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    Gavekal Research

    ASEAN And Modern Political Risk

    Southeast Asian countries’ recent success in grabbing direct investment and portfolio inflows is rightly attributed to positive growth dynamics, good policy and moderate aggregate debt levels. Less often mentioned is the role of stable politics and stronger democratic institutions in securing this growth dividend. Viewed in these terms, governments in Indonesia the Philippines and even rambunctious Thailand are being financially rewarded for...

    0
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    BoJ's Latest Currency War Salvo: A Dud

    When Bank of Japan officials convened around a table for a policy discussion this week, they had to pull up extra chairs: two top ministers from Shinzo Abe’s government joined the discussions. This alone would seem to justify protests from the Bundesbank and other central banks that monetary policy independence is dead in Japan. Yet outgoing BoJ governor Masaaki Shirakawa, whose term expires in April, did not completely cave under the pressure—...

    5
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    Gavekal Research

    Japan Reflation Trade: 2.0

    “Buy the rumor, sell the fact” is never a bad trading maxim—except perhaps when the main actor on the stage is a central bank. Over the last three years the Federal Reserve has reminded us of the money printers’ potent capacity to depreciate a currency. Similarly, with the Bank of Japan expected on Monday to formalize the move to an aggressive monetary easing program and the upping of its inflation target from 1% to 2%, the tailwinds for a weak...

    0
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    Gavekal Research

    Stick With The Manila Thriller Ride

    The Philippine benchmark index rose 42% in US dollar terms last year and despite being the most expensive equity market in Southeast Asia, it has started 2013 on a tear. The concern, however, is that a booming economy may be starting to get bubbly. When one market watcher recently intoned gravely that Manila was like “Dubai on steroids” we drew breath. After all, construction cranes cover large areas of the city’s prosperous middle class...

    0
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    Gavekal Research

    Is Japan Gunning For Europe?

    It almost looks like Japan has Europe’s export champions in its cross hairs. Yesterday saw another significant bout of yen weakness and this time it was particularly pronounced against the euro. Indeed, the yen lost 1.8% against the single currency, the biggest one-day drop since mid-September last year and is now trading at ¥117.8/€, the lowest level since May 2011. Given that Germany is a major trade competitor, and that Japan recently...

    0
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    Gavekal Research

    Stay Long The High-Beta Asia Ride

    Asia is usually an easy, no-brainer, high-beta play on the return of global growth. Which explains why Korean and Chinese cyclicals, our favorite growth-focused proxies, have run up 10-20% in USD terms since November, outpacing the World MSCI’s 5% return. But after two months of lively momentum, growth-focused assets seem to have lost impetus. This can partly be explained by normal technical retracements after a heated run-up. But it may also...

    1
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    Gavekal Research

    Japan Shakes The World?

    The themes that obsessed financial markets in 2012 emanated from the US, Europe and China, and they were all largely negative. Now that the US fiscal cliff and a euro breakup have been averted, and China’s economy again proved it was not a massive investment bubble on the brink of implosion, attention should turn elsewhere. In 2013, Japan—where politics and monetary policy have suddenly got exciting—could prove to be a major story.

    10
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    Gavekal Research

    India: Growth & Reform For Re-Election

    With inflation still high, the Reserve Bank of India yet again refused to cut rates yesterday. Investors may be disappointed, but the RBI made the right choice. Though inflation has begun to decelerate, the fact is that India’s real interest rates are not particularly high in historical terms (see chart below). India’s major problem in 2012 has been a government paralysis on policy, or even the most basic economic actions like approving...

    0
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    Gavekal Research

    Thai Equities: The Burma Warrant

    Thai equities have saved the bacon of more than a few emerging market fund managers this year, due to a strong recovery from the 2011 flood disaster. But with the benchmark SET index up 32% YTD, valuations are looking a little rich at 15x earnings compared to 13x for MSCI Asia ex Japan. Since the domestic credit cycle is starting to get long in the tooth, investors will be looking for a fresh catalyst. Arguably, such a kicker lies across...

    0
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    Gavekal Research

    Japan's Big If

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    Gavekal Research

    What Kind Of Victory For The LDP?

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    Gavekal Research

    Indonesia Running Against The Clock

    Indonesia may not be partying like it was 1996, but the economic cycle looks to be increasingly mature. Swinging Jakarta has benefitted from cheap money, a bubbly property market and bulging shopping malls. And yet a sharply deteriorating trade balance suggests that Southeast Asia’s comeback kid may be nearing its near term growth limits.

    0
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    Gavekal Research

    The End Of Japan As A Global Shock Absorber

    5
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    Gavekal Research

    Japan: Good For A Bounce

    Japanese equities are rallying. The Nikkei gained over 8% in the last week, a relative outperformance of 5 percentage points compared to the US and key markets in Asia, while the yen has fallen 6%. Investor interest has been revived by hopes of an aggressive monetary and fiscal easing if the LDP returns to power in upcoming snap elections (see Sayonara Deflation...). We expect further upward pressure on equities, and downward pressure on the yen...

    1
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    Gavekal Research

    India's Fiscal Fantasies

    After a fall full of hope that reforms would put India back into the stratosphere of growth, it is time to get real. Measures announced in September may have boosted sentiment, but they have a negligible impact on growth (see India: Reforms On A Knife Edge for details). Now focus has shifted to new promises to rein in the fiscal deficit, a vital economic issue as the ballooning deficit has stoked inflation and the cost of money. But these...

    0
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    Gavekal Research

    Sayonara Deflation, Konnichiwa Yen Carry-Trade? - by Louis Gave

    Jesper Koll of JP Morgan once wrote that there are two simple rules to remember when investing in Japan. The first is to never underestimate the amount of pain that the Japanese population can endure. The second is to never underestimate the Japanese policymakers' ability to test the first rule. Nothing that has occurred in recent years challenges this observation. From the Japanese government’s hapless reaction to last year’s tsunami, to...

    3
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    Gavekal Research

    Bubble Trouble Averted-- Maybe

    The spillover effect of extraordinarily loose US monetary policy has provided a similar dilemma for both the Hong Kong and Singapore governments. Over the last two years, property prices in both financial centers have hit new highs, resulting in increased social tensions and fears of brewing bubbles. Added to the mix, money has poured into bricks and mortar from well-heeled investors in their immediate economic hinterland regions. As a result,...

    2
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    Gavekal Research

    Goodbye Default Risk, Hello Volatility

    The global scramble for yield has caused investors to pour billions into emerging market bond funds. In a remarkable twist on recent history, markets such as Mexico and Indonesia have started to look like havens in the storm. Yet investors would be wrong to conclude that risk has been removed from emerging market fixed income investing. While solid fundamentals and lower total indebtedness has undoubtedly cut the chances of default, we would...

    1
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    Gavekal Research

    The Other Election To Watch

    For 55 years the hegemony of the Liberal Democratic Party meant that Japan was effectively a one-party state with awfully predictable politics. Parliament was occasionally rocked by scandal or factional disputes, but the core business of government was stitched up over a cognac by like-minded officials, business leaders and party bosses. While it is easy to dismiss the Democratic Party of Japan as old wine in a new bottle, it is clear that the...

    0
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    Gavekal Research

    Asia's Equity Dispersion Stretched

    Sun drenched southern economies do not always do worse than their more regimented northern neighbors. Just look at Asia where the heavily-industrialized, and more export-orientated north has struggled since early 2011, while the ASEAN markets have had their best streak since the late 1990s Asian crisis. A dollar invested in the ASEAN markets in early 2011 would have generated 29 percentage points more return than one invested up north. But with...

    0
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    Gavekal Research

    Indonesia Asks Foreigners To Dig Deeper

    Indonesia’s resource exports have slumped and mining FDI has fizzled after the government earlier this year imposed tough new regulations on foreign investors. That, at least, would be a conventional interpretation of the resource sector’s weak performance following the imposition of export taxes and new government control measures. This simple narrative, unfortunately, ignores the reality that weak global demand has caused mining investments...

    0
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    Gavekal Research

    India: Reforms On A Knife Edge

    India’s stock market soared last month after the government announced a slew of market openings for foreign investors as well as a long-awaited diesel price hike. But enthusiasm is already waning, and earlier this week the RBI hit the nail on the head when explaining why: sentiment will only hold if the announced reforms are followed up with deeper action. Unfortunately, it is by no means confirmed that India has embarked on a new era of...

    0
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    Gavekal Research

    BOJ Meets, But Does Not Exceed Expectations

    An investor once told us “I keep a special day to remind me how much I dislike investing in Japan. I call it “Monday”. And it is true that, with an equity market not that far off its 1982 levels, this widespread disdain is understandable.

    3
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    Gavekal Research

    ASEAN Is (Really) Working

    The apparent resolution to a long running secessionist struggle in the southern Philippines has spurred the way for development in the resource-rich but impoverished province of Mindanao. A festering dispute, whose origins date to the period of US colonial occupation, was brokered by the Malaysian government which has also promised to help Mindanao develop plantations, build infrastructure and mine commodities. Such an engagement was unthinkable...

    0
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    Gavekal Research

    Will China Spur An Asian Rally?

    Overseas appetite for Chinese assets has been firing up Hong Kong this month. Capital inflows have forced the de facto central bank to twice intervene in order to alleviate appreciation pressure on the Hong Kong dollar. This hot money surge looks to be the result of investors betting on a stabilisation in the China growth outlook and improved domestic liquidity conditions—Chinese H-shares, quoted in Hong Kong are almost 8% higher on the month...

    4
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    Gavekal Research

    China And India's Outperformance

    One of our fears in the days that followed the QE3 announcement (see The Markets Since QE3) was that a lot of ‘weak hands’ would get ‘sucked in’ to purchasing risk assets; i.e. fairly uncommitted investors who nonetheless felt that, because of the Fed’s unorthodox actions, the risk of sitting on the sidelines was simply too great. Our concern was that if markets failed to sustain upside momentum, such investors would likely be the first to rush...

    0
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    Gavekal Research

    China Is Changing Fast

    5
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    Gavekal Research

    There's A Great Future In Plastics (And Chemicals)

    The US is arguably on the cusp of a manufacturing renaissance that will be driven by cheap shale-based energy (see The Next American Revolution). But in two important American industries that future is already here. After a lengthy decline from the 1990s, US trade in plastics and chemicals has shown a sharp recovery. When the stodgy Mr. McGuire told a young Dustin Hoffman in The Graduate that there was “a great future in plastics,” he was early...

    2
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    Gavekal Research

    A Story Told By An AUD Bond

    BHP Billiton is getting aggressive in debt markets. It borrowed US$5bn in September, and yesterday it sold A$1bn in bonds – its first issuance in its home currency since 2001, and one of the biggest issues ever in Australia by a non-financial corporation. Why the rush to borrow, and the return to local-currency funding? We suspect two reasons. First, BHP may believe that the AUD’s days of strength are over as the commodity boom fades. Second, we...

    0
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    Gavekal Research

    Japan's Power Play Options

    For anyone hoping that the Bank of Japan’s newly expanded asset purchase program might signal a weaker yen, recent days have been a wake-up call. The yen has strengthened against the dollar dealing a further blow to manufacturers. With the US and euroland set on a clear beggar-thy-neighbor monetary debasement track, Japan Inc needs all the help it can get if it is to remain viable in domestic manufacturing. That assistance will not come from...

    0
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    Gavekal Research

    Can India Get The Lay Of The Land?

    On the ladder to economic development, India missed the first rung. The transformation from an agricultural to an industrial economy is the essence of development, so the process must begin on the farm. But where northeast Asian countries implemented land reforms to boost productivity and rural savings, India balked. And where Japan, Taiwan, Korea and China enhanced the benefits of land reform with the right public investments and private...

    9
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    Gavekal Research

    Back To The Future In Malaysia

    Malaysia in recent months has emerged as Asia’s dark horse. Despite a heavy export dependence (more than 90% of GDP), it has bucked the slowdown seen in Taiwan, Korea and Singapore. Growth in 2Q12 beat expectations to come in at a perky 5.4% YoY. While consumption has ticked up slightly, Malaysia managed to defy the Asian export crunch largely due to a 26% increase in capital spending. The government has been quick to take credit, pointing to...

    0
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    Gavekal Dragonomics

    Natural Gas: Dreams Of Plenty

    Our natural gas sector report—organized into three sections examining the industry’s structure, value chain, and policy environment—aims to educate investors both on the large opportunities and equally large uncertainties presented by China’s push to use more of this clean-burning fuel. The main conclusions include:

    0
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    Gavekal Research

    China Rides The Nationalist Tiger

    Will a tiny group of islands really drag the world’s second- and third-largest economies into conflict? The unresolved dispute between China and Japan over a cluster of islands, known as the Diaoyu to the Chinese and Senkaku in Japan, has long been a pretext for both governments to rally nationalist sentiment. The long-running quarrel generally involves a lot of angry rhetoric and the occasional symbolic gesture but not much else. But with China...

    2
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    Gavekal Research

    India Breaks Out (Of Paralysis)

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    Gavekal Research

    Asian Equities: Export Victims & National Champions

    In recent years a winning investment strategy in developed markets has been to own global “export champions” over domestically-focused firms that we have labelled “national victims” (see Europe’s Three-Tier Equity Market). The export champs prosper principally because they have transposed their profitable business models to fast growing emerging markets. The victims, by contrast, generally toil in regulated industries, suffer from residing in...

    5
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    Gavekal Research

    Mongolia: A Run For The Exits?

    Is Mongolia at risk of missing the resource bonanza? At one level the question is absurd for a country with the world’s largest single copper deposit and huge reserves of coking coal. Consider the fact that Mongolia’s world class projects are located close to the border of commodity-hungry China and it truly appears to be a lucky economy. However, Mongolia needs foreign capital and know-how to extract this bounty. The problem is that a newly...

    0
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    Gavekal Research

    Tread Softly Into Korean Equities

    Last week we argued the case for Asian equities (see Look To Asia For Value). But with global growth still sluggish, which markets stand out in a region that remains heavily geared toward exports? Chinese growth, after all, has slowed, causing many of the corporate winners from the last cycle to come unstuck (see China’s Path to Reform). Southeast Asia has strong growth drivers but after a good run cannot be considered cheap. Looking across Asia...

    4
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    Gavekal Research

    Look To Asia For Value

    The outperformance of US equity markets has certainly been impressive. Since the start of 2010 the S&P 500 is up +26%, beating the MSCI AC World by 16 percentage points. This outperformance has been driven by both US corporate strength and the weakening EMU and Asian economies. While we remain convinced of the long term structural re-rating of US equities (see Once More Into The Breach or Weeks When Decades Happen) after such a period of...

    20
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    Gavekal Research

    ASEAN's Outperformer Risks

    ASEAN equities may account for only about 8% of total Asian trading volume, but in the past two years their impact has felt amplified. The region’s equities, as well as its bonds, have outperformed on the back of strong credit cycles, relatively low inflation and high growth, ratings upgrades and decent yield (see Go East Young Bond Buyer). So far, there are few signs that the momentum is waning. Year to date, ASEAN bond funds have seen net...

    5
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    Gavekal Research

    Vietnam Dodges The Tough Choices

    Vietnam is the great Asian economic paradox. It has a skilled work force, superb entrepreneurs, a large population (90mn) with favorable demographics, and a one-party government that ought to be good at mobilizing infrastructure investment. In short, it has all the makings of another Asian economic success story in the tradition of South Korea, Taiwan, and China. Yet despite fiddling with reform for two decades, the country has suffered from...

    2
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    Gavekal Research

    Risk On, Risk Off And The AUD

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    Gavekal Research

    Safe Is The New Risky

    This has been a year for the bears. By late July anyone invested in long-dated treasuries had 12 month gains of +35%—not bad for owning the world’s “safe haven” asset. But even havens can get overrun. UST gains have partially reversed in recent weeks with yields rising from 1.5% to 1.8%. The trigger was slightly improved US economic news and waning hopes that the Fed will adopt a QE3 monetary stimulus. For this reason, we recently argued that...

    0
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    Gavekal Research

    GaveKal Five Corners—Asia

    For years it was fashionable to bemoan the scourge of “hot money” inflows into China. Now, with China’s foreign exchange reserves registering falls in three of the last four months, it is fashionable to talk about “hot money” flowing out of China. Another bit of evidence for the coming collapse of China? Hardly.

    0
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    Gavekal Research

    BoJ Faces Market Pressure To Revise QE

    When the Bank of Japan extended its quantitative easing program in February, its stated aim was clear: stop the slide back into deflation. By extension the hope was to arrest renewed yen strength. The plan relied on increased purchases of government bonds in the hope that consumers would be nudged into spending, and investors into selling the yen. Those who envisaged a new dawn in Japanese monetary policy believed that the BoJ would finally...

    5
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    Gavekal Research

    Would The Last Investor To Leave India Please Turn Off The Lights

    How can India be an emerging global power if it cannot keep the power on? Tuesday’s world-record power outage, the second in two days, blacked out 18 Indian states with a population of 680 million. The outage seems to have been tripped by a handful of monsoon rain-deficient northern states taking more electricity than they were allotted. But India suffers regular blackouts because a paralyzed government cannot secure approvals to mine coal, fix...

    2
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    Gavekal Research

    Mongolia Takes The Slow Train

    1
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    Gavekal Research

    Mongolia Takes The Slow Train

    Mongolia’s transition from Soviet vassal state to fledgling democracy has the potential to open up its vast mineral resources and shift global commodity markets. But it is not easy to realize that potential, because of Mongolia’s tricky geopolitical position. Mongolia’s government is keen to avoid dependence on either Russia or China.

    0
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    Gavekal Research

    Thailand's Mekong Dividend

    Thailand continues to outperform many other emerging markets, despite ongoing political dramas and the lingering disruptions from last year’s devastating floods. The explanation lies in growth and stimulus: the country is in the midst of an expanding credit and investment cycle, in large part thanks to an ongoing “catch-up development” story unfolding in the provinces. The northeast region, in particular, is burgeoning due to an economic...

    3
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    Gavekal Research

    Export Wars: Germany 1, Japan 0

    Japan and Germany both started the new millennium with dominant positions in the global export market and both had strong incentives to keep it that way. Japan’s domestic economy was still deflating from an epic asset bubble burst, while Germany was reeling from unification with the East’s wrecked and unproductive ex-communist economy.

    2
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    Gavekal Research

    Unlocking Mongolia's Treasure Chest

    Commodity prices boom when supply cannot respond fast enough to rapidly escalating demand. Those booms are destroyed when enough new capacity emerges to restore market balance. The past decade’s boom in prices of metals and minerals has been driven by China’s apparently insatiable demand, and has yet to be dented by a sufficiently large response on the supply side. Mongolia could change all that: its plans for developing world-scale, low-cost...

    0
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    Gavekal Research

    Mongolia And Resource Nationalism

    The resource boom of the last decade was driven by Chinese demand, chronic supply bottlenecks and, especially in recent years, a rising tide of resource nationalism. The belief that national booty has been sold too cheap has led to the imposition of windfall taxes, forced contract renegotiations and export bans. In extremis the worry is that such actions could strangle industrial economies and crunch global growth. In the last week, Indonesia...

    1
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    Gavekal Research

    Inflation: Stout Indians & Slender Chinese

    In the first half of the 2000s, India leapt into the global economic vanguard by growing as fast as Japan, Taiwan, Korea and China in their periods of rapid “catch up” growth. But investors have now soured on India’s economic prospects as the virtuous cycle of high growth and capital inflows has given way to a vicious cycle of persistent inflation, capital outflow and reduced economic activity. High rates of inflation reduce incentives to invest...

    0
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    Gavekal Research

    Japan In The Limelight

    This is a big political week: important supreme court decisions in the US, another “make or break” European summit, and a Japanese vote to double the consumption tax to 10% by 2015. That’s right! Even the land where policy moves at a glacial pace should make headlines with a parliamentary vote scheduled for later today on a major reform of its tax code. The reason investors should care about this is because, if the Ministry of Finance achieves...

    3
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    Gavekal Research

    India Turns King Coal Importer

    India is an energy-hungry economy which must substantially boost electricity generation if rapid growth is to be sustained. Its problem is a heavy reliance on coal-fired power stations even while domestic coal mine output is stagnant. As a result, Indian power firms last year imported 118 million tons of coal (versus 170mt for China) and, on current trends, may quickly dominate the seaborne trade. Despite a slowing economy, Indian coal demand in...

    2
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    Gavekal Research

    Go East Young Bond Buyer

    In the past, when markets were in risk aversion-mode, Asian assets suffered, often in magnified terms. The chart on the following page underlines how even Asian investment-grade bonds become assets-non-grata in times of financial panic. Yet in the past few weeks, equities are holding up, and regional bonds have seen some support—despite the fact that risk-off mode remains firmly in place with the EMU mess still unresolved, China numbers still...

    0
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    Gavekal Research

    The RBI Does What It Can: Very Little

    We have been arguing for some time that India’s slowdown is a result of policy paralysis; the government will only move on reforms if it is forced by either an economic or political crisis. Yesterday the RBI held interest rates and the reserve ratio, despite government calls and investor expectations for loosening to counter the economic slowdown. This brave and responsible move essentially put the ball in the government’s court and added to the...

    0
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    Gavekal Research

    The Jakarta Property Show Goes On

    Lady Gaga’s risqué stage show may have been too hot to handle for Jakarta’s censors, but Indonesian property investors have kept on rocking. Property prices in the capital rose a sizzling +16% YoY in 1Q12 after adding +14% YoY in 2011; in some of Jakarta’s most desirable suburbs prices actually doubled last year. Indonesia’s robust economic growth and low inflation has boosted real incomes, while the banking sector, hobbled after the 1997/98...

    0
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    Gavekal Research

    Conventional Wisdom vs The March Of Events

    Over the past few months, we have had one of our young, intrepid analysts, Gavin Bowring, run around Asia and report from places investors do not always hear about. Gavin has penned missives from Inside a North Korean “SEZ”, explained how Bank Indonesia Bets On Growth, detailed The Window of Opportunity in the Philippines as well as The Reforms in Myanmar. Over the coming months, he will publish a couple of pieces on Mongolia and Vietnam....

    1
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    Gavekal Research

    China-Myanmar: Relationship Blues

    Myanmar’s transformation from pariah state to potential tiger economy has been a victory for progressive international diplomacy. The big loser in this southeast Asian game-changer has been Beijing since strategic and corporate interests developed over the last 20 years are threatened by a backlash against Chinese influence. We believe that Myanmar’s reform track is irreversible (see Myanmar: It’s For Real) and expect the country to reach out...

    1
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    Gavekal Research

    India: A Deeper Crisis Required

    We attended a lunch yesterday where a veteran Indian journalist offered us the following wisdom: “India will reform just like everyone else does: when it has a crisis.” India’s 1Q12 GDP came in at a wretched 5.3% YoY yesterday, even lower than the quarters following the global financial crisis. So the obvious question is: Was that enough of a crisis? Unfortunately, we think the answer is “no”. Even after the global financial crisis, India did...

    2
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    Gavekal Research

    Japan: A Test For Efficient Market Theory

    Do markets reflect the upcoming future; or the near past? In other words, do market players tend to remember their most recent experiences and project those forward? Or do they calmly study the future and discount all available information? This debate between “behavioral finance” believers and adherents to “efficient-market theory” has raged for decades. We believe that upcoming events may settle the argument once and for all.

    3
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    Gavekal Research

    Paradise Deferred For The SGD

    The Singapore dollar has slumped about 3% MTD against the US dollar as investors flee risk assets and seek safety. While clearly oversold on a technical basis, we wonder if recent moves signal an end to a 10-year appreciation track that has seen the unit rally more than 45% against the USD. The same question applies to a number of Asian currencies that have moved up toward fair value levels versus the USD over the last year. This matters since...

    0
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    Gavekal Research

    A Robot's Homecoming In Japan

    Recent reports have pointed to manufacturing jobs “trickling back home” to OECD countries, from washing machine production in the American rust belt to the ramp-up of niche textile mills in bombed-out northern English towns. This makes a certain sense in jobs-scarce economies, where wage demands are muted, and governments are often willing to throw in regulatory and tax incentives, thus narrowing the cost gap with offshore production centers....

    3
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    Gavekal Research

    Unsatisfactory Peace To Follow The War

    When Microsoft last month said it would pay AOL US$1bn for a patent portfolio, long-time readers started emailing to congratulate us on the vindication of our long-standing thesis that "knowledge is the world's most undervalued asset." What better proof than the outlandish prices which tech companies now pay to acquire intellectual property packages?(The Microsoft/AOL deal pales in comparison to last year's $4.5 billion...

    0
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    Gavekal Research

    Philippines: A Window Of Opportunity

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    Gavekal Research

    India Pays The Price For Reform Backslide

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    Gavekal Dragonomics

    Chilled, Fracked, Or Piped?

    The new investment in aspiring US gas exporter Cheniere Energy, which plans to open its first liquefied natural gas terminal in 2015, will bring cheap US gas one step closer to ravenous Asian consumers. Cheniere’s Sabine Pass project, which has already signed contracts for the majority of its output, now looks nearly certain to succeed, after the infusion of US$468m in capital from Temasek Holdings and private equity firm RRJ Capital. Others may...

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    Will India Be The Next China?

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    Myanmar: It's For Real

    Myanmar is undergoing a remarkable national transformation without the spur of revolution, governmental change or existential threat. A pariah military dictatorship is inching towards a more representative form of government that includes the opposition National League for Democracy (NLD). In parallel, a largely closed economy is opening to foreign investment and trade. Early beneficiaries will be property investors, mining and energy firms, and...

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    The Recent Odd Currency Moves

    An old and experienced client once told us “I have a special day to remind myself how much I hate investing in Japan. I call it ‘Monday’!” And to be sure, this “post-BoJ” Monday did not go nearly as we had hoped. The Bank of Japan essentially met expectations of an additional ¥5trn in stimulus on Friday, yet the yen (one of the ultimate “risk-off” currencies) and JGBs rallied, and Japanese equities pulled back aggressively. Over the same 72...

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    Why Has Gold Failed To Move Higher?

    We at GaveKal have never really been full-paid up members of the buried kruggerrand investment society. In fact, what we have written on gold over the years hardly covers us in glory. To put it bluntly, we have mostly missed the massive gold bull market. And not because we didn’t see the expansion in central bank balance sheets (that one has been hard to miss). Nor because we were turned off by the zeal of most gold bulls, who tend to display a...

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    The Paradox Of Korean Thrift

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    Will The BoJ Meet Expectations?

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    Gavekal Research

    The GK Asian Allocation Indicator

    Asia presents the global investor with a painful paradox. The world’s fastest growing region scores well on most economic indicators and yet Asian equity market volatility continues to be deadly. Despite out-performing over the last decade, Asian markets have not decoupled from their OECD brethren. Moreover, external shocks hit Asian equities harder as shown by their lagging performance over the last 12 months due to concerns about a Euro-zone...

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    Gavekal Research

    India's Not All Doom And Gloom

    India’s RBI cut policy rates by 50bp yesterday, and, to our knowledge, not a single newspaper or brokerage reported this news in a positive light. True, the cut is marginal and will probably not cause a significant uptick in growth given poor sentiment, high inflation and commodity prices, and an incontinent fiscal policy. But it is important to keep things in perspective. Indian growth estimates still range around 7%. Structurally, India is...

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    Gavekal Dragonomics

    Chinese Exports' Second Wave

    As any casual visitor to the “Made in China” aisles in Walmart or Carrefour can attest, China’s prosperity has relied heavily on the export of cheap consumer goods to rich countries. But the image of China’s exporters as a phalanx of sweatshops churning out T-shirts and toys for American and European shoppers is outdated. Most of the growth in Chinese exports now comes from industrial goods—earth movers, telecoms network gear, construction...

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    Gavekal Research

    Robot Revolt: Picking The Next Intel

    Bill Gates forecasted that new generation robots may become as ubiquitous and have as transformative an effect as the personal computer. In the home, the rich world’s graying populations are forecast to soon rely on robots to conduct chores such as washing and cleaning. If such predictions prove half right then huge upside can be secured from identifying the early winners – put another way it may be like buying Microsoft or Intel stock in the...

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    Gavekal Research

    A Study In Constrasts: The BoJ & PBoC

    In early February the Bank of Japan promised a monetary expansion, while China vowed that its tightening regime was far from over. But of course, equity investors do not always get what they are promised. It now looks like the roles have been reversed.

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    Gavekal Research

    Our Indicator For Asian Currencies

    As our regular readers know, we fully expect a structural appreciation of the Asian exchange rates. They are still cheap, the region’s economies are growing and Asian fiscal positions remain very healthy. However, as the experience of recent years has shown, this journey will not be made in a straight line. Asian currencies fell precipitously during the Global Financial Crisis, only to bounce back spiritedly shortly afterwards. From trough to...

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    Gavekal Research

    Inside A North Korean "SEZ"

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    India's Credibility Deficit

    When India’s government announced a reasonably disciplined budget around this time last year, stocks rallied for several weeks afterward. This year’s budget proposal, unveiled on Friday, was viewed with a much more jaundiced eye. In particular, commentators collectively rolled their eyes at the goal to bring the FY12 fiscal deficit target to 5.1% of GDP, from the current 5.9%. And no wonder: this 5.9% compared to last year’s target of 4.6%. The...

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    The Strong Dollar And Asia

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    Japan Gets Exciting

    At this stage, one of the most important questions for Japanese, and international, investors is whether we have started new trends on the JPY (lower) and on the Japanese equity markets (higher). Indeed, since the beginning of February and the BoJ’s 1% inflation-targeting announcement, the yen has depreciated against every major currency (more than –9% vs the US$ and Korean Won, and –8% against the Euro). On the back of this renewed weakness,...

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    Gavekal Research

    The Markets Are Right On Asia

    It is hard not to notice a certain disconnect between what policymakers in emerging Asia are saying about growth, and what markets seem to be anticipating based on the rally in Asian equities since October (notwithstanding the last couple of days). Asian policymakers have, for the most part, offered very glum outlooks, pointing especially to a weak global export market. While some of the recent data would reinforce this wariness (e.g., falling...

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    The BoJ Uncertainty

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    India's Prickly Politics Of Recovery

    India’s GDP growth fell to 6.1% in 4Q11, mining the depths it hit during the global financial crisis. This is probably a cyclical trough, but the growth pickup in coming quarters is likely to be weak. With inflation running on the high side and the oil price rising, the Reserve Bank of India has little room to cut rates to boost growth. So it is up to the government to revive languid private investment by cutting its budget deficit and pushing...

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    Gavekal Research

    Thailand: The Vestiges of 1997

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    A Hedge For Uncertain Times

    There are two fundamental ways to view the current bull market: either we are seeing a sustainable improvement in global growth prospects, or we are witnessing a liquidity-infused rally that will evaporate as soon as central bankers stop pumping extra money into the markets. Optimists lean more towards the former explanation, but one can never be sure. Thus the need to hedge against a long equities bias—and to us the best medium-term hedge is to...

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    Gavekal Research

    The Kindling And The Fire

    Inflation in the key Asian city-states of Hong Kong and Singapore is dangerously resilient: Hong Kong’s CPI reading jumped to 6.1% in January, and Singapore’s CPI has remained well above 5% for several months. This comes as both cities have spent several years building the monetary and fiscal equivalent of a pile of kindling. Recently, the Fed and ECB have been playing with matches. We should not be surprised that the kindling has started to...

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    Gavekal Research

    A Checkup On Asia's 'Building Craze'

    Asia’s emerging economies may spend US$8trn on infrastructure before this decade is out, if they follow the ADB’s recommendations. That is, obviously, a lot of money: it is bit more than the total pre-tax corporate profits earned by US companies in the past ten years (US$7.6trn, based on the flow of funds data); and a lot more than estimated annual gross domestic savings in Asian emerging markets of US$5trn. Even big-spender China took about a...

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    Gavekal Research

    Where The Rubber Meets The Road

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    Did The BoJ Just Lay Down Its Cards?

    Jacques Rueff famously said that inflation subsidizes expenditures that give no returns with money that does not exist. According to this definition, yesterday’s decision by the BoJ to increase its asset purchase program from the existing ¥55trn to ¥65trn, all of which will be done through an additional purchase of long-term JGBs before the end of this year, should help the BoJ hit its new objective of a 1% annual increase in CPI. A reality...

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    Gavekal Research

    Bank Indonesia Bets On Growth

    Last week we explained the structural reasons why Indonesia is unlikely to realize the economic growth potential that has made it one of the darlings of emerging-market investors (Indonesia’s Missed Opportunity). This week we offer a more optimistic interpretation, based on a fascinating battle now brewing between the central bank, Bank Indonesia, and the commercial banks. In most countries, commercial banks lend recklessly until the central...

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    Indonesia's Missed Opportunity

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    Is The Asian FX Hedge Back?

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    Monthly Chart Book - Asian Economies Face The 'Chinese Century'

    In this, our last and final monthly chart book before returning to our quarterly format, we take a close look at the main economies of northeast and southeast Asia, other than China. Over the past decade, all these economies have had to adjust to the reality of life as satellites of the neutron star that is China. Before the Asian Financial Crisis of 1997-98, China -- despite its spectacular growth rates -- only accounted for one-third of GDP...

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    Gavekal Research

    Burma's Cash-Poor Farming Sector

    While the recent flurry of interest in Myanmar/Burma has largely focused on its rich energy and natural resources potential, and possible low-end manufacturing/industry relocation, by far and away the largest employer of its 60 million population is the agricultural, rural economy. We recently read an excellent study by Burma expert David Dapice of Tufts University, called “Recapitalizing the [Burmese] Rural Economy”, based on a year-long, on-...

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    Gavekal Research

    Japan it is a-Changing - Really!

    Forecasting dramatic change in Japan has not been a rewarding exercise for most of the past two decades. Nonetheless, we believe that several catalysts are now aligning that could cause a change fairly soon in the recent status quo of high yen, low bond yields, undervalued equity market valuations and low volatility. The key factors include:

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    Structural Pain in Philippine Exports

    Asian exporters have had a rough ride over the past year. But even in that company, the Philippines has had a staggeringly hard run, with exports falling for seven straight months, including November’s –19.5% YoY plunge. One would think it was the Philippines, rather than Thailand or Japan, that suffered a natural disaster this year...

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