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E.g., 17-07-2018
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    Gavekal Research

    What Constitutes A Certain Investment In Today’s Market?

    What concerns investors most in these tricky post-Brexit times is the sheer uncertainty of it all. No matter whether the “Leave” camp can work out a non-ruinous strategy for Britain to exit the European Union or “Remain” can exercise some kind of parliamentary blocking action against this “terrible mistake”, there is agreement that things will get messier before the picture clears. Even if the UK-EU “divorce” proves a rational end to a...

    0
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    Japan: Twice Bitten, Thrice Shy

    It was a case of twice bitten, thrice shy. This week Shinzo Abe announced he will postpone next April’s planned 2pp increase in Japan’s sales tax until October 2019—a step the prime minister had previously sworn he would only take in a Lehman-scale crisis. Despite Abe’s protestations to the contrary at last weekend’s G-7 meeting, the world economy is facing no such meltdown. Nevertheless, deferring the tax hike makes sense. Previous increases in...

    0
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    Gavekal Research

    Waiting For Another Tantrum

    One of the most powerful phenomena to hit markets can be the counter-trend reversal, especially when it is fueled by surprise and a big dollop of anxiety. Given the focus on the Fed’s upcoming policy decision, coming at a time when global bond yields are stuck at ultra-low levels, is another hissy fit possible?

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    The Message From Gold And Silver

    A simple rule of thumb that we at Gavekal use is to categorize assets depending whether their value derives from scarcity or a productive capacity to generate positive cash flows. A good proxy for investors’ preference for scarcity over productive assets is the gold/silver ratio, which stands close to a 20 year high. The implication of this extreme positioning is that the end of the world really is nigh, or alternatively a pull–back in the ratio...

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    The Chinese Debt Resolution

    China’s chosen development approach of investment-led industrialization meant it was fated to face an eventual debt crisis. Like Taiwan 30 years ago, China has moved from an export-driven economy to one motored by domestically-focused investment spending. Its challenge has been to “rebalance” toward consumption and in the process stop an escalating build-up of debt which funds projects with ever lower returns. Yet so long as China has a...

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    Gavekal Research

    Can The BoJ Ever Do The Right Thing?

    Another Bank of Japan meeting, another market slump. Yesterday saw investors mortified by a BoJ tease which came to nothing, while in January the same market response followed an activist move to charge a negative interest rate on a small part of banks’ reserves. In response to the disappointment the yen soared against the US dollar with its biggest daily move in seven years, while the ensuing six hours saw a 7% peak-to-trough move in Nikkei...

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    Emerging Markets Reality Check

    Emerging market assets have enjoyed a powerful momentum-driven rally over the last two months. A more dovish stance from the US Federal Reserve, falling yields, acceptance that the US dollar is no longer strengthening, and a pick-up in commodity prices combined to quell the market’s worst fears and persuade investors that emerging markets were not in fact facing Armageddon. More recently last week’s release of relatively upbeat economic data...

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    Gavekal Research

    Worth Buying This Japanese Dip

    Those with an active interest in Asian markets had much to process in early trading with shorts cheered by the hardly surprising news that Iran and Saudi Arabia could not agree on an oil production freeze, while longs could point to China whose 1Q15 GDP report on Friday seemed to confirm that the authorities will do whatever it takes to defend their near-term growth targets. But perhaps the bigger factor unnerving investors has been the fallout...

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    Gavekal Research

    The Yen And Japanese Equities

    It is hard not to feel a smidgen of sympathy for Haruhiko Kuroda. In the last 18 months, the Bank of Japan governor has deployed a whole battery of heavy artillery, stepping up his asset purchases to ¥80trn a year, extending them to cover exchange-traded funds and real estate investment trusts, and pushing short term interest rates into negative territory. As well as supporting asset markets, much of this effort was aimed at driving the yen...

    0
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    Gavekal Research

    Fade The Emerging Market Rally

    In defiance of conventional wisdom the oil price has tumbled -10% in the last two weeks despite a weak US dollar. For emerging markets investors, the breakdown of this correlation raises tricky questions.

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    Gavekal Research

    Dollar Liquidity And Its Dependents

    One of our long-standing rules of thumb has been that a deteriorating US trade balance is good news for the rest of the world, and especially for emerging markets. It is thus a positive sign that the ex-energy, ex-China trade balance shifted from surplus to a deficit in 2015, sending US$150bn to the world outside of China and the oil exporters. The overall trade balance is likely to continue worsening through late 2017, thanks to the lagged...

    5
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    Gavekal Research

    The Yen And Hard Truths

    The renewed “risk-on” moves of recent weeks has seen a vicious rebound in commodity prices, renewed stability in credit markets and, notably, a decline in the euro, which has fallen back to its early year level against the US dollar. The big outlier in these moves is the Japanese yen, which has become the new strong man of the currency world.

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    Gavekal Research

    Not Yet The Buy Of A Lifetime

    With emerging market equities up 13% over the last three weeks, and outstripping developed markets over the year to date, the notion is gaining traction that after four years of underperformance emerging markets are now “the buy of a lifetime”. Investors should be cautious. While it is indeed possible that emerging markets could continue to rally over the next few months as the US dollar tops out and commodity prices stabilize, the longer term...

    2
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    Gavekal Research

    The Avoidance Of Debt Traps

    Yesterday saw Asia’s two big emerging economies adjust economic settings to deal with their respective debt problems. China cut the required reserve ratio that banks must hold by 50bp and India’s government rolled out a cautious budget. Both countries' actions, while different in nature, reflect sensible responses to testing circumstances.

    0
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    Gavekal Research

    Japan’s Point Of No Return

    On January 29 the BoJ destabilized Japan's market equilibrium with a poorly communicated shift to negative interest rates. The message received by the market was that Governor Haruhiko Kuroda was making a desperate gamble with the suggestion that the BoJ’s quantitative-easing strategy had run up against key limits.

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    Gavekal Research

    Is Japan’s Building Boom For Real?

    As followers of our specialist Gavekal Japan Alpha service will know, something of a construction boom is emerging in Japan. At first glance this seems surprising, especially given that Japan is pedaling into some severe demographic headwinds. According to the 2010 national census, Japan’s population did grow between 2005 and 2010—but only by 0.2% over the five-year period, to reach 128mn. Over the coming decades, that anemic demographic growth...

    0
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    Gavekal Research

    Going Down With The Renminbi

    Emerging markets have faced significant headwinds ever since the “taper tantrum” of mid-2013 when investors began to factor in tightening moves by the Federal Reserve. Their headache got much worse last summer when China allowed a mini-devaluation of the renminbi, and 2016 is hardly starting well. The root problem is that most emerging markets are over-geared and need to ease policy if growth is to be kick-started. Unfortunately, easing is...

    4
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    Gavekal Research

    Are Emerging Markets Cheap?

    On the face of it, the valuation of emerging markets looks compelling. After declining -30% from its 2011 high, the MSCI Emerging Markets index is now at a forward P/E ratio of 12, a third cheaper than the S&P 500. As a result, the valuation premium of developed over emerging equity markets is close to its highest in more than ten years. What’s more on average, emerging-market currencies are now below fair value against the US dollar,...

    1
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    Gavekal Research

    Indonesia: After The Pain Trade

    Indonesian assets did well out of the late summer pain trade, with equities and rupiah bonds both rallying by around 20% in US dollar terms. Even more encouragingly, they have since held on to most of those gains as commodities have tested new lows. This is a signal that the rupiah has fallen enough over recent years to allow Indonesia’s economy to adjust to the end of the commodity boom. That makes the high yields on rupiah-denominated bonds...

    0
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    Gavekal Research

    Not So Bad In Japan

    Japan, as of Monday, was back in recession after GDP in 3Q15 shrank by -0.8% YoY, a second successive quarterly contraction. Such weakness supports a growing consensus that the economic renewal program of Prime Minister Shinzo Abe—based on the idea that monetary easing would spur domestic reflation—is a busted flush. For the bears, the question is when, not if, Japan tilts back into full-blown deflation. We are not so sure about this view, and...

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