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    Gavekal Dragonomics

    Chinese Equities And The Taiwan Syndrome

    Is China’s equity market going through a structural re-rating, or blowing up a bubble fueled by easy money and dumb investors? The broad Gavekal view is that China is again pursuing transformative economic reform which should end with a less meddling state and a greater role for market forces (see The New Way To Think About China). In emerging markets, such bursts of reform usually follow a financial crisis so conditions are rarely conducive to...

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    Gavekal Research

    The Other Reason To Avoid Turkey

    Investors had long priced in the risk that the ruling AK Party of Turkey’s Recep Tayyip Erdoğan could win a two-thirds majority in last Sunday’s parliamentary election, a result that would have allowed the president to reinforce his constitutional powers at the expense of parliament. What they failed to price in was the risk that the AKP could fail even to win a simple majority. In the event, that is exactly what happened, leaving Turkey facing...

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    Gavekal Research

    5C Asia: A Buffer Against Future Taper Tantrums

    Asia’s fragmented financial markets have grown a great deal more inter-connected since the currency crisis of the late 1990s. Even so, regional financial integration still lags far behind real sector integration. According to International Monetary Fund data, intra-regional shipments now make up the lion’s share of Asia’s cross-border trade. In contrast, even though their share has doubled over the last ten years, intra-Asian equity flows make...

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    Gavekal Research

    Beijing’s Margin Risk Calculus

    It is easy to point to possible triggers for yesterday’s gut-wrenching -6.5% sell-off in China’s Shanghai Composite A-share index. The Communist Party’s People’s Daily newspaper ran an editorial warning against the risks of an asset bubble. The central bank drained liquidity from the interbank market ahead of a series of initial public offerings next week which could lock up as much as RMB5trn. One of China’s sovereign funds reduced its...

    0
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    Gavekal Research

    The Next Phase Of Japan’s Bull Market

    Japanese equities continue to benefit from a situation where corporate growth is decent, but the outlook is not so hot as to spur central bank tightening (see A Japanese Goldilocks). The Nikkei 225 is again close to its peak in 2000, despite the yen having pretty much flat-lined against the dollar since late last year. Still, is this really sustainable considering that Japan remains highly dependent on external demand and the kicker from the...

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    Gavekal Research

    New York Seminar May 2015 - Anatole, Louis, Joyce & Will

    We held our US spring seminar in New York on May 11, with Anatole, Louis, Joyce & Will offering their views on the most important developments in the global economy.

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    Gavekal Research

    Embrace The Asian Deflation

    The specter of deflation continues to threaten big chunks of the global economy and the alarm has even spread to China after the GDP deflator was revealed to have slipped into negative territory in 1Q14. Our starting point is that deflation does not have to be some grizzly beast that must end with soup kitchens, for as Charles has forcefully argued, periods of falling prices have in the past been associated with rapid capital formation and...

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    Gavekal Research

    5C Asia: Japan’s Wageless Recovery

    Unlike the countries of the eurozone, which are plagued by persistently high unemployment, Japan is suffering from a labor shortage. Yet despite the dearth of workers, economic recovery has not fed through into wage rises—a cause of much frustration in Tokyo.

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    Gavekal Research

    Towards A Real Japanese Shake-Up

    International investors, otherwise disposed to embrace Japan’s re-rating story, face a real dilemma. Almost 30 months after Shinzo Abe launched his bold reflationary experiment, Japan’s equity market has more than doubled in value and the yen (on a trade-weighted basis) has devalued by -30%. And yet, throughout this period, economic growth has continued to disappoint. With two significant reforms in the offing, we reckon that could be about to...

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    Gavekal Research

    Fuel To The Fire

    As if the flames under Chinese equities weren’t hot enough already, Beijing is busy throwing fuel on the fire. Yesterday the People's Bank of China said it would cut the reserve requirement ratio for banks by 100bp, with an extra 100bp cut for small rural institutions. This is the greatest reduction in RRRs since November 2008 in the depths of the global financial crisis, and unlike the previous cut in February it is not intended merely to...

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    Gavekal Research

    5C Asia: Deflationary Rebalancing

    Take a look at Asia’s trade data, and you soon notice a striking divergence: export volumes and prices are heading in different directions. In the past, whenever external demand picked up, Asia’s exporters always enjoyed a beta-bounce on the back of rising pricing power. This time around, however, things are different. Despite the ongoing recovery in the US and the recent upturn in Europe, Asian exporters have found themselves forced to make...

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    Gavekal Research

    Buy On China Skepticism

    Widespread skepticism about the power of monetary policy at the outset of easing cycles can provide great investment opportunities. Despite clear lessons about the effects of central bank activism in the US in 2009, Japan in 2012 and Europe in 2014, international investors still doubt the quality of the bull run in China’s onshore stock markets ignited by the People’s Bank of China. As a result, even though the Shanghai A-share market has...

    0
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    Gavekal Research

    Thai Decision Rule Signals Time To Buy - Joyce Poon & Udith Sikand

    It would take a courageous investor to buy wholeheartedly into Thailand’s equity market just now. The country’s ruling generals may have lifted martial law last week, almost a year after seizing power, but local analysts dismiss the move as a cosmetic attempt to persuade Thailand’s Western allies that things are returning to normal. In reality, they report, the government is actually seeking to tighten its control in the face of undiminished...

    2
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    Gavekal Research

    Asia Is Not So Scary

    One reason we have received push-back on our call to overweight Asian equities has been the risks associated with a major US dollar spike. Asia has not racked up foreign currency debt at the rate seen in recent years since just before the region’s financial crisis in 1997. Still, we would argue that there are sufficient differences this time around to think that Asia can generate strong performance on lower volatility over the coming year.

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    Gavekal Research

    The EM Challenge

    With the US dollar on a tear and expectations hardening that the Federal Reserve will raise interest rates this summer, emerging market currencies are again in the firing line. In recent days, the Turkish lira and Mexican peso have hit all-time lows against the dollar, while the Brazilian real, Indonesian rupiah, Malaysian ringgit and South African rand are also in the toilet. And yet while developing world crises have often followed US...

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    Gavekal Research

    5C Asia: Asian Currencies Should Be Resilient

    A few years back we developed an Asian currencies indicator to help identify times when it pays to dial back exposure (see this report). The tool monitors six global and regional factors to which Asian currencies are sensitive; included are two volatility tracking indicators, two foreign exchange trend rates (renminbi and yen), the Gavekal global velocity indicator and the OECD Asian leading indicator.

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    Gavekal Research

    A Japanese Goldilocks?

    Ever since the Japanese bull market kicked off in late 2012, global asset allocators have been able to put the market on the back burner as equity gains have been eroded by yen weakness. Despite two years of aggressive monetary easing and a 70% rally in stocks, Japanese stocks still only matched global benchmarks (MSCI Japan versus MSCI AC World in US dollar terms). However, there are good reasons to think that this negative correlation between...

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    Gavekal Research

    5C Asia: Will The BoJ Follow Suit?

    Governor Haruhiko Kuroda’s comments at the World Economic Forum in Davos last week set off speculation that the Bank of Japan may soon expand its program of quantitative easing. Our base case is that the BoJ is unlikely to oblige QE enthusiasts in the next 6-12 months as Japan is currently in a ‘honeymoon’ period where lower inflation is likely tolerable.

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    Gavekal Research

    5C Asia: Oil's Bane Is Asia's Boon

    The oil price plunge is likely to create dislocations in the global economy for years to come, especially if consensus predictions of ‘lower for longer’ play out. Asia, as a net oil importer, almost certainly stands to gain, although the path to prosperity will vary depending on where a particular economy is in the economic cycle. Japan and India offer prime examples of this divergence.

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    Gavekal Research

    Discrimination Pays In The Emerging Markets

    Viewed as a single asset class, the emerging markets had a tough time of it in 2014. A world characterized by weak global demand, soft commodity prices and a stronger US currency left US dollar-reliant emerging economies exposed and vulnerable. Today, as we roll into 2015, emerging markets are still facing the same headwinds. The US will struggle to support global growth single-handedly and the oil price is unlikely to stage a meaningful...

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