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    Gavekal Research

    Securing The Indo-Pacific

    Forty years after the Southeast Asia Treaty Organization was dissolved, Tom argues that an expanded version of that “Asian NATO” concept may be developing, but this time the potential theater of operations stretches across the Indo-Pacific and includes the full panoply of great powers. What has not changed is that China remains the protagonists’ key bogeyman.

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    Gavekal Research

    Video: The Next Phase Of Europe's Recovery

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    Gavekal Research

    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%?

    0
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    Gavekal Research

    Sunshine (For China) In Korea

    Sunshine has dispelled the clouds of war on the Korean Peninsula, at least for now. News headlines are cautiously celebrating the de-escalation of tensions leading up to the South Korean Winter Olympics. Behind the scenes, it appears that China's freeze-for-freeze diplomacy which was outwardly rejected by both Pyongyang and Washington, is in fact taking shape.

    1
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    Gavekal Research

    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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    Gavekal Research

    Worry Not About Asian Currencies

    Asian central banks have in recent weeks taken actions or sent signals that seemingly aim to weaken their currencies. The worry is that a source of return which contributed to last year's outperformance has been lost and exchange rate declines may presage an inflationary breakout. Such a tightening scenario may materialize down the road, but it is far from being a concern.

    0
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    Gavekal Research

    Strategy Monthly: Everything Looks Fine, But…

    The year has opened with growth expectations and risk appetites at their highest levels in years. The consensus is probably right that it will be a good year for economies and stock markets. The main thing to watch out for is a faster-than-expected withdrawal of QE and low-interest rate policies by the ECB and the BOJ, which could send US bond yields sharply higher.

    0
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    Gavekal Research

    Indian Politics And The Cycle

    Despite its soaring equity markets, India had a sticky year in 2017. Quarterly GDP growth dipped below 6% in the summer, laid low by disruptive reforms, bad debt, anemic credit and weak private investment (see India’s Economic Funk). The outlook for 2018 is healthier: the twin shocks from demonetization and the introduction of a goods and sales tax have largely dissipated, consumption has rebounded, and manufacturing is accelerating. Feeble...

    0
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    Gavekal Research

    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.

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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    An Original Sinner Repents

    Two weeks ago, state-backed toll road operator Jasa Marga became the first Indonesian corporate to issue a “komodo” bond—a rupiah-denominated global bond. Seen in isolation, the three-year IDR4tn (US$295mn) issue yielding 7.5% might appear little more than a novelty. However, Udith thinks it could hold more significance.

    2
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    Gavekal Dragonomics

    CEQ: China 20/20

    In this final issue of China Economic Quarterly, an all-star cast of contributors takes a look back at how the country has changed since 1997, and a look forward at how China, and its global impact, might evolve in the next couple of decades. The basic lesson is that it has never paid to underestimate China’s growth potential and capacity for change.

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    Gavekal Dragonomics

    Pax Americana-Sinica

    China’s rise is making it increasingly costly for the US to uphold Pax Americana in Asia. China wants to replace it, but scant regional enthusiasm means Pax Sinica is some way off. For the next two decades, an uneasy truce should hold in Asia.

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    Gavekal Dragonomics

    Why India Will Never Be China

    Drawing a comparison between Asia’s two giants is tempting, but differences outnumber similarities. Despite the appeal of China’s economic model, there is little chance that Asia’s oldest democracy will follow in Beijing’s footsteps.

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    Gavekal Research

    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...

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    Gavekal Research

    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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    Gavekal Research

    Asia’s Triple Merit Scenario Lives

    Last week, the Bank of Korea raised its benchmark interest rate for the first time in six years and other Asian central banks seem likely to follow suit. This is not especially surprising given the ongoing global expansion and tightening moves by the Federal Reserve, which have narrowed short-rate differentials for Asian currencies. The worry, as elucidated by Anatole last week, is that such an expansionary scenario threatens the delicate “not...

    1
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    Gavekal Research

    Strategy Monthly: The Long Cycle Continues

    As equity markets everywhere continue to trade higher, money managers are getting increasingly nervous about how long the rally can last. In December’s Strategy Monthly, Anatole argues that we are still only half-way through a secular bull market that can last through the end of the decade. With further US rate hikes on the cards, barring any nasty surprises non-US markets are likely to outperform going forward. The only fly in the ointment is...

    0
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    Gavekal Research

    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).

    0
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    Gavekal Research

    Equities, The Yen And The BoJ’s Exit

    Last month Bank of Japan governor Haruhiko Kuroda participated in an ECB panel on the importance of communications as a tool of monetary policy. He seems to have taken the message to heart. In the couple of weeks since, scarcely a day has gone by without Kuroda or one of his colleagues on the BoJ’s policy board talking publicly about the “reversal rate”, hinting heavily that the central bank is looking to dial back its ultra-accommodative stance.

    0
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    Gavekal Research

    Goldilocks And The Ten Grizzly Bears

    Over the last fortnight, Anatole has written lengthy pieces on why he remains structurally bullish and how investors should play this trend. Today, he takes a realistic look at factors that could disrupt his generally upbeat assessment of the global economy and markets. This piece is a journey into Anatole’s darker side.

    2
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    Gavekal Research

    India Macro Update: The Pain Before The Gain

    India reports its third quarter GDP tomorrow and in this chartbook Udith and Tom offer their assessment of the economy. They expect the official numbers to show a pick-up in growth due to firms restocking after the rollout of the new Goods & Services Tax and think this trajectory will continue through to next year. They advise investors to stick with richly-valued equities, treat bonds cautiously and not worry too much about a currency...

    0
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    Gavekal Research

    Video: The Pain Before The Gain

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    Gavekal Research

    Not All Bank Recaps Are Created Equal

    A month ago, India outlined a US$32bn plan to fix its publicly-controlled banks’ bad debt problem, sparking a more than 30% rally in their share prices. The plan remains under wraps, but the “round tripping” approach will see deposits lent to the government as recapitalization bonds and then injected back into banks as fresh capital. The question is whether India’s effort is credible enough for banks to both write off debt and have enough...

    0
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    Gavekal Research

    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.

    0
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    Gavekal Research

    Asset Allocation For The Global Bull Market

    On Monday Anatole outlined his fundamental reasons to believe that the world is enjoying a global bull market that still has years to run. Today he reviews the investment recommendations that flow from his thesis, and examines how investors can best play the unprecedented divergence of the US business cycle from the cycles in Europe and the emerging markets.

    2
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    Gavekal Research

    This Is (Still) Not A Peak: It’s A Global Bull Market

    It was almost five years ago that Anatole started to shout loudly that the US equity market had achieved a clear breakout from its more than decade long bear market trading range. His advice has been to stick with the trend. In light of this year’s near across-the-board upward moves in risk assets globally, it would be tempting to back away from this positioning. However, in this piece he argues that the bull market is now going global and so it...

    3
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    Gavekal Research

    Video: Escaping The Indian Funk

    Udith presented on India during Gavekal's Hong Kong seminar in November. This video also includes relevant excerpts from the question and answer session.

    0
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    Gavekal Research

    Selling India’s Housing Dream — Part II

    When Indians visit China for the first time, it often comes as a shock: China is more materially developed than they could ever have imagined. And when Chinese visit India for the first time, it too comes as a shock: India is even more chaotic, dirty and materially backward than they had been told!

    0
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    Gavekal Research

    A Brave New, New World?

    The traffic has been one-way. Since mid-August, the Philly semiconductors index is up 23%, the Nikkei 225 by 18%, the S&P energy index by 14% and the S&P materials index by 10%. In other words, all “deep-cyclicals” and “price monetizers” are ripping higher. So what to make of this?

    2
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    Gavekal Research

    All Pomp, No Circumstance

    President Trump’s 12-day trek through Asia promises much pomp and little circumstance. Since his administration has no strategic vision for the region and has chosen to abandon many of the tools of diplomacy in favor of overblown rhetoric and empty threats, there is little chance of material progress on any important economic or security issues.

    0
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    Gavekal Research

    Strategy Monthly: How Much Longer For Low Rates?

    For decades fixed income and equity markets have enjoyed a secular bull market, propelled higher by low real long term interest rates, depressed by a glut of global savings. In this Strategy Monthly, Will Denyer updates his Capital Provider Ratio, a powerful demographic tool which indicates that the growth of global excess savings has peaked, and that the glut will soon begin to dry up, with far-reaching consequences for global asset markets.

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    Gavekal Research

    Selling India’s Housing Dream — Part I

    India’s economy is in a slump, laid low by a chronic lack of investment and weak job creation. How can India both revive growth and generate jobs for millions of low-skilled workers? Tom argues that one answer lies in the construction sector, specifically the mass buildout of affordable housing.

    0
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    Gavekal Research

    Video: After Abe's Election Victory

    Despite poor personal approval ratings, last weekend prime minister Shinzo Abe scored a convincing victory in Japan’s general election. In this short video interview Neil examines what the prospect of five more years of “Abenomics” policies means for Japan’s economy, corporate sector and stock market.

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    Gavekal Research

    Corporate Japan’s Cash Mountain

    Shinzo Abe’s thumping victory in Sunday’s Japanese general election set the seal on the local stock market’s unbroken run of gains. AfterAbe’s Liberal Democratic Party and its Komeito coalition partner together secured a comfortable two-thirds majority in Japan’s lower house of parliament, Monday saw the Nikkei 225 close higher for an unprecedented 15th day in a row just whisker short of a 21-year high.

    2
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    Gavekal Research

    Experiences, Not Things

    It is a core Gavekal belief that good money management is more about “avoiding losers” than “picking winners”. Yet sell-side research focuses almost entirely on identifying winners. This leaves an avenue for a small, independent firm like ours to lean the other way and help clients identify “losers”.

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    Gavekal Research

    Japanese Inflation: Hiding In Plain Sight?

    In Gavekal’s latest Strategy Monthly, Charles set out the reasoning that underpins his bullish call on Japan’s economy, currency and equities. In a nutshell, he outlined how Japan is finally emerging from the Fisherian “secondary depression” which followed the economy’s great boom and bust of the 1980s and 1990s. Growth is enjoying its longest sustained run in years. And with the private sector growing faster than overall GDP, corporate profits...

    7
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    Gavekal Research

    The Savings Glut’s Long Life And Slow Death

    Slow-moving demographic trends have a big impact on asset prices. For the last 35 years, the age structure of the world’s population has created a global savings glut which has propelled secular bull markets in both equities and bonds. Now that demographic tailwind is fading. In a few years it is likely to reverse. In this paper Will introduces a new measure, the Capital Providers Ratio, which relates the impending demographic shifts to the...

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    Gavekal Research

    Asia’s Best Story Tops Out

    On the face of it, the Philippines offers one of Asia’s best economic stories. Whatever you think of Rodrigo Duterte’s war on drugs, growth remains decent at about 6.5%, big tax reforms are in the offing and after years of promising action, infrastructure may soon actually get built. This has unfolded with public debt falling from more than 65% of GDP in 2006 to 42%. And yet the Philippine peso has slid -8% since Duterte took office in June last...

    1
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    Gavekal Research

    Audio & Transcript — Gavekal Research October Call

    In yesterday's monthly call Charles Gave outlined his bullish view on Japan. He argued that Japan has exited its long debt trap and is about to start a new cycle that will be substantially driven by capital spending. The fact that corporate Japan is sitting on US$4trn of domestic savings means this expansion can be funded without borrowing and so the risk of an interest rate shock is negligible. He also argued that the Bank of Japan is on...

    0
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    Gavekal Research

    Japan’s Fiscal Consolidation Deferred

    Kibo no To, the Party of Hope founded last month by Tokyo governor Yuriko Koike, will not win next week’s general election in Japan. And the chances that it will win enough seats in Japan’s lower house of parliament to be invited to join the Liberal Democratic Party of prime minister Shinzo Abe in forming a coalition government are slight; at this stage probably no more than 25%. Nevertheless, Koike’s upstart party is already having an impact on...

    0
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    Gavekal Research

    An Odd Bull Market

    When supermarket checkout clerks lecture their customers on the merits of leveraged ETFs, investors can be forgiven for thinking the bull market has finally passed its “shoeshine boy” moment. But although there is no shortage of late cycle indicators out there, Louis argues that for several reasons, the current run-up may still have further to go.

    12
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    Gavekal Research

    India’s Economic Funk

    India’s economy is in a cyclical funk, weighed down by rising bad debt, anemic credit and falling private investment. Growth is at its slowest for three years after weakening for five successive quarters to 5.7%, with little sign of an imminent pick up. Even foreign portfolio investors, who have poured more than US$26bn into India this year betting on its strong macro fundamentals, are beginning to waver. With the general election in 2019 now on...

    0
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    Gavekal Research

    Strategy Monthly: Japan Is Back!

    For a quarter of a century, Japan has been stuck in a structural malaise, and the only assets you wanted to own were Japanese government bonds. Charles believes this era is over. Corporate profits are at a record high relative to GDP and seemingly headed higher; the yen is the cheapest it has been, on a purchasing-power basis, since 1985. The yen could well be the best performing currency over the next few years, but is so undervalued that even...

    0
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    Gavekal Research

    The Return Of Alpha?

    This week’s obsession seems to be whether the big reflation trade is back on, heralding a shift in the investment environment. Louis will address this question in a piece to be sent later today, but it is worth noting another important morphing of the investment milieu: that actively managed funds are handily outperforming passive index funds.

    2
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    Gavekal Research

    Japanese Stocks Beyond The Election

    Global equity investors could be forgiven for ignoring the Japanese general election announced yesterday as of little importance. After all, many remain underweight the Japanese market, and at first glance there is little prospect of any change of government or policy likely to change their minds. However, such a dismissive attitude would be a mistake.

    2
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    Gavekal Dragonomics

    The Bottom Line On North Korea

    Even as the US and North Korea exchange more threats, actual US policy still focuses on getting China to apply economic pressure. Yanmei argues that while China has gradually cut trade ties with the North, it wants the regime to stay in place. This is China’s bottom line, not because of any friendship but because China’s own interests demand it.

    10
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    Gavekal Research

    EM Can Handle Fed Fallout

    Yesterday, the “world’s central bank” confirmed that it will reverse its quantitative easing policy and likely raise interest rates in December and then three times in 2018. On the same day, the benchmark emerging market index nudged higher and is only a whisker off a six year high. Ordinarily, Federal Reserve tightening is terrible news for EMs, especially for those economies with the temerity to simultaneously try policy easing. Yet this is...

    0
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    Gavekal Research

    India Macro Update: The Risk In The Rupee

    Indian Economic growth in the second quarter was expected to slow due to the impact of “demonetization” and a new sales tax being rolled out, yet the biggest hit to growth came from an overvalued rupee hitting net-exports. The impact of a strong currency may be to defer India’s capital spending cycle and put the economy on a lower growth trajectory. Since Indian equities are richly valued, Udith and Tom are cautious about their outlook. In this...

    0
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    Gavekal Research

    Reviewing My Calls

    Over the years my research has focused on broad concepts which have been applied in many situations and lots of reports. These include ideas such as the disruptive power of platform companies, assets whose value comes from scarcity rather than efficiency, or the effect of firms running on Schumpeterian, Malthusian or Ricardian principles. Once in a while, however, I do get specific and make investment calls. Having had a little time this week, I...

    6
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    Gavekal Research

    Audio & Transcript — Gavekal Research September Call

    In yesterday’s monthly call Louis Gave presented his view on the global investment outlook for the rest of the year. He argued that the key story so far in 2017 has been the strong performance of Asian equities, which has added a second leg to a bull market led by US technology and consumer stocks. The question is whether this can last.

    0
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    Gavekal Research

    A New World Order In The Making

    It’s all too easy to laugh at the BRICS group, a motley crew of five developing nations with little in common other than the fact that they’re (mostly) big and not yet rich. The term has been mocked as a “Bloody Ridiculous Investment Concept”. So why do the BRICS themselves take it so seriously?

    0
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    Gavekal Research

    Algo Trading: A Great Opportunity For The Human Brain

    The rise and rise in money management of computerized trading systems which seek out and exploit correlations among assets and markets can have some curious side effects. One of them is that the rise of the machines, far from rendering the human brain obsolete, can throw up some wonderful investment opportunities for those surviving managers who prefer to rely on solid economic principles and good old fashioned common sense.

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    Gavekal Research

    Strategy Monthly: A Two-Legged Equity Bull Market

    For the past several years, the brightest spot in global equity markets has been the US, and in particular tech and consumer stocks. This is changing, and we now have a "two-legged" equity bull market led both by US tech stocks and by a resurgent Asia. In our review of global investment conditions Louis explains why this is so, and argues none of the obvious land mines is likely to go off at any time soon.

    0
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    Gavekal Research

    Tremors On The North Korean Border

    Yanmei Xie reports from China’s border with North Korea, where local residents and officials were left largely unshaken yesterday by the earth tremors from Kim Jong Un’s latest and biggest test of a nuclear bomb. Despite imposing some trade sanctions on its troublesome neighbor, Beijing has no desire to back the North Korean regime into a corner.

    14
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    Gavekal Research

    Deteriorating Market Signals?

    We have a rule of thumb at Gavekal that when the S&P 500 equal-weighted outperforms the “S&P 500 index”, our equity clients are cheery since beating the benchmark is fairly easy. At such times, clients will typically take more risk. The reverse is, of course, true: outperformance by the S&P 500 makes for grumpy clients, tougher meetings, and less appetite for risk-taking. In the latter case, there is a tendency for investors to rush...

    3
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    Gavekal Research

    Video: Feeling Insecure — Japan’s Food Problem

    Japan’s late conversion to the cause of free trade owes a lot to the recognition that continued trade protection is no longer sustainable in what historically has been one of Japan’s most rigorously defended domestic sectors: agriculture. Demographics and changing diets mean Japan’s food self-sufficiency rate has fallen to 38%, the lowest among developed economies.

    0
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    Gavekal Research

    Behind Japan’s Free Trade Drive

    When in January Donald Trump’s administration announced that the US was withdrawing from the Trans-Pacific Partnership, pundits around the world lost no time in declaring Barack Obama’s flagship trade agreement dead in the water. They were premature. In a 180 degree policy U-turn, Japan stepped forward to provide leadership by stressing the attractiveness of access to its own home market.

    0
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    Gavekal Research

    Good Governance, Poor Performance

    Japan has embraced the idea that better corporate governance leads to superior stock price performance. In 2014 the stock exchange launched the JPX-Nikkei 400 good governance index in an attempt to get Japan Inc. to raise its governance game. There’s just one problem: the index has consistently underperformed the broader market.

    3
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    Gavekal Research

    Irving Fisher And Japan

    Few papers written by defunct economists have had as much influence on my way of looking at markets as Irving Fisher’s seminal 1933 article The Debt-Deflation Theory Of Great Depressions. In it, Fisher hypothesized the patterns that great depressions go through. In a nutshell, great depressions go through four phases.

    3
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    Gavekal Research

    It Is Not Slack Weighing On Wages

    How can a labor market be very tight, yet have barely any wage growth? In today’s daily Nick tackled this for the UK and found a mix of universal and idiosyncratic causes. For the US and Japan a frequent refrain is that official data hugely understates the potential size of the workforce and so a ready source of “slack”. Will and Udith beg to differ.

    4
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    Gavekal Research

    The Limits Of Magical Thinking

    A persistent American fantasy of hardliners is that threats of force will magically cause other countries to abandon their interests and cave in to US demands. The current occupant of the White House is taking this magical thinking to new heights in his approach to Asia. But thankfully, despite the dire headlines, the real-world impact is small.

    5
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    Gavekal Research

    Finding Outperformance In Japan

    On Monday, the cabinet office in Tokyo is expected to announce that Japan’s economy grew at an annualized rate of around 2.5% in the second quarter. If it does, it will mark Japan’s sixth consecutive quarter of economic expansion, the longest period of uninterrupted growth since the mid-2000s, when prime minister Junichiro Koizumi was in power.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research August Call

    In this week's call Tom Miller and Udith Sikand presented their view on India's macroeconomic situation and opportunities for foreign investors. Tom outlined the broad macro fundamentals and assessed the Modi government's progress in reforming the economy. Udith presented the investment consequences, expecting a capex revival to begin as soon as next year.

    0
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    Gavekal Research

    Strategy Monthly: India — Poised For A Pickup

    India clearly offers one of the best long-term growth stories in the world today. In 2016 for the first time it added more to global nominal GDP growth than China. Demographics are favorable, opportunities for infrastructure- and housing-driven growth are abundant, and despite some hiccups the Modi government has done a good job of taming inflation and setting the country on a structurally sounder path. For investors, the problem is that Indian...

    0
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    Gavekal Research

    Big Tech Is Not Standard Oil

    Back in May, Louis warned that the regulatory knives were coming out for Big Tech. In the worst case scenario for the dominant technology giants that have done so much to drive the stock market to new highs, Louis argued that they could even face the same treatment that Standard Oil received at the hands of the US government in 1911. Investors were forcibly reminded of this tightening regulatory squeeze yesterday when Google parent Alphabet...

    6
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    Gavekal Research

    Life’s Certainties And The Euro

    There are very few certainties in life. Death, taxes, US consumers living beyond their means, and Italian central bankers talking down their currency are pretty much the only things I have learnt in my career to be inevitable. Sure enough, Mario Draghi came out yesterday doing his best to sound as dovish as he possibly could. That did not stop the euro from surging past its ceiling of US$1.15 to reach US$1.1620.

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    EM Asia’s Most Sensible Market

    The “safety first” stance of Indonesian fiscal and monetary policies has contained the country’s budget deficit, restored its investment grade credit rating and capped inflation. Granted, these policies have come at the cost of lackluster growth. However, with the rupiah undervalued and plentiful carry available, Udith still sees opportunities in local currency bonds.

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    End Of The Line For EM Dollar Debt?

    As if alarmed by the realignment in global financial markets over the last few weeks, Janet Yellen struck a slightly more dovish note in her Congressional testimony yesterday. Yet the Federal Reserve chair’s more nuanced words are unlikely to temper by much the developing skepticism among investors towards the US dollar bonds of emerging markets.

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    The Wile E. Coyote Moment

    Sometimes financial markets can look a lot like Wile E. Coyote. So intent was the old Looney Tunes character on chasing the Road Runner, that he somehow never realized when he had shot over the cliff’s edge. For a few moments he would continue in thin air, legs a blur, supported by momentum and incomprehension. Only when he looked down... In much the same way, financial markets often continue their trend after the underlying conditions change,...

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    Into My Indian Arms

    Last week Louis argued that the most likely growth area for richly valued defense contractors was Western-aligned powers in East Asia. The problem was that despite rising regional tensions, India and Japan were playing hard to get (see Should Investors Chase Defense Stocks?). Last week’s events on the Korean peninsula should give the merchants of death a fresh calling card in Tokyo, Seoul and Taipei. Yet while garnering fewer headlines, the...

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    Video: The North Korea Conundrum

    In this brief video interview Yanmei Xie outlines the ever-shrinking list of options the US has for solving the problem of a nuclear-armed North Korea. The risk of military action remains slim, but with North Korea's recent test of an intercontinental ballistic missile it is no longer unthinkable.

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    The North Korean Tail Risk Just Got A Whole Lot Fatter

    Despite the protestations of some of the less temperate US news media, North Korea did not cross a US “red line” yesterday. However, with the successful test launch of an intercontinental ballistic missile that could, in theory, drop a nuclear warhead on the US state of Alaska, Kim Jong Un’s rogue state has brought North Asia a big step closer to the critical point at which investors can no longer rule out military action. A shooting war on the...

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    Should Investors Chase Defense Stocks?

    Aside from health care, the other “Trump trade” that has worked wonders since November 9 has been defense stocks. After all, with the Dow Jones sector index up some 22% in the period, what’s not to like? On taking office, Donald Trump cranked up military spending, and during his state visit to Saudi Arabia in May secured weapon sales worth US$110bn. On Friday—just hours before Xi Jinping took the stage in Hong Kong to celebrate the 20th...

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    The Indian Summer

    Tomorrow India will roll out its most important economic reform since the early 1990s. The Goods and Services Tax will transform the country’s 29 states, which run semi-autonomous fiscal systems, into a single market. Backed by strong fundamentals, Modi’s reform agenda is playing well with investors: MSCI India is up 19% this year, foreigners are piling into Indian bonds, and FDI is at record levels. Yet, look closer and a weaker economy emerges...

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    When Central Bankers Attempt To Change Direction

    In recent days , central bankers in the US and Europe have been signaling how much they want to end unconventional monetary policies and revert to a more normal monetary model that does not put asset prices at the heart of the system. It is a laudable aim. But, warns Charles in this piece, central bankers have seldom managed to transition from one monetary regime to another without causing convulsions in the financial markets. This time, the...

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    A Change In The Investment Environment?

    A couple of weeks ago, Louis asked if the downside breakout in bond yields (touching 2.10%) could foster a stable investment environment. At the time he foresaw three possible scenarios. After yesterday's hawkish pronouncements by multiple central banks, he is not so sure and is focusing on a narrower range of possibilities which may herald a new investment environment.

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    Video: Breaking The Yen-Equity Link

    Japanese equities recently touched a 17-year high in US dollar terms and perhaps more significantly, they appear to have decoupled from their usually tight inverse relationship with the yen. In this video interview Neil considers both cyclical and structural reasons for the apparent breakout and concludes that investors should not underweight a market that has plenty of tailwinds.

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    EMs And A Chill Trade Wind

    The Asian trade cycle, having perked up notably since mid-2016, shows worrying signs of rolling over. Korean export growth in May halved from a month earlier, while Taiwan has seen the same measure steadily slow since February. Today, China reported a reduction in export growth to single digit levels, while import demand growth for May fell to 15% YoY, compared to 38% in February. To an extent, this can all be explained by flattering base...

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    Figuring Out Where The Ball Will Be

    Rugby players fall into one of two categories: the forwards, who typically go where the ball is (and in the process put their heads in places most sane people wouldn’t put their feet), and the backs, who try to go where the ball will be, which enables them to look good and keep their kit clean, but earns them the scorn of the forwards. Peter FitzSimons, the first Aussie to play for a French club (Brive), once remarked: “Come the revolution, the...

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    Stimulus Gets More Direct In Japan

    Fresh reflation ideas are back on the agenda in Japan as inflation shows no sign of rising despite record stimulus and a tight labor market. Prime Minister Shinzo Abe is focused on hard-pressed 30-somethings who continue to save furiously in part as they must fund their children's higher education. His idea is to ease the burden and hopefully spur a step change in consumption spending.

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    India Macro Update: Navigating The Fog

    In this regular quarterly update, Udith and Tom survey the key developments in India’s macro-economy and markets, which have been clouded by the demonetization episode and yet more changes to national economic statistics. The fog may not be about to clear as the government prepares to rollout a new national goods and sales tax with the potential for significant economic disruption.

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    Video: India's Economic Fog

    In this interview Udith discusses the key developments in India’s macro economy and markets, which have been clouded by the demonetization episode and yet more changes to national economic statistics. The fog may not be about to clear as the government prepares to roll out a new national goods and sales tax with the potential for significant economic disruption.

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    Don’t Buy The Smartphone Hype

    As Apple prepares to launch its anniversary iPhone and Samsung unveils models that don’t blow up, technology equities in the US and Asia have soared on hopes for a new smartphone cycle. After 2016 saw high-end smartphone sales fall, investors are betting that consumers respond to gee-whizz gadgetry by replacing their devices more often. We are not so sure.

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    Video: Japan's Next Baby Boom

    In this interview Neil explains why the oft repeated line about Japanese couples not wanting to have many kids is a huge exaggeration. The problem is bizarre government regulations and a drastic shortage of childcare facilities. Such inhibitors to tiny feet pattering are about to get a major government-induced overhaul, and a Japanese baby boom may be around the corner. If correct, this shift in Japan’s demographic curve could have profound...

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    In Bed With The Japanese

    The international media have been full of headlines recently about how the Japanese are failing to make enough babies. But the reason for Japan’s failing fertility is not some lack of libido. Instead, as Neil explains, the government's antiquated policies towards women and families have proved a remarkably effective—if inadvertent—form of contraception.

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    A Clearer Picture In Seoul

    South Koreans went to the polls yesterday and elected a special forces soldier turned human rights lawyer as president. Moon Jae-in will need both skillsets in dealing with a belligerent North Korea, distrustful China and saber-rattling US. Yet an even tougher ask may prove delivering on his promises to shake up collusive ties between big business and the government, and so unleash animal spirits. I would argue, however, that for once the...

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    Calling Time On Indian Outperformance

    Indian equities have been on a tear this year with their 22% currency-adjusted gain only bested among emerging markets by Poland. This is not surprising given that India has strong fundamentals and a reform-minded government that still enjoys popular support. Yet, while long term positive drivers for the Indian market remain intact, equities have run ahead of themselves by pricing in a swift return to robust earnings growth.

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    The End Of Yen Outperformance

    Year-to-date, the yen is the best-performing of the G10 currencies. Over the last four months it has appreciated 5.2% against the US dollar, lifted by abating enthusiasm for the Trump trade and safe haven flows into Japan. Given the tight inverse correlation between the yen and Japanese equities, it is therefore no surprise that the Japanese stock market has underperformed its developed market peers so far this year.

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    China’s Kim Problem

    Last weekend's extreme tension on the Korean peninsula is just the latest episode to severely test Beijing’s patience with North Korea. Yet even as elements of the Chinese leadership tire of Kim Jong Un’s grandstanding, China remains unlikely to make a bold move that threatens the regime. Despite acute US pressure, China will seek to preserve the status quo.

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    Whether Or Not To Underweight The US

    Charles has been shifting his asset allocation recommendations in recent weeks away from US assets in favor of foreign alternatives. This was squarely valuation-based as his models show the US dollar, corporate bonds and equities to be overvalued. Here, he road tests this view by incorporating non-valuation-based macroeconomic factors into the analysis.

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    London Seminar — March 2017

    In Gavekal’s seminar in London last week Will Denyer, Charles Gave, Tom Miller and Anatole Kaletsky presented their macroeconomic outlooks and offered investors asset allocation advice.

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    India Gets Serious About Its Banks

    Indian equities delivered the best returns of any emerging market in 1Q17, as the economy rebounded from November’s demonetization debacle. With manufacturing expanding for three straight months, consumer demand returning to normal levels, and the BJP’s decisive victory in state elections boosting sentiment, MSCI India surged by 17%. Growth in the fiscal year to March 31 likely topped 7%, enabling India to retain its crown as the world’s fastest...

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    Strategy Monthly: Europe Braces For The French Election

    The macroeconomic stars are aligning for the eurozone. The region’s cyclical recovery is extending itself across economies and sectors alike. Inflation remains modest, reducing the chances of an early monetary tightening. Eurozone equities are relatively cheap in an expensive world. And the euro is fundamentally undervalued against the US dollar. However, the big risk for investors remains the possibility that nationalist euroskeptic Marine Le...

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    Hong Kong Seminar — March 2017

    In Gavekal’s Asia focused seminar in Hong Kong last week Arthur Kroeber, Udith Sikand and Tom Holland presented their outlooks for the rest of the year.

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    Gavekal Dragonomics

    Sanctions With Chinese Characteristics

    Since South Korea decided to host a US missile-defense system, China has restricted tourism and closed local operations of Korean firms. The dispute will mean some economic pain for Korea, but no lasting damage. But China is ever more willing to use such “sanctions with Chinese characteristics” to disrupt trade with countries that displease it.

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    Why This Time May Be Different For EMs

    Going into 2017, the logic of Donald Trump’s “America First” program suggested that investors should be long US equities and the dollar, and short longer-dated treasuries. Such an outcome would have been horrible for emerging markets. And yet EMs have rallied 13% year-to-date. The swing factor has been the sideways move of the US dollar in the intervening period, which persuaded investors to cover short-bets on EMs. In this chartbook Joyce...

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    The Risk Picture Diminishes

    Yesterday’s 25bp rate rise from the US Federal Reserve was universally expected. The relative dovishness of Fed officials was not. With headline CPI inflation in the US running at a brisk 2.7% in February, ahead of the meeting at least some market participants had been pricing in four rate hikes this year. But after the latest dot plot signaled that policymakers continue to see only three hikes—including yesterday’s—in 2017, those expectations...

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    Like Japan, Love Korea

    Ignore for the moment the drumbeat to hostilities on the 38th parallel; it has still been a head-spinning few weeks in the normally staid world of South Korean governance. First, the head of Samsung, the country’s biggest company, was arrested on bribery charges, and then last Friday saw President Park Geun-hye ousted by impeachment. It is our view that a political upheaval is afoot in Seoul that threatens the collusive ties between officials...

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