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    Gavekal Research

    Audio & Transcript — Gavekal Research Call December 2018

    In the final Gavekal Research Conference call of the year, Louis-Vincent Gave, Anatole Kaletsky and Charles Gave shared their perspectives on a year which has been challenging for all asset classes, and offered their thoughts on what could be in store for investors in 2019.

    0
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    Gavekal Research

    Understanding The Next Bear Market

    My career in financial markets began in January 1971, which means I’ve seen a few bull and bear markets. A common trait of bear markets is that as the big decline starts, most investors have no idea why asset prices are falling. At some point, perhaps much later, the root cause of the marauding bear becomes clear and this revelation triggers the final phase of the sell-off. Hence, in light of the recent pull-backs, readers may like to consider...

    0
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    Gavekal Research

    A Careless Loss Of Indian Central Bankers

    To lose one central bank governor may be regarded as a misfortune. To lose a second one, as India did yesterday, looks like carelessness bordering on recklessness. Urjit Patel’s resignation, after resisting months of pressure from the ruling BJP to ease credit conditions and hand over some of its cash reserves, is another black mark against the government.

    2
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    Gavekal Research

    Strategy Monthly: Three Questions For The Year Ahead

    This has been a miserable year across most asset classes, with markets roiled by tighter US dollar liquidity. Looking into 2019, Louis sees the investment environment being dictated by whether the US dollar liquidity situation really is easing, the overall US policy and the possibility for the “Chimerica” relationship to rupture.

    0
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    Gavekal Research

    The Next Target Of Trump’s Firepower

    In today’s Daily, Arthur Kroeber offered his analysis of the weekend’s Trump-Xi summit in Buenos Aires. In this short report, Louis takes a slightly different tack, reviewing the series of tumultuous events in recent weeks. His conclusion is that few investors’ portfolios are well positioned for the probable outcome.

    0
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    Gavekal Research

    India Macro Update: Post-Rout Uncertainty

    India is beset with economic problems that range from a deepening credit crunch, a worrying stand-off between the government and central bank and a capital spending cycle that has never really gotten going. Yet despite these challenges, the economy keeps chugging along and should hit 7.5% growth in the current fiscal year. In this quarterly macro update, Udith and Tom consider the outlook in light of political uncertainty ahead of next year’s...

    0
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    Gavekal Research

    EMs Need More Than A Bear Hug

    Having fallen -25% since late January, emerging market equities have been this year’s train crash of an investment. The good news is that EM equity valuations are at multi-year lows in both absolute and relative terms, begging the question: what could catalyze a rebound in oversold EM assets?

    3
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    Gavekal Research

    Countering The Belt And Road

    In its escalating rivalry with China, the US has a new target: the Belt and Road Initiative. But both the US and Europe are struggling to redefine the way they win friends and influence people with development finance. Tom argues that the somewhat quieter middle way being pursued by Japan is delivering it both influence and profits.

    3
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    Gavekal Research

    The Uphill Struggle For Equities

    Last week saw the MSCI World turn in its sixth negative week in eight, while the only sector to record gains over the last two months has been utilities; cyclical sectors like materials, industrials, IT, energy and consumer discretionary have mostly entered correction territory. That begs the question: Is this a dip to buy, or will the environment remain harsh?

    5
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    Gavekal Research

    This Really May Be The Start Of A Year-End Rally

    Although this week started with a violent sell-off, Anatole argues that the stars are aligned for a year-end equity rally, especially in emerging markets. This is because EMs have sold off not on US interest rate worries but a combination of rising oil prices and heightened political risk. Those headwinds now seem to be abating and beaten up markets could surprise before year-end.

    6
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    Gavekal Research

    London Seminar — October 2018

    At Gavekal’s seminar in London last month Charles Gave and Anatole Kaletsky presented on whether the world is breaking up into three different monetary zones, and whether this is a correction to, or an end to, the long-running global bull market. Micahel Clendenin of Gavekal RedTech explained how they conduct research on the Chinese technology and internet sector.

    0
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    Gavekal Research

    Hong Kong Seminar — November 2018

    At Gavekal’s seminar in Hong Kong this week, Yanmei Xie, Arthur Kroeber and Will Denyer presented their latest views on China's economy, trade war, and how to approach asset allocation in the US.

    0
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    Gavekal Research

    What's Changed In The Oil Market

    “Sanctions are coming,” proclaimed Donald Trump in a tweet last week, three days before the imposition of the latest US embargo on Iranian oil exports. The oil market was not impressed. Since late September, when crude hit four-year highs, the Brent price has slumped -16.7% from US$86.29 to US$71.91, with WTI falling -19.1%.

    0
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    Gavekal Research

    Strategy Monthly: Yes, We're Still In A Bull Market

    Anatole and Will believe that continued exposure to US equities makes sense, since underlying corporate profitability remains strong. So long as one avoids the most rate-sensitive sectors, US portfolios should be 70-75% in stocks, with the rest mainly in cash. Moreover, they argue that the period of EM underperformance is now done, and emerging markets are poised for a significant rally.

    0
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    Gavekal Research

    India's Soft Approach To Hard Money

    A key reason to hold Indian risk assets in recent years has been the presence of a strong government willing to incur short-term political pain in return for longer-term economic gain. Yet, with the Reserve Bank of India fighting the finance ministry over bank regulation policies that may crimp growth ahead of a national election, this premise looks shaky. The partially independent central bank has faced political attack before, but this is...

    2
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    Gavekal Research

    Has Oil Set Its High For This Cycle?

    With the price of WTI crude oil now back below its 200-day moving average, Louis puts himself in the shoes of Turkish president Recep Tayyip Erdogan and imagines what sort of leverage he could exert over Donald Trump, what this means for the enforcement of sanctions against Iran, and what that implies for the oil price going forward.

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    Gavekal Research

    Beijing Seminar — October 2018

    At Gavekal’s seminar in Beijing last week, Louis-Vincent Gave, Udith Sikand and Chen Long presented their latest views on the turn in global markets, the prospects for emerging markets in the quarters ahead, and on China's policy priorities as it faces down the US in a prolonged rivalry.

    0
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    Gavekal Research

    World Trade And A Troubling Signal

    As Donald Trump has ramped up tariffs on US imports from China, investors have understandably grown anxious about the impact on world trade. Few significant effects have shown up in the data so far. Nevertheless the outlook is alarming—although not necessarily in the way many might think.

    5
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    Gavekal Research

    JAM Today For Indian Fintech

    There is a Dickensian quality to Indian finance just now as banks struggle under bad debt piles and finance companies face a wholesale funding crunch after a recent high profile default. Yet if these are the worst of times for credit intermediaries in India, there is a clear silver lining as fintech firms capitalize on a national biometric database.

    0
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    Gavekal Research

    Reviewing The Yen As A Safe Haven

    Three months ago in July, I argued that international investors should consider holding Japanese equities without hedging their currency exposure. A month ago in September, I revisited that call, concluding that it still held. My essential argument was that investors had largely priced in the headwinds facing Japanese equities, which offered compelling valuations should trade tensions blow over and global risk appetite return. On the other hand...

    2
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    Gavekal Research

    Six Impossible Things Before Breakfast

    Louis investigates six of the most incongruous sets of relationships that have held sway this year and offers alternative explanations. In particular, he focuses on the strange case of China’s response to US trade hostility and argues that understanding Beijing’s game plan may hold the key to whether the long US bull market in equities can stay the course.

    4
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    Gavekal Research

    Bonds' Failure To Rally

    Given all the bad news for markets this year, one would be forgiven for thinking that US treasuries and German bunds would have been a good investment. But even as emerging markets have sold off and the US dollar has risen against almost every emerging market currency out there, US treasuries (and to a lesser extent bunds) have been an absolute dog of an investment.

    4
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call October 2018

    In this month’s Research Conference Call Louis-Vincent Gave examined the present bad tidings from markets and asked whether the global bull market faces a denouement. Anatole Kaletsky argued that this sell-off will likely prove to be a temporary setback for emerging markets and that the global bull market may have further to run. However, he warned that the outcome will depend heavily on where the oil price goes from here.

    0
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    Gavekal Research

    The EM Value Question

    After a grim seven-month sell-off, it is natural to ask whether emerging markets now offer attractive value. Since its January peak, the MSCI emerging markets index has fallen -22%. The corollary has been a deep derating, which has left EM equities trading below their long term mean P/E ratios. However, a healthy dose of caution is warranted.

    5
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    Gavekal Research

    Strategy Monthly: Are We Still In A Bull Market?

    At the start of the year, markets seemed poised for a rotation out of US equities into non-US assets. In fact, US equities and cash are the only assets to have delivered positive returns this year. Louis examines the reasons why and concludes that portfolio managers should stay defensive, while looking for buying opportunities in oversold emerging markets, and in European assets in non-euro countries such as the UK, Sweden and Switzerland.

    0
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    Gavekal Research

    The Severity Of India’s Rout

    It has been a torrid month for Indian markets. Equities have tanked by -7%, the rupee has dropped to all-time lows, and a new crisis is emerging in the financial sector. Liquidity is tightening in the money markets, threatening the survival of several non-bank financial companies and raising the prospect of contagion risk that could spill over to the rest of the financial system and lead to a broader economic slowdown. The rout in emerging...

    0
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    Gavekal Research

    Does Beijing Really Manage The RMB Against A Basket?

    Possibly the only easy thing about studying China is that Chinese policymakers tend to “say what they do and do what they say”. Take the Chinese exchange rate as an example. From 1998 to 2005, the renminbi’s exchange rate was fixed at CNY8.28 to the US dollar. Then, in 2005, investors were told that the renminbi would be allowed to appreciate gradually and with a controlled daily volatility. When the financial crisis hit, the Chinese exchange...

    4
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    Gavekal Research

    Back To A Three-Figure Oil Price

    Oil broke higher on Monday, with the price of Brent decisively breaching US$80/bbl, a level it had repeatedly tested since early May, when the US administration announced it would reimpose sanctions on Iranian exports. The immediate trigger for the break-out was the decision at the weekend by the Opec cartel plus Russia not to increase their formal output target in the near term. At first glance, the market response might appear an over-reaction...

    5
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    Gavekal Research

    Heads I Win, Tails I Don’t Lose In Japan

    A glance at the headlines suggests the story in Japan is still “stasis as usual”. As expected, on Wednesday the Bank of Japan reaffirmed its intention to keep interest rates low indefinitely. And later on Thursday, Shinzo Abe is all but sure to fend off a leadership challenge from within his ruling Liberal Democratic Party, setting him on course to become the country’s longest-serving prime minister. In tune with this “no change” refrain,...

    0
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    Gavekal Research

    Why You Should Buy Indonesia

    There are reasons to think that a 2% rise in the broad emerging market index over the last two days may be more than just a relief rally. For those investors who are minded to seek out EM equities, one of the more interesting options is Indonesia, which has unfairly been treated by investors as a sort of Asian Turkey.

    0
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    Gavekal Research

    Why The US Cannot Win A Trade War

    The US has made a fundamental policy mistake in pursuing a trade war against China. A Keynesian macroeconomic analysis shows that the US will likely be worst affected by the conflict, while China should escape unscathed and several other emerging markets could be clear gainers. This sell-off may be an ideal opportunity to "buy the dip" in EMs

    7
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    Gavekal Research

    The Exit From A Liquidity Squeeze

    If it walks like a duck and quacks like a duck, then it probably is a duck. By the same token, if central bank reserves are shrinking, the US dollar is rising, and emerging market currencies are cratering, we probably face a liquidity squeeze. None of this should be surprising, as the drains on US dollar liquidity have come from all directions this year.

    7
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    Gavekal Research

    On Getting It Wrong

    Louis went into 2018 with a set of assumptions about how growth and markets around the world would play out. It hasn’t exactly worked out as expected and in this mea culpa he seeks to understand how he got it wrong and what comes next. He concludes that a key driver of the changed investment environment was not so much the strength of the US dollar but China’s decision to allow a renminbi devaluation.

    10
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    Gavekal Research

    The Korean Advantage

    Yesterday was another bad day for weak-link emerging markets battling a rising US dollar. Still, my contention during this year’s EM sell-off has been that investors should sort the wheat from the chaff. With a current account surplus of 5% of GDP and forex reserves of US$400bn, exhibit-A is South Korea.

    0
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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.

    0
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    Gavekal Research

    Disentangling The EM Mess

    It has been tough reconciling weak emerging market performance this year with their generally decent macro fundamentals. Charles pins the blame on a US dollar squeeze and will publish an update later today. By contrast, Anatole reckons that markets have made a mistake in assuming that EMs are especially vulnerable to a strong US dollar. I see merit in both positions, but do not buy the fact that there is a catch-all explanation for what is going...

    0
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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...

    1
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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.

    4
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    Gavekal Research

    India Macro Update: A Mixed Masala

    As public spending is cranked up ahead of an election that is expected to be held next spring, India should be able to sustain its current level of economic growth for a while yet. However, the rate of expansion has likely passed the high water mark for this cycle, argue Udith and Tom in this quarterly update.

    0
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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”.

    5
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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 Research

    Why Indian Tourists Are The New Chinese

    Some 25mn Indians traveled abroad last year, making sub-continent tourists increasingly important for a range of major destinations. They may not yet rival Chinese travellers who are by far the biggest group of globe-trotters, but in this piece Tom argues that is only a matter of time. Already, it is cheaper for Indians to travel to a range of overseas destinations than within India itself and the middle class increasingly has the travel bug.

    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

    Strategy Monthly: Towards A Global Liquidity Crisis?

    In our latest outlook for global investment strategy, Charles Gave warns that the world may be heading into a dollar liquidity squeeze. There have been seven such scarce-dollar episodes since 1971, and every one produced some big financial accidents. The basic symptom today is that the US is heading into an inflationary boom, while the rest of the world is seeing slower economic growth and weaker asset prices. Investors must be defensive; but...

    0
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    Gavekal Research

    The Bank Of Japan's Choices

    Global bond markets have been jolted this week by an unusual source: the Bank of Japan. Reports that the BoJ is considering making unspecified tweaks to its policy stance triggered a 5bp spike in the 10-year Japanese government bond yield on Monday, and were blamed for an 8bp rise in the 10-year US treasury yield. BoJ governor Haruhiko Kuroda promptly denied the stories, insisting he knew “absolutely nothing” about the matter. And the central...

    0
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    Gavekal Research

    An Indian Quagmire

    India has won kudos for adopting a modern bankruptcy law that makes it easier for big lenders to clean house on a bad debt problem that has festered since the early 2000s. The problem is that an approach which would garner broad support on Wall Street and then be executed through fairly efficient courts in New York and Delaware, has in India run into the sand of murky politics and bureaucratic sloth.

    0
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    Gavekal Research

    Video: Understanding India’s Bad Loan Problem

    India has won kudos for adopting a modern bankruptcy law that makes it easier for big lenders to clean house on a bad debt problem that has festered since the early 2000s. In this video interview Udith discusses how the new bankruptcy law has worked in practice, and whether it will be enough to solve Indian banks' bad debt problem.

    0
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    Gavekal Dragonomics

    Destination Escalation

    Will we see any break in the escalation of Trump’s trade wars this year—either because one of the targets capitulates and tries to strike a deal with the US, or because blowback within the US against the negative impact of trade wars gets strong enough that Trump needs to beat a tactical retreat? The answer is a firm no, on both counts.

    2
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    Gavekal Research

    Fair Weather Friend, Or Safe Port In A Storm?

    On Thursday morning in Asia, the Japanese yen was trading at ¥112.7 to the US dollar. At that level the yen is down -7.2% from its late March high, a fall which has erased all its first quarter gains and left the currency exactly flat year-to-date. At first glance this fall might seem surprising, given the degree of nervousness in global markets and the yen’s reputation as a safe haven currency, not to mention its undervaluation relative to...

    0
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    Gavekal Research

    Japan Joins The Global Labor Market

    The biggest worry of senior managers at Japanese manufacturing firms is not Donald Trump’s trade war, the state of global demand or fear of Chinese intellectual property theft, but an acute shortage of workers. Neil charts the dynamics of Japan’s ever-decreasing labor market, and examines the policies Tokyo is rolling out in an attempt to deal with the problem.

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