E.g., 15-10-2018
E.g., 15-10-2018
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    Gavekal Research

    The Politics (And Economics) Of A Multi-Polar Europe

    This weekend’s election in Bavaria saw voters deal parties in Germany’s ruling coalition a bruising rebuff that further erodes Merkel’s authority and effectively kills off Macron’s plan for the EU to integrate at a faster pace. In light of such a changed environment, Nick and Cedric introduce a new framework to explain how political bargaining will work in an increasingly multi-polar Europe.

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    When Non Means Non

    The UK government is on the offensive trying to sell a “Chequers” plan that would leave it with a semi-detached trading and administrative relationship with the European Union. The negotiating position, has won few plaudits at home, and over the last week got a courteous, but non-committal response on the continent. Cedric is doubtful that the intended "divide and conquer" approach will bear fruit.

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    Whether To Buy Italy (And The Euro)

    On Wednesday, Louis argued that the Italian president’s rejection of a proposed coalition finance minister was “worse than a crime, a mistake”. Anatole and Cedric are not so sure. In this paper they examine the two conditions—one political, one financial—that will signal a major buying opportunity in Italy.

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    The Next Phase Of Eurozone Reform

    During last year’s French presidential election, Emmanuel Macron opened a debate by asking “what do we want to do with the euro?” His answer was more political integration and burden sharing. Those plans must get traction at the June 28-29 meeting of European Union leaders if they are not to be crowded out by a likely messy end to the Brexit process and next year’s European Parliament elections. Right now, this seems a long shot and attention...

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    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...

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    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.

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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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    Five Ways To Play European Equities

    After a traumatic couple of weeks in the equity markets, Nick and Cedric take this opportunity to revisit their longstanding advice that investors should overweight European mid-caps exposed to the eurozone’s cyclical upturn. As they explain in this report, that call still holds, and they suggest three sectors where investors should look to buy the dip, and two that portfolio managers would do well to avoid.

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    Eastern Europe's Equity Sweet Spot

    The big issue facing investors globally is whether inflation makes a Lazarus-like comeback. But in one significant economic region, it is already alive and kicking. Eastern Europe experienced a painful deflation and repricing after the 2008 crisis, but inflation is now well above 2.5%. Having underperformed for many years, Cedric argues that its financial-heavy equity indexes should continue to do well in an environment of strong domestic demand...

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    When Political Stagnation Is Benign

    Last week, European economic affairs commissioner Pierre Moscovici declared Italy a “political risk” for the European Union. Some of the Euroskeptic campaign rhetoric has certainly been alarming. But in this paper Nick and Cedric delve into Italy’s electoral arithmetic to conclude that no incoming government is likely to have the will or capability to act on such combative promises.

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    Spending Again In Germany

    Picture the typical German consumer. The image that comes to mind is almost certainly of a deeply conservative individual: cautious, thrifty in his or her spending habits, and with a deep-seated aversion to maxing out the credit card. As with most stereotypes, this one has some foundation in experience. But like many, it also looks increasingly out of date. While Germany’s booming export sector has got most of the attention recently, it is...

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    Gavekal Research

    France: Believe The Hype

    A basic assumption among Anglo-Saxon investors has been that France, for all its nice food, good wine and smart infrastructure, was the unreformable economy. Then Emmanuel Macron came along promising to fix things, duly got elected president, orchestrated a thumping parliamentary majority and actually began to deliver on promises.

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    German Overheating? No, Eurozone Rebalancing

    In early November, Germany’s Council of Economic Experts, a panel of five heavyweights that advises the government, declared there were clear signs that Europe’s largest economy was running above potential and at risk of overheating. Three weeks later inflation data showed that consumer prices rose by a faster than expected 1.8% year-on-year in October, up from 1.5% in September, with the core ex-energy and food inflation rate also surprising to...

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    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.

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    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.

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    Bond Markets Don’t Speak Catalan

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

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    A Somewhat Changed Germany

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

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    The Eurozone Is Now So Far Behind The US, It’s In Front

    Among the many tricky tasks facing investors is to determine the relative positions of the US and eurozone economies in their respective business cycles. Over the preceding two cycles—the ones that peaked in 2000/01 and 2005/06—the two economies moved broadly in phase, with the eurozone lagging the US by around one year. Estimates from the International Monetary Fund and OECD suggest that that relative position is largely unchanged, with the...

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    Gavekal Research

    The Real Macron

    On Monday Emmanuel Macron launched what is being dubbed an imperial presidency. He offered a neo-Gaullist vision of a strong leader nurturing a troubled nation’s recovery. Yet he also unfurled an electoral reform program aiming to break the old political duopoly. The worry is that Macron uses up his political capital and economic reform stalls.

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    Macron And French Optionality

    For investors, the great benefit of Emmanuel Macron is that even if his big plans for change fizzle a nice cyclical economic recovery will almost certainly play out. If the president-elect defies the stereotypical view of France as being basically unreformable, the kicker is huge optionality built into asset values that have non-challenging valuations. Either way, Cedric argues that France represents a stand-out investment opportunity.

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