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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.

    0
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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.

    0
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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-...

    0
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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...

    2
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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.

    0
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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...

    4
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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.

    2
  • Japanese Translation

    The Future 8 Fund

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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.

    0
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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.

    0
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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.

    0
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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.

    0
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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...

    0
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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...

    2
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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.

    0
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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.

    0
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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.

    0
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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.

    0
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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.

    0
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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.

    0
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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.

    0
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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.

    0
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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...

    3
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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.

    8
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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.

    0
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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.

    0
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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...

    0
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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.

    2
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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.

    0
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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.

    2
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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.

    0
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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.

    0
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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...

    0
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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...

    0
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    Gavekal Dragonomics

    A-Shares Ride An IPO Boom

    The state of initial public offerings is one of the Chinese stock market’s longest running embarrassments: regulators have been holding up IPO approvals for hundreds of firms for years now. But they are now finally picking up the pace, making it easier for younger, fast-growing firms to list—though full deregulation of IPOs is not on the agenda.

    0
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    Gavekal Research

    Calling Time On Bank Outperformance

    Tomorrow Donald Trump is scheduled to address a joint session of the US Congress. Although expected to be long on characteristic bombast, the president’s speech is likely to be short on hard details about his core policies. That shouldn’t be too surprising. Drawing up tax reform and infrastructure spending plans and squaring them away with the Republican majority in Congress will take many months. However, without concrete information to sustain...

    0
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    Gavekal Research

    Are Border Adjustments Protectionist?

    The introduction of border adjustments into the US tax code is by far the most controversial part of the House Republicans’ “blueprint” for tax reform—with good reason. This reform alone would be a game-changer, with many winners and losers. This is why, like all major tax reforms, it faces an uphill battle to become law, and why it may never happen. But the same was said of a Donald Trump presidency, and of Brexit. So, investors still need to...

    5
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    Gavekal Research

    The Battle To Command The Logos

    The “Logos” encompasses a society’s language, its way of looking at the world, and its dominant political narrative—he who commands it has his hands on all the levers of political power. Every so often, however, a new communication technology emerges that allows the rise of a new Logos to challenge the old.

    6
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    Gavekal Research

    The Eurozone’s Ongoing Rebalancing

    Yesterday the European Commission criticized Germany for its “persistently high current account surplus”. Berlin should take more steps to boost domestic demand in Germany, Brussels suggested, in order to trim its external surplus and to help the rest of the euro-area rebalance. It is hardly new advice, but the EC does not seem optimistic it will be heeded anytime soon. In the same release, it forecast that Germany’s current account surplus will...

    0
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    Gavekal Research

    A Qualified Positive For Chinese Banks

    The Hong Kong-listed H-shares of mainland Chinese financials are the best performing segment of one of the world’s strongest markets year-to-date. So far this year, the H-share index is up 12% in US dollar terms, driven largely by gains in the stocks of China’s big banks and insurers. So it is natural for investors to sit up and take notice on reports that China’s big four financial regulators have drafted a joint proposal to tighten their...

    0
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    Gavekal Research

    Hong Kong Seminar — February 2017

    Gavekal’s global macroeconomic seminar in Hong Kong in February featured Anatole Kaletsky, Will Denyer and Louis-Vincent Gave. They presented on the global investment outlook under a Trump presidency, the decline in US productivity, and the sustainability of the "Trumpflation" rally.

    0
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    Gavekal Dragonomics

    Three Risks To The Monetary Policy Outlook

    China’s central bank is striking a hawkish tone by pledging to curb speculation and leverage, but its actual tightening has been marginal and gradual. What might shift its stance to something tougher? In this piece, Chen Long evaluates three things that could push the PBOC to tighten more: inflation, financial risk, and the politics of growth.

    0
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    Gavekal Research

    A Methodology For Playing The Eurozone Bond Markets

    In yesterday’s Daily, I argued that a long position in the French CAC 40 stock index, locally funded, versus a short position in Germany’s Dax offers investors a neat “heads I win, tails I don’t lose” hedge against a possible break-up of the euro driven by French politics (see It’s Time To Buy French Equities).

    1
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    Gavekal Dragonomics

    The Secret Ingredient In Corporate Deleveraging

    Debt is rising rapidly in China, yet the debt-to-equity ratios of large public companies have still fallen. The secret of this deleveraging is that regulators allowed firms to raise lots of new equity through private placements. But regulators are now setting a higher bar for those deals, so this deleveraging formula won’t work as well in 2017.

    3
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    Gavekal Research

    The Italian Debt Trap Jaws Tighten

    In the middle ages Venice thrived as the economic, artistic and intellectual leader of the Mediterranean. By 1500 it was in retreat, but the roots of that decline dated to a 1286 decision by the city state’s governing council to vest power in the hands of 40 great families which dominated the trading economy. The cycle of innovation that had driven the “Queen of the Adriatic” ebbed as special interests gradually captured the system.

    2
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    Gavekal Research

    It’s Time To Buy French Equities

    As regular Gavekal readers may remember, I have always maintained that over the long run the returns delivered by two different stock markets— adjusted for exchange rate fluctuations and differences in pay-outs—must be the same. This is just another way of saying that in an open economy the returns on invested capital generated by well diversified stock markets have to be the same.

    6
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    Gavekal Research

    Audio & Transcript — Gavekal Research February Call

    In Gavekal Research’s February conference call, Louis-Vincent Gave delves into the unexpected origins of the reflation trade in order to assess its future prospects. And Arthur Kroeber unpicks the combative rhetoric emanating from Washington to gauge the probability of heightened trade friction between the United States and China.

    0
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    Gavekal Research

    The EM Reflation Trade Is Past Its Best

    The emerging market reflation trade has been on fire. This week Dr. Copper broke out of his six-year downward trend, adding fuel to the reflationary flames. As a result, while the relative performance of cyclical stocks has moderated in developed markets during February, EM cyclicals have continued their bullish run. Their strong performance has helped to lift the MSCI EM index by 10% year-to-date in US dollar terms to reach a 19-month high. But...

    2
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    Gavekal Research

    Mapping China’s Asian Dream

    China’s effort to build a regional sphere of influence is upending Asian geopolitics and through huge infrastructure building, quite literally changing the geography. As such, China’s pursuit of empire is an epochal undertaken which investors need to properly factor into their macro understanding of the region. This is why Gavekal’s Tom Miller wrote a book on the topic and as Louis explains in this piece, it is a tome he really wanted to write...

    0
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    Gavekal Research

    Decomposing Sterling

    In recent months, few discussions at Gavekal have been as polarized as the debate over sterling. Charles and Louis both note the pound’s undervaluation. History suggests it will revert to the mean. Anatole argues that the British economy will undergo a painful restructuring over the coming years facing hard Brexit. I will examine the structure of the UK’s current account and the forces that are at work to propel sterling.

    4
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    Gavekal Research

    The Eurozone’s Silver Lining

    Just as it has been hard to work up much excitement over the last couple of years about the eurozone’s grinding emergence from economic despond, so investors should not be too downhearted at the latest lackluster growth data. Yesterday Eurostat revised down its flash estimate for 4Q2016 eurozone GDP growth to 0.4% QoQ, compared with its advance estimate of 0.5% released two weeks ago. The downward revision was due mainly to weaker than expected...

    3
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    Gavekal Dragonomics

    Containing Capital Outflows

    China’s balance of payments show that 2016 was another big year for capital outflows, which accelerated in the second half. But Chen Long argues this pickup will not continue into 2017. Current outflows are not large enough to stop the central bank from pursuing its exchange-rate policy, which can be sustained for another couple of years.

    0
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    Gavekal Research

    In Dutch With The Electorate

    There is a tendency to divide Europe into the “serious” beer drinkers of the north and the not so serious wine tipplers of the south. Using such a dichotomy reinforces a common assumption that trouble in modern day Europe always arrives from the Mediterranean regions. It explains why there is a cottage industry of politicos watching developments in Italy, Spain, France and Portugal, while precious little energy is expended on political goings on...

    1
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    Gavekal Research

    Video: India After Demonetization

    Udith discusses the effects of India's demonetization last year on the growth of the economy

    0
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    Gavekal Research

    India Macro Update: After Demonetization

    India has been a strong growth story over recent years and offered a haven from the commodity boom-bust-boom cycle that has roiled emerging markets. However the investment climate has darkened in recent months due to the government’s surprise “war on cash” and the central bank seemingly coming to the end of its easing cycle. In this chart book, Udith and Tom take a systematic look at the macro environment and review the outlook for major asset...

    0
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    Gavekal Research

    US Inflation: The End Of The Affair

    If there is one consensus view about US markets it is that inflation is ticking up, a tightening cycle is underway and the dollar will again rise. As markets are made at the margin, any hit to these beliefs could push investors into a sharp repositioning. Within Gavekal there is disagreement on this score, with Anatole arguing that US inflation and bond yields are on an upward trend, Charles taking the opposite view and Louis stating that US...

    0
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    Gavekal Dragonomics

    Brace For US-China Trade Conflict

    Is Donald Trump backing down from his threat to get tough on China trade? It might seem so: after three weeks of rapid policy moves, his promised anti-China trade action is still missing. But it will not stay missing for long. Some US move against China trade looks inevitable in coming months, though the costs will be high and the benefits unclear.

    0
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    Gavekal Research

    Choosing Between Disadvantages

    It was a record that Germany would rather not have announced, at least not this week. Yesterday official data showed that Europe’s über exporter racked up a current account surplus in 2016 of US$281bn versus a mere US$210bn for China. With the US running by far the largest offsetting deficit, such data means that the temperature between Washington and Berlin is likely to get hotter.

    4
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    China’s Asian Dream

    China’s “Asian Dream” is to restore its position as the undisputed regional power. Trump’s decision to bin the Trans-Pacific Partnership, which would have anchored the US presence in Asia, brings China a step closer. While Trump’s sidekicks huff about wielding a bigger stick in the South China Sea, China is transforming the facts on the ground.

    1
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    The US$10 Trillion Question

    Over the last seven years, emerging markets have been stuck in a trading range they show no sign of exiting. For this reason, in Asia at least, I have advised investors to adopt a market timing strategy based on return-to-the mean valuation measures (see Go Contrarian In Asia). The problem with this approach is that it works until it doesn’t. So what could cause a breakdown? Charles for one worries that the presence of a huge global US dollar...

    7
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    Germany And The Greek Question

    Last month Cedric Gemehl and I argued that the new geopolitical back-drop offered by Donald Trump had changed the basic strategic equation for Germany. Berlin could respond by doubling down on its mercantilist impulses, or alternatively embrace its eurozone partners. An interesting test case of our hypothesis has just arisen: yes, the Greek problem is back on the agenda.

    0
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    A Win-Win Deal For Abe And Trump?

    This Friday Japanese prime minister Shinzo Abe will touch down in Washington for his second meeting with Donald Trump since the November 8 US election. The auspices hardly appear propitious. In the run-up to the meeting, the new US president has pulled out of the Trans-Pacific Partnership, a multilateral trade deal built largely around the US-Japan economic axis. He has railed against Japan for deliberately undervaluing the yen. He has bemoaned...

    3
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    Gavekal Dragonomics

    The Downside Of Dividends

    Dividends were long an afterthought for Chinese listed companies—but no more: most large firms now pay out more than 30% of their earnings to shareholders. Yet this change has been wrought by heavy-handed regulation, rather than improving governance. The resulting system distorts the signals to investors and the incentives of company managers.

    3
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    The End Of The European Dream

    Back in 2002 I wrote a book, Lions Led By Donkeys, whose main point was that the euro’s adoption would kill the competitive and heterogeneous Europe that I so loved. It was prefaced by Milton Friedman who predicted that Europe was set to enter a period of rigor mortis. Fifteen years on and it is clear that Europe as a unitary concept is indeed dying.

    4
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    Less Than It Seems: US Financial Deregulation

    US bank stocks rallied strongly on Friday on Donald Trump’s promise to tear up much of the Dodd-Frank 2010 financial regulation act. But steering a new act through Congress will not be easy. And while proposals now on the table greatly simplify the existing rules, they do not amount to the wholesale easing of regulations that would be needed to drive a rapid acceleration of bank lending.

    0
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    Golden Rule Says Extend Duration

    Great economists are seldom top flight mathematicians. One exception was Maurice Allais, who won the Nobel Prize in 1988 for his “rigorous mathematical formulations of market equilibrium and the efficiency properties of markets”. Among his findings was his so-called “golden rule”, which states that over the long run, long term government bond yields always converge with the structural growth rate of the economy.

    2
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    Gavekal Dragonomics

    Is It Finally Time For The Property Tax?

    After more than a decade of debate, could China finally be ready to start imposing a property tax? In this piece, Rosealea argues that political will and technical preparations point to progress toward a tax in 2017. While some fear the impact on prices, the gradual rollout of a narrowly focused tax should be mostly a non-event for markets.

    0
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    India’s Budget: A Fine Balance

    After the fiasco that followed India’s move in November to scrap large denomination banknotes, yesterday’s budget was carefully calibrated to reassure jumpy markets. With the IMF estimating that the monetary bloodletting will drain 1pp off growth this fiscal year, doubts have resurfaced over India’s ability to realize its economic potential. The good news for nervous investors is that India remains wedded to fiscal responsibility. The bad news...

    0
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    Strategy Monthly: Beyond The Trump Rally

    We have revamped the format of our Monthly to make it a more useful guide to our key investment views. In this month's edition, Louis Gave looks beyond the temporary euphoria that gripped markets after Donald Trump's election and sketches out investment strategies for the coming year.

    0
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    The Eurozone Upturn Continues

    The data flow out of the eurozone—both forward and backward-looking—continues to paint a picture of accelerating activity, subdued core inflation, ongoing monetary accommodation, and—most notably for investors—improving corporate earnings.

    0
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    Gavekal Dragonomics

    The Lost Promise Of Urbanization

    China’s government has been ramping up its focus on urbanization and rural land issues, promoting new policies as breakthroughs that will keep driving growth for decades to come. But for all the rhetoric, the new policies are not fundamentally liberalizing. And the incentives they create could slow rather than accelerate rural-urban migration.

    0
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    The Real Political Risk In France

    There are many areas where Anatole and I agree to disagree. But one in which the two of us see eye to eye is the heightened influence political risk may have on markets this year. Consider France, where the political situation threatens to get complicated. The problem is not so much the presidential election, due to be held in two rounds in April and May, but the legislative elections set to be held a month later.

    2
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    Gavekal Research

    Points Of Agreement And Dissent

    Last week Louis laid out his roadmap for navigating financial markets in 2017. In this follow-up, Anatole picks up on five debating points, and details where and why he agrees or disagrees with Louis.

    2
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    The “Experts” May Yet Be Right

    Last week Louis set out a comprehensive roadmap for 2017. I have just five points to add: two points of strong agreement (on Europe and the oil price); two of dissent (on US bonds and Britain); and one that echoes Louis’s uncertainty and anxiety, but for slightly different reasons (about the pressures on the US dollar and what they could mean for emerging markets). I will explore these specific issues of agreement and dissent in a lengthier...

    3
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    Border Tax Adjustments In Context

    US president Donald Trump moved a step closer to realizing his “America first” trade policy yesterday, promising a 20% tax on imports from Mexico. However, rather than an outright tariff on imports, it is looking increasingly likely that the new levy will come in the form of a border tax adjustment, as envisaged by the House Republican majority as part of a wider US tax reform program. In theory, border tax adjustments should be trade-neutral,...

    2
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    Video: Making Sense Of US Trade Tax Plans

    Yesterday Donald Trump met members of Congress to discuss a 20% tax on imports into the US. However, what is being proposed is not an outright tariff, but rather a system of “border tax adjustments”. Will explains what these are, how they will work, and what effect they will have on the US dollar and the real economy.

    0
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    The Dow 20,000 Conundrum

    The Trump trade continues. Yesterday the Dow Jones Industrial Average passed the magical 20,000 mark for the first time, with the S&P 500 closing at a record high just a whisker short of 2,300. I hate to be the one to douse the market’s high spirits with a bucket of cold water (well, I don’t really hate it), but sober analysis suggests that the current Trump-propelled rally is a fad that may soon fade.

    0
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    Gavekal Dragonomics

    A Very Marginal Tightening

    Monetary policy is getting interesting as the Chinese New Year holiday approaches. The central bank has injected huge amounts of liquidity to the market, but it has also made a rare move to raise the rates of its lending facilities. In this piece, Chen Long explains the PBOC’s moves and why they don’t signal a hike in benchmark interest rates.

    0
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    Gavekal Research

    Drawing Meaning From 2016, And A Roadmap For 2017

    Having experienced a rough 2016, the temptation for most investors is to clean the slate and start again. Unfortunately, life in financial markets does not allow for such neat endings. In one of his biggest reports in years, Louis argues that after such a complex and tumultuous year, it is essential for investors to draw a breath and derive some understanding of what just happened. Only then should they try to sketch out future scenarios.

    0
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    Gavekal Research

    The Return Of German Inflation

    Inflation is re-emerging in Germany, and a tightening labor market implies inflationary pressures will continue to mount in what could promise to become the great German reflation that many have long looked for to rebalance the eurozone economy. Yet rising inflation threatens to erode one of the central tenets of the German economic model.

    0
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    Gavekal Dragonomics

    The Investment Backlash Begins

    Xi Jinping’s passionate defense of the globalized economy at Davos last week was, in reality, a sign that Beijing knows the tide is turning against it. The surge of Chinese outward direct investment in recent years has already sparked a backlash, and the political momentum for more restrictions on Chinese investment now looks unstoppable.

    3
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    Do We Need To Worry About The Shrinking US Monetary Base?

    The US monetary base is shrinking, and with Fed officials talking about winding down their bond holdings, it is only natural for equity investors to be concerned. However, as KX explains, the contraction in base money is a technical effect of recent regulatory changes, and the Fed is not yet running down its assets.

    0
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    Trump May Yet Learn To Like Border Adjustments

    Last week, Donald Trump dismissed border tax adjustments as “too complicated”. He may yet reconsider. If the newly-installed president has one dominant policy objective, it is to make the US more attractive as a destination for investment and as a location for manufacturing. Alongside deregulation and cutting the US corporate tax rate, imposing border tax adjustments along the lines proposed by the House Republicans is one of the simplest and...

    2
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    Is China Ready For A Trade Shock From Trump?

    China reported an acceleration in its economic growth on Friday, just hours before Donald Trump was sworn in as US president. But growth could take a hit if Trump makes radical changes to tax and trade policy. And while China has plenty of weapons to fight a trade war, those measures are unlikely to completely offset a sudden shock to its exports.

    3
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    Germany’s Date With Destiny

    Germany, more than any other European economy, has relied on the US-dictated, rules-based international system to define its post-World War II identity. Germany’s highly specialized export-orientated economy has thrived within the World Trade Organization and its security has been ensured by the American nuclear umbrella. It is not clear whether Donald Trump’s recent broadside against Berlin reflects a permanent rupture in that order, but...

    0
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    Trump’s Declarations On The Dollar

    Even more than getting it right on US interest rates, performance in 2017 will most likely be driven by getting the US dollar call right. And forming a view on the US dollar with any high degree of certainty is a challenge.

    0
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    Gavekal Dragonomics

    Dodging A Bullet In The Interbank Market

    In late December, China’s interbank market experienced its greatest turbulence since 2013. Though it was resolved quickly, the mini-crisis still offers some important lessons. Beijing’s technocrats did show good crisis management skills—but it’s also clear that weak links in the domestic financial system will continue to test those skills.

    1
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    On Being Wrong

    For much of the second half of 2015, Charles was concerned that the US economy was softening, and that it would tip into recession sometime in mid-2016. The feared recession never materialized. In this paper, Charles asks “why not?”, re-examining normally reliable indicators to work out where and why they went wrong.

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