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    Gavekal Research

    Whither US Manufacturing

    US economic data has started to surprise on the downside, and much of this can be attributed to the manufacturing sector. This is worrying since the sector often leads the general economy. Hence, the $64,000 question is whether we should be bracing for an unscripted recession? Our answer is no, but investors should underweight the US manufacturing sector. In the near term, price adjustments, largely stemming from the energy and commodity price...

    3
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    Gavekal Research

    Maritime Silk Road Or “String Of Pearls”?

    China’s strategic expansion into the Indian Ocean is causing jitters in both Washington and Delhi. This week Xi Jinping pledged to finance a whopping US$46bn of investments in Pakistan, a large chunk of which will fund a 3,000km “economic corridor” from the Arabian Sea to northwest China. The route will begin at Gwadar, a Chinese-run port near the Iranian border, which Indian security experts fear will become a strategic base for the Chinese...

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    Gavekal Research

    Five Corners (22 April): Global Trade

    Overview: Charles Gave argues that an era of globalization and expanding world trade is coming to an end. On balance, he says this is no bad thing. United States: The negative impact of the strong dollar on US exporters will become clear once disruption from the early year port strikes on the US West Coast clear up according to Will Denyer and Tan Kai Xian. Europe: Europe’s huge trade surplus is purely a German issue. François-Xavier Chauchat...

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    Gavekal Research

    Towards A Real Japanese Shake-Up

    International investors, otherwise disposed to embrace Japan’s re-rating story, face a real dilemma. Almost 30 months after Shinzo Abe launched his bold reflationary experiment, Japan’s equity market has more than doubled in value and the yen (on a trade-weighted basis) has devalued by -30%. And yet, throughout this period, economic growth has continued to disappoint. With two significant reforms in the offing, we reckon that could be about to...

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    Gavekal Research

    5C Overview: Why The Coming Collapse Of World Trade Should Be Celebrated

    Sustained economic growth has always gone hand-in-hand with a big rise in communications infrastructure. To explain why, assume that a country has two cities, named A and B. At the point that a modern communication infrastructure is built (road, trains, internet) then, in each case, a single line of communication is needed. Three cities implies the need for three lines; a fourth city means six lines. Ultimately, if all the cities are to...

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    Gavekal Research

    5C Asia: Deflationary Rebalancing

    Take a look at Asia’s trade data, and you soon notice a striking divergence: export volumes and prices are heading in different directions. In the past, whenever external demand picked up, Asia’s exporters always enjoyed a beta-bounce on the back of rising pricing power. This time around, however, things are different. Despite the ongoing recovery in the US and the recent upturn in Europe, Asian exporters have found themselves forced to make...

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    Gavekal Research

    Small Is Beautiful

    At the end of the 1980s the world changed, with the collapse of the Soviet Union and the start of China’s renaissance. The next two and a half decades were marked by a mass movement towards globalization. We now have a long enough history to determine who were the winners over those 25 years. The answer is very simple: small countries.

    1
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    Gavekal Research

    The Perils Of Leadership

    Around 50 countries have signed up to join China’s Asian Infrastructure Investment Bank. A year ago, when Beijing began to draw up plans for a new multilateral lender, no one could have guessed that it would cause such a global stir. We first wrote about China’s attempt to provide an alternative to the US-dominated system of global development finance last June (see [China] A Chinese Bretton Woods?). But it is too early to conclude that the...

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    Gavekal Research

    Five Corners (8 April): The Outlook For Bank Earnings

    Overview: With banks’ earnings squeezed on one side by flat yield curves, and on the other by tech companies encroaching on their traditional consumer-facing business lines, Louis wonders where the banking sector will generate future earnings growth United States: Doing More With A Flatter Yield Curve: Now consumers have deleveraged, and with strengthening demand set to drive a pick-up in corporate investment, Will argues that earnings growth...

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    Gavekal Research

    Thai Decision Rule Signals Time To Buy - Joyce Poon & Udith Sikand

    It would take a courageous investor to buy wholeheartedly into Thailand’s equity market just now. The country’s ruling generals may have lifted martial law last week, almost a year after seizing power, but local analysts dismiss the move as a cosmetic attempt to persuade Thailand’s Western allies that things are returning to normal. In reality, they report, the government is actually seeking to tighten its control in the face of undiminished...

    2
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    Gavekal Research

    One Belt, One Road, One Grand Strategy

    In what can only be described as a triumph for Chinese financial diplomacy, some 48 countries had defied US disapproval to sign up for Beijing’s new Asian Infrastructure Investment Bank by yesterday’s deadline. The applicants included not only Europe’s big four economies, but staunch US allies such as Saudi Arabia, geopolitical rivals like India, and even Taiwan, which China does not recognize as a separate country.

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    Gavekal Research

    5C Asia: Capturing Beta From India’s Laggard Banks

    The stars could hardly be aligned more propitiously for India’s economy. The falls in oil and other commodity prices have helped to correct the external deficit and have paved the way for the Reserve Bank of India to continue its monetary easing cycle. On the fiscal side, in February Narendra Modi’s government underscored its pledge to prioritize investment when it proposed a 25% YoY increase in capital expenditure in its first full year budget...

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    Gavekal Research

    Where Has The Modi Magic Gone?

    India has fallen out of favor with investors lately. Over the last four weeks, the Nifty stock index has dropped 4.6%, a fall that included eight consecutive sessions of declines, the market’s longest losing streak in more than 18 months. Investors blamed the collapse of lofty valuations following poor earnings results, with the fall exacerbated by rising tensions in the Middle East. But critics of India’s government say the problems go deeper....

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    Gavekal Research

    Exogenous vs Endogenous Shocks

    Markets can be hit either by endogenous shocks (they collapse suddenly because of the build-up of internal excesses—think the 2000 tech bubble, the 2008 US mortgage crisis, or the 2011-12 eurozone crisis) or by exogenous shocks (9/11 in the US, or the price of oil shooting up from US$100/bbl to US$150/bbl in 2008 following the Sichuan earthquake and preceding the Beijing Olympics). This raises the question how investors should view...

    4
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    Gavekal Research

    The Divergence In Market Action

    After yesterday’s trading action, the S&P 500 is now broadly flat for the year so far, and stands at the same level as on November 21. Interestingly, over the past 26 days since February 17, the US index has not managed to string together two consecutive days of gains. In other words, US equities are now adding more volatility and less returns to portfolios. That’s hardly the combination that most investors are looking for. In contrast, the...

    3
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    Gavekal Research

    Five Corners (25 March): Where To Find Value

    Overview: Louis deconstructs the cycle across different regions to work out what investment strategies should work best, and where. North America: David Hay argues that the Canadian dollar may be nearing its trough, and if so, that Canadian REITs offer compelling value. Europe: Turkish assets have suffered recently. But with cheaper oil and a recovery in European demand emerging, Cedric makes the case for an impending rebound. China: With yields...

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    Gavekal Research

    5C Asia: Japan Finally Gets Religion

    Japan has been tough on value investors. With no catalysts to unleash shareholder value, investors have typically found themselves sitting on their portfolios waiting for the Grim Reaper. Time and again activist funds have tried to release locked-up value, only to be blocked at every turn by intransigent management and unsympathetic regulators. Now the market is watching with considerable interest to see how Daniel Loeb’s Third Point Management...

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    Gavekal Research

    All 21st Century Roads Lead To...

    With trillions of US dollars’ worth of transactions every day, the G7 foreign exchange markets are supposed to be the most liquid, least prone to manipulation, markets out there. Even so, the five day rate of change of the EUR-US$ exchange rate has lately fluctuated in the +5% to -3% range usually only seen at times of deep market crisis. As a result, most investors, or companies looking at their budgets and sales projections for the second...

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    Gavekal Research

    5C Overview: Three Regions, Three Strategies

    Fundamentally, there are three ways to make money in financial markets: Momentum trades: ideally buying high and selling higher. Return to the mean trades: ideally buying low and selling higher. Carry trades: borrowing short to lend long.

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    Gavekal Research

    London Seminar March 2015 - Anatole, François, Andrew & Charles

    We held our main spring seminar in London on March 17 with Anatole, François, Andrew and Charles offering their views of the global economic pulse and recent market and central bank developments.

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    Gavekal Research

    Asia Is Not So Scary

    One reason we have received push-back on our call to overweight Asian equities has been the risks associated with a major US dollar spike. Asia has not racked up foreign currency debt at the rate seen in recent years since just before the region’s financial crisis in 1997. Still, we would argue that there are sufficient differences this time around to think that Asia can generate strong performance on lower volatility over the coming year.

    1
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    Gavekal Research

    Who Gains When The Fed Hikes?

    The Fed has lost patience in words only, not in deeds. In its statement yesterday the Federal Open Market Committee dropped its linguistic backstop—the word “patient”—indicating that the first rate rise since 2006 could come as early as June (remember, Fed chair Janet Yellen defined “patience” as meaning there would be no rate hike for at least two meetings after the word’s use). But the underlying message the market took away yesterday is that...

    0
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    Gavekal Research

    Don’t Bet On A Renminbi Depreciation

    A number of clients have asked recently when we think the renminbi will start to weaken against the US dollar, and how far we expect it to fall. With the euro and the yen having both recorded double digit percentage falls against the US currency over the last six months, and with the Taiwan dollar down -4% and the Korean won now down -7% after the Bank of Korea cut interest rates last week to a record low, the renminbi is a glaring exception....

    1
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    Gavekal Research

    Five Corners (11 March): Currency Wars

    Overview: Charles Gave wonders whether Japan might surprise by affecting an appreciation of the yen. United States: With the US dollar rampant, Will Denyer runs the numbers against the euro and yen and finds decisively in favor of the yen. Europe: Francois Chauchat argues that as a major trading currency, the euro was never going to be driven just by trade flows. However in the final analysis the strong external position of euroland will make...

    0
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    Gavekal Research

    The EM Challenge

    With the US dollar on a tear and expectations hardening that the Federal Reserve will raise interest rates this summer, emerging market currencies are again in the firing line. In recent days, the Turkish lira and Mexican peso have hit all-time lows against the dollar, while the Brazilian real, Indonesian rupiah, Malaysian ringgit and South African rand are also in the toilet. And yet while developing world crises have often followed US...

    0
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    Gavekal Research

    5C Overview: Going Long The Yen

    If I held a decision making role within the Japanese policy apparatus, I would do everything in my power to spur a yen appreciation. Here is why:

    1
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    Gavekal Research

    5C United States: A Crowded Trade, With Good Reason

    The dollar has had quite a run—with the DXY up 22% since July. This crowded trade is obviously vulnerable to pullbacks. But volatility aside, is there potential for the dollar to rally further in the medium term? The short answer is yes, especially against the euro. But if you want to be contrarian, we suggest going long yen. These calls are based on three factors: (i) relative monetary policy trajectories, (ii) the likely direction of fund...

    0
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    Gavekal Research

    5C China: A Slowdown In Currency Internationalization

    As the renminbi’s once-steady appreciation against the US dollar has lost steam, so has the pace of currency internationalization. After doubling in size from early 2013 to early 2014, thanks to strong growth in Taiwan and South Korea, total offshore renminbi deposits have barely increased in recent months. In January, renminbi deposits actually declined by more than 2% in Hong Kong, the currency’s largest offshore center.

    0
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    Gavekal Research

    5C Asia: Asian Currencies Should Be Resilient

    A few years back we developed an Asian currencies indicator to help identify times when it pays to dial back exposure (see this report). The tool monitors six global and regional factors to which Asian currencies are sensitive; included are two volatility tracking indicators, two foreign exchange trend rates (renminbi and yen), the Gavekal global velocity indicator and the OECD Asian leading indicator.

    1
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    Gavekal Research

    The New Normal Will Not Be 7% Growth

    How far have China’s famously growth-obsessed leaders really dialed back their growth expectations? We fear not quite enough. China has given up on pursuing 10% growth, but still wants to keep growth of at least 7%. We do not think this is possible, for at least three reasons: history, housing and leverage.

    0
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    Gavekal Research

    Investing Along The New Silk Road

    In China, political slogans matter. They help to set the agenda, acting as political weather vanes. In recent months, “One Belt, One Road” has become a signature slogan of Xi Jinping’s administration. A contraction of “Silk Road Economic Belt” and “21st Century Maritime Silk Road,” “One Belt, One Road” describes Beijing’s policy of financing and building transport infrastructure across Eurasia, the South China Sea and the Indian Ocean—aka the...

    0
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    Gavekal Research

    A Japanese Goldilocks?

    Ever since the Japanese bull market kicked off in late 2012, global asset allocators have been able to put the market on the back burner as equity gains have been eroded by yen weakness. Despite two years of aggressive monetary easing and a 70% rally in stocks, Japanese stocks still only matched global benchmarks (MSCI Japan versus MSCI AC World in US dollar terms). However, there are good reasons to think that this negative correlation between...

    0
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    Gavekal Research

    Growth & Markets Monthly (March 2015)

    Our latest monthly report shows that the modest recovery in growth indicators, which started last month, has continued. Since central banks are engaged in aggressive easing action on a number of fronts, it would be surprising if this improvement does not continue. In addition, our velocity indicator has rallied and hovers at a six month high, which mirrors the low level of the VIX index. Such readings point to a “risk-on” environment, but we...

    0
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    Gavekal Research

    India’s Budget Is Not The Real Story

    Following India’s dramatic national accounts revision, images of a turbo elephant overtaking an exhausted dragon are becoming tiresome. We are upbeat on India’s secular growth outlook, but struggle to reconcile last year’s purported 6.9% expansion with other indicators. Our concern is that for all Narendra Modi’s reforming zeal, capital spending remains near its post-2009 crisis low. Looking forward to Saturday’s annual budget, the key factor...

    2
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    Gavekal Research

    5C Overview: The Importance Of Property

    Property, both residential and commercial, is the world’s oldest investment and, in the long run, the most reliable and profitable store of economic value. Like the world’s oldest profession, however, it operates in the financial shadows. Property lacks the transparency of mainstream asset classes such as equities, bonds and currencies, with no completely objective price benchmarks to measure returns reliably even in sophisticated markets such...

    3
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    Gavekal Dragonomics

    Can The New Silk Road Revive China’s Exports?

    The various New Silk Road initiatives add up to one of the biggest and most elaborate export-promotion plans in history. Yet even this new brand of checkbook diplomacy may struggle to reverse the global economic forces that have been weighing on Chinese exports.

    0
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    Gavekal Research

    Five Corners (11 February): The Earnings Squeeze

    Overview: Charles contrasts US companies' strong accounting profits with the less impressive numbers reported in the national accounts and asks some hard questions. United States: The latest earnings season revealed a tale of two markets with multinationals and energy firms lagging while domestics surge ahead. Will and KX ask whether this can last. Europe: François argues that if eurozone GDP growth picks up to the degree that the...

    0
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    Gavekal Research

    5C Asia: Look For Real Growth To Boost Earnings In Asia

    A strong US dollar has rarely been a tailwind for emerging market equities. Set against the backdrop of anemic global demand and the concomitant fall in commodity prices—a severe weight on export revenues for many EMs—the outlook for EM corporate earnings is not exactly benign. However, Discrimination Pays In The Emerging Markets. The rapidly changing global environment is likely to throw up a new set of winners and losers in the EM universe.

    0
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    Gavekal Research

    Turning Cautious on US Equities

    Given their remarkable performance over the last four years, can US equities really continue to outperform global peers? Recent developments give cause for concern as market technicals look weak and earnings announcements for bellwether stocks have come in lackluster. Earlier this week Louis asked some basic questions about US equity market leadership (see Does It Still Make Sense To Overweight US Equities?). We share his concern not because we...

    4
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    Gavekal Research

    Asia’s Encouraging Currency Stability

    Three months ago to the day, the US Federal Reserve ended its outright purchases of treasuries. Three months before that, the ECB instituted negative interest rates. And whether by coincidence or causation, most commodity prices chose the past six months to unravel. The combination of these events has led to some sharp exchange rate moves. Over the past three months, commodity currencies have been taken to the woodshed: the Russian ruble is down...

    0
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    Gavekal Research

    Does It Still Make Sense To Overweight US Equities?

    Investment decisions are typically driven by the costs of five factors: land, labor, capital, energy and government. One of the key theses of Too Different for Comfort, the book I wrote a couple of years ago (available for free download here), was that in the years following the Asian Crisis of the late 1990s, Asia boasted one massive comparative advantage: a much cheaper cost of labor than anyone else. So for ten years, any new factory,...

    2
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    Gavekal Research

    Five Corners (28 January): In Central Banks We Trust

    Overview: When central banks led a war on inflation in the late 1970s and 80s they kept on fighting long after the enemy was beaten into submission. They are likely to take the same approach of using overwhelming force in today’s fight against deflation, says Anatole. United States: The Swiss may have given forward guidance a bad name, but the Fed should be taken at its word, argues Will Denyer. Unlike Anatole, he thinks that interest rate...

    3
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    Gavekal Research

    The Case For A Real Chinese Bull Market

    This report makes the case for a secular improvement in returns from Chinese equities. It does so by a political economy analysis of long-run equity market performance in the three East Asian developmental success stories most akin to China: Japan, South Korea and Taiwan. The basic argument is that when a high-growth economy shifts from policies of “financial repression” to a more liberalized financial system, a sustained period of improved...

    1
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    Gavekal Research

    5C Asia: Will The BoJ Follow Suit?

    Governor Haruhiko Kuroda’s comments at the World Economic Forum in Davos last week set off speculation that the Bank of Japan may soon expand its program of quantitative easing. Our base case is that the BoJ is unlikely to oblige QE enthusiasts in the next 6-12 months as Japan is currently in a ‘honeymoon’ period where lower inflation is likely tolerable.

    0
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    Gavekal Research

    Australia, The Next Shoe To Drop

    Central bankers are ditching managerial gradualism in their monetary policy communication and are getting serious. Switzerland, Denmark, India and now Canada have all made surprise interest rate moves in recent days—okay, the European Central Bank continues to drip-feed its every thought to friendly journalists, but the sheer scale of the adjustment taking place in relative global prices means that policymakers must respond swiftly to events....

    0
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    Gavekal Research

    The Essential Emerging Market

    These are challenging times for emerging markets and investors could be forgiven for writing them off as being more trouble than they are worth in terms of risk-adjusted returns. The macro environment is harsh given the continued cratering of commodity prices and a potential reversal of US dollar flows on the back of a likely Federal Reserve tightening. Still, we think this would be a terribly short sighted formulation as the coming year is...

    4
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    Gavekal Research

    5C Asia: Oil's Bane Is Asia's Boon

    The oil price plunge is likely to create dislocations in the global economy for years to come, especially if consensus predictions of ‘lower for longer’ play out. Asia, as a net oil importer, almost certainly stands to gain, although the path to prosperity will vary depending on where a particular economy is in the economic cycle. Japan and India offer prime examples of this divergence.

    0
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    Gavekal Research

    Discrimination Pays In The Emerging Markets

    Viewed as a single asset class, the emerging markets had a tough time of it in 2014. A world characterized by weak global demand, soft commodity prices and a stronger US currency left US dollar-reliant emerging economies exposed and vulnerable. Today, as we roll into 2015, emerging markets are still facing the same headwinds. The US will struggle to support global growth single-handedly and the oil price is unlikely to stage a meaningful...

    0
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    Gavekal Research

    Stay Long The Renminbi

    With the Federal Reserve expected to raise interest rates, Europe seemingly about to embrace quantitative easing, and Japan’s economy still in the doldrums, the US dollar’s rise looks unstoppable. But for investors seeking a longer term store of value, the Chinese renminbi is a surer bet.

    4
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    Gavekal Dragonomics

    Beijing Will Call The Shots In Resource Sector Battle Royal

    In October the world’s fourth largest mining company, Glencore, launched an audacious merger bid for the world’s second biggest miner, Rio Tinto. The approach was rebuffed, and United Kingdom takeover rules—both companies have London listings—forbid Glencore from making any further overtures for the following six months. Yet few in the mining business believe that is the end of the story. Glencore’s chief executive officer Ivan Glasenberg has...

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