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E.g., 23-06-2017
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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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...

    2
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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    The BoJ’s Tantrumless Taper

    When the Bank of Japan’s board meets on Wednesday and Thursday this week, at least one member will be calling for a retreat from the central bank’s policy of negative interest rates coupled with quantitative easing “with yield curve control”. In a speech last month Takahide Kiuchi called on the BoJ to taper its purchases of Japanese government bonds from ¥80trn annually to ¥45trn. The chance that the central bank will announce any such change in...

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    Gavekal Research

    Modi’s Big Political Win

    After a shaky few months, India’s reform project is back on track. The ruling BJP’s unexpectedly strong performance in state elections will enable Prime Minister Narendra Modi to continue with pro-business policies that should both deliver economic growth and buoy equity markets.

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    Gavekal Research

    The Best Macro Trade Of 2017

    What has been the world’s most crowded macro trade of the year to date? Not buying dollars, shorting US bonds or selling French OATs or sterling. The most over-extended speculative position in the world by historic standards has been the bullish exposure to crude oil. This began to reverse last week, and the -7% correction in Brent could soon turn into an avalanche.

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    Gavekal Research

    The North Korean Wedge Between The US And China

    This week’s missile launches by North Korea, the latest in a recent series of provocations, are forcing the US into a position where it must take steps to limit the threat to itself and its Asian allies. But such moves are certain to antagonize China, and shatter the fiction that the US and China have common interests in dealing with North Korea.

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    Gavekal Research

    India’s Property Dream

    In India, home building constitutes just 1% of GDP and fails to satisfy basic amenity demand—some 60mn Indians live in urban dwellings deemed unfit for human habitation. The good news is that India is getting serious about supporting residential property development, which could yet have a China-like impact on domestic demand and global commodity markets.

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    Gavekal Research

    A Structural Turn In Japan

    For more than a quarter of a century Japan has been a reliable source of disappointment for investors. After a nice little run-up late last year, a familiar pattern has emerged in 2017 as equities edge nervously sideways. Despite some evidence of Asia’s trading economy spluttering into life, Japan yesterday released surprisingly soft industrial production data for January. To top things off, the Wall Street Journal on the same day ran a...

    2
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    Gavekal Research

    The EM Reflation Trade Is Past Its Best

    The emerging market reflation trade has been on fire. This week Dr. Copper broke out of his six-year downward trend, adding fuel to the reflationary flames. As a result, while the relative performance of cyclical stocks has moderated in developed markets during February, EM cyclicals have continued their bullish run. Their strong performance has helped to lift the MSCI EM index by 10% year-to-date in US dollar terms to reach a 19-month high. But...

    2
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    Gavekal Research

    Video: India After Demonetization

    Udith discusses the effects of India's demonetization last year on the growth of the economy

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    Gavekal Research

    India Macro Update: After Demonetization

    India has been a strong growth story over recent years and offered a haven from the commodity boom-bust-boom cycle that has roiled emerging markets. However the investment climate has darkened in recent months due to the government’s surprise “war on cash” and the central bank seemingly coming to the end of its easing cycle. In this chart book, Udith and Tom take a systematic look at the macro environment and review the outlook for major asset...

    0
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    Gavekal Research

    A Win-Win Deal For Abe And Trump?

    This Friday Japanese prime minister Shinzo Abe will touch down in Washington for his second meeting with Donald Trump since the November 8 US election. The auspices hardly appear propitious. In the run-up to the meeting, the new US president has pulled out of the Trans-Pacific Partnership, a multilateral trade deal built largely around the US-Japan economic axis. He has railed against Japan for deliberately undervaluing the yen. He has bemoaned...

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    Gavekal Research

    India’s Budget: A Fine Balance

    After the fiasco that followed India’s move in November to scrap large denomination banknotes, yesterday’s budget was carefully calibrated to reassure jumpy markets. With the IMF estimating that the monetary bloodletting will drain 1pp off growth this fiscal year, doubts have resurfaced over India’s ability to realize its economic potential. The good news for nervous investors is that India remains wedded to fiscal responsibility. The bad news...

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    Gavekal Research

    Drawing Meaning From 2016, And A Roadmap For 2017

    Having experienced a rough 2016, the temptation for most investors is to clean the slate and start again. Unfortunately, life in financial markets does not allow for such neat endings. In one of his biggest reports in years, Louis argues that after such a complex and tumultuous year, it is essential for investors to draw a breath and derive some understanding of what just happened. Only then should they try to sketch out future scenarios.

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    Gavekal Research

    Audio & Transcript — Gavekal Research January Call

    Charles Gave argued that Donald Trump’s protectionist policy could lead to a breakdown of the post-1971 fiat money system that is based on a US dollar standard. Will Denyer deconstructed the likely workings of a new trade taxation regime in the US and explained what that means for currencies. Arthur Kroeber outlined the likely Chinese response to a US trade broadside and argued that Beijing was decently well placed to weather the attack.

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    Gavekal Research

    Emerging Markets Trumped

    In yesterday’s Daily, Louis argued that despite the renewed strengthening of the US dollar over the last couple of months since the US election, there has been no generalized flight out of emerging markets. Sure, Turkey appears to be experiencing a classic emerging market currency crisis. But as Louis noted, the collapse of the lira has been driven by peculiarly Turkish factors. There is little or no risk of contagion spreading to the broader...

    0
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    Gavekal Research

    Japanese Equities: More Where That Came From

    Japan is the top performer among developed world equity markets over the last six months, with the Nikkei 225 up 28% in local currency terms. Even in US dollar terms, the Japanese market has gained a robust 14%, enough to outperform an S&P 500 lent wings by the Trump trade. That strength is set to continue into 2017, with the Tokyo market remaining well bid on the back of a monetary policy stance that the Bank of Japan will find it hard—even...

    2
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    Gavekal Research

    The Alchemist’s Apprentice

    If done right urbanization can be considered development alchemy as it transforms surplus rural labor and simple building materials into the “gold” of economic growth. India has lagged China’s embrace of city life over the last 30 years, but that is now changing and the result could be transformative for the Indian economy’s growth outlook.

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    Gavekal Research

    The Gavekal Monthly: Our Top 12 Questions For 2017

    For our first Monthly of the year, we depart from our normal format to offer our thoughts on the dozen most important questions investors must face this year. Not surprisingly, the issues that rose to the top were the impact of the new Trump administration's policies on the dollar and US bond yields, and whether the eurozone will spend the year tearing itself apart. Also,oil prices, the risk of financial implosion in China, and where to...

    2
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    Gavekal Research

    Our 2016 Holiday Reading List

    “All books are divisible into two classes,” said John Ruskin, “the books of the hour, and the books of all time.” This year’s list of works enjoyed by Gavekal staff in 2016 includes books from both categories; among them are an account of Russian nationalism, an examination of the sharing economy, and a look at the future of Japan. Happy reading.

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    Gavekal Research

    The Unsustainable Oil Price Spike

    It took a while, but the spike in the oil price expected at the end of November finally occurred this morning in Asia, when front-month Brent crude futures briefly hit US$57.89/bbl, up from US$54.33/bbl on Friday. The jump higher was triggered by news over the weekend that a handful of major non-Opec producers led by Russia have agreed to cut their output by 558,000 barrels per day on top of the 1.2mn b/d reduction announced by Opec at the end...

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    Gavekal Research

    An Indian Payoff

    What was it that Kipling said about keeping one’s head, when all around you others are losing theirs? That was the Reserve Bank of India’s approach yesterday when it defied calls for an interest rate cut in response to severe economic disruption caused by the government’s hasty withdrawal of big denomination banknotes. The RBI downgraded its growth forecast for the year ending in March by just 0.5pp, and argued that price pressures remain a...

    0
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    Gavekal Research

    The Japan Reflation Trade

    About a month ago, Japanese investors learnt that a man who wants to rip up their prime minister’s prized free trade deal and potentially jettison Japan’s key security guarantees would soon be US president. After an initial wobble, they spent most of the last four weeks buying equities with such gusto that the Nikkei 225 is up almost 14%.

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    Gavekal Research

    Audio & Transcript — Gavekal Research December Call

    Louis and Anatole outlined their views on the new investment environment. Louis focused on the apparent contradictions in investors’ reaction to Donald Trump’s win in the US presidential election. Anatole argued that the US has almost certainly transitioned to a more inflationary growth path, but said it would be a slow build-up.

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    Gavekal Research

    Assessing EMs Vulnerability To The Trump Trade

    Emerging markets have faced selling pressure since Donald Trump’s US presidential election win started to drive treasury yields higher. EM debt funds saw their largest ever outflow the week after the election, while currencies have fallen on fears of trade protectionism and more talk of the US dollar being primed for a 1980s-style super-spike. Given this basket of worries, Joyce revisits her “emerging market relative balance sheet vulnerability...

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    Gavekal Research

    How Bad Is The Dollar Squeeze?

    This has not been your regular dollar squeeze. Over the last month, the cost of obtaining US dollars offshore has soared to levels last seen in “crisis” periods, yet bank equities have rallied the most in six years. Rather than a new crisis unfolding, we seem to be transitioning to a macro environment where dollars are structurally scarce. This will be challenging for weak link economies, as shown yesterday by adverse market moves in Brazil and...

    2
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    Gavekal Research

    Something's Gotta Give

    Louis Gave held a conference call on December 6 where he discussed the state of global markets as the US gets ready for a Trump presidency. The fundamental challenge for investors is that while equities and the US dollar have rallied strongly and bonds have sold off in a “Trump reflation trade,” it is not clear how long that trade can withstand the reality of Trump’s economic program.

    0
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    Gavekal Research

    A New Tech Cycle?

    Weak Japanese exports for October were not a big surprise given that the yen has been strong and global trade remains lackluster. Yet buried within recent (dreary) trade releases is evidence pointing to a new semiconductor investment cycle. The first signal, from official data at least, came in Japan’s 3Q16 GDP report which showed growth at 0.5%, versus an expected 0.2%, with the difference explained by exports of electronic components and...

    0
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    Gavekal Research

    Hong Kong Seminar — November 2016

    Arthur Kroeber presented his thoughts on the outcome of the US election, as well as an analysis of China's leadership politics. Will Denyer presented his thoughts on the US economy. Tom Miller gave an optimistic take on reforms in India under Modi's government.

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    Gavekal Research

    Why So Calm In Emerging Markets?

    Historically, a strengthening US dollar has been bad news for emerging markets; just think of the Asian crisis of 1997. And rising US long rates do not exactly help; consider the taper tantrum of 2013. Put them together then, and throw the prospect of greater trade protectionism into the mix, and the current global environment should be absolutely toxic for emerging market assets. Yet despite considerable local pain, notably in Mexico, the...

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