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E.g., 18-11-2017
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    Gavekal Research

    How Much Slack In The Eurozone?

    It is a core contention of the bullish view on Europe espoused by Anatole and Cedric that the eurozone’s recovery is running four or five years behind the US economic cycle and that there is still plenty of slack left in the eurozone economy. But is there really as much as the bulls believe?

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    Gavekal Research

    A Turkish Vortex

    For a country that relies on the kindness of strangers to fund its economy, Turkey, under Recep Tayyip Erdoğan, has been going out of its way to alienate allies and capital providers. Its relationship with the US has been on a downward trajectory for months and things are not much better with the European Union. This matters because the pieces are in place for a classic balance of payments and financial crisis in Turkey. This much is clear from...

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    Gavekal Research

    Living With A Nuclear North Korea

    A special envoy of Chinese president Xi Jinping will head to North Korea in what is being billed as a gesture of solidarity and friendship between the two countries’ communist parties. Coming just days after Donald Trump’s visit to the region, the move appears to give the lie to Trump’s assertion that he successfully convinced Xi to “use his great economic influence” to press North Korea to give up its nuclear weapons.

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    Gavekal Research

    Asset Allocation For The Global Bull Market

    On Monday Anatole outlined his fundamental reasons to believe that the world is enjoying a global bull market that still has years to run. Today he reviews the investment recommendations that flow from his thesis, and examines how investors can best play the unprecedented divergence of the US business cycle from the cycles in Europe and the emerging markets.

    2
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    Gavekal Dragonomics

    Decent Growth Risky For Bond Yields

    China’s economic data for October confirms that the moderate slowdown in growth is continuing as the housing cycle fades and government spending weakens, even as corporate earnings benefit from higher-than-expected inflation. Chen Long now sees an increasing risk for domestic bond yields in this combination, though it is bullish for equities.

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    Gavekal Research

    Too Much Forward Guidance?

    It should be an ideal environment for equity investors. Europe yesterday published stronger than expected growth figures for the third quarter, with German GDP expanding 2.8% YoY, and even laggard Italy growing 1.8%. That performance raises the possibility of faster earnings growth even as the European Central Bank is proposing to stretch out its stimulative asset purchases through the third quarter of next year and keep interest rates in...

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    Gavekal Research

    The Consequences Of Saudi Arabia

    Our new monthly Loser Report aims to identify things that investors should avoid, whether countries, sectors, themes or asset classes. In this second instalment Louis looks at the tumult affecting Saudi Arabia and assesses the ricochet effect across the Middle East and beyond. He wonders whether regional currency pegs could be set to topple and whether a major industry centered in Europe and the US could be a major victim of the shakeout.

    8
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    Gavekal Research

    Brexit, The Pound And UK Stocks

    When it comes to Brexit, I suspect that one of the few things about which Anatole and I agree is that the negotiations between London and Brussels have so far bordered on the farcical, and that the internal squabbling within the UK’s governing Conservative Party has hardly been conducive to raising the tone. Beyond that we part company. Anatole believes the Brexit talks are approaching a critical juncture for investors in UK assets—a view he...

    3
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    Gavekal Dragonomics

    Three Retail Takeaways From 11.11

    It was a busy weekend for China’s online retailers, who reported huge sales numbers for their November 11 promotional events. Alibaba’s aggressive strategy is helping uphold its dominance even as market growth slows, and online retail integrates with offline. In this piece, Ernan cuts through the wave of publicity with three simple points.

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    Gavekal Research

    Reading China’s Financial Opening

    Friday’s surprise announcement that China will scrap its restrictions on foreign ownership of local financial institutions has been widely hailed as a major opening of the domestic market. But as Chen Long explains, while it is a significant move with positive implications for Chinese equities, it is certainly not about to change China’s financial sector landscape in any major material way.

    1
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    Gavekal Research

    This Is (Still) Not A Peak: It’s A Global Bull Market

    It was almost five years ago that Anatole started to shout loudly that the US equity market had achieved a clear breakout from its more than decade long bear market trading range. His advice has been to stick with the trend. In light of this year’s near across-the-board upward moves in risk assets globally, it would be tempting to back away from this positioning. However, in this piece he argues that the bull market is now going global and so it...

    2
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    Gavekal Research

    Video: Escaping The Indian Funk

    Udith presented on India during Gavekal's Hong Kong seminar in November. This video also includes relevant excerpts from the question and answer session.

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    Gavekal Research

    Selling India’s Housing Dream — Part II

    When Indians visit China for the first time, it often comes as a shock: China is more materially developed than they could ever have imagined. And when Chinese visit India for the first time, it too comes as a shock: India is even more chaotic, dirty and materially backward than they had been told!

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    Gavekal Research

    Audio & Transcript — Gavekal Research November Call

    In our monthly research conference call yesterday, Will Denyer outlined his case that demographic factors explain much of the decline in interest rates over the last 30 or so years. His point is that we are nearing a turning point in the global demand-supply relationship for loanable funds and the overall direction of interest rates should be higher.

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    Gavekal Research

    Contradictory Signals On US Corporate Credit Risk

    US high-yield spreads have widened by 39bp over the last three weeks. Nevertheless, by long term historical standards, they remain exceptionally tight, indicating that the bond market is pricing in remarkably little US corporate credit risk. That message is at odds with the tale being told by the US equity market, which is signaling that corporate credit risk is on the rise. Only one of them can be correct. There are good reasons to think it may...

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    Gavekal Dragonomics

    From Tianjin, Affordable Luxuries

    The surging population of affluent Chinese households is a key global market for all kinds of luxury goods. Foreign brands have done well in this boom, but the market is getting more competitive as local firms up their game. Thomas and Ernan report from Tianjin on two very different companies that are both succeeding in high-end niche markets.

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    Gavekal Research

    The Truth About Euro-Dollar

    At the time of writing, a five-year zero coupon treasury bond is priced at about 90 while a comparable German zero sells for 101.9. This absurdity reflects the fact that for all the talk of incipient European inflation, German five-year yields are still negative. Hence a fellow buying-to-hold such a German bond today is guaranteed to lose money, at least in euro terms.

    3
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    Gavekal Research

    Saudi Arabia’s Shifting Sands

    For the last three years the dominant narrative in the oil market has concentrated on the fundamentals of supply and demand. Geopolitical risk has been a minor—and transient—sideshow. All that changed at the weekend, when Saudi Arabia’s 32-year-old crown prince Mohammed bin Salman, or MbS as he is known, exercised his authority as the head of the kingdom’s newly-established anti-corruption commission to take down a broad swathe of the Saudi...

    4
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    Gavekal Research

    A Brave New, New World?

    The traffic has been one-way. Since mid-August, the Philly semiconductors index is up 23%, the Nikkei 225 by 18%, the S&P energy index by 14% and the S&P materials index by 10%. In other words, all “deep-cyclicals” and “price monetizers” are ripping higher. So what to make of this?

    2
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    Gavekal Research

    All Pomp, No Circumstance

    President Trump’s 12-day trek through Asia promises much pomp and little circumstance. Since his administration has no strategic vision for the region and has chosen to abandon many of the tools of diplomacy in favor of overblown rhetoric and empty threats, there is little chance of material progress on any important economic or security issues.

    0
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    Gavekal Research

    Equities When The Dollar Declines

    The US dollar has strengthened over the last couple of months. But the relative maturity of the US cycle, the US dollar’s overvaluation, and the prospect for changes in monetary policy stances outside the US all argue for US dollar depreciation over the medium term. Against this bearish backdrop, KX examines the characteristics of equities that tend to outperform when the US currency is depreciating.

    0
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    Gavekal Dragonomics

    The View Into 2018

    The Chinese economy has experienced a nice cyclical recovery since 2016, but now most forecasters are expecting a loss of momentum in 2018. So how is this slowdown likely to play out? In this piece Chen Long lays out his case for a gradual cooling in both real and nominal growth that will not spook global markets.

    2
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    Gavekal Research

    The Pain In Spain

    To date, the situation in Catalonia reminds that a political imbroglio does not have to morph into an economic crisis. It all depends on the context. Recent data shows that Spain’s economy has broadly shrugged off the secession drama being played out in Barcelona and Madrid.

    0
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    Gavekal Dragonomics

    The Politicians Behind A Big Data Boom

    A local politician named Chen Min’er rose to prominence last week with his promotion to the Communist Party’s ruling Politburo. Chen’s main claim to fame is his transformation of Guizhou, one of China’s poorest provinces, into a supposed powerhouse of “big data.” But Chen’s real skill was in using political leverage from his ties to Xi Jinping.

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    Gavekal Research

    The US Investment Environment

    House Republicans put forward their tax reform bill and Jerome Powell was put up to replace Janet Yellen at the Federal Reserve. On the face of it, this all seems like good news for markets. US firms may soon get a permanent tax cut on domestic earnings and mostly keep Uncle Sam away from their foreign earnings, while the prospect of a Taylor-rule adjustment to interest rates has been dodged as Powell seems set to maintain a path of gradual...

    2
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    Gavekal Dragonomics

    Housing & Construction Review 2017

    In her annual overview, Rosealea summarizes the outlook for the housing market and construction activity in China. This concise chartbook reviews the drivers of growth in 2017, digs into the key indicators and explains the core scenario for 2018: a modest correction in housing sales and prices, and a gradual slowdown in construction activity.

    0
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    Gavekal Research

    Keep Calm And Suck It Up

    The Bank of England is expected to turn tail today by raising interest rates for the first time in a decade. What follows is a particular worry for homeowners, who since 2008 have seen interest payments on mortgages fall by as much as -95% due to 550bp of rate cuts. After all, the specter of a disorderly Brexit looms, businesses are threatening to move out of the UK and economic growth has slowed to a miserly 1.5%. I am relaxed about this...

    0
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    Gavekal Research

    Debating The Eurozone Recovery

    Over the last two years, Nick and Cedric have held similar views about the eurozone’s economic situation. In recent months, however, they have started to diverge on whether this framework still describes Europe’s situation. The upshot is that while Cedric is bulled up, Nick has begun to think the recovery is running out of road.

    2
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    Gavekal Research

    A Different Order Of Political Risk

    Investors in big technology companies, both US and Chinese, are waking up to political risk. In Washington yesterday, senators hauled lawyers for Facebook, Google and Twitter over the coals for carrying foreign-funded political advertisements during the 2016 presidential election campaign in contravention of US law. Meanwhile in China, the government is demanding representation on the boards of big internet companies, including Tencent, Alibaba...

    1
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    Gavekal Research

    Strategy Monthly: How Much Longer For Low Rates?

    For decades fixed income and equity markets have enjoyed a secular bull market, propelled higher by low real long term interest rates, depressed by a glut of global savings. In this Strategy Monthly, Will Denyer updates his Capital Provider Ratio, a powerful demographic tool which indicates that the growth of global excess savings has peaked, and that the glut will soon begin to dry up, with far-reaching consequences for global asset markets.

    0
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    Gavekal Research

    Selling India’s Housing Dream — Part I

    India’s economy is in a slump, laid low by a chronic lack of investment and weak job creation. How can India both revive growth and generate jobs for millions of low-skilled workers? Tom argues that one answer lies in the construction sector, specifically the mass buildout of affordable housing.

    0
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    Gavekal Research

    False Dawn For The Dollar — And Oil

    Last week the US dollar broke out of its summer trading range and hit its strongest level against the euro and the yen since July. The Brent oil price broke through US$60/bbl to a two-year high. And even sterling seemed to be on the verge of strengthening beyond its post-French election trading range against the euro. How should investors respond to all these breakouts?

    1
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    Gavekal Dragonomics

    The Reconstruction Of The Administrative State

    The clear message from the Communist Party Congress is that Xi Jinping has political primacy for the foreseeable future. But what does Xi want to do with all his power? In this piece, Andrew summarizes three of the more concrete policy trends Xi signaled at the Congress. Behind all three is a drive to strengthen the apparatus of the Party-state.

    0
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    Gavekal Research

    The Unconvincing Pick-Up In US GDP

    US third quarter GDP growth came in on Friday at 3% QoQ annualized, much higher than the expected 2.6% rate. The strength of the headline number sparked optimism that the US economy had successfully shrugged off any negative impact from hurricanes Harvey and Irma, and certainly did nothing to discourage equity investors, as both the S&P 500 and the Nasdaq Composite rode buoyant earnings to new highs.

    0
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    Gavekal Research

    London Seminar — October 2017

    Anatole argued that the investment environment should remain upbeat given predictable monetary policy and a global cyclical upturn. Chen Long contended that China’s post-Party Congress slowdown should be gradual. Cedric made a bullish case for European equities, while Charles presented Gavekal’s latest artificial intelligence investment tools.

    0
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    Gavekal Research

    Tapering Without The Tantrum

    Mario Draghi yesterday confirmed the European Central Bank’s decision to opt for a “slower for longer” approach to winding down its quantitative easing program of asset purchases. His announcement outlined a threefold approach to ECB tapering:

    0
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    Gavekal Research

    Video: After Abe's Election Victory

    Despite poor personal approval ratings, last weekend prime minister Shinzo Abe scored a convincing victory in Japan’s general election. In this short video interview Neil examines what the prospect of five more years of “Abenomics” policies means for Japan’s economy, corporate sector and stock market.

    0
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    Gavekal Research

    US Equity Exposure For The Late Cycle

    The US equity bull run continues even as the US economy issues an increasing number of late cycle indicators. For investors who want to maintain exposure to the stock market but are getting nervous that the economy may soon turn down, KX examines the characteristics that allow stocks to outperform in the late stages of the cycle.

    2
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    Gavekal Research

    Bitcoin And Money

    Philosophically, I have often argued that an asset’s value can derive from just two sources. It can be scarce like a jewel, or useful like a tool. It is customary to measure these values using “money”, which offers a unit of account, a medium of exchange and a store of value. When “national money” forms the backbone of a banking system, it is usually guaranteed by a central authority. Yet, the real question about money has always been whether it...

    6
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    Gavekal Research

    India’s Sly Bank Recap

    So here’s a conundrum. As finance minister, you preside over a slowing economy with banks and corporates that have giant holes in their balance sheets. You may have stellar demographic “tail winds”, but private sector investment has stalled. Your headache is a gaping fiscal deficit and a credit rating one notch above junk status. You notice, however, that your banks are flush with cash.

    1
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    Gavekal Research

    After Xi’s Coronation

    China’s Communist Party concluded its conclave with a decisive validation of Xi Jinping’s personal leadership, granting him a status and authority unmatched by any Chinese political figure in recent history, and setting the stage for him to exert that power for many years to come.

    2
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    Gavekal Dragonomics

    Unmixing The Signals Of The Industrial Cycle

    China’s business cycle indicators are sending mixed signals in 2017: PMI surveys show a steady acceleration, even though housing is cooling, while the official indicator of industrial value-added has been strangely volatile. In this piece, we clear up the confusion, and show that industry is indeed tracking the gradual slowdown in construction.

    1
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    Gavekal Research

    Corporate Japan’s Cash Mountain

    Shinzo Abe’s thumping victory in Sunday’s Japanese general election set the seal on the local stock market’s unbroken run of gains. AfterAbe’s Liberal Democratic Party and its Komeito coalition partner together secured a comfortable two-thirds majority in Japan’s lower house of parliament, Monday saw the Nikkei 225 close higher for an unprecedented 15th day in a row just whisker short of a 21-year high.

    2
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    Gavekal Research

    The Curious Case Of European Optimism

    This weekend saw Madrid announce emergency measures over Catalonia, upping the chance of a declaration of independence being made in Barcelona. Yet despite the worst Spanish political crisis since the 80s, markets have mostly shrugged. After eight years viewing all glasses as half-empty, investors in eurozone assets have since the Brexit vote seemingly turned into congenital optimists.

    1
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    Gavekal Research

    The (Austrian) Empire Strikes Back

    The weekend’s news hardly bolsters confidence that Europe’s technocrats are in competent command of the continent’s political situation. In Spain, hundreds of thousands took to the street to protest central government rule over Catalonia. Meanwhile in unofficial referendums, millions of citizens in two of Italy’s wealthiest regions voted overwhelmingly in favor of greater political and fiscal autonomy from Rome.

    6
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    Gavekal Dragonomics

    The Housing Slowdown Stays Contained

    China’s housing downturn is here: September data showed nationwide property sales declining for the first time since 2015. But the government’s attempt to cool sales and prices while limiting the impact on the real economy is working. While growth will certainly slow further, this manageable slowdown will not require policy to loosen anytime soon.

    0
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    Gavekal Research

    Back Away From Buyback Plays

    From a cyclical peak of US$161bn in 1Q16, US corporate share buybacks fell to US$120bn in 2Q17. But although buyback activity is down, it is not out. In the past few weeks companies including Walmart, HP and Allergan have announced new share repurchase programs. The question for investors is whether they should chase these buyback plays.

    0
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    Gavekal Research

    The New Era Of Chinese Socialism

    In his first term, Xi Jinping has been nothing if not ambitious. So it is not surprising that, in a speech to mark the start of his second term, he announced a series of ambitious goals. It is more surprising that, in Xi’s “new era” of Chinese socialism, the pursuit of national greatness will no longer be centered around economic growth.

    2
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    Gavekal Research

    Experiences, Not Things

    It is a core Gavekal belief that good money management is more about “avoiding losers” than “picking winners”. Yet sell-side research focuses almost entirely on identifying winners. This leaves an avenue for a small, independent firm like ours to lean the other way and help clients identify “losers”.

    27
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    Gavekal Research

    Video: Which Messenger To Believe?

    After Louis wrote up today’s Daily on the strange dichotomy between strong growth and moribund yields, we sat down to quiz him further on how this contradiction gets resolved. In this short video, he explains why the bond market is the thing that will probably have to give.

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