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    Gavekal Research

    No Good Choices For China

    China wants to show that it will stand up to US threats to escalate the trade war. Yet Yanmei argues that it has few attractive policy choices. It can neither back down from the confrontation nor retaliate enough to deter the US. With little prospect of a negotiated solution in the near term, Beijing is focused on stabilizing the domestic economy.

    5
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    Gavekal Research

    Weighing The Forces Driving The US$

    Where is the US dollar going next? After weakening markedly against other developed economy currencies at the beginning of the year, the US dollar staged a vigorous rebound in April and May. Since then, the DXY US dollar index has essentially tracked sideways. Of course, trying to forecast the US dollar’s moves is frequently a thankless task. Nevertheless, it is important to examine both the bullish and bearish forces at work and to weigh their...

    1
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    Gavekal Dragonomics

    Will Mergers Become A New Front In The Trade War?

    On July 25, Qualcomm canceled its US$44bn acquisition of NXP Semiconductors after it failed to get approval from Beijing before its self-imposed deadline. In this piece, Matt assesses the big question this failure raises: has China decided to use its merger-review process to punish US companies for the tariffs imposed by the Trump administration?

    0
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    Gavekal Research

    The Bullish Logic Of Trump’s U-Turns

    The news on Wednesday that Donald Trump’s administration is considering imposing tariffs of 25%—rather than 10%—on an additional US$200bn of Chinese goods might appear to be an aggressive escalation of its trade conflict with China. But there is a high probability the proposed tariffs will never be implemented. Trump has a track record of talking tough, only to back down before it comes to the crunch; a pattern of behavior that may help to...

    4
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    Gavekal Research

    US Housing Gets Vertiginous

    There is a lot to like about US housing. Vacancy rates are low, as are inventories of unsold homes. The labor market is tight and wages are steadily rising. At this point of the cycle there has usually been substantial over-building, but not this time. While supply has increased, housing starts have yet to exceed my estimate of the structural rate of household formation. Yet despite these decent enough fundamentals, valuations look stretched and...

    0
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    Gavekal Research

    Strategy Monthly: Towards A Global Liquidity Crisis?

    In our latest outlook for global investment strategy, Charles Gave warns that the world may be heading into a dollar liquidity squeeze. There have been seven such scarce-dollar episodes since 1971, and every one produced some big financial accidents. The basic symptom today is that the US is heading into an inflationary boom, while the rest of the world is seeing slower economic growth and weaker asset prices. Investors must be defensive; but...

    0
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    Gavekal Research

    What Will Halt The Renminbi’s Fall?

    The momentum for a weaker renminbi is considerable, with the US ratcheting up its trade war with China and the Chinese government moving to easier fiscal and monetary policies. But Chen Long argues that the renminbi’s downside from current levels may prove limited even though the central bank is unlikely to intervene as much as it did in 2015-16.

    2
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    Gavekal Research

    Lessons From The Tech Sell-Off

    Last week’s technology sector jitters have continued into the this week, with the FANG+ index now down -9% from last Wednesday’s close. Amid the general pull-back, two spectacular high-profile face-plants have really stood out: within one trading session, Facebook and Twitter both shed a fifth of their values. Awkwardly, these severe sell-offs unfolded on what was pretty mundane news: disappointing revenue guidance for Facebook, and...

    1
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    Gavekal Research

    When To Buy US Equities?

    Last month, Will and KX asked When To Buy US Bonds? This month, they turn their attention to US equities and devise a portfolio asset allocation model that advocates overweighting stocks against bonds when returns on invested capital and earnings yields exceed corporate funding costs. Back-testing gives an impressive historical outperformance at a reduced volatility relative to the S&P 500. But just as important is what the model has to say...

    0
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    Gavekal Research

    Good News Really Is Good News

    The US economic engine is humming, and corporate earnings continue to beat expectations. Data released on Friday showed real GDP grew at an annualized 4.1% in the second quarter. And with just over half the S&P 500’s constituents having reported for 2Q, 83% have exceeded earnings expectations. Yet investors are unimpressed. The US stock market has so far failed to regain its January pre-VIX-spike high, and despite Friday’s strong GDP print,...

    2
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    Gavekal Research

    No Exit From Brexit

    On Friday, Anatole set out his view that a second Brexit referendum is likely, and that in all probability it will reverse the original 2016 vote. Exercising his right to reply, today Charles explains why no second referendum is possible, why a no-deal, hard Brexit is increasingly likely, and why this will present a great buying opportunity in UK assets.

    15
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    Gavekal Research

    Stabilizing, Not Slumping

    After a rocky first half of the year, in which a clutch of key indicators deteriorated steeply, recent signs indicate that eurozone growth is stabilizing rather than rolling over. Without doubt, there are still formidable downside risks. However, on balance the latest batches of data point to a continuation of above-potential growth, albeit in a lower gear than in 2017.

    0
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    Gavekal Research

    The Arithmetic Of Brexit

    If a country votes to make two plus two equal five, that “democratic decision” will eventually be overwritten by the rules of arithmetic. Anatole reckons this is what’s playing out in Britain, as Theresa May’s government struggles to get a parliamentary majority for any realistic Brexit plan. If the situation persists, the only alternative will be another referendum—only this time the choice would be between remain and a far less attractive, but...

    11
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    Gavekal Research

    No Cause For Celebration

    The US-EU trade truce announced by President Donald Trump and European Commission President Jean-Claude Juncker on Wednesday is good news for the world economy. Yet it is still far too early to write off global macro risk from a generalized trade war. US tariffs on steel and aluminum imports remain in place, as do the EU’s retaliatory tariffs on US goods; and the threat of American levies on US$335bn in car and car part imports has been...

    1
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    Gavekal Dragonomics

    Housing Inventories Hit Bottom

    The long decline in China’s housing inventories—the key factor driving the recovery in construction—now seems to have ended. After falling in 2015, 2016 and 2017, housing inventories are now on pace to end 2018 slightly higher. In this piece, Rosealea explains why this change will not spell the end of the construction cycle just yet.

    0
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    Gavekal Research

    The Bank Of Japan's Choices

    Global bond markets have been jolted this week by an unusual source: the Bank of Japan. Reports that the BoJ is considering making unspecified tweaks to its policy stance triggered a 5bp spike in the 10-year Japanese government bond yield on Monday, and were blamed for an 8bp rise in the 10-year US treasury yield. BoJ governor Haruhiko Kuroda promptly denied the stories, insisting he knew “absolutely nothing” about the matter. And the central...

    0
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    Gavekal Dragonomics

    Stemming The Tide Of Bond Defaults

    As China’s government shifts economic policy more explicitly into easing mode, will it relieve the growing strains in the corporate bond market? In this piece, Chen Long diagnoses the underlying causes of a recent wave of defaults that have spooked investors, and explains how the government is changing policy to ease that financial stress.

    0
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    Gavekal Research

    An Indian Quagmire

    India has won kudos for adopting a modern bankruptcy law that makes it easier for big lenders to clean house on a bad debt problem that has festered since the early 2000s. The problem is that an approach which would garner broad support on Wall Street and then be executed through fairly efficient courts in New York and Delaware, has in India run into the sand of murky politics and bureaucratic sloth.

    0
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    Gavekal Research

    Video: Understanding India’s Bad Loan Problem

    India has won kudos for adopting a modern bankruptcy law that makes it easier for big lenders to clean house on a bad debt problem that has festered since the early 2000s. In this video interview Udith discusses how the new bankruptcy law has worked in practice, and whether it will be enough to solve Indian banks' bad debt problem.

    0
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    Gavekal Dragonomics

    Destination Escalation

    Will we see any break in the escalation of Trump’s trade wars this year—either because one of the targets capitulates and tries to strike a deal with the US, or because blowback within the US against the negative impact of trade wars gets strong enough that Trump needs to beat a tactical retreat? The answer is a firm no, on both counts.

    2
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    Gavekal Research

    What US Auto Tariffs Would Mean For Europe

    Last week’s public hearings in Washington heard a chorus of industry opposition to the US administration’s proposed import tariffs on cars and car parts. But in Europe at least, markets appear to be coming around to the view that the tariffs will go ahead regardless. After Friday’s fall, the auto and auto parts sub-index of the Stoxx 600 has slumped -15% since late May when the US Commerce Department announced its Section 232 investigation,...

    1
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    Gavekal Research

    Europe's Tri-Polar Disorder

    Having been at odds with each other for at least three years, the empire is striking back against an upstart member. The European Union on Thursday said it will sue Hungary for its unfair treatment of asylum seekers. A few years ago, such a stand-off would have been assumed to have only one outcome: a win for the dispensers of patronage in Brussels. That is no longer the case and this tells us much about how the EU’s traditional power brokers—...

    3
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    Gavekal Research

    Fair Weather Friend, Or Safe Port In A Storm?

    On Thursday morning in Asia, the Japanese yen was trading at ¥112.7 to the US dollar. At that level the yen is down -7.2% from its late March high, a fall which has erased all its first quarter gains and left the currency exactly flat year-to-date. At first glance this fall might seem surprising, given the degree of nervousness in global markets and the yen’s reputation as a safe haven currency, not to mention its undervaluation relative to...

    0
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    Gavekal Research

    Trump, And The US Dollar As The World's Reserve Currency

    For the 70 years since the launch of the Marshall Plan, the US dollar has reigned unchallenged as the world’s reserve currency. I have written extensively about the characteristics of the world monetary system that has grown up based on the US dollar. But I do not remember ever having written on the costs the US must bear to sustain what Jacques Rueff termed its “imperial privilege” as issuer of the global reserve currency.

    8
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    Gavekal Dragonomics

    Don't Fixate On Fixed-Asset Investment

    If you believe China’s official statistics on fixed-asset investment, then capital spending is now collapsing across the country. But you probably shouldn’t believe those numbers, for reasons that Andrew explains in this piece. True growth in investment spending will slow in 2018, but much less catastrophically than the headline data suggest.

    2
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    Gavekal Research

    Allez Les Bleus!

    A year into Emmanuel Macron’s presidency, the French have finally invaded the streets in huge numbers. It was not, however, to man the barricades and defy his reform agenda, but instead to engage in a massive national celebration after Les Bleus won their second football World Cup in 20 years. Having suffered the confidence-sapping impact of 12 major terrorist attacks since 2012, Sunday’s win against Croatia has blown away the cobwebs and as one...

    0
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    Gavekal Dragonomics

    Video: China's Technology Strategy

    China has an ambitious industrial upgrading plan, called Made in China 2025, which targets Chinese leadership in about 30 technological segments. In this video interview Dan explains how the government aims to achieve this, how this plan differs from previous Chinese policy goals, and whether it is likely to succeed.

    0
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    Gavekal Research

    The Yield Curve As A Recession Signal

    Every time since the 1960s that the US yield has inverted, a recession has followed within 18 months to two years. So it is no surprise that the recent flattening of the curve, which has seen the 10-2-year treasury yield spread fall to just 25bp, is attracting attention. Many observers say the flattening reflects market expectations of weaker aggregate demand ahead. Some argue that the flattening of the curve itself may cause a recession, by...

    0
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    Gavekal Dragonomics

    Time To Get Fiscal?

    China’s latest data reinforce an economic trajectory that is getting worrisome for policymakers, with weaker domestic activity, an escalating trade conflict and a greater-than-expected slowdown in credit growth. Further easing of monetary policy is definitely in the cards, but there is now rising pressure on Beijing to step up fiscal spending.

    1
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    Gavekal Research

    Japan Joins The Global Labor Market

    The biggest worry of senior managers at Japanese manufacturing firms is not Donald Trump’s trade war, the state of global demand or fear of Chinese intellectual property theft, but an acute shortage of workers. Neil charts the dynamics of Japan’s ever-decreasing labor market, and examines the policies Tokyo is rolling out in an attempt to deal with the problem.

    1
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    Gavekal Dragonomics

    The Biggest Winners In Real Estate

    China’s real-estate developers are getting hammered in stock and credit markets. But the largest of these firms are well-placed to ride out current strains, and are the main beneficiaries of accelerating consolidation and government policy. As the Chinese property market matures, the winners are likely to be a small group of the largest companies.

    0
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    Gavekal Research

    The Chinese Juggernaut Will Roll On

    In 2015, I sat down with Sri Lanka’s then-new finance minister. The “teardrop of India” had recently elected a fresh government, kicking out a corrupt president widely regarded as in China’s pocket. Vowing to scrutinize all Chinese deals, the new leaders suspended a massive real estate project in Colombo harbor. “The high costs come from nothing other than corruption, but we do not want taxpayers to pay for the past decisions of a corrupt regime...

    1
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    Gavekal Dragonomics

    Audio & Transcript — Gavekal Research Call July 2018

    In this call Arthur Kroeber outlined his view on why President Donald Trump’s trade war is not a bluff, and is likely to escalate ahead of the US midterm elections in November; Andrew Batson explained the macro-level effects caused by all this uncertainty; and Chen Long discussed the market impacts in China and the country’s likely response.

    0
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    Gavekal Research

    The Real Italian Story

    The big worry about Italy is that its new populist government adopts policies that spark another eurozone crisis, and even a breakup of the European Union. This view is almost certainly wrong, for despite the government this week announcing a roll-back of labor market reforms, it will struggle to implement its radical agenda in any systematic way. This is due to constitutional checks that inhibit radical changes, and the fraught political logic...

    4
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    Gavekal Dragonomics

    Policy Headwinds For Chinese Stocks

    Chinese equities have finally had a few solid trading sessions after their steep decline in the latter half of June. But the CSI 300 index is still down -14% year-to-date, and betting on a rebound from here looks unwise. A confluence of factors has been pushing down the market—tougher financial regulation, weak data, a falling currency, and the trade conflict with the US. And none of these factors is turning positive, especially with the US...

    0
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    Gavekal Research

    The Recession Of 2019

    Over the last three months, I have become increasingly concerned that a recession will hit the world economy in 2019. In this paper, I shall explain why. My reasoning is simple, and is based on the behavior of an indicator I have long followed, which I call the World Monetary Base, or WMB. Every time in the past that this monetary aggregate has shown a year-on-year decline in real terms, a recession has followed, often accompanied by a flock of...

    17
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    Gavekal Research

    India’s Logistics Revolution

    India's logistics sector is so inefficient that getting goods from producers to consumers accounts for about 17% of national output, or twice the level in most developed economies. The result is retarded growth and weakened competitiveness. But thanks to a nationwide goods and services tax, growing consumer demand and rising land prices, consolidation and modernization is afoot across the sector.

    0
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    Gavekal Research

    The Message From Eurozone Credit

    Should we worry that eurozone corporate bond spreads have doubled since late January? After all, bond yields are rising globally and as deflationary risks have ebbed the European Central Bank has signaled its intent to normalize monetary policy. Yet, looking back at the eurozone’s last cycle, policy was tightened without spreads blowing out. My concern is that the present squeezing of financial conditions is sending a darker message, and will...

    0
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    Gavekal Research

    Still Caught In The Cycle

    The June US labor market report released on Friday appears to bear out Federal Reserve chairman Jay Powell’s view, set out in a speech last month, that “there is a lot to like about low unemployment”. Although the headline payrolls number grew by an unexpectedly strong 213,000 month-on-month, the unemployment rate actually ticked higher from 3.8% to 4%, as greater numbers entered, or reentered, the labor market.

    0
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    Gavekal Dragonomics

    The Global Rise Of Chinese Smartphones

    Xiaomi and other Chinese smartphone makers are among the first Chinese consumer-goods companies to have gained significant market share outside of China. In this piece, Dan explains where their success has come from and assesses their prospects: Chinese smartphones may not displace Apple and Samsung, but can limit their gains in emerging markets.

    0
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    Gavekal Research

    Time To Buy Brexit Britain

    “Will the Brexit agony never end?” Anatole asked in mid-June. It now seems that the agony may end much sooner than expected. Following last Friday’s decision by prime minister Theresa May to blur all her “red lines” in negotiations with the EU, and—paradoxically—the subsequent resignation of hard-Brexiteer cabinet minister David Davis, the time to start buying cheap British assets may have come.

    4
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    Gavekal Research

    A National Security Imperative

    Depending on commodity prices, in any given year China spends between US$250bn and US$400bn on imports of the “big five” commodities it needs to continue growing: oil, iron ore, coal, copper and soybeans. Before it can do that, it must first “earn” those US$250-400bn. Only then can it can turn around and buy the stuff the country needs to ensure its long-term growth.

    10
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    Gavekal Research

    Hard Yards For Emerging Markets

    Emerging markets have been hit by the combined effect of a stronger US dollar, tighter international liquidity and rising trade tensions, causing their currencies to fall more in the last few months than in the 2013 “taper tantrum”. The big fear for EMs is that the end of easy money globally creates a giant margin call. As a firm, we have tended to be upbeat on their prospects in this cycle, and it may be that a huge buying opportunity has...

    2
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    Gavekal Dragonomics

    The Renminbi Catches Up With Reality

    After its biggest downward move since 2015, where is the renminbi headed next? Since mid-June it has fallen by over -4% against the US dollar to CNY6.63, and the trade-weighted CFETS index has also declined by -3% from its June peak. This has led to some commentary that China is pushing down its currency to prepare for a trade war with the US. In fact the downward move was overdue, and was largely a delayed reaction to foreign exchange market...

    0
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    Gavekal Research

    A Better Fed Model

    The “Fed model” which values US equities relative to bonds is now more than 20 years old. In that time, it has become widely used and has attracted equally widespread criticism. In this paper Will and KX revise the original to iron out some of its flaws, and come up with an improved model which offers greatly superior risk-adjusted returns.

    6
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    Gavekal Research

    The Trade War And The US Cycle

    How will the US administration’s trade disputes affect the US economic cycle? In the worst case scenario, if Donald Trump follows through on all his threats the disruption to global supply chains could be great enough to push the world economy into recession. At this point, the greatest impact flows from the high degree of uncertainty about future actions.

    0
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    Gavekal Research

    Strategy Monthly: The Four Roads Ahead

    The first half of the year was not a great one for global equities, and the second half is clouded by risks: slowing growth, rising inflation, renewed political stress in the eurozone, and most of all the threat of massive protectionism by the United States. Louis Gave offers four scenarios of how things could play out, and Arthur Kroeber explains why it's time to start seriously worrying about a worst-case trade scenario.

    0
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    Gavekal Dragonomics

    The End Of Normal Trade

    The US may have backed down from imposing new restrictions on Chinese investment in the US. But it would be wrong to see this as a de-escalation of the US-China trade conflict. In this piece, Andrew argues that the tariffs taking effect Friday will mark the end of two decades of normal US trade with China, and the return of political uncertainty.

    0
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    Gavekal Research

    What Could Turn The Tide?

    The global equity bull market is increasingly looking like the German soccer team: old, tired and getting slow, having reached its peak a while back. Even the “captain” of the bull market, the S&P 500, last made new highs five months ago. Since then, the asset classes that have delivered positive returns have been as few and far between as German goals. Year to date, investors have lost money on US investment grade bonds, on emerging debt,...

    2
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    Gavekal Dragonomics

    A Rethinking Of Housing Subsidies

    China's government, worried about continued rapid growth in housing prices, is now reconsidering a major program for subsidizing housing sales. As Rosealea explains, this policy change shows the government is still more focused on curbing frothy housing prices than on boosting growth, and will weigh on housing sales in the rest of 2018.

    0
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