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    Gavekal Research

    Strategy Monthly: A Simple Guide To US Asset Allocation

    We synthesize four years of work on asset allocation and present a model portfolio built around analysis of the cost of and return on capital; the real rate of return on equities, bonds and cash; and the ideal duration of fixed-income holdings. Today we recommend that US portfolios hold 75% in equities, 25% in cash, and shun bonds.

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    Gavekal Dragonomics

    An Overdue Tax Cut For Households

    Facing trade conflict with the US and a slowdown in credit growth, China is under pressure to use fiscal policy more aggressively to support the economy. On Friday, the National People’s Congress delivered on at least part of the solution, passing a large cut in personal income taxes. In this piece, Ernan explains the impact of this tax cut.

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    Gavekal Research

    Tail Risks That Worry Me

    Yesterday I made the case that emerging markets should be superior performers in a global bull market, which I characterized as the most hated in history. What that analysis left out was the relative prospects of the other big blocks in the global equity universe; namely, Europe and Japan. My core point yesterday was that trade wars do more harm to economies that close their markets than those countries which supply them, and on this score...

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    Gavekal Research

    Misunderstanding Today’s EMs

    Suppose that, like me, you think the global equity bull market has a few more years to run and hence the sell-off which culminated with Turkish debt being downgraded two weeks ago was a merely a correction. Where are the best opportunities to “buy the dip”? The answer depends on whether you also share my view about the underlying causes of this year’s market setbacks.

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    Gavekal Dragonomics

    The Consumer Soldiers On

    Consumer spending has been the ballast of China's economy over the past six years. But this year its resilience has been questioned, thanks to a sharp fall-off in automobile sales and reported growth rates in retail sales that appeared to bear no relationship to the underlying data. Ernan finds that household spending is actually holding up well.

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    Gavekal Dragonomics

    The Retail Sales Data Enigma, Explained

    This technical note explains why the retail sales growth numbers reported by the National Bureau of Statistics are so much higher than the growth rates one can calculate by comparing this year's sales values with last year's. This is not an effort to cover up bad economic performance by fudging statistics, but the opposite.

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    Gavekal Dragonomics

    The Winter Air Pollution War (Part 2)

    North China is gearing up for big cuts in heavy industry output this winter, in a repeat effort to clean up the skies over Beijing. This campaign will, by constraining supply and raising costs, exert steady upward pressure on metals prices. In the long run, it will encourage producers to move to other regions, redrawing China’s industrial map.

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    Gavekal Dragonomics

    Clogging China’s Cash Pipeline To Silicon Valley

    In the past years, billions of dollars of Chinese venture capital have poured into US tech firms. This is alarming to the US Defense Department, which believes these investments could lead to a flow of critical technology back to China, eroding the American advantage in fields such as artificial intelligence, robotics, and autonomous vehicles.

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    Gavekal Research

    Trouble With Monopsonies II: Joan Robinson Versus David Ricardo

    Among the discussion topics at this week’s Jackson Hole meeting of world central bankers will be whether the market power of giant corporations is so great it allows them to hold down workers’ wages at the global level. Charles has no doubt, arguing in this paper that the development of platform companies into labor monopsonies accounts for what has been misunderstood as “secular stagnation”.

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    Gavekal Research

    A Step Back From War On All Fronts

    Events of the past few weeks have lowered the risk of the worst-case scenario of a trade-war-on-all-fronts that Arthur laid out earlier this summer. But although officials in both the US and China are eyeing a truce, no bilateral deal can be nailed down until the two countries’ presidents meet in November, after the US midterm elections. That leaves time for the Trump administration’s trade hawks to regain the upper hand.

    6
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    Gavekal Dragonomics

    A Military Embrace Brings Risks For Technology

    China’s government is making a determined effort to co-opt private technology companies to help modernize its military. The pressure to support this drive, known as “military-civil fusion,” creates new political risks for tech companies and their investors: they could face more Chinese government interference and a political backlash from abroad.

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    Gavekal Research

    How To Assess The Stresses On EMs

    Emerging market equities are officially in a bear market, with the MSCI EM index down -20% from its January peak. EM-related commodities are also hurting, notably copper which has fallen -18% since June. The central question now is whether one should steer clear of all EM assets, because the rout is general and likely to get worse; or if one should keep an eye out for buying opportunities here and there. With some trepidation, we advise the...

    4
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    Gavekal Dragonomics

    Show Me The Stimulus

    China's data releases for July showed that the easing measures of the last few months have yet to have an impact on the real economy, with industrial value-added, fixed-asset investment and retail sales all slowing. Further monetary easing measures will follow. But as Long argues, they are unlikely to lead to a major increase in credit growth. Instead any stimulus efforts are likely to be financed by an increase in local government bond...

    3
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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 Dragonomics

    Softening Up On SOE Deleveraging

    China this year ordered central SOEs to bring down their asset-liability ratio down by 2pp by 2020. That might sound like a modest change, but it means doing much more deleveraging in the next two years than in the last two. With policymakers now starting to ease policy, this aggressive hard target for deleveraging will likely become a soft one.

    0
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    Gavekal Research

    The Fire Testing Of Asian Junk

    The strong US dollar, rising oil prices and a gathering trade war have sent capital fleeing from emerging markets. Asian high-yield debt has taken a hit with the benchmark (JP Morgan) index down -3% this year, sparking worries of a self-feeding cycle that ends with a debt crisis. We have taken a fairly constructive view on emerging economies due to their generally non-threatening macro-fundamentals. Hence, with EM asset prices stabilizing it is...

    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.

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    Gavekal Research

    No Good Choices For China

    China wants to show that it will stand up to US threats to escalate the trade war. Yet Yanmei argues that it has few attractive policy choices. It can neither back down from the confrontation nor retaliate enough to deter the US. With little prospect of a negotiated solution in the near term, Beijing is focused on stabilizing the domestic economy.

    5
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    Gavekal Dragonomics

    Will Mergers Become A New Front In The Trade War?

    On July 25, Qualcomm canceled its US$44bn acquisition of NXP Semiconductors after it failed to get approval from Beijing before its self-imposed deadline. In this piece, Matt assesses the big question this failure raises: has China decided to use its merger-review process to punish US companies for the tariffs imposed by the Trump administration?

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    Gavekal Research

    What Will Halt The Renminbi’s Fall?

    The momentum for a weaker renminbi is considerable, with the US ratcheting up its trade war with China and the Chinese government moving to easier fiscal and monetary policies. But Chen Long argues that the renminbi’s downside from current levels may prove limited even though the central bank is unlikely to intervene as much as it did in 2015-16.

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