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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

    0
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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

    0
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    Gavekal Research

    India Pays The Price For Reform Backslide

    0
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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...

    0
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    Gavekal Research

    Will India Be The Next China?

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    10
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    Gavekal Research

    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...

    2
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    Gavekal Research

    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...

    9
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    Gavekal Research

    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...

    0
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    Gavekal Research

    The Paradox Of Korean Thrift

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    Gavekal Research

    Will The BoJ Meet Expectations?

    0
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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...

    2
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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...

    0
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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...

    1
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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...

    7
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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.

    4
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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...

    1
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    Gavekal Research

    Inside A North Korean "SEZ"

    2
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    Gavekal Research

    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...

    0
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    Gavekal Research

    The Strong Dollar And Asia

    0
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    Gavekal Research

    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,...

    0
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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...

    0
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    Gavekal Research

    The BoJ Uncertainty

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    Gavekal Research

    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...

    2
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    Gavekal Research

    Thailand: The Vestiges of 1997

    0
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    Gavekal Research

    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...

    4
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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...

    3
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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...

    2
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    Gavekal Research

    Where The Rubber Meets The Road

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    Gavekal Research

    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...

    8
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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...

    3
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    Gavekal Research

    Indonesia's Missed Opportunity

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    Gavekal Research

    Is The Asian FX Hedge Back?

    7
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    Gavekal Research

    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...

    1
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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-...

    0
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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:

    13
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    Gavekal Research

    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...

    0
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    Gavekal Research

    Mansions in Communist India

    We recently visited Kochi, a port city in the southwest Indian state of Kerala. Fort Kochi, formerly a Portuguese and then Dutch colony, is a major tourist destination. Most visitors take in Fort Kochi and then head down to the “backwaters” for a boat tour of this a chain of brackish lakes and waterways that head inland along the Keralan coast. The drive down from Kochi to the city of Alleppey, where most set off into the backwaters, yielded...

    0
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    Gavekal Research

    Daily - Will 2012 Be Better for Asian Assets?

    For those of us based here in Hong Kong, 2011 was a year that saw soaring office rents, restaurants booked out, taxis hard to hail, airplanes and subway trains packed, and even bouncer-controlled queues at designer handbag shops. In other words, from the ground, it felt very much like a roaring bull market. The problem for investors, however, is that it did not trade like one. In fact, Asia underperformed in nearly all categories; stocks sold...

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    Daily - The Not-So-Strange Stability of Communist Regimes

    Why do repressive regimes stick around for so long? And when they finally fail, why do they fail? Earlier this year we saw protests which toppled long-standing dictatorships in Tunisia in Egypt in a matter of weeks, and an insurrection that ended Muammar Qaddafi’s hold on Libya in a few months. Stable on the surface, it turns out these autocracies were built on foundations as sandy as the deserts they governed.

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    Indonesia Gets Its Upgrade & Its Land Bill

    Last week was a good one for Indonesia. On Thursday Fitch Ratings upgraded Indonesia’s long-term debt to investment grade, and on Friday the parliament passed a hotly-debated land acquisition bill. The first piece of news brought immediate awards for bond holders, but we believe the second is actually more important for Indonesia’s long-term prospects.

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    Europe's Drag on North Asian Exports

    A lot of ink has been spilt trying to analyze the impact of the ongoing EMU crisis with respect to Asian funding needs—after all, a significant share of Asia’s trade financing (USD) comes from European banks (see The Global Funding Environment and Asia). By contrast, there seems to have been less focus on what Euro crisis could mean for Asia’s export industry. And the signs here are not encouraging: Overall, developed world leading indicators...

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    Singapore Property: A Big Change in the Pipeline?

    Singapore property has been a great investment story over the last few years and the city state has a number of key fundamental attributes that will allow it to continue to attract growth and business opportunities for many years to come. Yet unlike Hong Kong, another Asian financial capital that experienced a huge run-up in residential property values, few are calling for a sharp correction in Singapore. Indeed, both Hong Kong and Singapore...

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    Daily - Getting Over Delhi-Belly

    A steady flow of terrible news has issued from the Indian sub-continent recently. The Sensex took a 1,000 point dive in the days following Prime Minister Singh’s embarrassing reversal on efforts to open India’s retail market to greater foreign investment. Meanwhile, India’s commerce ministry admitted to overstating national exports for April through November by US$9bn (4.5%) due to “misclassification and errors.” And on Monday industrial...

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    Singapore's Surprising Austerity Move

    This is an interesting move. Two potential motives stand out:

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    Japanese Manufacturers Move Abroad

    Japan’s merchandise trade surplus recently fell into deficit for the first time since 2009, as supply chain disruptions from the great earthquake take their toll. While this development may be temporary, it does draw attention to another, longer-term, trend. Japanese manufacturers have steadily increased their foreign investment in recent years, but many are now fast-tracking these plans to mitigate the effects of the high Yen and concerns...

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    KORUS FTA: Another Nail in Japan's Coffin? by Will Freeman

    The Korea-US free trade agreement was finally ratified on November 22, 2011 after more than five years of negotiations. While the FTA will be most helpful to Korea domestic consumers, in terms of cheaper imports and the benefit of more competition, Korea will also receive a marginal competitiveness boost externally in the US market. Moreover, the FTA will help Korea continue to eat away at Japan’s share of the US export market.

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    The Global Funding Environment & Asia

    After the post-Lehman global financial shock, Asian policymakers vowed to wean domestic entities from their dependence on foreign funding. After all, the pain caused by the Dollar squeeze—collapsing currencies, major bank losses on FX derivatives, corporate bankruptcies with goods abandoned at piers, etc—seemed unnecessary, in the sense many countries in the region are not exactly starved of capital resources. Saving rates are high, loan-to-...

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    Japan: Something Will Have to Give, But What?

    In recent weeks, the European sovereign debt crisis has clearly entered into a new, more dangerous, phase with government bond yields across Europe’s periphery rising, and German bond yields no longer falling. As a result, the average European yield is soaring to new decade-long highs:

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    Daily - Is the Rupee Sell-off Almost Over?

    As global risk assets sell off on back of the unfolding Euroland disaster, any good news is bound to get tuned out. Take for example India, where the Rupee remains under heavy pressure. Because India is an emerging market that depends on inflows to finance its current account and fiscal deficits (see India’s Borrowed Reserves and Other Headaches), the country remains vulnerable to liquidity squeezes (and we are now getting increasing signs of...

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    Daily - Looking for Signs of EMU-Related Funding Stress in Asia

    European banks are essentially the world’s most global banks—providing, for example, more US$ loans to the rest of the world than US banks do. Indeed, the EMU played a lead role in the growth in the global funding market from 2000-2007—when total global cross-border claims on average grew by +5% of global GDP every six months (see chart), rising as high as US$22.5 trillion before the bust in 2008.

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    Floods and the Thai Investment Landscape

    Despite the extent of the Thai flood damage, often described as a slow moving tsunami, the SET however is up +7% since October 1st (and virtually flat in November, a very tough month for Asian assets). The reason for this resilience, is because the flooding has impacted on the revenues of only a very few of listed Thai companies. Indeed, despite total economic losses arising from the floods amounting to THB400-500bn (or 4-5% of GDP), the worst...

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    Turning Japanese

    We dedicated a portion of the latest Monthly Chart Book to comparative demographics. In particular, we looked at the "prime worker ratio", or the ratio of people aged 20-59 to those 60+. This ratio is a significant determinant of long-term growth rates: if a country has a lot of people of prime working age and relatively few retirees, its tends to get higher growth rates.

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    Don't Despair About Asia

    This year has been a difficult one for Asian fund managers. The US economy has struggled up until very recently, and the EMU crisis keeps getting worse no matter what politicians do. Meanwhile, the Asian economies have weathered this economic landscape surprisingly well (see A Different Asian Sell-Off). But contrary to what is suggested by the diverging economic fundamentals, most Asian markets have underperformed the OECD. Thus, it is not...

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    Daily - So How Will Asia Fare as the EMU Falters?

    Yesterday’s blistering sell-off in Asian equities served as a reminder that we are all in this together: Europe’s financial crisis and likely coming recession will have global reverberations. Yet while politicians have been backed into the wall in the EMU, and to some extent the US (as the Super Committee hearing may soon remind us), in Asia the policy options are more numerous. Moreover, despite the region’s continued dependency on exports to...

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    Daily - The Eerie Quietness of Japan

    In the midst of the 1907 panic, JP Morgan was asked by a reporter what the market would do in the coming weeks. He replied that “it will fluctuate”. A little over a century later, and with Europe confronting its own crisis, this observation definitely still applies (the World MSCI fell -8.9% in September, before rallying back +10.3% in October) though oddly enough, not in Japan! Indeed, against the backdrop of a massive spike in global equity...

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    India's Borrowed Reserves and Other Headaches

    With its twin deficit status, India has seen the worst equity and currency performance of any major Asian country so far this year. One would expect that its foreign reserve position would reflect this disfavor, but in fact India’s foreign international reserves have expanded by nearly +7% in the past year, to $319bn, even as its trade deficit widened. How can we explain this conundrum?

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    Australia: Implications of an Easing Cycle

    Last week the RBA cut the Australian policy rate from 4.75% to 4.5%, citing declining inflationary pressures. These falling pressures are symptomatic of a slowing domestic economy (see Australia’s Boom Fades), as Australia’s non-mining economy remains uncompetitive with the AUD around current levels. Thus, in absence of a sustained correction in the exchange rate, we expect more rate cuts over the coming quarters. Just how much the RBA eases...

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    Has Japan Drawn a Line in the Sand on the Yen?

    The Yen plunged from an all-time high ¥75 to the USD to ¥79 on Monday October 31st, after the Bank of Japan intervened on the currency with a record ¥7.7trn (US$100bn) sold. This is Japan’s third intervention effort this year, but there are several notable features about this one that suggests the new Minister of Finance Azumi, who sets currency policy, will be more assertive than his predecessor (now Prime Minister Noda):

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    Italy or Indonesia?

    These days Asian sovereign fixed-income markets have qualities that few countries in the West can boast. Despite the 2009 stimulus spree, most nations in the region have reasonable debt-to-GDP ratios, undervalued currencies, ample foreign exchange reserves, relative political certainty, and strong growth rates. Great qualities—yet some of these countries still have yields that pay nearly as much as Italy’s beleaguered signature!

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    Daily - BoJ Intervention Adds to a Strong Dollar Scenario

    After asking in Friday’s Daily whether the risk-on/weak US$ correlation should abate, we received enquiries from clients, who find this hypothesis puzzling and doubtful. Yet historically, there are a number of periods when risk and a strong US$ were not adverse (e.g., 1981 to 1985 and 1995 to 2000). Moreover, as we argued in A Structural Turning Point for Markets, from 1995-2008 a Ricardian growth model dominated, as comparative trade...

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    Is Bank Indonesia Playing With Fire?

    However, the BI is often quick to cut policy interest rates but slow to hike them, usually due to political pressure from influential Jakartans (see Bank Indonesia Versus The World). Is the central bank taking a big risk with its premature easing? After all:

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    Evidence Mounts That Thai Inflation Will Rise

    Earlier this month Thailand’s Finance Minister, Thirachai Phuvanatnaranubala, and the Bank of Thailand Governor, Prasarn Trairatvorakul, agreed to amend the Bank of Thailand’s inflation target. The target will be changed from core inflation of 0.5-3.0%, to total inflation of 3.0% +/-1.5%, effective from January 2012. Authorities argue that this is largely a cosmetic change that makes interpreting monetary policy easier for all concerned, and...

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    Daily - Time for Asia to Outperform?

    Over the past year, macro-concerns have predominantly focused on Europe and to a lesser extent the US, but the equity market pain has been most acute in emerging markets—proving once again that these are markets one cannot emerge from in an emergency. For example, year to date, Hong Kong equities are actually underperforming Italian ones. Taiwan and China have fallen more than the Eurostoxx, and the Indian Rupee has shed a cool –11.5% against...

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    Loans Called in for Indonesia's Bakrie Group

    Indonesia-watchers have been following with interest the news that banks had called in a US$1.35bn loan to the Bakries, one of Indonesia’s biggest and most politically influential business empires. This follows a -40% plunge in London listed Vallar/Bumi Plc since the loan deal last December—the Bumi shares were in used as collateral for a loan to Bakrie & Brothers, and their sharp fall has triggered a mandatory repayment ahead of maturity in...

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    Vietnam: Small Big Steps to Economic Reform

    Vietnam, once a magnet for investors, has been off the radar for a while, suffering from chronic inflation, a run on the currency and a deflating property bubble. There have been headline defaults at state-owned enterprises, which account for 50% of capital investment but only 15-20% of GDP and 5% of employment. SOEs accessed cheap financing and invested in sectors unrelated to core business, becoming huge conglomerates with self-financing arms...

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    The Return of Thaksinomics

    With Thaksin firmly behind the new Puea Thai (PT) government, facets of the former Prime Minister’s management style, branded “Thaksinomics”, have re-surfaced. These policies emphasized less reliance on the export-led, cheap labor model, and tried to stimulate domestic demand and entrepreneurship, backed by state-directed credit schemes. While this helped Thailand achieve fast growth during Thaksin’s rule from 2001-2006, we are less comfortable...

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