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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 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

    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

    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

    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 Research

    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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    Gavekal Research

    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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    Gavekal Research

    Behind The Market’s Inability To Rally

    “A week is a long time in politics”, Harold Wilson was said to have once quipped to a young aide. The former British prime minister should have tried working in the US equity market. In recent days, it has sometimes felt as if time stood still. So what should we make of stocks’ inability to mount a rally after they again closed on their lows?

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    Gavekal Research

    Parsing The Market Sell-Off

    One of the first things Charles taught me is that in a bear market you should never do on the Monday what you wish you had done on the Friday. As bad news piles up, investors brood, sleep poorly, snap at their spouses or children, and go in first thing Monday morning and start to liquidate positions. Undeniably the picture for the now rather stretched equity bull market has been deteriorating for a while, with spiking bond yields, creeping...

    2
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    Gavekal Research

    The Drains On Liquidity

    For ease of math, assume that the world consumes 100mn barrels of oil a day. Then further assume an inventory across the system equal to about 100-days’ usage (in pipelines, ships and refineries). Thus, when the price of oil rises by US$10/bbl in three months—as occurred in 4Q17—a “liquidity drain” of about US$100bn is created.

    4
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    Gavekal Research

    Cui Bono?

    Today, with European growth humming along and Beijing having (again) shown an ability to keep China’s economy on a sustained expansion path, no one seems fazed about a possible economic downturn. Apart from the UK (where the obsession is Brexit), concern centers on geopolitical risks. Yet depending on their region, investors are worrying about very different things.

    2
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    Gavekal Research

    The Bitcoin Bubble Changes Shape

    All the talk about crypto-currencies, initial coin offerings, distributed ledgers etc. feels a lot like discussions on carnal knowledge in a high school boys’ locker room. Everyone is talking about it. Yet almost everyone’s experience is extremely limited. And it is likely to stay that way for the time being, because for all the talk, very few of those doing the chattering are actually getting any action. So what is there left to say about the...

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    Gavekal Research

    Have We Just Glimpsed Growth Stocks’ Achilles’ Heel?

    The best scene in HBO’s hit show “Silicon Valley” had brash billionaire Russ Hanneman explain to start-up CEO Richard Hendricks that the first goal of his tech firm should be to avoid booking sales: “If you show revenue, people will ask ‘how much?’ and it will never be enough” (see clip). This scene crystallizes the observation that in recent years investors have been rewarded in spades for loading up on “long-dated assets”. And it has been a...

    4
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    Gavekal Research

    The Bull Market And The Yield Curve

    Keeping up with a runaway bull is no easy task. Which may explain why so many investors remain unenthusiastic participants: the market is old and increasingly unattractive, but holding back could cost them their careers. Yet, the upward march of global equity markets continues relentlessly (for reasons reviewed in recent articles. Today, some 84% of markets around the world are up over the past 12 months in local currency terms. Historically,...

    2
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    Gavekal Research

    The Growth And Yield Dichotomy

    Of the 45 economies tracked by the OECD, all 45 are expanding, and 33 are seeing an acceleration in their rates of growth.Simply put, both official economic data and market prices are pointing the way towards economic growth—which probably explains why a “data-dependent” Federal Reserve is intent on tightening monetary policy.

    1
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    Gavekal Research

    The Rather Lame US Dollar Rally

    The year is far from over but when the time does come to close the books, it seems likely that the sudden weakness of the US dollar this year will count as one of 2017’s biggest surprises. Most investors started the year with a distinct bullish bias on the dollar, and a consequent bearish bias against emerging markets (an outlook we did not share, see for example our January 19 piece Trump’s Declarations On The Dollar). However, instead of...

    6
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    Gavekal Research

    Winners And Losers From The German Election

    Whatever the result of Germany’s election on Monday morning, the leaders of the Christian Democratic Union will start preparing for the post-Merkel era. Which is why this German election matters. Indeed, there is a significant spread of potential outcomes, which have different implications for both the European economy and investors in European assets.

    0
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    Gavekal Research

    Disasters, Bond Yields And The Dollar

    In the past few weeks the US administration cut a deal with opposition Democrats to keep the government open, increasing the likelihood of a budget deficit expansion, and a string of natural disasters have roiled North America. In turn, these events seem to have triggered a sell-off in the US dollar and a global bond rally. Louis outlines two scenarios for where things could go from here.

    0
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    Gavekal Research

    The Difference A Couple Of Years Makes

    In August 2015 the offshore renminbi fell -4.5% against the US dollar, unleashing a global panic as investors fretted that another big deflationary downdraft beckoned. Fast forward to August 2017 and the renminbi rose a little over 2.07%, making it the world’s best performing major currency—it even outstripped rises in the euro and Scandinavian currencies.

    0
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    Gavekal Research

    Deteriorating Market Signals?

    We have a rule of thumb at Gavekal that when the S&P 500 equal-weighted outperforms the “S&P 500 index”, our equity clients are cheery since beating the benchmark is fairly easy. At such times, clients will typically take more risk. The reverse is, of course, true: outperformance by the S&P 500 makes for grumpy clients, tougher meetings, and less appetite for risk-taking. In the latter case, there is a tendency for investors to rush...

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