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E.g., 21-05-2018
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    Gavekal Research

    A UK Consumer Reckoning

    This week saw the release of moderately good news for the Brexit-bound UK economy, as wages rose the most in almost three years. With inflation moderating, real incomes have edged higher, giving hope that consumption can again fire up growth. The problem is that the UK—like the US—increasingly displays late cycle characteristics, as shown by a tight labor market and falling profit growth.

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    Gavekal Research

    Oil As A Party Spoiler

    I have tended to see oil not so much as an asset in which to build a position as a party spoiler that can wreak havoc on a portfolio. Yesterday saw the price of Brent break above US$80 a barrel for the first time since November 2014 and the pain is visible in a range of emerging markets that run big external deficits. To be sure, most of my colleagues remain sanguine about EM prospects and do not expect a generalized crisis (see The Refuge In...

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    Gavekal Research

    The Next Phase Of Eurozone Reform

    During last year’s French presidential election, Emmanuel Macron opened a debate by asking “what do we want to do with the euro?” His answer was more political integration and burden sharing. Those plans must get traction at the June 28-29 meeting of European Union leaders if they are not to be crowded out by a likely messy end to the Brexit process and next year’s European Parliament elections. Right now, this seems a long shot and attention...

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    Gavekal Research

    The Outcomes In Italy

    Political uncertainty isn’t always bad news. It is now 10 weeks since Italian voters went to the polls in a general election, and still Italy’s bickering political parties have not managed to form a stable coalition government. That hasn’t proved an obstacle for investors. Since the election, Italian equities have gained 9.7% in euro terms, 6.4% in US dollar terms, making Italy the world’s best performing major stock market over the year to date.

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    Gavekal Research

    Time To Stop Thinking

    In a long career spent trying to formulate reliable investment rules, here is one I have found to work time and again without fail. If two assets show no historical trend, and if in the past their relative price has always reverted towards its historical mean, then when that relative price reaches two standard deviations away from its mean, it is time to stop thinking and just play the mean reversion. Now is one of those times.

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    Gavekal Research

    Europe’s Coiled Spring Currency

    There was a neat circularity to yesterday’s press briefing by Mario Draghi. The European Central Bank was happy to stick with its monetary accommodation as growth data had softened and the euro was pleasingly weaker. Hence, as German exporters go through one of their periodic bouts of angst and confidence readings pull back across the eurozone, the logic runs that the euro could now slide further. This would especially seem to be the case as...

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    Gavekal Research

    Still Bond Bears

    Matching its 2013 peak, the world’s most-watched interest rate—the US 10-year treasury yield—yesterday touched 3%. Concerns are now high that it will soon move higher, perhaps much higher. For perspective, the US 10-year hit 3.75% in 2011, 4% in 2010 and 5% in 2007. In this cycle, we think yields will break above 3% and then march upwards. In short, we remain bond bears and continue to recommend keeping duration short. Today, we want to...

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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...

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    Gavekal Research

    No Time To Give Up On Europe

    Even as winter descended in January, the economic climate seemed decidedly balmy. Eurozone growth for 4Q17 came in at 2.7% YoY, while the year’s first PMI peaked at a post-2006 high of 58.8. Investors liked the idea of deflation finally being slain and a possible earlier-than-expected normalization of monetary policy. Alas the fun didn’t last as a series of data disappointments punctured an equity rally that had been led by financials. My bet is...

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    Gavekal Research

    Hong Kong Seminar — April 2018

    At Gavekal’s seminar in Hong Kong this week, Arthur Kroeber, Rosealea Yao and Nick Andrews presented their latest views on the brewing trade war between the US and China, Chinese growth and the property market outlook, and how to capture European growth.

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    Gavekal Research

    La France En Grève

    Once again, French public sector workers are en grève—on strike. In the last couple of weeks, railway workers, air traffic controllers and teachers (and their students) have walked out in protest against Emmanuel Macron’s structural reforms. Inevitably such broad opposition to official policy has prompted memories of 1995, and even 1968. But as Cedric explains, times have moved on, and today the public is more ready than ever before to...

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    Gavekal Research

    After Constructive Engagement

    Separating signal from noise in the ongoing US-China trade dispute continues to be a thankless task. Trade war fears rose late last week thanks to an offhand threat from President Donald Trump to impose tariffs on another US$100bn of imports from China. They ebbed early this week when Trump reversed course and said a deal was likely soon, and Chinese president Xi Jinping delivered a speech promising a reduction in automobile tariffs and market...

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    Gavekal Research

    Reasons To Buy The Dip

    After spending many years as Gavekal’s equity permabull, I joined Charles and Louis last December in warning of the risks to what was then a roaring, and accelerating, bull market. But my way of thinking about these risks was rooted in a different analytical framework, and so I have come to a different conclusion about how investors should respond to this latest sell-off (for Louis’ take, see Following Yesterday’s Pullback). With the lows of mid...

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    Gavekal Research

    Ready For A Further P/E Derating

    I see but through a glass darkly. Sometimes, however there are glimmers of light. Four months ago, in early December, I examined the signals being broadcast by the various investment rules I have long followed and concluded that: “While global markets have been stable for the past 18 months, we may soon be entering a period of greater instability.”

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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”.

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    Gavekal Research

    Strategy Monthly: Navigating In Choppy Waters

    With its latest sell-off, the S&P 500 capped two months of volatility by moving officially into correction territory: down -10% from its January high, and below its 200-day moving average for the first time in two years. Is this the end of the long US equity bull market? In this edition of our Strategy Monthly, we offer three perspectives on how investors should position themselves in these more volatile times.

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    Gavekal Research

    On Protectionism

    As the US toughens up its negotiating stance on trade, it seems that ghosts from the Great Depression haunt the land. The men of Davos can be heard to intone gravely that President Donald Trump is aping Herbert Hoover, and as in the 1930s, the global economy may go into a tailspin. I am struck that our cherished elites have discovered a form of government intervention that they do not like, especially given their support for so many other “...

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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,...

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    Gavekal Research

    London Seminar — March 2018

    In our seminar in London this week Charles pondered the investment consequences of the US moving back into an inflationary period. Tom discussed Chinese politics in light of Xi Jinping’s elevation. Cedric presented on how investors can best benefit from the diversity of the European economy. Anatole explained why the long-running global bull market is likely to continue, but also where the risks are buried.

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    Gavekal Research

    Legitimacy Versus Legality

    France’s top central banker yesterday called for the nations of the eurozone to cease bickering over ideological questions, and instead get things done. National leaders should stop wasting time on “theoretical debates” that pitted “risk reduction against risk sharing”, said Francois Villeroy de Galhau. They should, instead, tackle real problems like the half-built capital markets union. It was the authentic voice of the European technocracy and...

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