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    Gavekal Research

    More Than Collateral Damage

    Among the collateral casualties of Turkey’s lira crisis have been European bank shares. Over the last week, as the lira plunged, the SX7E index—the EuroSTOXX banking index—slumped -7% on fears about banks’ exposure to Turkish borrowers. But Turkey is not the only concern weighing on European bank stocks. The sell-off over the last week is just the latest in a series of downlegs that together have seen the SX7E fall -19.7% over the last six...

    0
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    Gavekal Research

    Is Italy The Whale?

    Markets have an end-of-an era feeling to them as the US’s exit from easy money causes the dollar to rise, emerging markets to crater and strongmen to cry blue murder . Louis yesterday concluded that we are not yet seeing the kind of event that marks a cycle’s denouement. I agree but wonder if we did just glimpse a big beast breaking the surface in the shape of Italy, which judging by yesterday’s 12bp rise in BTP yields may already be in play.

    16
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    Gavekal Research

    Turkey Is A Big Fish, But No Whale

    The meltdown unfolding in Turkey is not a surprise (see A Turkish Vortex). However, it does raise the question of where we go from here, and whether the Turkish crisis is a symptom of a change in the investment environment.

    2
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    Gavekal Research

    The Biggest Question Of The Day

    Should we take Donald Trump literally when he says he wants to eliminate the US trade deficit? In this paper, Louis examines the different ways the US might hope to cut its trade deficit, including its bilateral deficit with China, and explores why the outlook for risk assets depends enormously on the US administration's real aims in launching its international trade war.

    7
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    Gavekal Research

    When Non Means Non

    The UK government is on the offensive trying to sell a “Chequers” plan that would leave it with a semi-detached trading and administrative relationship with the European Union. The negotiating position, has won few plaudits at home, and over the last week got a courteous, but non-committal response on the continent. Cedric is doubtful that the intended "divide and conquer" approach will bear fruit.

    0
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    Gavekal Research

    The Bullish Logic Of Trump’s U-Turns

    The news on Wednesday that Donald Trump’s administration is considering imposing tariffs of 25%—rather than 10%—on an additional US$200bn of Chinese goods might appear to be an aggressive escalation of its trade conflict with China. But there is a high probability the proposed tariffs will never be implemented. Trump has a track record of talking tough, only to back down before it comes to the crunch; a pattern of behavior that may help to...

    4
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    Gavekal Research

    No Exit From Brexit

    On Friday, Anatole set out his view that a second Brexit referendum is likely, and that in all probability it will reverse the original 2016 vote. Exercising his right to reply, today Charles explains why no second referendum is possible, why a no-deal, hard Brexit is increasingly likely, and why this will present a great buying opportunity in UK assets.

    14
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    Gavekal Research

    Stabilizing, Not Slumping

    After a rocky first half of the year, in which a clutch of key indicators deteriorated steeply, recent signs indicate that eurozone growth is stabilizing rather than rolling over. Without doubt, there are still formidable downside risks. However, on balance the latest batches of data point to a continuation of above-potential growth, albeit in a lower gear than in 2017.

    0
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    Gavekal Research

    The Arithmetic Of Brexit

    If a country votes to make two plus two equal five, that “democratic decision” will eventually be overwritten by the rules of arithmetic. Anatole reckons this is what’s playing out in Britain, as Theresa May’s government struggles to get a parliamentary majority for any realistic Brexit plan. If the situation persists, the only alternative will be another referendum—only this time the choice would be between remain and a far less attractive, but...

    11
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    Gavekal Research

    No Cause For Celebration

    The US-EU trade truce announced by President Donald Trump and European Commission President Jean-Claude Juncker on Wednesday is good news for the world economy. Yet it is still far too early to write off global macro risk from a generalized trade war. US tariffs on steel and aluminum imports remain in place, as do the EU’s retaliatory tariffs on US goods; and the threat of American levies on US$335bn in car and car part imports has been...

    1
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    Gavekal Research

    What US Auto Tariffs Would Mean For Europe

    Last week’s public hearings in Washington heard a chorus of industry opposition to the US administration’s proposed import tariffs on cars and car parts. But in Europe at least, markets appear to be coming around to the view that the tariffs will go ahead regardless. After Friday’s fall, the auto and auto parts sub-index of the Stoxx 600 has slumped -15% since late May when the US Commerce Department announced its Section 232 investigation,...

    1
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    Gavekal Research

    Europe's Tri-Polar Disorder

    Having been at odds with each other for at least three years, the empire is striking back against an upstart member. The European Union on Thursday said it will sue Hungary for its unfair treatment of asylum seekers. A few years ago, such a stand-off would have been assumed to have only one outcome: a win for the dispensers of patronage in Brussels. That is no longer the case and this tells us much about how the EU’s traditional power brokers—...

    3
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    Gavekal Research

    Allez Les Bleus!

    A year into Emmanuel Macron’s presidency, the French have finally invaded the streets in huge numbers. It was not, however, to man the barricades and defy his reform agenda, but instead to engage in a massive national celebration after Les Bleus won their second football World Cup in 20 years. Having suffered the confidence-sapping impact of 12 major terrorist attacks since 2012, Sunday’s win against Croatia has blown away the cobwebs and as one...

    0
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    Gavekal Research

    The Real Italian Story

    The big worry about Italy is that its new populist government adopts policies that spark another eurozone crisis, and even a breakup of the European Union. This view is almost certainly wrong, for despite the government this week announcing a roll-back of labor market reforms, it will struggle to implement its radical agenda in any systematic way. This is due to constitutional checks that inhibit radical changes, and the fraught political logic...

    2
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    Gavekal Research

    The Recession Of 2019

    Over the last three months, I have become increasingly concerned that a recession will hit the world economy in 2019. In this paper, I shall explain why. My reasoning is simple, and is based on the behavior of an indicator I have long followed, which I call the World Monetary Base, or WMB. Every time in the past that this monetary aggregate has shown a year-on-year decline in real terms, a recession has followed, often accompanied by a flock of...

    17
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    Gavekal Research

    The Message From Eurozone Credit

    Should we worry that eurozone corporate bond spreads have doubled since late January? After all, bond yields are rising globally and as deflationary risks have ebbed the European Central Bank has signaled its intent to normalize monetary policy. Yet, looking back at the eurozone’s last cycle, policy was tightened without spreads blowing out. My concern is that the present squeezing of financial conditions is sending a darker message, and will...

    0
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    Gavekal Research

    Time To Buy Brexit Britain

    “Will the Brexit agony never end?” Anatole asked in mid-June. It now seems that the agony may end much sooner than expected. Following last Friday’s decision by prime minister Theresa May to blur all her “red lines” in negotiations with the EU, and—paradoxically—the subsequent resignation of hard-Brexiteer cabinet minister David Davis, the time to start buying cheap British assets may have come.

    4
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    Gavekal Research

    Hard Yards For Emerging Markets

    Emerging markets have been hit by the combined effect of a stronger US dollar, tighter international liquidity and rising trade tensions, causing their currencies to fall more in the last few months than in the 2013 “taper tantrum”. The big fear for EMs is that the end of easy money globally creates a giant margin call. As a firm, we have tended to be upbeat on their prospects in this cycle, and it may be that a huge buying opportunity has...

    2
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    Gavekal Research

    The Trade War And The US Cycle

    How will the US administration’s trade disputes affect the US economic cycle? In the worst case scenario, if Donald Trump follows through on all his threats the disruption to global supply chains could be great enough to push the world economy into recession. At this point, the greatest impact flows from the high degree of uncertainty about future actions.

    0
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    Gavekal Research

    Strategy Monthly: The Four Roads Ahead

    The first half of the year was not a great one for global equities, and the second half is clouded by risks: slowing growth, rising inflation, renewed political stress in the eurozone, and most of all the threat of massive protectionism by the United States. Louis Gave offers four scenarios of how things could play out, and Arthur Kroeber explains why it's time to start seriously worrying about a worst-case trade scenario.

    0
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    Gavekal Research

    What Could Turn The Tide?

    The global equity bull market is increasingly looking like the German soccer team: old, tired and getting slow, having reached its peak a while back. Even the “captain” of the bull market, the S&P 500, last made new highs five months ago. Since then, the asset classes that have delivered positive returns have been as few and far between as German goals. Year to date, investors have lost money on US investment grade bonds, on emerging debt,...

    2
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    Gavekal Research

    Slower Eurozone Growth Ahead

    Wednesday was another grim day for European bank stocks, which are now down almost -24% from their late January peak. Yesterday Louis looked at the reasons behind the slump in bank shares globally, and attempted to find a silver lining to the dark cloud of their underperformance (see The Message From Bank Stocks). When it comes to Europe, however, the fall in bank shares is just one more reason to feel pessimistic.

    0
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    Gavekal Research

    Behind European Underperformance

    Amid Monday’s trade-war-inspired risk-off, it is significant that European equities underperformed. Sure, Europe had already closed when White House trade advisor Peter Navarro emerged to reassure investors that the US administration is not proposing blanket investment restrictions. Even so, European markets suffered disproportionately. That should be no surprise, considering that the current global trade uncertainties have arisen against a...

    0
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    Gavekal Research

    Oil After The OPEC Meeting

    Let us start with a simple reality: assuming the world economy avoids a 2008-type implosion, then global demand for oil should approach 100mn barrels per day by the year’s end. That represents an increase in global demand this year of roughly 1.5mn bpd—more or less the same pace of increase the world has had to deal with in recent years.

    11
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    Gavekal Research

    Why US Long Rates Aren’t Going Up

    The behavior of US long rates presents something of a puzzle just now. The US economy is humming along nicely for this late in the cycle, and is even booming following last year’s tax cuts. Inflation is ticking higher. And short rates are rising. As a result, I would normally expect long rates to be climbing towards the top of the reasonable valuation band dictated by my bond market model (seeBond Market Risks). But they are doing no such thing...

    1
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    Gavekal Research

    Europe Through Rose-Tinted Specs

    If the European Central Bank had a dot plot, on Thursday it would have shifted downwards. The ECB’s dovishness stood in contrast with the Federal Reserve, which just a day earlier moved its own dot plot projection of future interest rates upwards. If the market retained confidence in Europe’s relative growth and returns, this divergence of rate expectations probably would not matter greatly. But with European growth softening, and political risk...

    0
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    Gavekal Research

    The Terms Of Betrayal

    Will the Brexit agony never end? Theresa May managed this week to remove troublesome amendments attached by the House of Lords to her legislation for taking Britain out of the European Union. But she was immediately in even deeper political trouble. These problems show just why I have been advising clients to avoid any big bets in sterling assets, whether long or short.

    1
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    Gavekal Research

    Europe's Cyclical Blues

    When they meet on Thursday, European Central Bank policymakers face a dilemma. As wage and price pressures rise across the eurozone, they are expected to outline an exit from quantitative easing policies. At the same time, growth indicators are weakening, raising the specter of a eurozone recovery (again) being cut off in its infancy. The essential point is whether Europe’s turnaround has become self-sustaining. We think the answer to that...

    0
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    Gavekal Research

    A Revolution In Switzerland?

    This weekend the people of Switzerland vote in a referendum that could upend their country’s monetary system in ways never seen before. If the “Vollgeld” initiative is approved, it will be a major event in world economic history. And even if rejected, the growing groundswell in favor of similar proposals elsewhere in the world means it is worth paying attention to.

    6
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    Gavekal Research

    A War On All Fronts

    I have previously argued that Trump Administration trade policy—and specifically policy on China—should be understood as a volatile reaction among four forces: the president, the trade warriors, the national security hawks, and the business community. While all four forces are still hard at work, it’s clear that President Trump has the upper hand—as a result of which the US now seems committed to waging trade war on all fronts.

    0
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    Gavekal Research

    Whether To Buy Italy (And The Euro)

    On Wednesday, Louis argued that the Italian president’s rejection of a proposed coalition finance minister was “worse than a crime, a mistake”. Anatole and Cedric are not so sure. In this paper they examine the two conditions—one political, one financial—that will signal a major buying opportunity in Italy.

    2
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    Gavekal Research

    Worse Than A Crime

    On hearing that Napoleon Bonaparte had ordered the execution of a Bourbon-family duke, the arch realpolitik practitioner Charles Maurice de Talleyrand reputedly exclaimed: “This is worse than a crime. It’s a mistake”. Fast forward a few centuries and it’s not hard to imagine what Talleyrand would make of Italy’s President Sergio Mattarella. In a move that will likely spur fresh elections and put Euroskeptic parties firmly in the ascendancy,...

    8
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    Gavekal Research

    The Incredible Shrinking Krona

    With the US dollar pushing towards its 2017 high, it may be time to scout out value in the currency markets. One option is the Swedish krona, which is down -7.2% against the dollar this year, making it the worst performing G10 currency. Three weeks ago Charles argued that the krona was so cheap that Swedish assets offered a “heads I win, tails I don’t lose” type of trade. I don’t disagree, yet in the intervening period, the krona has...

    0
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    Gavekal Research

    What Bothers Me About The Eurozone

    With Italy facing a constitutional crisis and likely fresh elections within months, attention is set to again focus on Europe’s single currency system. One effect of the euro is that it distorts self-correcting price adjustments, which regulate normal market-based economies. Understanding this dynamic is crucial, argues Charles, if equity investors are not to be pulled into value-traps, of the type which are now presenting themselves.

    1
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    Gavekal Research

    Europe’s Italian And Turkish Troubles

    On the face of it, the collapse on Sunday evening of attempts in Italy to form a coalition government comprising the populist and Euroskeptic Five Star and Lega parties should be good news for European assets and the euro, at least in the short term. On Friday, fears of a populist government in Rome, coupled with the prospect of a no confidence motion and general election in Spain undermined both the euro and peripheral debt. Also down were...

    0
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    Gavekal Research

    My Kind Of Safe Haven

    Long and sometimes bitter experience of financial markets has taught me that when the organically-produced fertilizer hits the rotary ventilation device, a few assets go up in price, while the vast majority go down. The first list is a short one, but on it you will always find the Swiss franc. Historically, the problem with this Swiss-franc-as-safe-haven idea was that the gnomes’ currency usually tends to be something of a collector’s item....

    3
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    Gavekal Research

    Giuseppe Who?

    The leaders of Italy’s Five Star and Lega political parties on Monday nominated little-known law professor Giuseppe Conte to be the country’s next prime minister. Assuming president Sergio Matarella accepts their choice, Conte will be tasked with leading a coalition government whose disparate members have little in common except populism, euroskepticism, and expansionary fiscal plans.

    2
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    Gavekal Research

    The Resurgence Of Political Risk

    Political risk is now the main driving force of financial markets. In 2017 investors learned—or thought they had learned—that political upheavals just create noise, with no lasting effect on market trends that are set by economic fundamentals. But in 2018 this relationship has been reversed. Wherever we look today—at oil prices, global trade flows or conditions in Europe—politics seems to overwhelm economic fundamentals and set the market trends.

    2
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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.

    0
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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...

    2
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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...

    0
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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.

    0
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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.

    3
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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...

    3
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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...

    0
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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

    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...

    0
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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.

    0
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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...

    0
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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...

    0
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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...

    0
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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.”

    6
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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

    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 “...

    2
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    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.

    0
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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...

    2
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    Gavekal Research

    A Fork In The Road For European Equities

    In the first half of last year making money in European stocks was easy as benchmarks steamed higher on hopes that less political risk would allow an economic surge into sunlit uplands. It has not exactly worked out that way. Such has been the loss of momentum that both the MSCI EMU and broader MSCI Europe indexes have plunged below their 200-day moving averages (just as worrying for tea leaf readers, the 50-day moving average for the narrower...

    3
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    Playing Russia’s Continued Recovery

    The result of this weekend’s Russian presidential election is not in doubt. But investors in Russia face considerable uncertainty. Despite monetary policy and exchange rate liberalization, Russia has made little progress towards the structural reforms needed to boost its potential growth rate above rock-bottom levels. Nevertheless, cyclical tailwinds mean there are still some attractive pockets of opportunity for international investors.

    0
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    Gavekal Research

    What A Trade War Means For Europe

    The departure of free-trader Gary Cohn from the Trump administration has investors rightly concerned that a global trade war may loom. Markets rallied yesterday on reports that the US may carve out exclusions for its steel and aluminum tariffs, but President Donald Trump seems set to announce a punitive package as early as today. The European Union has taken a tough stance against the US threat, and yesterday added orange juice and peanut butter...

    1
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    Gavekal Research

    Another Finest Hour

    At Gavekal, we have no house view, but in recent weeks something of a united front has formed among my erudite colleagues on the subject of Europe and her politics. Just to be sure that clients don’t conclude that we have all imbibed the Brussels-dispensed Kool Aid, let me offer my take on the situation and the implication for financial asset values.

    1
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    Gavekal Research

    Change And Stasis In Italy

    In Italy’s general election on Sunday, the anti-establishment Five Star Movement emerged as the largest single party in each chamber of parliament, and the populist Lega eclipsed Silvio Berlusconi’s Forze Italia to dominate the right of Italian politics. Following these changes, it is hard to see how any plausible combination of parties can secure a stable majority in both houses of parliament. As Cedric and Anatole explain, the most likely...

    0
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    Gavekal Research

    Time To Stop Worrying About EU Political Risk

    Is it time for investors to finally forget about “political risk” in the eurozone? Judging by the weekend’s events in Germany and Italy the answer is an emphatic “Yes”. The big event was the overwhelming vote by Germany’s Social Democratic Party to participate in a “grand coalition” with the center-right. This means that Angela Merkel will be reappointed for a fourth term as chancellor. Thus Germany will have a stable government with no serious...

    6
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    Gavekal Research

    Strategy Monthly: Trading On European Diversity

    The European economic recovery has matured into a sustained, broad-based expansion, and the risks from politics and ECB policy normalization are modest. But eurozone equity indexes have not done well. In relative terms, they started trading sideways after Macron's victory in the French election last May, and for the past several months they have underperformed. The fault lies in the indexes, not in Europe's corporate sector. The...

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    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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    What Lies Beneath

    As liquidity in the global financial markets tightens, Louis turns to Gavekal’s longstanding dynamite fishing analogy in a speculative exercise that attempts to identify some of the “whales” that might just go belly up in the squeeze.

    6
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    Eurozone Growth: Blip, Peak Or Plateau?

    European growth was always going to soften at some point; the question is whether this week’s squishy data releases reflect a fizzling out of the upswing, or merely an inevitable maturing of the cycle. The fact that the deterioration unfolded during a market dislocation that did not originate in Europe certainly gives succor to skeptics who see the single currency area as the soft underbelly of the current global synchronized upturn.

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    Bond Market Risks

    Charles is bemused by the cacophony of commentary on the apparent bursting of a US government bond bubble. By his reckoning, treasuries are at about fair value. The same cannot be said for certain other big bond markets, where far bigger risks lurk. In this short piece, he updates his broad view on risks in the global bond market.

    12
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    A Very British Tightening

    Last week, the Bank of England upped its UK growth forecast and signaled that interest rates may be raised harder and faster than expected. This week, Theresa May’s government maintained its muddled passage towards a European Union exit, which has increasingly fretful multinationals warning that Britain’s economy could be headed for the rocks. Even, if like me, you think the UK will secure an eventual squishy-type deal with the EU that involves...

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    EMs And The Global Cycle

    The market correction of the last two weeks has been centered on the US, but also hit emerging markets pretty hard. A year ago, I argued that the sustainability of the EM run-up depended on continued strong global growth, more oil price gains and a further fall in tail risks associated with the financial system. The issue is whether the newly volatile conditions in global markets are a game-changer for the emerging world. That conundrum depends...

    0
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    Five Ways To Play European Equities

    After a traumatic couple of weeks in the equity markets, Nick and Cedric take this opportunity to revisit their longstanding advice that investors should overweight European mid-caps exposed to the eurozone’s cyclical upturn. As they explain in this report, that call still holds, and they suggest three sectors where investors should look to buy the dip, and two that portfolio managers would do well to avoid.

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    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?

    0
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    The End Of Germany’s ‘Nein’ Policy?

    On the face of it, yesterday’s coalition deal between Angela Merkel’s center -right grouping and the Social Democratic Party differed little from that agreed last month. In addition to domestic stimulus measures it backed more European integration. Yet look closer and the German political landscape may just have been roiled by an earthquake, for while Merkel should stay chancellor the new man at the finance ministry is set to be Olaf Scholz, the...

    3
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    Nobody Rings A Bell At The Top Of A Market

    Let’s start with a hypothesis. For the purposes of this note, let’s assume that the bull market that started in the second half of 2011 ended in January 2018, and that a bear market is now under way. The obvious follow-on question is what variety of the Ursus genus is emerging from its lair.

    3
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    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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    Real Yields, The Euro And The Dollar

    The global bear market in bonds growls on. Yesterday the yield on 10-year US treasuries climbed to a new 45-month high at 2.7%. Even more striking, the yield on five-year German bunds rose to zero for the first time since November 2015, marking the beginning of the end of an era for eurozone negative yields as market expectations grow that the ECB will reduce its monetary accommodation sooner rather than later.

    4
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    Eastern Europe's Equity Sweet Spot

    The big issue facing investors globally is whether inflation makes a Lazarus-like comeback. But in one significant economic region, it is already alive and kicking. Eastern Europe experienced a painful deflation and repricing after the 2008 crisis, but inflation is now well above 2.5%. Having underperformed for many years, Cedric argues that its financial-heavy equity indexes should continue to do well in an environment of strong domestic demand...

    0
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    The German Coalition And Europe

    Late Sunday, party delegates of Germany’s social democrat SPD voted 362 to 279 to begin formal coalition talks with chancellor Angela Merkel’s CDU/CSU conservatives. Hurdles still remain, but our base case is that the weekend’s vote paves the way for the formation of a Grand Coalition by April. After months without a stable government, any reduction in uncertainty will naturally be positive for markets. But for investors, the most significant...

    0
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    From Recovery To Expansion

    Perception is a funny thing. Yesterday President Emmanuel Macron pitched up in London and wowed the British by loaning them a 70 meter piece of embroidered propaganda that celebrates their conquest 950 years ago. By contrast, the last French president to visit Britain had a pint of warm beer with David Cameron in a pub and no one noticed. A similarly discombobulated dynamic can be seen in European equity markets, where years of pessimism have...

    0
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    The Five Big Bond Market Questions

    With 10-year US treasury yields near the point of breaking out above their 2017 high of 2.6%, financial commentators around the world have suddenly become obsessed with a single question: Have bonds finally entered a bear market, after the multi-decade bull trend that started back in October 1981, when the 10-year yield peaked at 15.8%?

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    Don’t Fear The End Of The Bond Bull Market

    Bond bears have been given succor in the opening days of 2018. First the Bank of Japan trimmed buying of long-dated Japanese government bonds, indirectly causing 10-year treasury yields to surge to 2.6%. Then European Central Bank policymakers were yesterday shown to be bulled up on the state of the eurozone recovery. On the face of it, central banks seem to be whistling a very different tune. In fact, it is investors who have caught up with...

    1
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    Spending Again In Germany

    Picture the typical German consumer. The image that comes to mind is almost certainly of a deeply conservative individual: cautious, thrifty in his or her spending habits, and with a deep-seated aversion to maxing out the credit card. As with most stereotypes, this one has some foundation in experience. But like many, it also looks increasingly out of date. While Germany’s booming export sector has got most of the attention recently, it is...

    1
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    France: Believe The Hype

    A basic assumption among Anglo-Saxon investors has been that France, for all its nice food, good wine and smart infrastructure, was the unreformable economy. Then Emmanuel Macron came along promising to fix things, duly got elected president, orchestrated a thumping parliamentary majority and actually began to deliver on promises.

    1
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    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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    The Big Questions For 2018

    Many of the important questions confronting investors at the beginning of 2018 are the same as they were 12 months ago. And in most cases I would suggest the same answers. This may seem boring or stubborn, but it is quite reasonable in the middle of a long term economic expansion and structural bull market.

    1
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    German Overheating? No, Eurozone Rebalancing

    In early November, Germany’s Council of Economic Experts, a panel of five heavyweights that advises the government, declared there were clear signs that Europe’s largest economy was running above potential and at risk of overheating. Three weeks later inflation data showed that consumer prices rose by a faster than expected 1.8% year-on-year in October, up from 1.5% in September, with the core ex-energy and food inflation rate also surprising to...

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    The Persistence Of European Political Risk

    This was supposed to be the year that European political risk was laid to rest by the spring defeats of populist Euro-skeptic parties in the Dutch and French elections. But as 2017 draws to a close, anyone glancing at the headlines from Europe is likely to come away with the impression that reports of the demise of political risk were ludicrously premature. A rundown of this week’s news, from today’s regional election in Catalonia, through...

    2
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    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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    Where Has Eurozone Inflation Gone?

    The eurozone’s recovery continues, but all is not proceeding quite as expected. At its meeting last week, the European Central Bank’s governing council raised its forecasts for eurozone growth over the next two years to reflect the single currency area’s strengthening cyclical upswing. But while growth is accelerating, inflation remains largely missing in action, with the ECB last week revising down its forecasts for core inflation.

    0
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    No Full English Brexit In The EU’s Roach Motel

    Full English Brexit is off the menu. When Theresa May rushed into the Café Berlaymont at 6:00am last Friday, all that was left on the menu was an over-priced double espresso with a side of Irish bacon. When she returned to Brussels yesterday, after losing a crucial parliamentary vote on her Brexit policy, the only new item on the menu was a large slice of humble pie.

    2
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    The Questions For The Coming Year

    The apparent glide path into year-end suggests that 2018 should offer up more of the same seen in 2017. Louis does not rule out a continuation of this “Goldilocks” scenario, but worries that global inflation could be brewing in unexpected quarters at a time when frenzied trading in speculative assets such as bitcoin produces countervailing responses from policymakers. In this wide-ranging tour across the investment landscape he asks whether, in...

    3
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    Towards ECB Stealth Tightening?

    As the eurozone’s economy picks up, the European Central Bank finds itself facing a dilemma. In order not to freak out financial markets and push long-dated yields sharply higher, which could threaten to trigger a new financial crisis, it has promised to continue its quantitative easing program of asset purchases until at least September 2018, and not to raise policy rates until well after the end of those purchases. Yet as inflationary...

    4
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    Our 2017 Holiday Reading List

    History, far from being over, looms large in this year’s Gavekal holiday reading list. From failing empires in the Middle East to Europe’s ceaseless struggle for dominance and Asia’s inability to bury ghosts, our writers consider how the past is shaping our future. As befits a research firm, we have lots of economics with a tour of the stagnation debate and an assessment of the threats and benefits offered by artificial intelligence. We consider...

    2
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    What the US Yield Curve Really Says

    Since 1968, the US economy has suffered seven recessions, each preceded by an inversion of the yield curve. It thus makes sense to ask if such an upending of the link between time and interest is necessary for a recession to occur. A follow-on question might be whether a recession cannot happen so long as the yield curve shape is “normal”. With the US yield curve flattening by the day Charles seeks to answer these questions.

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    Turning The Page On The Eurocrisis

    You can be forgiven for having missed yesterday’s not so momentous news that Portugal’s finance minister Mario Centeno is taking over the presidency of the Eurogroup of finance ministers. Yet, look a little closer and this switch may, in fact, signify the end of the eurocrisis and a move onto the next phase of eurozone development.

    3
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    From A Ferrari To A Jeep

    When I turned 70 (I am still struggling with the fact that I now have a “7” handle), the Gavekal partners had the good idea of bringing into the firm some very bright “quants” and giving them a simple mandate: quantify and qualify the various investment rules that I have been using for decades (somewhat sporadically, and often with biases that I myself sometimes struggled to acknowledge).

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    Behind Eurozone Credit Growth

    The eurozone credit cycle is accelerating. Data released yesterday showed loans to non-financial companies grew at 2.9% YoY in October, the fastest rate since June 2009, while loans to households were up 2.7% YoY for the third month running. The pick-up in lending to private businesses bodes well for eurozone growth and markets next year, with respondents to the European Central Bank’s bank lending survey indicating that investment and...

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    Fake Brexit? Or No Brexit?

    The British economy since the Brexit referendum is often likened to the suicide jumper who leaps off a 20-storey building, shouting “so far, so good” as he falls past the 10th floor. This comparison is unfair to suicides. The real message about economic performance from the government’s annual budget statement yesterday was “so far, so bad”. While a minority of economists and investors—plus a large majority of Conservative politicians—share...

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    New York Seminar — November 2017

    At Gavekal's November seminar in New York Louis Gave, Arthur Kroeber, Cedric Gemehl and Anatole Kaletsky presented their macro outlooks and investment recommendations.

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    Investing For Constrained Insurers

    At Gavekal we have a sizable number of European Union insurance companies among our clients. Over the last three months, I have visited more than a few of them to outline my current investment recommendations, for example that investors should buy the Japanese stock market. Typically in these meetings, the investors have listened carefully and then regretfully shaken their heads, saying: “I’m afraid we can’t do it—for regulatory reasons”.

    1
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    Who Needs A Government?

    What would it take to make you put more risk on the table in the final month of a year that has generally produced decent investment returns? It helps to have a synchronized global economic recovery that relies on multiple engines of growth and a US-tested monetary policy framework that seems to work as advertised. Yet the potential for disappointment, starting with US tax reform, appears to be growing. Add to that list an outbreak of political...

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