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    Gavekal Research

    Why India’s Growth Is Not Jobless

    India desperately needs to create jobs if it is not to squander what may be the biggest “demographic dividend” in economic history. On the face of things, it looks to be blowing that opportunity, as in recent years the size of the workforce has actually shrunk. In this piece, Tom argues that the raw data obscures a picture that while not ideal, is far better than it looks.

    0
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    Gavekal Research

    Still Bond Bears

    Matching its 2013 peak, the world’s most-watched interest rate—the US 10-year treasury yield—yesterday touched 3%. Concerns are now high that it will soon move higher, perhaps much higher. For perspective, the US 10-year hit 3.75% in 2011, 4% in 2010 and 5% in 2007. In this cycle, we think yields will break above 3% and then march upwards. In short, we remain bond bears and continue to recommend keeping duration short. Today, we want to...

    0
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    Gavekal Dragonomics

    Dangerous Dealing Along The Belt And Road

    In countries involved with China’s Belt-and-Road Initiative, there is a growing realization of the risks to signing up for the scheme. As debt has mounted and fears of economic dependence have increased, a backlash has begun. But as Tom explains, the lure of easy Chinese capital is a dangerous habit that many countries will struggle to kick.

    0
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    Gavekal Research

    Policy And Productivity In The USA

    If President Trump is to accomplish his stated goal of renewing American economic greatness then an absolute requirement is for productivity growth to be pushed above its current miserable level of 1%. To an extent, the economic cycle is helping him, as a tightening jobs market is pushing up wages and creating incentives for firms to add labor-saving capital investments. I would also point to three structural developments, which, although not...

    1
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    Gavekal Research

    Emerging Markets And Energy

    We all know, don’t we, what defining characteristics the emerging markets have in common? Of course we do. Emerging markets are developing countries on course to become advanced economies, typically with the assistance of powerful demographic tailwinds. But although they enjoy rapid growth over the long term, their institutional architecture is still under construction. As a result, emerging equity markets are more volatile than those of the...

    0
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    Gavekal Dragonomics

    New Jobless Rate, Same Old Problems

    China has moved to rid itself of a longstanding statistical embarrassment, replacing its discredited unemployment data with a new survey based on international standards. But as Ernan explains, the old problems have not gone away: the new jobless rate is still implausibly low and stable, and likely still subject to political manipulation.

    0
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    Gavekal Research

    A Japanese Sandwich

    Shinzo Abe played a fair amount of golf with Donald Trump in Mar-a-Lago, but unlike other US allies he got no trade concessions. The talk is again of the Japanese prime minister being a busted flush who may have to resign. Last month, I said such an outcome should not derail Japan’s recovery and corporate prospects (see Abenomics After Abe). The same logic applies to fears of escalating US-China trade tensions upending Japan’s recovery.

    0
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    Gavekal Research

    The Message From Credit Markets

    Over the last three weeks US high yield credit spreads have collapsed by 100bp—a tightening that far exceeds the 10bp narrowing in investment grade spreads over the same period. Coming after a marked widening in the Libor-OIS and Ted spreads over February and March, this fall in credit spreads is clearly encouraging. It supports our contention that the widening of Libor spreads was an idiosyncratic anomaly, and nothing investors should be overly...

    0
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    Gavekal Research

    Dreaming Of A Better India

    In a year’s time, 900 million Indians will be eligible to go to the polls in India’s general election. Two-thirds of them are likely to cast a vote, including 200 million aged under 30. Youth politics in India matters as nowhere else: the world’s biggest democracy has nearly as many young voters as the rest put together. So what do young Indians want, and who will they vote for?

    0
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    Gavekal Research

    A First Step Towards Easing

    The Chinese central bank is no longer in full policy tightening mode. That’s good news for Chinese bank shares. Shortly after government statisticians released economic data for the first quarter on Tuesday, the People’s Bank Of China announced a 100bp reduction in bank reserve requirement ratios. For big banks, this reduces the proportion of their deposits they are required to lodge as reserves at the central bank from 17% to 16%. In gross...

    0
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    Gavekal Dragonomics

    Keeping Credit Growth On Track

    China’s central bank has tweaked monetary policy to soften the slowdown in credit growth. The RRR cut continues its strategy of managing liquidity to limit the economic impact of the campaign against financial risk. Other data for March still point to a moderate growth slowdown in 2018, particularly given the continued strength in property.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call April 2018

    During yesterday’s monthly call, Arthur Kroeber addressed rising geoeconomic and geopolitical tensions between the world’s two biggest economies. He argued that US moves against China ran far deeper than trade tariffs as actors across the political spectrum in Washington were intent on changing China’s basic economic model, something that Beijing will likely fiercely resist. Much of his focus was on the tech sector, which is front-and-center of...

    0
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    Gavekal Research

    Learning To Love The Loonie

    There are plenty of reasons to dislike the Canadian dollar: disappointing economic data, a frothy real estate market, over-exposed banks, the fact that the Canadian team failed to get either the men’s or the women’s ice hockey gold at the winter Olympics, and a prime minister who dresses up like the Thompson twins when he travels to foreign countries.

    3
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    Gavekal Research

    No Time To Give Up On Europe

    Even as winter descended in January, the economic climate seemed decidedly balmy. Eurozone growth for 4Q17 came in at 2.7% YoY, while the year’s first PMI peaked at a post-2006 high of 58.8. Investors liked the idea of deflation finally being slain and a possible earlier-than-expected normalization of monetary policy. Alas the fun didn’t last as a series of data disappointments punctured an equity rally that had been led by financials. My bet is...

    0
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    Gavekal Research

    Hong Kong Seminar — April 2018

    At Gavekal’s seminar in Hong Kong this week, Arthur Kroeber, Rosealea Yao and Nick Andrews presented their latest views on the brewing trade war between the US and China, Chinese growth and the property market outlook, and how to capture European growth.

    0
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    Gavekal Research

    A Different Analytical Approach

    I have read with great interest the arguments put forward here by Anatole that equities are in a “structural” bull market. Having listened closely to his presentation at Gavekal’s London seminar, I now understand where our main point of difference lies. Anatole argues that we are in a bull market that began in 2013 when US stocks broke above their long-established trading range and which continues to this day (see This Is (Still) Not Peak: It’s...

    2
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    Gavekal Dragonomics

    The Changing Language On Leverage

    China’s policymakers have for the first time called for reducing the total debt-to-GDP ratio. This shift has raised worries that monetary policy could get tougher, on top of the tightening of financial regulation that is already underway. In this piece, Long explains that no shift in policy is imminent; if anything, easing is getting more likely.

    0
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    Gavekal Research

    The Future Of Facebook

    For someone infamous for his social awkwardness, Mark Zuckerberg acquitted himself relatively well in his two days of testimony before US Congressional committees. Certainly investors thought so. After sliding -14.5% over February and March, shares in Facebook rallied 5.3% over two sessions on Tuesday and Wednesday. The short term market reaction notwithstanding, Zuckerberg’s public grilling clearly signals that the user-as-product, advertising-...

    5
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    Gavekal Dragonomics

    What Inflation Means For Margins

    As China’s producer price inflation cools and its consumer price inflation picks up, one might expect corporate margins to be fattening, as cost pressures wane and pricing power strengthens. In fact, the opposite is true: margins have been fat, and are now getting tighter. In this piece, Thomas explains how inflation really affects margins.

    0
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    Gavekal Research

    La France En Grève

    Once again, French public sector workers are en grève—on strike. In the last couple of weeks, railway workers, air traffic controllers and teachers (and their students) have walked out in protest against Emmanuel Macron’s structural reforms. Inevitably such broad opposition to official policy has prompted memories of 1995, and even 1968. But as Cedric explains, times have moved on, and today the public is more ready than ever before to...

    0
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    Gavekal Research

    US Budget Deficits And Long Term Interest Rates

    On Monday the Congressional Budget Office published its latest projections for the US economy and government finances, incorporating for the first time the effects of December’s tax cuts. With government revenues set to fall from 17.3% of GDP last year to less than 17% over the next five years, and spending expected to grow from 20.8% to more than 22%, the CBO projects that the US budget deficit will expand from 3.5% of GDP last year to more...

    0
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    Gavekal Research

    After Constructive Engagement

    Separating signal from noise in the ongoing US-China trade dispute continues to be a thankless task. Trade war fears rose late last week thanks to an offhand threat from President Donald Trump to impose tariffs on another US$100bn of imports from China. They ebbed early this week when Trump reversed course and said a deal was likely soon, and Chinese president Xi Jinping delivered a speech promising a reduction in automobile tariffs and market...

    0
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    Gavekal Research

    The New Source Of Market Risk

    Believe it or not, there was good news, as well as bad, from the US markets last Friday. The bad news was obviously Donald Trump’s threat to escalate the trade war with China and the equally aggressive response from Beijing. The good news was the fall in March’s US payrolls growth to just 103,000 from February’s upwardly-revised 326,000. This slowdown has eliminated, at least until after the summer, the risk of an unexpected Federal Reserve...

    0
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    Gavekal Research

    Why To Buy India’s Battered Banks

    India’s central bank surveyed the landscape and yesterday painted an upbeat picture. It argued that the investment cycle may be turning, while inflation, the sub-continent’s constant bugbear, is becalmed. With Indian equities off -6% in 2018, this would seem a decent reentry point. The problem is public sector banks, for even as a US$32bn recapitalization is rolled out and bad debt is cleaned up, investors remain spooked by an outlandish scandal.

    0
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    Gavekal Research

    Reasons To Buy The Dip

    After spending many years as Gavekal’s equity permabull, I joined Charles and Louis last December in warning of the risks to what was then a roaring, and accelerating, bull market. But my way of thinking about these risks was rooted in a different analytical framework, and so I have come to a different conclusion about how investors should respond to this latest sell-off (for Louis’ take, see Following Yesterday’s Pullback). With the lows of mid...

    0
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    Gavekal Dragonomics

    Video: Making Sense Of China's New Era

    In this lively presentation from our recent London seminar, Tom Miller outlines the dramatic political changes that have been taking place in China. He explains what Xi Jinping’s new status means for economic policy and governance, and how the links between the Communist Party and the state are being strengthened.

    0
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    Gavekal Research

    US Auto Sales: No Longer A Growth Driver

    Strong US auto sales in March mask a stagnating longer term trend and rising auto loan delinquencies. Happily, as KX explains, neither has broader implications for overall US consumer demand. Although auto sales may no longer be contributing to US growth, rising bad loans in the sector do not prefigure a wider consumer credit crisis.

    0
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    Gavekal Dragonomics

    How Steel Survived The Battle For Blue Skies

    It’s been a wild winter for China’s steel industry, with huge swings in output and prices. The main culprit is the aggressive official campaign to reduce air pollution—and the industry’s creative responses to it. Their back-and-forth has not hurt underlying growth much, but the resulting volatility in steel prices is not going away.

    1
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    Gavekal Research

    Ready For A Further P/E Derating

    I see but through a glass darkly. Sometimes, however there are glimmers of light. Four months ago, in early December, I examined the signals being broadcast by the various investment rules I have long followed and concluded that: “While global markets have been stable for the past 18 months, we may soon be entering a period of greater instability.”

    6
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    Gavekal Research

    Following Yesterday’s Pullback

    Two weeks ago I looked back at Enron’s collapse in 2001 and asked whether a crash-and-burn at Tesla or Uber would be this cycle’s catalyst for a fundamental re-assessment of business models. But perhaps my sights were set too low, as this roll-over was triggered not by a cash-burning profligate flaming out, but by turmoil engulfing the Facebook gorilla, and by extension the likes of Google and Snap, which rely on “the user being the product”.

    2
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    Gavekal Research

    Strategy Monthly: Navigating In Choppy Waters

    With its latest sell-off, the S&P 500 capped two months of volatility by moving officially into correction territory: down -10% from its January high, and below its 200-day moving average for the first time in two years. Is this the end of the long US equity bull market? In this edition of our Strategy Monthly, we offer three perspectives on how investors should position themselves in these more volatile times.

    0
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    Gavekal Research

    Abenomics After Abe

    It’s been a rough few weeks, both for Japanese prime minister Shinzo Abe and for the Japanese stock market. Reelected just five months ago, Abe is facing growing demands for his resignation after an influence-peddling scandal that has been bubbling away for the last year boiled over with leaks about an official cover-up. In response, Abe’s approval rating has slumped towards 30%, traditionally a level from which Japanese prime ministers struggle...

    0
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    Gavekal Research

    Video: Can The EM Run Last?

    In this video interview Joyce discusses why profits should drive a maturing cycle in EMs that increasingly favors commodity-focused markets outside of Asia, and the risks to such a benign scenario.

    0
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    Gavekal Research

    Can EMs Survive A Trade War And Keep Thriving?

    A US-China trade war would disrupt trade, likely drive up inflation and potentially spark a general risk-off move in markets. This scenario would be pretty terrible for emerging markets, but Joyce reckons it is a tail risk and the general outlook remains decent. In this chartbook, she reviews EMs' vulnerability to a trade bust and explains why profits should drive a maturing cycle that increasingly favors commodity-focused markets outside...

    0
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    Gavekal Dragonomics

    Macro Update: Centralization Amid Conflict

    In our latest chartbook, Chen Long outlines a relatively positive cyclical economic picture for China, with steady macro policy, strengthening financial regulation, and further political centralization. The risks to this outlook are tightening property policies, a local government funding squeeze and the looming threat of a US-China trade conflict.

    5
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    Gavekal Research

    Don’t Fret About Libor

    A disproportionate increase in Libor relative to other benchmark short term rates over recent months has got many observers flustered. In this concise paper, Will and KX dig down to the cause of the increase, and explain what it does and doesn’t mean for portfolio investors.

    0
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    Gavekal Research

    On Protectionism

    As the US toughens up its negotiating stance on trade, it seems that ghosts from the Great Depression haunt the land. The men of Davos can be heard to intone gravely that President Donald Trump is aping Herbert Hoover, and as in the 1930s, the global economy may go into a tailspin. I am struck that our cherished elites have discovered a form of government intervention that they do not like, especially given their support for so many other “...

    2
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    Gavekal Dragonomics

    The Pain Of Power Producers

    The rebound in commodity prices since 2016 has been a boon for much of China’s industrial sector—but coal-burning power plants have been big losers. Coal prices cannot go much higher without causing serious financial distress. This means that policy should now be shifting to favor power producers, by ensuring coal prices do not climb further.

    1
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    Gavekal Research

    Why Aren’t Bond Investors Panicking?

    Once again, the volatility that rocked global financial markets in recent days was at least as interesting for what it didn’t tell us as what it did. Amid growing protectionism, rising rates and fiscal irresponsibility in the US government, the biggest and most important financial market of all—the US treasury market—isn’t bothered.

    7
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    Gavekal Dragonomics

    Trade Wars: A China Expert Roundtable

    Last week’s sharp equity market sell-off followed the US effectively threatening China with a trade war. In this report, Arthur, Long and Andrew address China’s capacity to strike back and explore what it means for the relationship between the world’s two biggest economies.

    1
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    Gavekal Research

    Farewell My Lovely Bull Market

    No doubt market pundits will go on discussing the trigger of last week’s sell-off in equity markets and debating its implications ad nauseam. But whatever the proximate cause of the latest risk-off, it is looking increasingly as if the uncomplicated, low volatility bull-market-in-everything that prevailed through much of last year is now no more than a pleasant memory. With markets apparently intent on retesting the lows set in early February,...

    2
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    Gavekal Research

    Trade Wars: Advantage China

    In the US-China trade war, China is skillfully playing Go while the US is playing tic-tac-toe, badly. Arthur analyses the announcement of US$60bn worth of tariffs by the US on Chinese imports and finds the US flailing without a firm strategy. But behind the news, a dangerous consensus has emerged among America’s elites which holds that China’s rise comes at the US’s expense, and must be checked.

    2
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    Gavekal Research

    London Seminar — March 2018

    In our seminar in London this week Charles pondered the investment consequences of the US moving back into an inflationary period. Tom discussed Chinese politics in light of Xi Jinping’s elevation. Cedric presented on how investors can best benefit from the diversity of the European economy. Anatole explained why the long-running global bull market is likely to continue, but also where the risks are buried.

    0
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    Gavekal Research

    A (Slightly) Different Wicksellian Analysis

    In developing “Wicksellian” theory and applying it to portfolio management, readers may have noticed that Charles and Will Denyer have plowed slightly different furrows. The aim of this piece is to clarify points of agreement and highlight differences in their methodology. In so doing, Charles hopes to illuminate both approaches and help readers to navigate a subject that is fairly central to Gavekal research.

    5
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    Gavekal Research

    Focus On Corporate Yields, Not Policy Rates

    There were no big surprises at yesterday’s Federal Reserve meeting, but in offering a slightly more hawkish tone, policymakers have amped up market anxiety. I must admit to not being in this crowd, for the perhaps heretical observation that the future of this bull market may not be decided at the Fed.

    13
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    Gavekal Research

    Don’t Wade Into Treasuries

    Leading up to today’s Federal Reserve meeting, long-dated treasuries have slipped back into their trading range. There are two reasons to think this offers a good opportunity to “buy the dip”. First, global growth has eased off as shown by our diffusion index of OECD leading indicators, which tends to lead year-on-year changes in 10-year treasury yields by about four months. Second, investors overreacted to January’s spike in US wage growth data...

    0
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    Gavekal Research

    Giving Up Value Investing For Lent

    A client recently told me that he had wanted to give up “value investing” for Lent. Unfortunately, his priest pointed out that this was like forgoing boiled spinach as Lent commemorates Christ’s 40 days in the desert and requires doing without something that feels good: think of giving up Amazon, Nvidia or Tencent (at least until this week) for energy stocks, Japan and emerging market financials. Our client chose self-flagellation and stuck with...

    3
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    Gavekal Dragonomics

    Beyond Anti-Corruption

    China’s legislature has approved the creation of a national “supervision” system, an arm of government equal to the executive, legislative and judicial branches that is charged with overseeing the vast public sector. As Yanmei explains, the new system transforms Xi Jinping’s signature anti-corruption crusade into something even more ambitious.

    2
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    Gavekal Research

    The Ogre Eating His Own Children

    Our regular Loser Reports are based on the premise that good money management can be as much about “avoiding losers” as “picking winners”. This month, Louis looks at the (worrying) direction of US fiscal policy and wonders whether the next shoe to drop could be defense contractors and energy producers in the US, and even municipal bonds.

    2
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    Gavekal Research

    The New Economic Team

    China’s top economic team for the next five years was released this morning, and the theme seems to be “steady as she goes”, with a vote of confidence for experts in their fields. Chen Long has looked at the list, which includes a new PBOC governor, and offers his take on what this means for financial policy in the years ahead.

    2
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    Gavekal Research

    Video: Fixing The Model

    Earlier this week Will issued a mea culpa report that explained why he was revising his Wicksellian asset allocation model and substantially changing his recommendations for the US market. In this video interview he explains the story behind this revision.

    0
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    Gavekal Research

    The Corporate Bond Play

    With high-yield and investment grade spreads having shrunk to historically low levels, US corporate bonds are hardly cheap. Yet the combination of favorable tax policy and fiscal incontinence recommends them to any US bond portfolio. As the US economy is likely in the dog days of this cycle, the tricky question is what duration investors should focus on.

    0
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    Gavekal Research

    Why Does India Have No Clothes?

    Given its size and comparative advantages, India should have more than a hundred million people working in the garment industry. Bad policies and missed opportunities means it has about half that number. The government has big plans to fix this situation and Tom recently spent time meeting with textile entrepreneurs in and around Delhi to see if this is changing. This is his report card.

    3
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    Gavekal Dragonomics

    Cold Weather, Hot Data

    China’s first data release of 2018 delivered a couple of surprises, with a big jump in industrial value-added and a pickup in real-estate investment. But neither amounts to a convincing signal that the economy is actually re-accelerating. The most likely outcome is still a moderate growth slowdown driven by a shallow downcycle in property.

    2
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    Gavekal Research

    Legitimacy Versus Legality

    France’s top central banker yesterday called for the nations of the eurozone to cease bickering over ideological questions, and instead get things done. National leaders should stop wasting time on “theoretical debates” that pitted “risk reduction against risk sharing”, said Francois Villeroy de Galhau. They should, instead, tackle real problems like the half-built capital markets union. It was the authentic voice of the European technocracy and...

    2
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    Gavekal Research

    A Fork In The Road For European Equities

    In the first half of last year making money in European stocks was easy as benchmarks steamed higher on hopes that less political risk would allow an economic surge into sunlit uplands. It has not exactly worked out that way. Such has been the loss of momentum that both the MSCI EMU and broader MSCI Europe indexes have plunged below their 200-day moving averages (just as worrying for tea leaf readers, the 50-day moving average for the narrower...

    3
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    Gavekal Research

    Stuck In The Middle-Income Trap

    Three years ago Malaysian prime minister Najib Tun Razak faced the kind of graft allegations that would ultimately defenestrate heads of government in Brazil and South Africa. His political fortunes were further imperiled by Malaysia’s highly trade-dependent economy staggering trough the 2014-15 commodity bust. Yet, remarkably, Najib survived and now seems set to be reelected at an upcoming general election. His Houdini-like escape is bad for...

    0
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    Gavekal Dragonomics

    A New Organization Chart

    China yesterday unveiled a sweeping plan to reorganize its central government. In this piece, Yanmei explains how Xi is streamlining administration and empowering new agencies to carry out his distinctive domestic-policy priorities of environmental protection, risk control, and poverty alleviation, as well as his assertive foreign policy.

    6
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    Gavekal Research

    The Curious Case Of The HK Dollar

    One of the longest awaited adjustments in financial markets may finally be about to happen. Last year, betting that Hong Kong dollar interest rates would rise to converge with US dollar rates was reckoned to be among the surest trades in world markets. Yet the convergence never happened. Over the last 12 months, one-month Hong Kong dollar Hibor has consistently traded at a discount to one-month US dollar Libor of more than 30bp. And since the...

    0
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    Gavekal Research

    Turning 90% Bullish

    Over the last three years, Will has developed his own version of Charles's Wicksellian framework to analyze the US economic cycle. His approach has been to gauge the difference between the private sector’s return on invested capital and its cost. In this candid report, he explains why he is overhauling his model and how this has substantially changed his recommendations.

    10
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    Gavekal Research

    The Curiously Weak Dollar

    Since early February, global markets have had a volatile ride. The big exception has been the US dollar, which has stayed stoically range-bound. This is odd considering the Federal Reserve’s fairly hawkish outlook for monetary policy and the fact that imposing tariffs on metal imports should lessen the US trade deficit. Not to pat ourselves on the back, but the general Gavekal view on the US dollar has in recent times been fairly bearish (see...

    4
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    Gavekal Research

    Playing Russia’s Continued Recovery

    The result of this weekend’s Russian presidential election is not in doubt. But investors in Russia face considerable uncertainty. Despite monetary policy and exchange rate liberalization, Russia has made little progress towards the structural reforms needed to boost its potential growth rate above rock-bottom levels. Nevertheless, cyclical tailwinds mean there are still some attractive pockets of opportunity for international investors.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call March 2018

    In last week’s Research Conference Call Cedric Gemehl and Nick Andrews presented a thematic approach for playing the European growth story. Cedric explained why the major stock indexes fail to capture the geographical and sectoral potential in Europe, and Nick proposed specific investment themes that should allow investors to benefit from Europe’s continued expansion.

    0
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    Gavekal Dragonomics

    Zhou Xiaochuan’s Legacy

    Zhou Xiaochuan is expected to retire this month after 15 years heading the People’s Bank of China, during which he oversaw both major reforms and an explosion of debt. Chen Long argues that Zhou’s successor faces three main challenges: completing interest and exchange rate reform, managing financial risk, and adapting to a bigger global role.

    0
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    Gavekal Research

    Trade Wars: The Phantom Menace?

    In the aftermath of the past week’s to-ing and fro-ing over steel and aluminum tariffs, there is one thing we can be certain of this year: we are going to see a lot more protectionist theatrics coming out of the White House. What is much less certain is how worried we should be.

    0
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    Gavekal Dragonomics

    The Property Tax Is Back

    A property tax is back on the Chinese government’s agenda: after being postponed in 2017, the long-discussed tax was brought up again at this week’s legislative session. The draft law could come in 2018, with actual taxes being levied by late 2019 at the earliest. But Rosealea expects this to be largely a non-event for the property market.

    0
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    Gavekal Research

    Making In Delhi

    Narendra Modi’s “Make in India” initiative is supposed to transform India from an industrial laggard into a global manufacturing hub. Tom and Udith recently kicked the tires in the industrial heartlands surrounding Delhi and can confirm that China, for now, does not have serious competition. Yet they found some surprisingly encouraging developments that point to the policy in pockets displaying genuine success.

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    What A Trade War Means For Europe

    The departure of free-trader Gary Cohn from the Trump administration has investors rightly concerned that a global trade war may loom. Markets rallied yesterday on reports that the US may carve out exclusions for its steel and aluminum tariffs, but President Donald Trump seems set to announce a punitive package as early as today. The European Union has taken a tough stance against the US threat, and yesterday added orange juice and peanut butter...

    1
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    Gavekal Dragonomics

    The New Challenger In Memory Chips

    China is making an expensive new push to crack the market for memory chips, now dominated by a South Korean-led oligopoly. In this piece, the first in an occasional series looking at China’s technological ambitions and the Made in China 2025 plan, Dan assesses whether and how China can succeed in this drive to gain semiconductor market share.

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    Housing And The US Economy

    The last economic cycle in the US was marked by excesses in residential investment and a dearth of business investment, which proved negative for productivity growth. As the current cycle gets a pro-cyclical boost in its mature phase from last year’s tax reforms, that imbalance will be at least partially reversed.

    2
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    Another Finest Hour

    At Gavekal, we have no house view, but in recent weeks something of a united front has formed among my erudite colleagues on the subject of Europe and her politics. Just to be sure that clients don’t conclude that we have all imbibed the Brussels-dispensed Kool Aid, let me offer my take on the situation and the implication for financial asset values.

    1
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    Change And Stasis In Italy

    In Italy’s general election on Sunday, the anti-establishment Five Star Movement emerged as the largest single party in each chamber of parliament, and the populist Lega eclipsed Silvio Berlusconi’s Forze Italia to dominate the right of Italian politics. Following these changes, it is hard to see how any plausible combination of parties can secure a stable majority in both houses of parliament. As Cedric and Anatole explain, the most likely...

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    Gavekal Dragonomics

    The Meaning Of ‘High-Quality’ Growth

    According to Xi Jinping, China’s high-speed growth is over, and it is pursuing “high-quality” growth instead. With today’s publication of official targets for 2018, the real impact of that rhetorical change is getting clearer. In practice, the focus on “quality” will not end pressure to deliver economic growth, nor reduce government intervention.

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    Time To Stop Worrying About EU Political Risk

    Is it time for investors to finally forget about “political risk” in the eurozone? Judging by the weekend’s events in Germany and Italy the answer is an emphatic “Yes”. The big event was the overwhelming vote by Germany’s Social Democratic Party to participate in a “grand coalition” with the center-right. This means that Angela Merkel will be reappointed for a fourth term as chancellor. Thus Germany will have a stable government with no serious...

    6
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    The US Current Account, Trump’s Trade War And Equities

    US president Donald Trump’s announcement last week of tariffs on imports of steel and aluminum are just the first salvo of a trade war aimed at reducing the US$566bn annual US trade deficit. Yet even far more extensive tariffs than those announced on Thursday will do nothing to narrow the US trade gap. As KX argues in this report, more powerful economic forces are working to widen the US trade and current account deficits over the coming...

    2
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    Video: Surviving China's Regulatory Storm

    Scarcely a week goes by without word of some new regulatory crackdown on China’s financial services industry. After years of financial liberalization, runaway growth in the shadow banking market, and rampant regulatory arbitrage, the authorities are now moving to unify a fragmented regulatory regime and contain the risks posed by excessive leverage and complexity. In this video interview, Chen Long makes sense of the about-face and explains what...

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    The First Casualty In Trump’s Trade War

    Donald Trump has finally delivered on his long-delayed promise of trade protectionism, and in the worst possible way. By promising to impose tariffs on metals imports (25% on steel, 10% on aluminum) on “national security” grounds, he addresses a problem that doesn’t exist, and creates a host of new ones. All this assumes, of course, that the tariffs are not watered down or more narrowly targeted when they are formally announced next week—a real...

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    How Much Risk Of A US-China Economic Cold War?

    Donald Trump’s announcement of tariffs on US imports of steel and aluminum looks like the first salvo in a new trade war. But while Thursday’s measures will mostly affect America’s closest allies, behind the scenes the US administration appears to be preparing a more focused campaign directed against China. In this analysis, Arthur examines the political maneuvering over trade within the Trump team, explains why the hardliners are now in the...

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    The Surprising Upside Of Yen Strength

    The best performing currency in the world so far this year is... the Japanese yen. Over the first two months of 2018, the yen has climbed 5.5% against the US dollar, remaining well bid even as the US dollar itself has found support in recent days. At the same time, the Japanese equity market has taken a beating, falling -4.3% in local currency terms over the year to date. As a result, even though Japanese stocks are still up in US dollar terms...

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    Strategy Monthly: Trading On European Diversity

    The European economic recovery has matured into a sustained, broad-based expansion, and the risks from politics and ECB policy normalization are modest. But eurozone equity indexes have not done well. In relative terms, they started trading sideways after Macron's victory in the French election last May, and for the past several months they have underperformed. The fault lies in the indexes, not in Europe's corporate sector. The...

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    Gavekal Dragonomics

    Is Construction Preparing An Upside Surprise?

    Since markets reopened after the Chinese New Year holiday, the prices of commodities tied to China’s construction cycle have been picking up. This optimism could be justified: construction fundamentals are solid and policy interventions are mostly positive. In this piece, Rosealea explains the upside risks for construction activity in early 2018.

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    The Dollar’s New Crush

    The foreign exchange market, I’ve often said, is a serial monogamist. There are multitudes of potential drivers out there. But the market likes to step out with just one at a time. Its relationships can last anywhere from a few quarters to a couple of years. But sooner or later, it gets bored and switches its affections. So, in 2005-07, the main driver was the growing US current account deficit and the perception that the US was flooding the...

    2
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    India Macro Update: Politics Trumps Economics

    Indian growth in the fiscal year ending March 31 should top 7%, before accelerating to nearer 7.5% in FY18-19. Yet Indian equities failed to rebound with other emerging markets after this month’s correction, and the rout in bonds since last summer is continuing. In the latest edition of Gavekal’s India Macro Update Udith and Tom assess what this muddled picture means for investors.

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    The New Challenge Confronting Investors

    Few in the markets will be sorry to see the back of February. But as a tough month draws to a close, this seems a reasonable time to take stock and draw lessons for the future. It is perturbing that lesson Number One must be that there really was nowhere to hide. Geographical diversification served little purpose, as all markets fell and then rebounded in unison. The same held with sectors, for those that performed worst in 2017 (energy and...

    1
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    What Lies Beneath

    As liquidity in the global financial markets tightens, Louis turns to Gavekal’s longstanding dynamite fishing analogy in a speculative exercise that attempts to identify some of the “whales” that might just go belly up in the squeeze.

    6
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    Emperor Xi Is Not So Far Away

    By removing term limits from his office of president, Xi Jinping has shown there are no constraints left on his political power. As he strengthens his grasp on the top of China’s political pyramid, he is also enforcing his will more effectively at the bottom. For better or for worse, he is moving China to a more centralized and top-down system.

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    The Most Important Chart Today

    In a development uncomfortably reminiscent of the breakdown of the 1987 Louvre Accord, recent US dollar weakness has propelled a marked outperformance of Chinese government bonds in US dollar terms relative to treasuries. This potentially leaves Chinese policymakers facing a tricky choice: Will Beijing repeat the BoJ’s great mistake of the late 1980s, or will it prefer the Bundesbank’s hard line?

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    Eurozone Growth: Blip, Peak Or Plateau?

    European growth was always going to soften at some point; the question is whether this week’s squishy data releases reflect a fizzling out of the upswing, or merely an inevitable maturing of the cycle. The fact that the deterioration unfolded during a market dislocation that did not originate in Europe certainly gives succor to skeptics who see the single currency area as the soft underbelly of the current global synchronized upturn.

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    After The Yellen And Bernanke Puts, The Pavlov Put

    Last Monday, I pointed to three reasons why the recent turmoil in global equities would probably prove nothing worse than a counter-trend “buy on dips” correction, rather than the start of a serious bear market. That's not to say that worries about inflation and overheating are unfounded. But investors are still quite relaxed about both growth and inflation, as evidenced by historically modest bond yields.

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    Gavekal Dragonomics

    Taming The Inflation Risk From Pork

    What are the odds that China has a surprise jump in inflation this year? In China, surges in the CPI are usually driven by food—particularly highly cyclical pork prices. But while food inflation is likely to turn positive this year, Ernan argues that the odds of an inflation spike are low, as farm consolidation has tamed the pork price cycle.

    2
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    Notes On An Indian Scandal

    As most emerging equity markets have clawed back a good portion of the losses they suffered in early February’s risk-off, there has been one notable exception. Far from rebounding, Indian stocks have taken another leg down following revelations of a US$1.7bn fraud at Punjab National Bank, the country’s second-largest state-owned lender. The scale of the fraud—roughly twice the amount promised to the bank by the government in the first tranche of...

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    Bond Market Risks

    Charles is bemused by the cacophony of commentary on the apparent bursting of a US government bond bubble. By his reckoning, treasuries are at about fair value. The same cannot be said for certain other big bond markets, where far bigger risks lurk. In this short piece, he updates his broad view on risks in the global bond market.

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    Gavekal Dragonomics

    Local Infrastructure Feels The Chill

    China’s financial crackdown is now extending to the funding tricks that local governments use to pay for infrastructure projects, which have long been tolerated in the name of economic growth. This report explains why this crackdown will put more of a chill on infrastructure spending—but also why public-works investment is unlikely to collapse.

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    Gauging The Strength Of The Oil Bid

    It made headlines around the world earlier this month when the US government’s Energy Information Administration announced that US oil production had hit 10.25mn bpd in the last week of January. At that rate, the US was not just pumping more crude than at its previous production peak in 1970, it was very likely pumping more than Saudi Arabia, lifting the US into second place in the global production league table behind Russia.

    5
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    How To Play An EM Rebound

    On Thursday, my colleague Joyce Poon argued that strong global growth and favorable financial conditions should allow emerging markets to sustain their outperformance. In the immediate run-up to the recent global sell-off, Latin American markets like Brazil and Mexico had charged hardest on the back of higher commodity prices and an incipient global shift from growth stocks toward value plays. But once the dust settles and EMs get their mojo...

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    Audio & Transcript — Gavekal Research Call February 2018

    In last week’s Research Conference Call Andrew Batson outlined the risks—both downside and upside—to the Chinese economy in 2018. Yanmei Xie focused on the risk of overzealous implementation of policy. This is especially the case for environmental regulations, which gave Beijing an uncharacteristically smog-free winter, but at the cost of a natural gas shortage.

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    A Very British Tightening

    Last week, the Bank of England upped its UK growth forecast and signaled that interest rates may be raised harder and faster than expected. This week, Theresa May’s government maintained its muddled passage towards a European Union exit, which has increasingly fretful multinationals warning that Britain’s economy could be headed for the rocks. Even, if like me, you think the UK will secure an eventual squishy-type deal with the EU that involves...

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    CSI Wall Street (Part II)

    On Monday, in CSI Wall Street Anatole morphed into Sherlock Holmes to investigate the crime scene following the market correction. He concluded that: “There’s nothing to see here. Please move along.” And the markets promptly did. Over the past week, equities have rallied around the world while volatility has gradually ratcheted down. A few more weeks like the past one, and the market moves of late January and early February will quickly be...

    5
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    EMs And The Global Cycle

    The market correction of the last two weeks has been centered on the US, but also hit emerging markets pretty hard. A year ago, I argued that the sustainability of the EM run-up depended on continued strong global growth, more oil price gains and a further fall in tail risks associated with the financial system. The issue is whether the newly volatile conditions in global markets are a game-changer for the emerging world. That conundrum depends...

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    Deficits And Bondholders

    Economics 101 says that when there is more of something, then other things being equal its price should go down. That is worrying for US bond investors as US lawmakers last week passed a budget deal that may raise deficits by US$320bn over the next 10 years (any new infrastructure spending will be extra). Interestingly, and perhaps not entirely coincidentally, just as debt-fueled big-government becomes the new normal in Washington, November’s...

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