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E.g., 29-07-2017
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    Gavekal Research

    Stay Long Ruble Bonds

    Russia has been a consensus overweight among emerging market managers since early 2016. They have been handsomely rewarded. Over the last 12 months, ruble-denominated Russian finance ministry bonds, known as OFZs, have returned 37% in US dollar terms. Small wonder then that over the same time period non-resident holdings of OFZs have increased from 21% of outstanding issuance to 27%. After such an impressive outperformance, it is natural to ask...

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    Gavekal Research

    Why This Time May Be Different For EMs

    Going into 2017, the logic of Donald Trump’s “America First” program suggested that investors should be long US equities and the dollar, and short longer-dated treasuries. Such an outcome would have been horrible for emerging markets. And yet EMs have rallied 13% year-to-date. The swing factor has been the sideways move of the US dollar in the intervening period, which persuaded investors to cover short-bets on EMs. In this chartbook Joyce...

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    Gavekal Research

    The Risk Picture Diminishes

    Yesterday’s 25bp rate rise from the US Federal Reserve was universally expected. The relative dovishness of Fed officials was not. With headline CPI inflation in the US running at a brisk 2.7% in February, ahead of the meeting at least some market participants had been pricing in four rate hikes this year. But after the latest dot plot signaled that policymakers continue to see only three hikes—including yesterday’s—in 2017, those expectations...

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    Gavekal Research

    Like Japan, Love Korea

    Ignore for the moment the drumbeat to hostilities on the 38th parallel; it has still been a head-spinning few weeks in the normally staid world of South Korean governance. First, the head of Samsung, the country’s biggest company, was arrested on bribery charges, and then last Friday saw President Park Geun-hye ousted by impeachment. It is our view that a political upheaval is afoot in Seoul that threatens the collusive ties between officials...

    2
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    Gavekal Research

    A Qualified Positive For Chinese Banks

    The Hong Kong-listed H-shares of mainland Chinese financials are the best performing segment of one of the world’s strongest markets year-to-date. So far this year, the H-share index is up 12% in US dollar terms, driven largely by gains in the stocks of China’s big banks and insurers. So it is natural for investors to sit up and take notice on reports that China’s big four financial regulators have drafted a joint proposal to tighten their...

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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

    The US$10 Trillion Question

    Over the last seven years, emerging markets have been stuck in a trading range they show no sign of exiting. For this reason, in Asia at least, I have advised investors to adopt a market timing strategy based on return-to-the mean valuation measures (see Go Contrarian In Asia). The problem with this approach is that it works until it doesn’t. So what could cause a breakdown? Charles for one worries that the presence of a huge global US dollar...

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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

    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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    Gavekal Research

    Assessing EMs Vulnerability To The Trump Trade

    Emerging markets have faced selling pressure since Donald Trump’s US presidential election win started to drive treasury yields higher. EM debt funds saw their largest ever outflow the week after the election, while currencies have fallen on fears of trade protectionism and more talk of the US dollar being primed for a 1980s-style super-spike. Given this basket of worries, Joyce revisits her “emerging market relative balance sheet vulnerability...

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    Gavekal Research

    How Bad Is The Dollar Squeeze?

    This has not been your regular dollar squeeze. Over the last month, the cost of obtaining US dollars offshore has soared to levels last seen in “crisis” periods, yet bank equities have rallied the most in six years. Rather than a new crisis unfolding, we seem to be transitioning to a macro environment where dollars are structurally scarce. This will be challenging for weak link economies, as shown yesterday by adverse market moves in Brazil and...

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    Gavekal Research

    Why So Calm In Emerging Markets?

    Historically, a strengthening US dollar has been bad news for emerging markets; just think of the Asian crisis of 1997. And rising US long rates do not exactly help; consider the taper tantrum of 2013. Put them together then, and throw the prospect of greater trade protectionism into the mix, and the current global environment should be absolutely toxic for emerging market assets. Yet despite considerable local pain, notably in Mexico, the...

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  • Gavekal Research

    Joyce Poon: Market Timing In Asia

    Investors need to get nimbler in playing Emerging Asia’s equity markets due to the lack of any clear trend that dates back to 2010. Joyce outlines a trading strategy that can potentially make a big difference to performance.

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    Gavekal Research

    Go Contrarian In Asia

    Investing in Emerging Asia is tricky due to the high volatility that exists within the overall trend of the region’s asset markets. Hence, market-timing has become a fairly essential strategy. It was not always so, for between the mid-1980s and 2010 Emerging Asia was a fairly straightforward call—“all in” worked during structural bull markets, and “all out” was the way to go during periodic bear markets.

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    Gavekal Research

    A Good Bond Repricing, Anyone?

    Even after the recent move higher in yields, there is general agreement at Gavekal that long-dated bonds remain horribly overvalued. The question is whether the adjustment toward fair value happens in a disruptive manner, or through a smooth transition to a new growth cycle. Anatole tends to the view that US economic growth should pick up from here, while Will Denyer is on recession-watch. The Federal Reserve, for its part, is worried about...

    2
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    Gavekal Research

    The Economics Behind Korea’s Political Scandal

    The political turmoil engulfing South Korea claimed the scalps of both the prime minister and the finance minister on Wednesday, as embattled president Park Geun-hye opted for a cabinet reshuffle in a bid to shore up her sagging administration. In recent months Korea has seen the bankruptcy of Hanjin Shipping, the country’s largest shipping company, and the recall of millions of Samsung’s Galaxy Note 7 phones, the flagship product from the...

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    Gavekal Research

    Safety First In EMs

    After a steady rise in emerging market inflows over the last seven months, tighter US financial conditions have led to an abrupt reversal. On the back of inflation concerns and a stronger US dollar, the seven day moving average of daily portfolio flows to EMs, as of last Monday, had fallen to its lowest level since the renminbi-induced sell-off 14 months ago. EMs are vulnerable to an externally-induced pull-back, for even if key central banks...

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    Gavekal Research

    The Gavekal Monthly: What Price On A Trump Victory?

    Markets seem sanguine about the prospect of a Donald Trump victory in next month's US presidential election—too sanguine. Expert opinion gives Hillary Clinton a 75% chance of winning. But remember that four months ago in the UK, expert opinion discounted polls showing a strong chance of Brexit, and the experts were proved wrong. And the consequences of a Trump win are so huge and potentially destabilizing that even a 25% chance means...

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    Gavekal Research

    That Sinking Feeling

    You almost have to feel sorry for poor Haruhiko Kuroda. Just over a week after the Bank of Japan governor announced his intention to overshoot the central bank’s 2% inflation target, it is painfully obvious that investors believe he will fall short. That much is clear from the Japanese government bond market. At last week’s meeting the BoJ announced that from now on it will tailor its JGB purchases to target a 10-year yield of zero. In the days...

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    Gavekal Research

    Real Yields In The Driving Seat

    Notwithstanding yesterday’s bounce, the stock market is a nervous place just now. After riding a post-Brexit rebound that saw both the S&P 500 and the Nasdaq Composite scale record highs on minimal volatility, investors are increasingly wondering about the extent of the potential near term downside, not just in the US but around the world

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