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    Gavekal Research

    The Best Macro Trade Of 2017

    What has been the world’s most crowded macro trade of the year to date? Not buying dollars, shorting US bonds or selling French OATs or sterling. The most over-extended speculative position in the world by historic standards has been the bullish exposure to crude oil. This began to reverse last week, and the -7% correction in Brent could soon turn into an avalanche.

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    The North Korean Wedge Between The US And China

    This week’s missile launches by North Korea, the latest in a recent series of provocations, are forcing the US into a position where it must take steps to limit the threat to itself and its Asian allies. But such moves are certain to antagonize China, and shatter the fiction that the US and China have common interests in dealing with North Korea.

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    Gavekal Research

    India’s Property Dream

    In India, home building constitutes just 1% of GDP and fails to satisfy basic amenity demand—some 60mn Indians live in urban dwellings deemed unfit for human habitation. The good news is that India is getting serious about supporting residential property development, which could yet have a China-like impact on domestic demand and global commodity markets.

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    Gavekal Research

    A Structural Turn In Japan

    For more than a quarter of a century Japan has been a reliable source of disappointment for investors. After a nice little run-up late last year, a familiar pattern has emerged in 2017 as equities edge nervously sideways. Despite some evidence of Asia’s trading economy spluttering into life, Japan yesterday released surprisingly soft industrial production data for January. To top things off, the Wall Street Journal on the same day ran a...

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    Gavekal Research

    The EM Reflation Trade Is Past Its Best

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

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    Gavekal Research

    Video: India After Demonetization

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

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    Gavekal Research

    India Macro Update: After Demonetization

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

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    Gavekal Research

    A Win-Win Deal For Abe And Trump?

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

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    Gavekal Research

    India’s Budget: A Fine Balance

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

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    Gavekal Research

    Drawing Meaning From 2016, And A Roadmap For 2017

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

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    Gavekal Research

    Audio & Transcript — Gavekal Research January Call

    Charles Gave argued that Donald Trump’s protectionist policy could lead to a breakdown of the post-1971 fiat money system that is based on a US dollar standard. Will Denyer deconstructed the likely workings of a new trade taxation regime in the US and explained what that means for currencies. Arthur Kroeber outlined the likely Chinese response to a US trade broadside and argued that Beijing was decently well placed to weather the attack.

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    Gavekal Research

    Emerging Markets Trumped

    In yesterday’s Daily, Louis argued that despite the renewed strengthening of the US dollar over the last couple of months since the US election, there has been no generalized flight out of emerging markets. Sure, Turkey appears to be experiencing a classic emerging market currency crisis. But as Louis noted, the collapse of the lira has been driven by peculiarly Turkish factors. There is little or no risk of contagion spreading to the broader...

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    Gavekal Research

    Japanese Equities: More Where That Came From

    Japan is the top performer among developed world equity markets over the last six months, with the Nikkei 225 up 28% in local currency terms. Even in US dollar terms, the Japanese market has gained a robust 14%, enough to outperform an S&P 500 lent wings by the Trump trade. That strength is set to continue into 2017, with the Tokyo market remaining well bid on the back of a monetary policy stance that the Bank of Japan will find it hard—even...

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    Gavekal Research

    The Alchemist’s Apprentice

    If done right urbanization can be considered development alchemy as it transforms surplus rural labor and simple building materials into the “gold” of economic growth. India has lagged China’s embrace of city life over the last 30 years, but that is now changing and the result could be transformative for the Indian economy’s growth outlook.

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    Gavekal Research

    The Gavekal Monthly: Our Top 12 Questions For 2017

    For our first Monthly of the year, we depart from our normal format to offer our thoughts on the dozen most important questions investors must face this year. Not surprisingly, the issues that rose to the top were the impact of the new Trump administration's policies on the dollar and US bond yields, and whether the eurozone will spend the year tearing itself apart. Also,oil prices, the risk of financial implosion in China, and where to...

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    Gavekal Research

    Our 2016 Holiday Reading List

    “All books are divisible into two classes,” said John Ruskin, “the books of the hour, and the books of all time.” This year’s list of works enjoyed by Gavekal staff in 2016 includes books from both categories; among them are an account of Russian nationalism, an examination of the sharing economy, and a look at the future of Japan. Happy reading.

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    Gavekal Research

    The Unsustainable Oil Price Spike

    It took a while, but the spike in the oil price expected at the end of November finally occurred this morning in Asia, when front-month Brent crude futures briefly hit US$57.89/bbl, up from US$54.33/bbl on Friday. The jump higher was triggered by news over the weekend that a handful of major non-Opec producers led by Russia have agreed to cut their output by 558,000 barrels per day on top of the 1.2mn b/d reduction announced by Opec at the end...

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    Gavekal Research

    An Indian Payoff

    What was it that Kipling said about keeping one’s head, when all around you others are losing theirs? That was the Reserve Bank of India’s approach yesterday when it defied calls for an interest rate cut in response to severe economic disruption caused by the government’s hasty withdrawal of big denomination banknotes. The RBI downgraded its growth forecast for the year ending in March by just 0.5pp, and argued that price pressures remain a...

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    Gavekal Research

    The Japan Reflation Trade

    About a month ago, Japanese investors learnt that a man who wants to rip up their prime minister’s prized free trade deal and potentially jettison Japan’s key security guarantees would soon be US president. After an initial wobble, they spent most of the last four weeks buying equities with such gusto that the Nikkei 225 is up almost 14%.

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    Audio & Transcript — Gavekal Research December Call

    Louis and Anatole outlined their views on the new investment environment. Louis focused on the apparent contradictions in investors’ reaction to Donald Trump’s win in the US presidential election. Anatole argued that the US has almost certainly transitioned to a more inflationary growth path, but said it would be a slow build-up.

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