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E.g., 26-06-2017
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    Gavekal Research

    Should Investors Chase Health Care Stocks?

    Years ago, when Charles attempted to retire, my mother promptly decided that retirement was the “worst of both worlds”: more husband and less money. She quickly put the kibosh on the idea. The US government is a little more complicated to run than the Gave household, yet health care policy also offers a “worst of both worlds” outcome—profligate spending and rising bureaucracy (from government interference) and eye-watering prices (from the...

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    Gavekal Research

    Keeping It Simple

    Three prices have a disproportionate impact on global financial prices: the oil price, the price of the US dollar, and US interest rates. Often the rest is just noise. In the long term, it is shifts in these three prices that drive economic cycles and determine the performance of almost any investment strategy. Take this year as an example. The investment environment has been dominated by:

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    Gavekal Research

    Figuring Out Where The Ball Will Be

    Rugby players fall into one of two categories: the forwards, who typically go where the ball is (and in the process put their heads in places most sane people wouldn’t put their feet), and the backs, who try to go where the ball will be, which enables them to look good and keep their kit clean, but earns them the scorn of the forwards. Peter FitzSimons, the first Aussie to play for a French club (Brive), once remarked: “Come the revolution, the...

    2
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    Gavekal Research

    The Underperformance Of Energy Stocks

    Charles likes to say that good money management often involves taking a few key decisions and sitting on them for a decade. In 1982, for example, the avoidance of energy and material stocks ensured almost 10 years of outperformance. In 1990, avoiding Japan paid off for two decades. In 2000, sidestepping TMT and underweighting the US dollar worked for almost a decade. In 2006, avoiding financials also paid off for a decade, as did underweighting...

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    Gavekal Research

    The Consequences Of Trump’s Syrian Strike

    In his 1992 book Give War a Chance, P.J. O’Rourke remarked that “wherever there’s injustice, oppression and suffering, America will show up six months late and bomb the country next to where it’s happening”. Now, in fairness to Donald Trump, the bombing of assorted Middle Eastern countries by the US armed forces did not just start this past weekend. Nonetheless, by launching his cruise missiles at a Syrian airbase, Trump has now waded into the...

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    Gavekal Research

    The Future Of The US SPR

    While North Korea is sure to be a major topic at Donald Trump and Xi Jinping's meeting this weekend, bubbling under the surface will be America’s US$347bn bilateral trade deficit with China. Few observers believe the summit will lead to a meeting of minds over the deficit, but a couple of recent developments in the energy sector suggest one way the deficit could be reduced to the satisfaction of both Washington and Beijing.

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    Gavekal Research

    Handicapping The French Election

    Things are on the up across Europe: better PMIs, growing employment, increasing trade, stronger consumer confidence and of course rising currency and equity markets. The combination of re-accelerating growth across emerging markets—key export markets for most eurozone countries—low energy prices, very easy monetary policy, low interest rates and a deeply undervalued exchange rate is working its magic. In fact, at this juncture, the only factor...

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    Gavekal Research

    Hong Kong: Meet The New Boss

    Meet the new boss. Same as the old boss? Last Sunday saw the “election” of Carrie Lam, CY Leung’s former Number 2, to the post of Hong Kong chief executive. The hope now has to be that, just as Robert Wagner in Austin Powers proved altogether more competent than Dr Evil, Hong Kong’s Number 2 will show herself to be more competent than her former boss in handling the territory’s affairs.

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    Gavekal Research

    Hedges In A Bull Market

    It is hard to find an equity market anywhere that is not in bull market territory. This much is clear from a quick look at the Gavekal TrackMacro grid. Simply put, not a single country is now flashing red. You have to go back to the Spring of 2014 for such a benign global macro backdrop.

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    Gavekal Research

    Where Next For The Reflation Trade?

    What was the biggest surprise of 2016? Ask the question in the US and invariably the answer is Donald Trump’s election victory. Ask in Europe and the answer is either the same or, if not, it is the result of the Brexit vote. But are these the events that genuinely moved markets the most? Look at it this way: over the past 12 months, commodity producers have typically been the best performers in almost every market, followed by financials. The...

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    Gavekal Research

    Trump’s Declarations On The Dollar

    Even more than getting it right on US interest rates, performance in 2017 will most likely be driven by getting the US dollar call right. And forming a view on the US dollar with any high degree of certainty is a challenge.

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    Gavekal Research

    A Very Turkish Mess

    Get into a taxi in Rio de Janeiro, Jakarta or Cape Town, and ask for that day’s US dollar exchange rate, and the chances are that the driver will know the answer to within a decimal point. Try the same thing in Tokyo, London or Berlin and you will likely receive a blank stare. My anecdote reflects a simple reality: most people in emerging markets think in two currencies: their own and the US dollar. This highlights most emerging market consumers...

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    Gavekal Research

    Risk-On And The Rising US Dollar

    Inflation is when the haircut that used to cost you US$20 back when you had hair now costs you US$30. Looking at recent market moves, it seems that investors are increasingly pricing in, and even welcoming, a higher rate of US inflation. In a world in which deflation is a problem, currency depreciations such as those we have just witnessed (whether of the yen, the euro, the renminbi etc.) are bad news, for they accentuate deflationary pressures...

    1
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    Gavekal Research

    The Decision Tree From Here

    For months, I have argued that the MSCI World’s push to within a couple of percentage points of its all time high was driven by two powerful forces: the extremely low level of global bond yields, and the continued compression of foreign exchange volatility. I went as far as to argue that this environment was reminiscent of 1986-87, and the Louvre Accord, whose breakdown ultimately triggered the 1987 crash (see Forget Central Banks, Watch Foreign...

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    Gavekal Research

    When Elites Fail

    Burkean conservative in me wants to agree with de Tocqueville: the passions unleashed by this election will hopefully once again, go back into their box for the next three and half years, only to be stirred up again the next time the electoral cycle comes around. Still, there are two elements of this week’s vote that do raise discomfort.

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    Gavekal Research

    Deteriorating Price Momentum And Rising Political Risk

    As of Friday’s close the S&P 500 had recorded nine consecutive down days, falling back to its 200-day moving average. One can point the finger for this pull-back at any of several factors: broadly disappointing earnings (ex-financials), rising foreign exchange volatility (see Is Perfidious Albion Undermining The ‘Shanghai Agreement?’), higher long term interest rates and, of course, rising political risk. Unfortunately, none of these forces...

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    Gavekal Research

    Is Perfidious Albion Undermining The 'Shanghai Agreement'?

    Back in the early 1980s, foreign exchange volatility wreaked havoc on business spending plans and countries’ ability to repay foreign currency debt. To remedy this situation, the world’s key financial policymakers got together to agree on a plan for coordinating monetary policies; the idea was to reduce currency volatility and so limit the scope for financial shocks.

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    Gavekal Research

    What Does The Italian Elite Want?

    Should we care about the Italian referendum? Without wanting to sound smug toward what remains Europe’s second prettiest country, I can’t remember ever witnessing an Italian election with consequences beyond its own borders. But the December 4th referendum could be such a first: an Italian election that matters.

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    Gavekal Research

    Angela Merkel’s Catch 22

    Back in April, we pondered whether, with their negative interest rate policies, central bankers were showing themselves to be particularly incompetent by condemning commercial banks to years of unprofitability, or whether their greater design was to drive weaker banks to the wall to advance a consolidation of banking industries around the world under the umbrella of nationalization (see NIRP: Machiavellian Design Or Policy Mistake?). In other...

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    Gavekal Research

    Will Low Volatility Get Trumped?

    As we enter the final stretch of the exhausting US electoral cycle, the single most important question confronting investors may well be whether the current low volatility environment for equities, bonds, and exchange rates is dependent on politicians or not. Clearly, with the VIX hovering around 12, and with volatility in exchange rates barely noticeable (see Forget Central Banks, Watch Foreign Exchange Volatility), financial market...

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