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    Gavekal Research

    Why Malaysia’s Falling Knife Is Worth Catching

    The downgrade of Brazil’s debt last week to junk status has renewed fears that emerging markets may face another vicious sell-off. To date EM angst has mostly focused on resource exporters made fragile by the China-induced commodity bust. But the prospect of an imminent US interest rate hike has focused attention more generally on markets with heavy foreign currency debt exposure. Malaysia looks to face the worst of all worlds as its external...

    8
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    Gavekal Research

    Deleveraging In The Emerging World

    There has been a lot of talk in recent weeks about the collapse in emerging market currencies, with extravagant comparisons to the 1997-98 crisis. In reality, however, there is no “crisis”. Over the last three years an equally-weighted index of major emerging market currencies has fallen no more against the US dollar than an index comprising the euro and the yen. And despite all the recent turbulence in financial markets, there have been no...

    1
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    Gavekal Research

    Has The Asian Currency Collapse Run Its Course?

    The past four months have seen an unprecedented divergence in the performance of developed market and emerging market currencies, with Asian units getting sucked into the EM downdraft even though their manufacturing-heavy economies should, on paper, be beneficiaries of the commodity collapse. Or to be more specific the more than 10% decline in Asian currencies against the euro over the last four months has been a near two standard deviation...

    0
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    Gavekal Research

    The US Current Account Deficit And World Markets

    Spotting turning points in the US current account is central to Gavekal’s research method, as such shifts impact all other economic relationships. When the US dollar is strong the US tends to run a big current account deficit, providing the world with lots of “earned dollars.” Conversely, a weak dollar eventually leads to a shrunken US current account deficit and more incentive to borrow in dollars. Big moves in the dollar exchange rate create...

    0
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    Gavekal Research

    The Four Horsemen Of The Apocalypse

    Markets are entering bear market territory and what vexes Charles and Louis is whether the root cause is a liquidity crunch, a solvency crisis or a deflationary bust. In this wide ranging chart book they explore the problem through the revelatory prophecy of four riders whose presence marked the coming of judgement day. We don’t mean to pile on the misery in what is shaping up as a tough week and the moderately good news is that the-end-of-times...

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    Gavekal Research

    No Light At The End Of The Tunnel

    Four years of grizzly underperformance has turned everyone into an emerging markets bear. First it was the currencies of the twin deficit countries that took a hit in the 2013 taper tantrum. Then it was the EM resource producers that faced the crunch when commodity prices halved in just 12 months. Now liquidity which had found its way into the healthier emerging markets in Asia is rushing out the door after China’s currency shock tilted the risk...

    1
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    Gavekal Research

    A Solvency Crisis Or A Liquidity Crisis?

    Over the past five years, critics of zero-interest rate policies have typically fallen into one of two camps:

    0
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    Gavekal Research

    Emerging Asia’s Nightmare

    The investment case for Asian currencies has been a tough one to make over the last year as stagnant global trade and a stronger US dollar has constrained the growth outlook. Still, until this week’s “renminbi shock”, the region’s reasonable fundamentals and decent yields continued to justify a holding in Asian currencies. After China’s “devaluation”, this risk-reward position has changed as regional currencies look like prime victims of Beijing...

    0
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    Gavekal Research

    Sorry Singapore Patriots, You Are A Great Short

    On most matters the Gavekal house view is best explained by the fact that we don’t have one. Charles for now stands out as the house bear due to his concerns about a global system enfeebled by policymakers’ misguided efforts to ameliorate all risks. Our more bullish group, led by Anatole, reckons that “creative destruction” is afoot, but outdated national income accounting tools are not capturing the benefits delivered by digital globalization....

    1
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    Gavekal Research

    Japan’s ROE Revolution

    The adoption of a UK-style “stewardship code” and an officially sanctioned index of companies that satisfy minimum corporate governance standards (JPX-Nikkei Index 400) marks a serious attempt by Japan to boost both corporate productivity and shareholder returns. This effort is integral to the economic rejuvenation plan of Prime Minister Shinzo Abe, and arguably failure is not an option for an economy that a few years ago had started to flirt...

    0
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    Gavekal Research

    Growth & Markets Monthly (August 2015) – by Pierre Gave

    Our latest monthly indicators look to have taken on a somewhat schizophrenic character. On the growth side, our main indicator of global economic activity is perking up, implying a stronger second half of the year. But our diffusion index of OECD leading indicators is clearly heading south, as are commodities. A similarly bifurcated story can be seen on the risk-appetite side. Our velocity indicator has registered improvement and short term...

    1
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    Gavekal Research

    Five Corners (July 29): The Slowdown In Trade

    Overview: After years in which the world’s major governments have been busy manipulating prices, Charles Gave finds it astonishing that anyone should be surprised by the current slowdown in global trade.

    0
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    Gavekal Research

    5C Asia: No Escape From The Regional Trade Slowdown

    Asia’s trade performance has been disappointing. After a two-year post-crisis rebound in 2010-2011, export growth in the region has slowed to an annual average of 7.5% in US dollar terms and 6% in volume terms. Compare that with US dollar growth rates of 30% seen in the years before the crisis.

    0
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    Gavekal Research

    5C Overview: Why The Surprise At Slowing Trade?

    I am afraid I am rapidly turning into Gavekal’s resident bear—asleep half the time, grumpy the rest. In particular, I am amazed how some people have suddenly discovered that world trade is going nowhere, and that they are so bamboozled by this strange pattern. Where exactly have they been for the last 15 years?

    0
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    Gavekal Research

    Not A People’s Republic-An Empire

    We often say that money managers are not paid to forecast, but to adapt. The challenge, of course, is knowing what to adapt to. For example, an investor picking up a copy of today’s Financial Times will be left scratching his head over the importance of the Greek crisis to the future of the eurozone, the likely impact of coming US Federal Reserve rate hikes, and how the deepening oil supply glut will affect global markets. In our latest...

    1
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    Gavekal Research

    Indonesia: One Step Forward, Two Back

    Almost a year after Joko Widodo blew through Indonesian politics like a breath of fresh air to win the 2014 presidential election, international investors’ enthusiasm for his country has all but evaporated. Under Jokowi, as the president is known, policy has disappointed, growth has slowed further, the current account deficit has failed to improve significantly, the rupiah has slumped, and inflation has mounted—keeping interest rates high and...

    1
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    Gavekal Dragonomics

    For Beijing, It’s Goodnight Vietnam

    Vietnam recently scrapped foreign ownership caps across a swathe of industries as a spur to its stalled program to privatize state-owned enterprises. It has signed up to the proposed Trans-Pacific Partnership, a US-led attempt to boost trade and investment in the Asia-Pacific, and is pursuing a free trade agreement with the EU. Liberal-minded Vietnamese are hopeful that the reformist prime minister, Nguyen Tan Dung, will take over as Communist...

    0
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    Gavekal Research

    For Beijing, It’s Goodnight Vietnam

    Vietnam recently scrapped foreign ownership caps across a swathe of industries as a spur to its stalled program to privatize state-owned enterprises. It has signed up to the proposed Trans-Pacific Partnership, a US-led attempt to boost trade and investment in the Asia-Pacific, and is pursuing a free trade agreement with the EU. Liberal-minded Vietnamese are hopeful that the reformist prime minister, Nguyen Tan Dung, will take over as Communist...

    0
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    Gavekal Research

    Five Corners (July 15): Deflation Redux

    Overview: When governments interfere with the price discovery mechanism, most people believe the inevitable result is runaway inflation. On the contrary, argues Charles Gave, official manipulation of prices threatens to plunge us all into deflation. United States: Tan Kai Xian examines the marked divergence between goods prices and services prices and ponders what it means for the overall US inflation outlook. Europe: As the eurozone inches its...

    0
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    Gavekal Research

    5C Asia: Is Deflation Japan’s Disease, Or Just A Symptom?

    For a generation the words “Japan” and “deflation” have been inseparable in the minds of economists. The association is so entrenched that it is universally taken for granted that the central aim of Japanese economic policy must be to defeat deflation and, by extension, that any inflation must be a good thing. The result is the massive monetary expansion being undertaken by the Bank of Japan.

    0
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    Gavekal Research

    Growth & Markets Monthly (July 2015)

    With the drama in Athens casting a pall over markets, what is the message from the Gavekal dashboard of economic and risk indicators? Overall, reasonably positive. Our main growth indicator suggests that the momentum of economic activity should pick up in the second half of the year. If correct, this would mark a repeat of the pattern seen in the last few years. Still, given the uncertainty associated with the Greek situation, there has been a...

    0
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    Gavekal Research

    Japan’s Sustainable Bull Market

    Plenty of old hands who thrived in Japan’s 1980s bubble era spent the next 25 years watching a structural bear market unfold and are starting to opine that history may repeat itself. With due respect to this grizzled breed, we are skeptical about historical comparisons and reckon that the combined drivers of the modern Japanese market offer a rare opportunity. Ironically, one of the biggest factors supporting Japanese equity values is that...

    1
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    Gavekal Research

    Five Corners (July 01): Manufacturing Machinations

    Overview: Charles Gave argues that the manufacturing sector remains the last bastion of proper economic data in the US, and the message being sent is not good. United States: Tan Kai Xian somewhat demurs from Charles and argues that the US manufacturing sector is unlikely to be the fountainhead of the next US recession. Europe: Central Europe has emerged as the manufacturing powerhouse of Europe at the expense of France and the southern...

    0
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    Gavekal Research

    5C Asia: “Make In India”, But For Who?

    Last year Indian prime minister Narendra Modi unveiled his “Make in India” initiative in an attempt to replicate the successes of the tried and tested East Asian development model in which economies pursue export-led manufacturing growth. To boost the share of manufacturing in output—currently at 16%—and its contribution to employment—around 12%, mostly in the “informal” sector—Modi outlined a number of key policies. But while developing...

    0
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    Gavekal Research

    Buy India On Bank Reform

    In recent months India has offered investors incrementally bad news due to bad monsoon rains, the government suffering a series of political missteps and a tougher external financing environment as higher US interest rates are contemplated. Moreover, the gradual rise in the oil price has diminished the growth-boosting dividend that India won in the second half of last year. So it was pleasing to get some “good India” news yesterday with the...

    2
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    Gavekal Research

    Still A Lonely Power

    China, the political scientist David Shambaugh declared last year, is a “lonely power”—lacking close friends and possessing no allies. That is something that Xi Jinping’s “proactive” foreign policy aims to change. His New Silk Road vision—now officially termed the “Belt and Road Initiative”—is to forge a “community of shared destiny,” in which Asia’s prosperity is tied to China’s rise. Rather than building formal alliances, Beijing’s goal is to...

    0
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    Gavekal Research

    Yen In The Hands Of Foreigners

    Having traded in a tight range since late last year, the Japanese yen made a technical breakout last week, weakening beyond ¥125 to the dollar for the first time since 2002. While Bank of Japan governor Haruhiko Kuroda came out to jaw-bone against more falls, higher volatility is a worry for investors who have grown used to making Japanese equity gains in US dollar terms. We would stick with Japanese stocks which continue to benefit from strong...

    2
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    Gavekal Research

    Thinking Big About China

    There are two big facts about China today. One: its economy is slowing, and will almost certainly continue to do so for the next couple of years. Two: under its forceful president Xi Jinping, it is making a big push on many fronts to increase its influence around the world. The question is which of these facts deserves more attention.

    2
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    Gavekal Research

    The Spat In The Spratlys

    It is typhoon season once again in the South China Sea. Last May, China ignited a storm of violent protest across Vietnam when it started drilling for oil off the Vietnamese coast. This year the squall is further south in the disputed waters of the Spratly Islands, where the US has demanded that China halt its land reclamation efforts. Ordered to leave the area by the Chinese military last week, a US Navy surveillance aircraft ignored the...

    0
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    Gavekal Research

    Five Corners (3 June): Shifting Capital Flows

    Overview: Louis Gave traces China’s rejection of planned economy shibboleths over the last 30 years and contends that Beijing is charging full tilt toward the final frontier: the liberalization of capital itself. United States: With the strength of the US dollar favoring imports over US-made goods, the US current account balance is set to deteriorate. This, argues Will Denyer and Tan Kai Xian, will mean a bigger supply of US dollar liquidity in...

    0
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    Gavekal Research

    5C Asia: A Buffer Against Future Taper Tantrums

    Asia’s fragmented financial markets have grown a great deal more inter-connected since the currency crisis of the late 1990s. Even so, regional financial integration still lags far behind real sector integration. According to International Monetary Fund data, intra-regional shipments now make up the lion’s share of Asia’s cross-border trade. In contrast, even though their share has doubled over the last ten years, intra-Asian equity flows make...

    0
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    Gavekal Research

    Growth & Markets Monthly (June 2015)

    This month saw a clear deterioration of our growth indicators. The pattern of the last few years with a weaker than expected first half of the year appears to be holding up. The question is whether 2015 will see the habitual pick-up in the second half of the year? On the inflation front, things remain quiet. US breakeven inflation rates, which looked as if they may have been breaking upwards last month, are now heading south again. Given the...

    0
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    Gavekal Research

    5C Overview: First You Get The Money

    In Scarface, Al Pacino observes “First, you get the money, then you get the power, then you get the women”. To some extent, this sums up the challenge facing China’s leadership. Indeed, the lesson the Party learnt once Deng Xiaoping took over from the power-mad Mao Zedong was that ceding control over a part of the economy delivered more power internationally as booming growth made China a more credible regional, then global, power.

    0
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    Gavekal Research

    A Question Of When, Not If

    The cacophony emanating from China can be disorientating. On the one hand, China’s domestic stock markets are in the throes of a vigorous bull run. Locally-listed equities are up 140% in the last 12 months, with repeated government support measures and rising openness to international fund flows sustaining the momentum. On the other hand, China’s economic growth continues to slow, while the geopolitical drumbeat is increasingly daunting. With...

    0
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    Gavekal Research

    Why Germany Is Not Turning Japanese

    Germany has economic problems that most countries would die for—low unemployment and steadily rising real wages mean that policymakers must respond to bottlenecks such as labor shortages (see Germany Normalizes). The longer-term worry is that these “gaps” will become permanent as high-growth Germany must also grapple with Japanese-style demographics. The fear is that its post-2010 expansion could be a swan song before the structural growth...

    0
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    Gavekal Research

    Five Corners (20 May): Assessing Oil's Comeback

    Overview: In light of the rebound in oil prices Anatole Kaletsky questions his own view that the oil market is becoming driven by “marginal cost producers”, rather than classic monopoly dynamics.

    0
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    Gavekal Research

    The Next Phase Of Japan’s Bull Market

    Japanese equities continue to benefit from a situation where corporate growth is decent, but the outlook is not so hot as to spur central bank tightening (see A Japanese Goldilocks). The Nikkei 225 is again close to its peak in 2000, despite the yen having pretty much flat-lined against the dollar since late last year. Still, is this really sustainable considering that Japan remains highly dependent on external demand and the kicker from the...

    0
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    Gavekal Research

    The Dissonance In Markets

    Perhaps the biggest challenge confronting investors today is the disconnect between financial markets and economic data. Indeed, despite weak readings from the growth locomotives of the global economy (China and the US), recent weeks have seen bonds selling off, commodities going on a tear, and deep cyclical equities experiencing huge rebounds. In short, while economic data is pointing towards a mediocre global growth outlook, markets are...

    1
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    Gavekal Research

    5C Overview: Regime Change In The Oil Market Only Just Starting

    Since late last year, when the battle for oil market share broke out between OPEC and the US frackers, we have argued that this is not just a contest between rival groups of producers, but between distinct pricing regimes, based on very different economic principles (see Will US$50 Be Oil’s Floor, Or Its Ceiling? and The Macro Dividend From Oil).

    0
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    Gavekal Research

    5C Asia: Malaysia Will Manage To Contain The Pain

    Unlike many oil and commodity-dependent emerging economies that have seen growth collapse, Malaysia looks to be doing just fine—its economy grew at 5.6% YoY in 1Q15, roughly in line with its post-2009 average. Hence, even as the Malaysian ringgit continues to track the oil price lower, an argument can be made that the markets have got it wrong.

    0
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    Gavekal Research

    New York Seminar May 2015 - Anatole, Louis, Joyce & Will

    We held our US spring seminar in New York on May 11, with Anatole, Louis, Joyce & Will offering their views on the most important developments in the global economy.

    0
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    Gavekal Research

    Why Asia Should Suck Up Tantrum II

    Asian currencies took a hit yesterday as the ongoing global bond market sell-off forced capital outflow. Yet unlike the “taper tantrum” of two years ago, the region has navigated this sell-off with limited collateral damage—emerging Asia’s benchmark bond index has fallen by -3% in the last two weeks compared with a -19% peak-to-trough slump in 2013. In this piece we are not going to opine on the outlook for global bond markets as our last two...

    0
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    Gavekal Research

    A Sino-Indian Powerhouse?

    Next week the leaders of the world’s two biggest emerging economies will meet for talks in Beijing. Together, China and India have a population of 2.6bn—36% of the global total—and a GDP exceeding US$12trn. They share a border nearly 4,000km long. Yet China trades more with Thailand than with its most populous neighbor, and there are eight times as many flights between Beijing and Bangkok per week as there are between Beijing and Delhi. The weak...

    1
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    Gavekal Research

    Why Brazil Trumps India

    The last year has been tough for emerging market investors—a recent survey showed that only 20% of actively managed EM funds beat their benchmark compared to an average 60-70% over the past five years. Recent weeks have not provided much respite with out-of-favor, commodity-rich markets like Russia and Brazil going on a tear, while much loved darlings such as India have taken a pounding.

    0
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    Gavekal Research

    Embrace The Asian Deflation

    The specter of deflation continues to threaten big chunks of the global economy and the alarm has even spread to China after the GDP deflator was revealed to have slipped into negative territory in 1Q14. Our starting point is that deflation does not have to be some grizzly beast that must end with soup kitchens, for as Charles has forcefully argued, periods of falling prices have in the past been associated with rapid capital formation and...

    0
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    Gavekal Research

    Five Corners (6 May): The Weakness In Wages

    Overview: Charles Gave wonders why in spite of policymakers having the best of intentions, their efforts have caused declining productivity, lower median incomes and fewer quality jobs. United States: The labor market is no longer a clear indicator of the US economic cycle, says Will Denyer, who looks for new insights into what variables may guide the Fed in its policymaking. Europe: Although jobless numbers have fallen across much of the...

    0
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    Gavekal Research

    Growth & Markets Monthly (May 2015)

    While our growth readings ticked higher last month, the big shift came with a sharp rise in our risk appetite indicators. We also note an easing of deflationary pressure with the US breakeven inflation level registering a nine-month high. On the liquidity side, the European Central Bank has cranked up its expansionary efforts and its balance sheet is rising at 16% YoY. Taken together, these moves have benefited equity markets (notwithstanding...

    0
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    Gavekal Research

    The World's Most Crowded Trade

    Markets are made at the margin. As a result, the key driver of prices for a given asset is the question of where the marginal buyer (or seller) comes from. This is why very crowded trades can prove dangerous: by the time every one and their dog is convinced that (i) the euro can only go down (early 2015), (ii) being short long-dated bonds is the single best trade out there (early 2014), (iii) underweighting European equities is the easiest path...

    6
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    Gavekal Research

    5C Asia: Japan’s Wageless Recovery

    Unlike the countries of the eurozone, which are plagued by persistently high unemployment, Japan is suffering from a labor shortage. Yet despite the dearth of workers, economic recovery has not fed through into wage rises—a cause of much frustration in Tokyo.

    0
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    Gavekal Research

    Whither US Manufacturing

    US economic data has started to surprise on the downside, and much of this can be attributed to the manufacturing sector. This is worrying since the sector often leads the general economy. Hence, the $64,000 question is whether we should be bracing for an unscripted recession? Our answer is no, but investors should underweight the US manufacturing sector. In the near term, price adjustments, largely stemming from the energy and commodity price...

    3
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