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E.g., 30-03-2017
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    Gavekal Dragonomics

    A Shaky Foundation For Iron Ore

    Iron ore prices are still high, but for how much longer? Returning from a field trip, Rosealea is now more convinced prices will fall. A government campaign to close low-end steel producers is aggravating cyclical swings rather than changing the structure of the industry. As supply is now rising to meet demand, prices will come under pressure.

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    Gavekal Research

    Hong Kong Seminar — March 2017

    In Gavekal’s Asia focused seminar in Hong Kong last week Arthur Kroeber, Udith Sikand and Tom Holland presented their outlooks for the rest of the year.

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    Gavekal Research

    Yes To Brexit, No To Rate Hikes

    Tomorrow should see the UK initiate its departure from the European Union by triggering Article 50 and starting the clock on a two year exit negotiation. Yet far from anxiously counting down the days, investors have spent the last week bidding sterling higher, largely on the belief that a robust UK economy may soon spur tighter monetary policy. That is probably a bullish interpretation too far, and the pound’s next significant move will probably...

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    Gavekal Research

    After The Health Care Reform Failure

    The Republican drive to repeal and replace Obamacare failed ignominiously on Friday. Together, President Donald Trump and House Speaker Paul Ryan were unable to muster enough support to pass the new health care bill through the House of Representatives. Bowing to reality, they pulled the vote. If there is a positive element to this failure, it is that both the administration and Congress will now shift their focus to tax reform. However, the...

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    Gavekal Research

    A-Shares Come In From The Cold

    Last year, MSCI raised three objections which prohibited the inclusion of China’s onshore A-share markets in its benchmark indexes. In a document published yesterday MSCI suggested two of those obstacles can now be overcome. Chances are high that the third objection can also be dealt with, allowing the inclusion of A-shares as early as this year.

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    Gavekal Dragonomics

    Sanctions With Chinese Characteristics

    Since South Korea decided to host a US missile-defense system, China has restricted tourism and closed local operations of Korean firms. The dispute will mean some economic pain for Korea, but no lasting damage. But China is ever more willing to use such “sanctions with Chinese characteristics” to disrupt trade with countries that displease it.

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    Gavekal Research

    Europe’s Surest Bet

    As investors fret about the trajectory of US growth and the sustainability of the Trump reflation trade, Europe is getting drawn in. Sovereign yields fell pretty much across the board yesterday on worries that the eurozone’s gathering cyclical upturn could be disrupted. In this case, the thinking is that monetary stimulus by the European Central Bank gets extended. To our mind, such worries are overdone as—absent an external shock—Europe’s pick-...

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    Gavekal Research

    Will Washington Disappoint?

    Equity markets have pretty much straight lined higher since the US election on hopes for market-friendly tax cuts, health care reform, and broad deregulation. Worries about high import tariffs and other potential growth-sapping measures have been set to one side. In short, investors have been counting on “Trump without the bad stuff”. With the S&P 500 yesterday sliding -1.2%—the first fall of more than -1% since November’s election—they now...

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    Gavekal Research

    Why This Time May Be Different For EMs

    Going into 2017, the logic of Donald Trump’s “America First” program suggested that investors should be long US equities and the dollar, and short longer-dated treasuries. Such an outcome would have been horrible for emerging markets. And yet EMs have rallied 13% year-to-date. The swing factor has been the sideways move of the US dollar in the intervening period, which persuaded investors to cover short-bets on EMs. In this chartbook Joyce...

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    Gavekal Dragonomics

    The State Of The State Sector

    After forty years of market reforms, state-owned enterprises retain an exceptionally large role in China’s economy. Though their financial performance is deteriorating and their debts are growing, SOEs’ share of the economy is rising rather than falling. In this chartbook, Andrew pulls together the data to show the true state of China’s SOEs.

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    Gavekal Research

    The Profit Illusion

    Inflation has a way of making things look better than they really are. This is especially true of corporate profits. After a dismal first half last year, S&P 500 companies reported an earnings recovery in 2H16. In the final quarter, they posted profit growth of 6% YoY (with or without financials). Alas, this recovery appears to be a mirage, caused by accelerating inflation. Using official flow of funds data for the domestic non-financial...

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    Gavekal Research

    Where The French Center May Fail

    Just five weeks after the deciding second round of France’s presidential election, French voters go to the polls yet again. In another two-round ballot, to be held on successive Sundays in June, the French electorate will vote in a new lower house of parliament. The overwhelming consensus is that voters will choose a centrist in the presidential election. But if they do, their choice may well not allay France’s heightened political risk.

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    Gavekal Research

    The UK Nine Months After The Brexit Vote

    With Theresa May’s government set to begin the formal exit process from the European Union, Charles reckons now is the right time to step back and see just how the UK economy has fared in the nine months since that fateful referendum. In this concise chartbook, he tours Britain’s economic and market landscape and finds that value is to be had across multiple asset classes.

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    The Future 8 Fund

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    Gavekal Research

    Audio & Transcript — Gavekal Research March Call

    Yesterday’s call had Cedric Gemehl and Anatole Kaletsky opine on political risk leading up to French and German national elections later this year. Nick Andrews argued that the eurozone recovery is becoming self-sustaining, and offered views on capturing the upside, while hedging against political risk.

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    Gavekal Research

    Hedges In A Bull Market

    It is hard to find an equity market anywhere that is not in bull market territory. This much is clear from a quick look at the Gavekal TrackMacro grid. Simply put, not a single country is now flashing red. You have to go back to the Spring of 2014 for such a benign global macro backdrop.

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    Gavekal Dragonomics

    The Tightening That Dare Not Speak Its Name

    China’s central bank has raised short-term policy rates for the second time this year—while going to great lengths to avoid signaling an aggressive tightening. The central bank likely still hopes that a coming roll-over in producer price inflation will calm sentiment, and that other, non-monetary measures will help cool down the property market.

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    Gavekal Research

    The Risk Picture Diminishes

    Yesterday’s 25bp rate rise from the US Federal Reserve was universally expected. The relative dovishness of Fed officials was not. With headline CPI inflation in the US running at a brisk 2.7% in February, ahead of the meeting at least some market participants had been pricing in four rate hikes this year. But after the latest dot plot signaled that policymakers continue to see only three hikes—including yesterday’s—in 2017, those expectations...

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    Gavekal Research

    Like Japan, Love Korea

    Ignore for the moment the drumbeat to hostilities on the 38th parallel; it has still been a head-spinning few weeks in the normally staid world of South Korean governance. First, the head of Samsung, the country’s biggest company, was arrested on bribery charges, and then last Friday saw President Park Geun-hye ousted by impeachment. It is our view that a political upheaval is afoot in Seoul that threatens the collusive ties between officials...

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    Gavekal Dragonomics

    Older And Unhealthier

    China’s rapid development came with impressive improvements in basic health indicators. Yet growing richer and older is now creating tremendous health challenges. Without swift action, China is heading for a public health crisis.

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    Gavekal Dragonomics

    Public Health, Private Gains

    Failings in China’s public health system open up great opportunities for private players. Yet, to be successful, they will have to navigate a changing legal environment, swim with the policy tide, and cope with intense competition.

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    Gavekal Dragonomics

    For China, Trump Is A Paper Tiger

    The risk of a trade war between China and the US is fading as economic pragmatism gains ground, despite administrative incompetence in Washington. But Trump’s America-alone approach is weakening the US’s hand while China’s economic leverage grows ever stronger.

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    Gavekal Dragonomics

    Debating Reflation And Tightening

    We expect only marginal and gradual tightening from the PBOC. But three factors could make it more hawkish: higher than expected inflation, rising financial risk, and a shift in the politics of growth.

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    Gavekal Dragonomics

    Chinese Football: Here We Go

    The excessive money spent on China’s domestic football league has raised both eyebrows and fears of yet another Chinese bubble. But the sector has undeniable assets: a large domestic fan-base, strong political backing, and countless big businesses with a taste for the game.

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    Gavekal Dragonomics

    The Ghost Of A Communist Past

    Despite what Beijing thinks, political liberalization wasn’t what brought down the USSR. The economy did. Andrew Batson reviews Chris Miller's The Struggle to Save the Soviet Economy.

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    Gavekal Dragonomics

    Building A National Health System

    Thanks to the 2009 health reform plan, most of China’s population now has health insurance. But hospitals are still crowded, doctors underpaid and drugs overprescribed. And the next big challenge will be to persuade Chinese people to live healthier lives.

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    Gavekal Dragonomics

    CEQ: Healthcare—Crisis Or Opportunity?

    China’s growing economy has brought its people longer lives, but also a new set of health problems. Though the government is trying to improve coverage, change is happening slowly. So there is a growing opportunity for private companies to fill the gap. This issue of China Economic Quarterly investigates the nation’s health problems, and solutions.

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    Gavekal Research

    The Importance Of The Dutch Election

    Today’s Dutch election may not seem very important in itself, since it is almost inconceivable that the anti-immigration Freedom Party of Geert Wilders will win enough votes to enter the next Dutch government. Nevertheless, the result—which is likely to be clear by around 0400 GMT Thursday—will have a big market impact. That’s because the Freedom Party’s performance will rightly be seen as a leading indicator of political events during the...

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    Gavekal Research

    The BoJ’s Tantrumless Taper

    When the Bank of Japan’s board meets on Wednesday and Thursday this week, at least one member will be calling for a retreat from the central bank’s policy of negative interest rates coupled with quantitative easing “with yield curve control”. In a speech last month Takahide Kiuchi called on the BoJ to taper its purchases of Japanese government bonds from ¥80trn annually to ¥45trn. The chance that the central bank will announce any such change in...

    0
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    Gavekal Dragonomics

    The Reflation That Just Won't Quit

    China’s latest data show the reflation that began in 2016 continued in early 2017: growth is accelerating and the housing market is very strong. Chen Long draws two conclusions from this. First, with construction supported the government will have no problem keeping growth stable in 2017. Second, a further tightening of policy is very likely.

    9
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    Gavekal Dragonomics

    An Early Harvest Of Bumper Profits

    China’s listed companies won’t report their final Q4 earnings for another month, but preliminary numbers show it was their best quarter since 2010: profits for the median company jumped 28% in Q4 after a 25% rise in Q3. Strong earnings mean that fundamentals are supporting the slow but steady rally in A-shares that is now about nine months old.

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    Gavekal Research

    Modi’s Big Political Win

    After a shaky few months, India’s reform project is back on track. The ruling BJP’s unexpectedly strong performance in state elections will enable Prime Minister Narendra Modi to continue with pro-business policies that should both deliver economic growth and buoy equity markets.

    2
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    Gavekal Research

    The Best Macro Trade Of 2017

    What has been the world’s most crowded macro trade of the year to date? Not buying dollars, shorting US bonds or selling French OATs or sterling. The most over-extended speculative position in the world by historic standards has been the bullish exposure to crude oil. This began to reverse last week, and the -7% correction in Brent could soon turn into an avalanche.

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    Gavekal Research

    When A Less Dovish Dove Is A Hawk

    As changes of tone go, Mario Draghi’s was a muted shift. At yesterday’s meeting, the European Central Bank president said that the sense of urgency driving additional easing had diminished, and dropped his pledge to use all the weapons in the ECB’s arsenal to effect monetary accommodation. Interest rates will still remain negative for an extended period, and quantitative easing will continue at least until the end of the year. But while the...

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    Gavekal Research

    Playing The Eurozone Recovery

    For the first time in years you don’t have to be a swivel-eyed loon to think the eurozone has a fairly bright economic future. Growth is broadening, deepening and frankly becoming less newsworthy. The wrinkle is political tail risk, but we think this threat is containable.

    2
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    Gavekal Research

    The North Korean Wedge Between The US And China

    This week’s missile launches by North Korea, the latest in a recent series of provocations, are forcing the US into a position where it must take steps to limit the threat to itself and its Asian allies. But such moves are certain to antagonize China, and shatter the fiction that the US and China have common interests in dealing with North Korea.

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    Gavekal Research

    Don’t Bet on US Manufacturing

    The Federal Reserve seems convinced that strong survey readings point to a strengthening US economy that is becoming self-sustaining. This is the reason that investors are betting with increasing confidence on a series of interest rate increases this year. KX is not convinced that such assumptions are built on solid ground.

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    Gavekal Research

    The Prime Minister Has No Clothes

    Britain’s House of Lords passed a crucial amendment yesterday to Theresa May’s Brexit bill. This amendment would give Parliament a “meaningful vote” at the end of the Brexit negotiations and could offer the possibility of stopping Brexit or seeking to extend the negotiations beyond the 2019 deadline, if the deal Mrs May brings home next year is deemed to be not good enough. Anatole argues this is a game changer for opponents of Brexit.

    7
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    Gavekal Dragonomics

    Relief For Workers Is Coming

    Premier Li Keqiang says pressure on employment is growing, so he has raised the government’s target for urban job creation in 2017. Ernan however disagrees with the premier: the pressure on China’s job market will actually ease somewhat this year, as the cyclical recovery in the economy means that companies have less need to cut jobs.

    2
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    Gavekal Research

    Time To Exit US Equities

    Over the last few months Charles has argued that the US stock market rally was running on fumes. In the intervening period, US equities have, of course, powered to new highs. He now says that for the first time since 2007 his valuation model definitively points to US equities being overvalued.

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    Gavekal Dragonomics

    Fiscal Stimulus? What Fiscal Stimulus?

    China’s latest budget report reinforces its recent shift toward marginally dialing back economic stimulus. In 2016, the finance ministry raised the deficit to 3% of GDP from 2.4% in 2015; for 2017, it is standing pat, targeting a 3% deficit again. Less publicized but more relevant is the fact that off-budget public works spending is also slowing.

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    Gavekal Research

    India’s Property Dream

    In India, home building constitutes just 1% of GDP and fails to satisfy basic amenity demand—some 60mn Indians live in urban dwellings deemed unfit for human habitation. The good news is that India is getting serious about supporting residential property development, which could yet have a China-like impact on domestic demand and global commodity markets.

    0
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    Gavekal Research

    On Borrowed Time In Hong Kong

    Last month, home prices in Hong Kong’s secondary market climbed to a record high, up more than 150% from the depths of the financial crisis. At the same time, Hong Kong’s stock market has been among the world’s strongest major markets so far this year, comfortably outperforming the S&P 500. The buoyancy of Hong Kong assets owes more than a little to investor enthusiasm for the global reflation trade, and to inflows of Chinese money. But more...

    2
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    Gavekal Dragonomics

    Picking Apart The Iron Ore Conundrum

    Is China’s continued rally in iron ore prices the result of benign structural change in the steel sector, or frenzied financial speculation? Rosealea and Arthur review the competing explanations, and find both have some merit. So while a lot has to go right to avoid an ore price crash, this correction could still take a while to materialize.

    1
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    Gavekal Research

    Video: The Self-Sustaining Eurozone Recovery

    A broadening and deepening of the eurozone’s economic recovery suggests that the expansion has finally become self-sustaining. The worry is that a political shock from upcoming national elections tips the single currency area back into crisis. Nick Andrews does not think such a bearish outcome is likely, and in this video explains his preferred investment strategy.

    0
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    Gavekal Research

    The Upside Of Eurozone Inflation

    As even formerly dovish policymakers on the Federal Open Market Committee have hardened their rhetoric in recent days, the US dollar has strengthened, with the bilateral EUR/USD rate falling back to dip briefly below the US$1.05 mark late Tuesday. Whether the US dollar’s run-up can be sustained is questionable, however. With the market expecting three US rate hikes this year, the US dollar appears priced for a “Trumpflation” outcome that both...

    0
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    Gavekal Research

    Because Of Trump, Or Despite Him?

    The enthusiastic market reaction to US President Donald Trump’s big speech on Tuesday night can be interpreted in two ways, both bullish for equities and bearish for bonds, but only one of them positive for the dollar.

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    Gavekal Research

    A Structural Turn In Japan

    For more than a quarter of a century Japan has been a reliable source of disappointment for investors. After a nice little run-up late last year, a familiar pattern has emerged in 2017 as equities edge nervously sideways. Despite some evidence of Asia’s trading economy spluttering into life, Japan yesterday released surprisingly soft industrial production data for January. To top things off, the Wall Street Journal on the same day ran a...

    2
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    Gavekal Research

    Strategy Monthly: Reflation Gets A China Boost

    For the last three months, markets have been focused on “Trumpflation”. But the global reflation trade began long before Donald Trump’s November election, with China’s surprisingly strong growth rebound early last year. This suggests that China’s growth performance in 2017 will be a key factor in determining the sustainability of global reflation. In this edition of Gavekal’s Strategy Monthly, Arthur Kroeber and Chen Long argue that China’s...

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    Gavekal Research

    Where Next For The Reflation Trade?

    What was the biggest surprise of 2016? Ask the question in the US and invariably the answer is Donald Trump’s election victory. Ask in Europe and the answer is either the same or, if not, it is the result of the Brexit vote. But are these the events that genuinely moved markets the most? Look at it this way: over the past 12 months, commodity producers have typically been the best performers in almost every market, followed by financials. The...

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