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E.g., 13-12-2018
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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.

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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...

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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.

    5
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    Gavekal Research

    No Renminbi 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.

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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.

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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.

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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-...

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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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    Gavekal Research

    Bonds' Failure To Rally

    Given all the bad news for markets this year, one would be forgiven for thinking that US treasuries and German bunds would have been a good investment. But even as emerging markets have sold off and the US dollar has risen against almost every emerging market currency out there, US treasuries (and to a lesser extent bunds) have been an absolute dog of an investment.

    4
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call October 2018

    In this month’s Research Conference Call Louis-Vincent Gave examined the present bad tidings from markets and asked whether the global bull market faces a denouement. Anatole Kaletsky argued that this sell-off will likely prove to be a temporary setback for emerging markets and that the global bull market may have further to run. However, he warned that the outcome will depend heavily on where the oil price goes from here.

    0
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    Gavekal Dragonomics

    Building The Northern Powerhouse

    After a decade of splurging on infrastructure projects, China’s local governments are now having to cut back. But Beijing has continued to pour money into centrally supported initiatives, particularly Xi Jinping’s pet project for developing the region surrounding Beijing. In this piece, Tom reports on how this northern megaproject is progressing.

    0
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    Gavekal Research

    The EM Value Question

    After a grim seven-month sell-off, it is natural to ask whether emerging markets now offer attractive value. Since its January peak, the MSCI emerging markets index has fallen -22%. The corollary has been a deep derating, which has left EM equities trading below their long term mean P/E ratios. However, a healthy dose of caution is warranted.

    5
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    Gavekal Research

    Why I Love The Euro

    By now surely almost everyone, except perhaps Jacques Delors and Jean-Claude Trichet, must accept that the euro is the greatest monetary mistake governments have imposed on their unsuspecting populations since then Chancellor of the Exchequer Winston Churchill took Britain back onto the gold standard in 1925.

    2
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    Gavekal Research

    Beijing Is Aiming At Stabilization, Not Stimulus

    Chinese authorities are stepping up the pace of monetary easing, and are prepared to tolerate greater exchange rate volatility as a consequence. But, as Chen Long explains in this piece, Beijing’s easing measures are aimed at stabilizing the domestic economy, not stimulating activity in response to a trade-war-induced slump.

    0
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    Gavekal Research

    Bottoming Out In France

    It has been a tough summer for the French economy, and a difficult rentrée—as the French call September’s return to classes at the start of the school year—for the government of president Emmanuel Macron. France’s growth rates have fallen of a cliff this year, with GDP growth falling to just 0.2% quarter-on-quarter in the first and second quarters, from an average of 0.7% in 2017. And after household spending actually contracted in 2Q, consumer...

    0
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    Gavekal Research

    Still Not Interested In US Bonds

    Wednesday saw the second biggest sell-off in US bonds since November 10, 2016, immediately after the US presidential election. The 10-year treasury yield jumped 11bp to 3.16%, its highest since 2011. However, investors should be wary of treating this as a buying opportunity, for a number of reasons.

    4
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    Gavekal Research

    Strategy Monthly: Are We Still In A Bull Market?

    At the start of the year, markets seemed poised for a rotation out of US equities into non-US assets. In fact, US equities and cash are the only assets to have delivered positive returns this year. Louis examines the reasons why and concludes that portfolio managers should stay defensive, while looking for buying opportunities in oversold emerging markets, and in European assets in non-euro countries such as the UK, Sweden and Switzerland.

    0
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    Gavekal Research

    Italy’s Inevitable Endgame

    Just over a year ago, with the optimism towards eurozone stock markets, and Italy in particular, riding high, I wrote a paper expressing the view that none of the eurozone’s underlying problems, nor Italy’s, had been solved. One year later, the situation is now looking very dangerous indeed.

    1
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    Gavekal Dragonomics

    How Demographics Are Shaping China's Future

    Where is China heading as it undergoes demographic change of unprecedented speed and scale? In this chartbook, Ernan offers a comprehensive guide to the unfolding transformation of the nation’s population, focusing on changes in family-planning policy, the implications of an aging society, and the shifting patterns of migration.

    0
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    Gavekal Research

    New Nafta Clears The Way For A China Fight

    The good news is that after months of posturing, President Donald Trump’s administration has cut a deal for a new Nafta, following July's hasty agreement with the EU to defer car tariffs. Trade war on all fronts may now be off the agenda, but conflict with China over trade, investment, technology and geopolitical dominance will only escalate.

    2
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    Gavekal Research

    More Trouble Ahead For Italian Yields

    The market gave an unequivocal two thumbs down to Italy’s budget deficit forecast announced on Friday. In proposing a deficit target for each of the next three years of 2.4% of GDP, finance minister Giovanni Tria was perceived to have bowed to pressure from Italy’s populist coalition for spending increases and tax cuts, and to have relegated debt reduction to a back seat. In response, Italy’s 10-year government bond yield jumped 26bp to 3.14%,...

    0
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    Gavekal Dragonomics

    Catching Up In Chips

    Technology is at the heart of China’s trade conflict with the US, and no technology is more critical than semiconductors. So as the US moves to block its access to technology, China is doubling down on its drive to build up a domestic semiconductor industry. In this piece, Dan lays out the reasons why China’s drive will eventually succeed.

    3
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    Gavekal Research

    The Big Lesson From Argentina

    One of the reasons this summer’s sell-off in Argentinian debt was so vicious was that few international banks these days are willing to make markets in such “exotic” bonds, and even fewer are prepared to hold a substantial inventory. As a result, when foreign investors rushed for the exit, there was no market. But as Louis explains in this paper, the problem is hardly unique to Argentina. Markets a lot closer to home could face similar trouble.

    8
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    Gavekal Research

    The Severity Of India’s Rout

    It has been a torrid month for Indian markets. Equities have tanked by -7%, the rupee has dropped to all-time lows, and a new crisis is emerging in the financial sector. Liquidity is tightening in the money markets, threatening the survival of several non-bank financial companies and raising the prospect of contagion risk that could spill over to the rest of the financial system and lead to a broader economic slowdown. The rout in emerging...

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