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E.g., 12-12-2017
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    Gavekal Research

    The Rather Lame US Dollar Rally

    The year is far from over but when the time does come to close the books, it seems likely that the sudden weakness of the US dollar this year will count as one of 2017’s biggest surprises. Most investors started the year with a distinct bullish bias on the dollar, and a consequent bearish bias against emerging markets (an outlook we did not share, see for example our January 19 piece Trump’s Declarations On The Dollar). However, instead of...

    6
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    Gavekal Dragonomics

    The Expanding Universe Of Private Companies

    In 2017, China is on track to host a record-setting number of IPOs, mostly by private firms. Big state firms may still dominate stock market indexes, but they are no longer the only option for investors. The number of Chinese private firms large and liquid enough to be of interest to investors is ten times larger than it was just five years ago.

    1
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    Gavekal Research

    A Kinder Semiconductor Cycle

    In August, the world’s semiconductor-makers shipped chips worth a record US$35bn, up by more than 20% over a year earlier. That growth has been reflected in stock prices. The PHLX semiconductor index has risen 43% over the last 12 months, and at yesterday’s close was just 11% below its all-time high, set in March 2000.

    0
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    Gavekal Research

    India’s Economic Funk

    India’s economy is in a cyclical funk, weighed down by rising bad debt, anemic credit and falling private investment. Growth is at its slowest for three years after weakening for five successive quarters to 5.7%, with little sign of an imminent pick up. Even foreign portfolio investors, who have poured more than US$26bn into India this year betting on its strong macro fundamentals, are beginning to waver. With the general election in 2019 now on...

    0
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    Gavekal Research

    Strategy Monthly: Japan Is Back!

    For a quarter of a century, Japan has been stuck in a structural malaise, and the only assets you wanted to own were Japanese government bonds. Charles believes this era is over. Corporate profits are at a record high relative to GDP and seemingly headed higher; the yen is the cheapest it has been, on a purchasing-power basis, since 1985. The yen could well be the best performing currency over the next few years, but is so undervalued that even...

    0
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    Gavekal Dragonomics

    Southwest Rising

    For almost two decades, China’s government has been pouring investment into its inland provinces. Tom Miller visits the southwest and finds the results have been striking: major cities have modernized and incomes are up substantially. Better infrastructure and industrial relocation are now arguably driving a self-sustaining regional growth story.

    0
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    Gavekal Research

    The Catalan Question And The Future Of Europe

    Yesterday the world was treated to the unedifying sight of the national police of a democratic state using violence in an attempt to prevent peaceful crowds of citizens from voting. If any investors still believed that the electoral defeat of the far right earlier this year in the Netherlands and the election of Emmanuel Macron in France had resolved the structural forces working to fragment the European Union, yesterday’s footage from the...

    5
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    Gavekal Research

    The Cycle And The Structure

    This bull market has been driven not by conviction, but a belief that in a zero-interest world there is no alternative to equities. Yet with global growth picking up in a seemingly coordinated fashion, commodity prices rising and bond yields firming up, does that condition still hold? Louis thinks that many investors’ “barbell” strategies could be extremely vulnerable to a change in the investment environment that may now be unfolding.

    8
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    Gavekal Research

    The Return Of Alpha?

    This week’s obsession seems to be whether the big reflation trade is back on, heralding a shift in the investment environment. Louis will address this question in a piece to be sent later today, but it is worth noting another important morphing of the investment milieu: that actively managed funds are handily outperforming passive index funds.

    2
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    Gavekal Research

    No Closer To Effective Tax Reform

    The much-anticipated US tax reform plan from “the big six” (officials from the administration, House and Senate) has landed. What a disappointment it is. The ball has barely been pushed forward at all. It thus seems unlikely the US will get major tax reform. And if it does, it is likely to be much less effective than the plans previously proposed by the House Republicans.

    9
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    Gavekal Dragonomics

    Macro Update: Prolonging The Peak

    In our latest quarterly chartbook, Chen Long reviews the mixed signals from China’s economy and markets. While the cycle has peaked, the government has still found ways to prolong industrial reflation. But economic growth and bond yields will head down from here, though gradually, as the tightening of financial regulation has been well managed.

    0
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    Gavekal Research

    The German Election And Macron's Speech

    Somewhat incongruously, French President Emmanuel Macron yesterday delivered a grand new vision of a federalist European Union less than 48 hours after German voters had offered two fingers up to such solutions. Louis applauds Macron for focusing on the logic demanded by the single currency system, but wonders if he may be whistling in the wind as Berlin turns its head eastward.

    4
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    Gavekal Research

    The Real Story With US Inflation

    While hardly ranking as a hawk, Janet Yellen yesterday restated her view that inflation remains a worry. The Federal Open Market Committee as a whole may have last week nudged its 2017/18 inflation forecasts lower, but Yellen continues to argue that weak pricing pressures are transitory. The corollary is that the Fed should stick with its gradual monetary tightening plan. This places her slightly at odds with policymakers like Charles Evans, who...

    2
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    Gavekal Research

    Japanese Stocks Beyond The Election

    Global equity investors could be forgiven for ignoring the Japanese general election announced yesterday as of little importance. After all, many remain underweight the Japanese market, and at first glance there is little prospect of any change of government or policy likely to change their minds. However, such a dismissive attitude would be a mistake.

    2
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    Gavekal Dragonomics

    The Bottom Line On North Korea

    Even as the US and North Korea exchange more threats, actual US policy still focuses on getting China to apply economic pressure. Yanmei argues that while China has gradually cut trade ties with the North, it wants the regime to stay in place. This is China’s bottom line, not because of any friendship but because China’s own interests demand it.

    10
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    Gavekal Research

    Better Than It Looks In Germany

    Headline writers seem unsure whether to laud Angela Merkel for winning a likely fourth term as German chancellor, or dub her a lame duck amid a fractured political landscape. With the Social Democratic Party (SPD) polling just 20%, it is clear that the implosion of center-left continental parties continues apace, while the stellar performance of an avowedly far-right party shows that populism remains a potent force. My bet, however, is that the...

    1
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    Gavekal Research

    May’s Misguided Brexit Speech

    Listening to Theresa May’s speech last week in Florence, Charles thought the British prime minister sounded like an unfaithful wife attempting to achieve an amicable separation from the husband she cuckolded. Her approach is mistaken. May’s interlocutors in Brussels cannot be mollified with promises of continued affection. They are ideologues, and they are out to punish the UK for daring to challenge their ideology.

    10
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    Gavekal Research

    Winners And Losers From The German Election

    Whatever the result of Germany’s election on Monday morning, the leaders of the Christian Democratic Union will start preparing for the post-Merkel era. Which is why this German election matters. Indeed, there is a significant spread of potential outcomes, which have different implications for both the European economy and investors in European assets.

    0
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    Gavekal Research

    Bond Markets Don’t Speak Catalan

    This week has seen the Spanish government arrest Catalan public officials and take control of the region’s public finances in response to an independence plebiscite that it says is illegal. Cedric concedes that the row is messy and won’t be quickly resolved, but says that it is highly unlikely to result in a genuine political crisis that derails the Spanish economic recovery.

    4
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    Gavekal Dragonomics

    Online Retail Is Maturing

    The red-hot growth of online retailing in China has cooled in recent years, but it heated up again in the first half of 2017. Ernan argues this is likely a blip, as the fundamentals show online retail is an increasingly mature market. Leading firms are now focusing on the convergence of offline and online retail as the next big opportunity.

    0
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    Gavekal Research

    EM Can Handle Fed Fallout

    Yesterday, the “world’s central bank” confirmed that it will reverse its quantitative easing policy and likely raise interest rates in December and then three times in 2018. On the same day, the benchmark emerging market index nudged higher and is only a whisker off a six year high. Ordinarily, Federal Reserve tightening is terrible news for EMs, especially for those economies with the temerity to simultaneously try policy easing. Yet this is...

    0
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    Gavekal Research

    QT And The Treasury Quandary

    The Federal Reserve has confirmed that quantitative tightening will begin next month as it gradually lowers its holding of treasuries and mortgage-backed securities. For investors, the question is whether they should “fight the Fed” by owning assets that are now out of favor with the central bank. I would argue that such a formulation is wrong and these are good times to be mitigating risk by picking up treasuries, probably of shorter duration.

    7
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    Gavekal Research

    Sterling And The Brexit Soup

    Anyone who doubts that interest rate expectations are the main driving force of currency movements, got a wake-up call last week, when sterling surged from US$1.32 to US$1.36 in response to the Bank of England’s bluntly hawkish statement that “there may need to be some [upward] adjustment of interest rates in the coming months”. Nevertheless, I remain a denier.

    0
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    Gavekal Research

    India Macro Update: The Risk In The Rupee

    Indian Economic growth in the second quarter was expected to slow due to the impact of “demonetization” and a new sales tax being rolled out, yet the biggest hit to growth came from an overvalued rupee hitting net-exports. The impact of a strong currency may be to defer India’s capital spending cycle and put the economy on a lower growth trajectory. Since Indian equities are richly valued, Udith and Tom are cautious about their outlook. In this...

    0
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    Gavekal Research

    A Somewhat Changed Germany

    After recent high-drama elections in the US, France and Britain, Germany’s national democratic exercise has been a relative snooze-fest. On Sunday, Angela Merkel’s Christian Democratic Union grouping should comfortably win the biggest slice of the vote and the coalition building will start. There are, however, reasons to think that Merkel could attempt to strike out on her own.

    6
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    Gavekal Research

    Reviewing My Calls

    Over the years my research has focused on broad concepts which have been applied in many situations and lots of reports. These include ideas such as the disruptive power of platform companies, assets whose value comes from scarcity rather than efficiency, or the effect of firms running on Schumpeterian, Malthusian or Ricardian principles. Once in a while, however, I do get specific and make investment calls. Having had a little time this week, I...

    6
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    Gavekal Research

    Any US Profits Rebound Lacks Legs

    US equities have rallied to new highs on a favorable liquidity tide, buoyed by hopes for coordinated global growth. But they have also been given a leg-up by an apparently improved US profits outlook, as shown in the second quarter national accounts data. There are, however, compelling reasons to think that an uptick in profit margins cannot last. As 59% of value added by US non-financial corporates went to their workers in 2Q17, these center on...

    0
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    Gavekal Dragonomics

    Capacity Cuts Won't Hold Up Metals Prices

    To reduce air pollution, China says it will run northern steel mills at just half their capacity this coming winter. Prices of steel and other metals initially rallied on the news, but now are coming off. In this piece, Rosealea argues that metals prices have seen the top of their range, and explains why capacity cuts won’t push prices higher.

    0
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    Gavekal Dragonomics

    High Financial Anxiety

    China’s financial system has its troubles, but a large-scale crisis is unlikely. Localized problems among poorly run, small-scale city and rural banks are the bigger risk.

    0
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    Gavekal Dragonomics

    Your Guide To The Maze

    China’s financial system has grown almost five-fold and seen a proliferation of players and products over the past decade. We try to impose order on chaos and explain how the system works.

    0
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    Gavekal Dragonomics

    A Short History Of Financial Deregulation

    Financial deregulation has seen a cartel of national state-owned banks give way to a bewildering array of local banks, non-bank lenders, wealth management products and loans disguised as investments. Regulators are tightening their grip, yet so long as Beijing demands high-speed growth, it will have to tolerate some financial misbehavior.

    0
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    Gavekal Dragonomics

    China’s Banks Are Better Than You Think

    China’s banks get a bad rap. But actually they are pretty well run, especially if one understands their twin roles as commercial actors and tools of state development policy.

    0
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    Gavekal Dragonomics

    Beijing’s Bid To Make US Rail Great Again

    CRRC is winning contract after contract in the US light rail market, slowly squeezing out traditional competitors. Its secret? The promise of direct investment and job creation.

    0
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    Gavekal Dragonomics

    Hollywood Hoo-ha

    Chinese investors have developed a taste for Hollywood, but their buying spree has drawn more scrutiny than tangible benefits. With their wings clipped by new foreign investment rules, their focus will turn back to their home market.

    0
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    Gavekal Dragonomics

    Finally, China Learns To Kick Ass

    When future historians seek to mark the moment when China celebrated its arrival as a world power, they may well point to its newly crowned highest-grossing movie, Wolf Warrior 2. The film is repudiates every sick-man-of-Asia slight China has suffered since the Opium War, and tells the world: those days are over; China is powerful; get used to it.

    0
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    Gavekal Dragonomics

    Rebooting China Inc.

    Beijing is tightening controls on cross-border deals. The good old days of unhindered and lavish outward investment are over. Strategic ODI is back in fashion, with China’s SOEs at the helm.

    0
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    Gavekal Dragonomics

    Dealing The Right Kind Of Opium

    Xi Jinping’s embrace of traditional Chinese religions is a highly political move to build up popular support. But his hostility to Christianity, Islam and Tibetan Buddhism could cost him dearly in terms of social stability.

    0
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    Gavekal Dragonomics

    Three Sets Of Books

    China’s financial system has grown dizzyingly complex, but at its heart sit the banks, which provide most of the funds for shadow lending by non-banks. To assess the system’s risks, we need to understand the banks’ three credit books: their loans, their “investments” routed through non-banks, and their off-balance-sheet wealth management products.

    0
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    Gavekal Research

    A Very British Zombie Apocalypse

    After the Bank of England signaled its intent to raise interest rates yesterday, sterling jumped more than 1% against the US dollar and the international FTSE 100 index fell similarly. With the UK’s latest inflation reading rising to 2.9% and unemployment hitting a post-1975 low of 4.3%, it is increasingly hard to justify leaving the policy lending rate at 0.25%. One argument for deferring hikes is the UK’s lack of wage growth, but such thinking...

    4
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    Gavekal Dragonomics

    CEQ: The Financial Labyrinth

    Is China’s financial system going to collapse? The speed of credit growth, the proliferation of financial institutions and financial products, and the chaotic and fragmentary data all make it reasonable to fret that China is on the verge of catastrophe. This issue of the CEQ is our attempt to bring clarity to this mystifying landscape.

    0
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    Gavekal Dragonomics

    Straight On Through The Party Congress

    China’s economic data for August confirmed that growth has stepped down a bit in the third quarter. The long-anticipated slowdown is for real, but is also still quite gradual. Andrew argues that policymakers will be comfortable with this situation, and that we should not expect a big change of direction after the Party Congress in October.

    0
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    Gavekal Research

    Asian Hardware Makers Trump California Engineers

    When Apple launched its new lineup of smartphones a couple of days ago, the loudest cheer may have come not from its new donut ring headquarters in Cupertino, but the factory lands of Taiwan and Korea that house its key component suppliers. Launching a flagship phone whose innards are in short supply represents a subtle shift in power from software engineers in California to hardware makers in Asia.

    4
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    Gavekal Research

    2002 All Over Again For Europe?

    The eurozone’s recovery is speeding up despite the unresolved “original sin” of lumping a single currency on to a heterogeneous economy. Yesterday Charles argued that this conceit meant the next big move for Europe would be back toward crisis, and among other things investors should avoid eurozone banks. I would not dispute this basic analysis, but take a different view on timing.

    0
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    Gavekal Research

    Italy: The Bear Case

    No chain is stronger than its weakest link, and the eurozone’s weakest link is Italy. Growth has picked up over the last two years, but as Charles demonstrates in this paper, the Italian economy is uncompetitive both within the eurozone and on the global stage. With the rise in the euro exacerbating the problem, and the prospect of ECB tapering threatening to push up Rome’s funding costs, Italy risks falling once again into a debt trap.

    1
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    Gavekal Research

    Video: The Robots Are (Not Yet) Coming

    It is hard to open a business magazine these days without finding some grave prediction about machines eating the jobs of middle class professionals from Pittsburgh to Paris. Yet for all the agonizing about mechanized baristas in every neighborhood coffee shop, killer robots and subversive AI algorithms, it is not clear that machines are taking over. Dan has run the numbers, and in this video interview sets the record straight.

    0
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    Gavekal Research

    Disasters, Bond Yields And The Dollar

    In the past few weeks the US administration cut a deal with opposition Democrats to keep the government open, increasing the likelihood of a budget deficit expansion, and a string of natural disasters have roiled North America. In turn, these events seem to have triggered a sell-off in the US dollar and a global bond rally. Louis outlines two scenarios for where things could go from here.

    0
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    Gavekal Research

    Robots Everywhere, But The Statistics

    It is hard to open a business magazine these days without finding some grave prediction about machines eating the jobs of middle class professionals from Pittsburgh to Paris. Yet for all the agonizing about mechanized baristas in every neighborhood coffee shop, killer robots and subversive AI algorithms, it is not clear that machines are taking over. Dan runs the numbers in this piece and reaches some sobering conclusions.

    10
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    Gavekal Research

    Time For A Eurozone Reality Check

    A new wave of optimism is sweeping across the eurozone. Disconcerted by the single currency area’s new-found economic buoyancy, confirmed euroskeptic Charles reviews the structural trends at work in the eurozone to determine whether it is finally time to throw in the towel on his longstanding euro-pessimism.

    7
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    Gavekal Research

    After The Renminbi Rally

    The last renminbi bears are throwing in the towel: with Chinese corporates unwinding the dollar holdings they have accumulated over the last two years, the renminbi is up strongly. Although the PBOC is for now happy to step back and let appreciation happen, there are still limits to how much it will want the trade-weighted exchange rate to rise.

    2
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    Gavekal Research

    Audio & Transcript — Gavekal Research September Call

    In yesterday’s monthly call Louis Gave presented his view on the global investment outlook for the rest of the year. He argued that the key story so far in 2017 has been the strong performance of Asian equities, which has added a second leg to a bull market led by US technology and consumer stocks. The question is whether this can last.

    0
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