juice. In this piece, Rosealea explains why more decisive stimulus is very unlikely before the property market weakens significantly, and even then will not be as large as in previous cycles.

    1
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    Gavekal Research

    US Macro And The Market

    Coming after another bruising week in the market, which saw the S&P 500 flirting with correction territory, down -9% from its late-September high, Friday’s third quarter US GDP report is heartening. Although 3Q’s quarter-on-quarter annualized growth rate of 3.5% was slower than the 4.2% rate recorded in 2Q, it was still strong relative to the expected 3.3% and compared with the US economy’s structural growth rate. While US growth will...

    0
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    Gavekal Research

    Listen To What Italians Say

    Among the factors rattling global markets this week has been the brewing dispute between Brussels and Italy’s populist government over its blowout budget proposal.The fear is that Italy gets into a vicious circle of tightening credit markets and faltering growth that could end with a resumption of the euro crisis and ultimately its exit from the single currency.

    0
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    Gavekal Research

    Buy The Dip

    “Things are fine now, but they are going to get worse.” This is what I hear from commentators on US growth, from corporate managers talking about profit margins, and from Chinese exporters discussing the impact of the trade war. The same could be said of US financial conditions—they are fine now, but as interest rates rise they will deteriorate.

    3
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    Gavekal Dragonomics

    On The Front Lines Of The Trade War

    There now seems to be little chance that the trade frictions between the US and China will be resolved anytime soon. So how are Chinese exporters dealing with the prospect of a steep rise in tariffs come January? Our analysts report from the Canton Fair on how exporters are coping now, and their strategies for the future.

    1
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    Gavekal Research

    Bolsonaro’s Brazil

    Barring an extraordinary twist, Brazilians will on Sunday elect as president a right-wing tough guy who hints at being a closet economic liberal. He will inherit an economy that is enjoying a cyclical upturn and a reform initiative to social security that is far enough advanced that it can’t reasonably be reversed. For this reason, expect a near term upside for asset values.

    0
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    Gavekal Research

    World Trade And A Troubling Signal

    As Donald Trump has ramped up tariffs on US imports from China, investors have understandably grown anxious about the impact on world trade. Few significant effects have shown up in the data so far. Nevertheless the outlook is alarming—although not necessarily in the way many might think.

    5
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    Gavekal Research

    The Odd Behavior Of Gold

    Barbarous relic it may be, but I have long looked on gold as a proxy for emerging markets. The logic is that when the emerging market consumer—whether in India, China, Indonesia, Africa or the Middle East—finds himself at the end of the month with extra money in his pocket, he often tends to put that money into gold coins or jewelry. This makes sense if you live in a country with capital controls, or an untrustworthy financial system, under-...

    0
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    Gavekal Research

    JAM Today For Indian Fintech

    There is a Dickensian quality to Indian finance just now as banks struggle under bad debt piles and finance companies face a wholesale funding crunch after a recent high profile default. Yet if these are the worst of times for credit intermediaries in India, there is a clear silver lining as fintech firms capitalize on a national biometric database.

    0
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    Gavekal Research

    How The Brexit Stalemate Breaks

    As the Brexit negotiations enter their endgame, a stalemate has become the most likely outcome. Theresa May’s Conservative Party is now in open rebellion against her leadership, with Britain’s weekend press reporting that her government is just 72 hours from collapse. And a “No Deal” Brexit “car crash” is now described as a 50-50 probability by many politicians and commentators in both Britain and Europe. Yet the pound has maintained its value...

    6
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    Gavekal Dragonomics

    Still Waiting For Stimulus

    At the moment it seems there is only one question about China that people care about: when will the government move more aggressively to stimulate growth? With most economic indicators slowing in September, the time when the government will need to change course is getting closer. But, as Andrew explains in this piece, it is not here yet.

    2
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    Gavekal Research

    Video: Why China Is Unlikely To Fold

    To many outside observers, China’s economy looks like a house of cards that is vulnerable to collapse should the US push a little harder in its trade actions. Louis is not convinced that this market-focused analysis of China’s situation properly reflects its vulnerability. He thinks the leadership is dug in for a long struggle against Washington.

    0
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    Gavekal Research

    Reviewing The Yen As A Safe Haven

    Three months ago in July, I argued that international investors should consider holding Japanese equities without hedging their currency exposure. A month ago in September, I revisited that call, concluding that it still held. My essential argument was that investors had largely priced in the headwinds facing Japanese equities, which offered compelling valuations should trade tensions blow over and global risk appetite return. On the other hand...

    2
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    Gavekal Dragonomics

    More Loans For The Private Sector

    China’s central bank is trying a new strategy to help private companies get access to credit. Rather than just push small-business lending, it is encouraging lending to all private firms, including larger ones. In this piece, Thomas explains why the old strategy wasn’t working, and why the new one is more likely to help the private sector.

    0
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    Gavekal Research

    The Consequences Of Khashoggi

    In 1939, Franklin Roosevelt famously dismissed reservations about Nicaragua’s brutal dictator Anastazio Somoza with the comment “he may be a sonofabitch, but he’s our sonofabitch.” In the world of foreign policy realpolitik, to a large degree FDR’s doctrine still holds true. Witness, for example, the verbal contortions that US president Donald Trump and secretary of state Mike Pompeo have been forced to pull off in recent days in order to...

    6
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    Gavekal Research

    Equities In The Late Cycle (Revisited)

    The stock market volatility of the last week, triggered by fears over rising bond yields, emphasizes how participants now accept that the US economy is in the late phase of its cycle. KX argues this is not a reason to flee US equities, but it does demand a more discerning approach.

    0
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    Gavekal Research

    A Better Class Of Bear Market

    Although China’s A-shares are the world’s worst performing major market this year, this bear market is turning out to be a very different animal from that of 2015. Authorities are taking a very different strategy: rather than trying to prop up prices, regulators have focused on making technical changes to improve the way the market functions.

    0
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    Gavekal Research

    Six Impossible Things Before Breakfast

    Louis investigates six of the most incongruous sets of relationships that have held sway this year and offers alternative explanations. In particular, he focuses on the strange case of China’s response to US trade hostility and argues that understanding Beijing’s game plan may hold the key to whether the long US bull market in equities can stay the course.

    4
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    Gavekal Research

    Softly, Softly, Mr. Draghi

    Last week was an ugly one for equity markets on both sides of the Atlantic. But there was a crucial difference. US stocks are down from an all-time high set as recently as last month, with the S&P500 closing on Friday above (just) its 200-day moving average. In contrast, eurozone equities have been trending continuously lower ever since the end of January.

    0
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    Gavekal Research

    The Politics (And Economics) Of A Multi-Polar Europe

    This weekend’s election in Bavaria saw voters deal parties in Germany’s ruling coalition a bruising rebuff that further erodes Merkel’s authority and effectively kills off Macron’s plan for the EU to integrate at a faster pace. In light of such a changed environment, Nick and Cedric introduce a new framework to explain how political bargaining will work in an increasingly multi-polar Europe.

    2
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    Gavekal Research

    Time To Rebalance Into Equities

    The S&P 500 is down almost -7% in six days, the biggest drawdown since the -10% decline in the first quarter. It is now below its 200-day moving average, for the first time since April 2nd. Will it bounce back, or is a US equity bear market now upon us? I would bet on the former, but not too aggressively.

    0
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    Gavekal Research

    Hidden Leverage In Hong Kong

    Last month, for the first time in 12 years, Hong Kong banks raised their prime lending rates. This increase, coming at a time when the Hong Kong government has pledged to boost housing supply, has prompted fears that rising mortgage rates and falling home prices could expose a dangerous accumulation of hidden leverage in the local property market.

    1
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