Gavekal Research
December 5, 2019
Who would have thought at the time of the September attacks on Saudi that the oil sector would perform so dismally in the weeks after? This has been in line with a longer term underperformance, which has led many investors to dismiss the energy sector as uninvestible. Louis examines some of the arguments underlying this belief, and comes to an intriguing conclusion.
Gavekal Dragonomics
December 5, 2019
The Chinese government has made artificial intelligence a national development priority and is dedicating huge resources to the task. Yet, as Lance explains in this report, the effort is suffering from mismanagement, wasteful provincial competition and difficulty retaining skilled workers.
Gavekal Research
December 5, 2019
With the Federal Reserve firmly set in easing mode and the US heading into an unpredictable election season, there are good reasons to think the US dollar could be set for a period of weakness. A key beneficiary could be Asian currencies, which as a group are down about -10% against the global reserve currency in the last five years.
Gavekal Research
November 1, 2019
To make the point that gold is the only monetary asset that is not someone else’s liability, John Pierpont Morgan used to say that “gold is money, the rest is credit”.
Gavekal Research
October 29, 2019
In the spring of 2003 Gavekal posited that China would become the new locomotive of world growth. But now, the days when China could be counted upon to gear up its balance sheet and pull global growth up by its bootstraps are coming to an end. And as global activity slows investors are asking “where will the growth come from"?
Gavekal Research
October 17, 2019
Some time ago, I had gathered a team in Paris to develop a new venture that would apply macro research analysis to portfolio construction in a systematic way. Things are progressing well and I wanted to update readers on the initiative. The common thread is a rejection of forecasting and a reliance on market prices and economic data.
Gavekal Research
October 28, 2019
Signs are growing that the US and China will have a mini-deal on trade ready by the time Trump and Xi meet at the mid-November APEC summit. The key questions are whether opposition from US hardliners could derail the deal at the last moment, and whether the campaign to “decouple” the two economies will be knocked back if there is a deal.
Gavekal Research
October 14, 2019
The US-China trade cease-fire shows that President Trump needs a quick deal: facing a soft economy and likely impeachment, he wants to bank a win as soon as possible. The two sides are moving toward a deal in November, but that will not change China's economic model or end US efforts to constrain China's technological rise.
Gavekal Research
September 30, 2019
It is sometimes said that getting a clear view of Chinese policy is impossible; the best you can hope for is an “impressionist” picture of what broadly is going on. Increasingly it looks as if this impressionism is catching.
Gavekal Research
November 7, 2019
Whether moving into a fixer-upper or a freshly finished McMansion, most homeowners will splurge on big ticket items to embellish their new abode. With the US housing market looking strong, investors should bet on consumer discretionary—it has the advantage of offering protection if long-dated bond yields move materially higher.
Gavekal Research
October 31, 2019
No wonder the S&P 500 closed at a new high yesterday. On the same day the Federal Reserve cut interest rates by 25bp, US GDP growth for 3Q19 came in at a robust 1.9%. For its part, the Fed gave no indication of paring down its new asset purchase program (quantitative easing in all but name).
Gavekal Research
October 25, 2019
The richly-valued US dollar is finally starting to look vulnerable. While still in its post-2015 trading range, the DXY index has given up -1.5% in the last 11 trading days; broader trade-weighted measures have also swooned.
Gavekal Research
November 13, 2019
Public support for Hong Kong's protest movement has been re-energized by perceived police brutality, the local government offering no political response to the crisis and Mainland authorities delivering mixed, but slightly sinister messages about their next move.
Gavekal Research
November 12, 2019
When I wrote on the Hong Kong dollar peg back in May, there was no inkling that trust between the police and much of Hong Kong’s population would fully break down. Today, Hong Kongers are saying: “We don’t trust the police to do the right thing, or even speak the truth”.
Gavekal Research
October 7, 2019
The Hong Kong government’s stated aim is to drive a wedge between radical protesters who are resigned to jail or worse, and a less committed group that it thinks will be cowed by increased penalties. Initial evidence suggests the strategy is a busted flush.
Gavekal Dragonomics
November 13, 2019
US sanctions on Chinese technology companies have grown progressively less effective since the US government used them to take down ZTE. Huawei has refused to collapse, and other targeted firms are not too troubled. In this piece, Dan explains why export controls, once the kiss of death, are becoming just another operational challenge.
Gavekal Dragonomics
November 4, 2019
Presidents Trump and Xi may be edging toward a trade deal, but trust between the US and China has not been restored. As Lance explains in this piece, China’s bureaucracy is ramping up its already-restrictive security rules on technology hardware, software and data flows. This push will ensure some decoupling of China’s tech sector from the US.
Gavekal Dragonomics
September 12, 2019
The Trump administration has shown the world that it is willing and able to inflict severe pain on China’s top technology firms. But can the US really squeeze China hard enough to cut it off from global R&D, or stop all advances by Chinese companies?
Gavekal Dragonomics
November 15, 2019
China’s data releases for October showed signs that the global downturn in electronics, and the domestic fall in car sales, are starting to fade. But the bad news is that the property and heavy industry complex is weakening. That combination means roughly stable growth for the moment, reassuring policymakers that their cautious stance works.
Gavekal Dragonomics
November 11, 2019
The corporate bond market was once promoted as a better way to finance China’s private firms. Instead, as Xiaoxi explains in this piece, it has turned into another source of financial pressure. The corporate bonds of private firms are now maturing faster than they can issue new ones, creating a financing squeeze that could last through 2021.
Gavekal Dragonomics
November 7, 2019
China’s industrial slowdown is not just about exports. The deep downturn in auto sales accounts for about half of the slowdown in GDP growth since 2018, Thomas estimates. Things are now starting to look less bad, and the growth drag is heading back toward zero. But autos are still not about to deliver a big boost to growth or commodity demand.
Gavekal Research
November 8, 2019
Yesterday saw a global risk-on move as investors cheered reports that a US-China trade deal may be in the offing. In Europe, this followed data releases that showed German factory orders picking up and PMIs stabilizing. On first blush, this looks reminiscent of 2017’s recovery.
Gavekal Research
October 30, 2019
Sweden’s Riksbank plans to raise its main policy rate to zero from -0.25%. A relieved governor, Stefan Ingves, said last week it would be a “bonus” to return to parity in December and warned against staying negative for too long.
Gavekal Research
October 24, 2019
Mario Draghi threw the cat among the pigeons at last month’s fiery policy meeting of the European Central Bank by cutting interest rates and cranking up asset purchases.
Gavekal Research
October 10, 2019
Almost a month after missile attacks on key Saudi Arabian oil production and processing facilities pushed benchmark global oil prices up by 20% overnight, the market has moved on. Saudi Arabia has defied industry expectations by continuing to supply oil to the market in abundant quantities. The current market pricing reflects that.
Gavekal Research
September 18, 2019
Three “master” prices tend to dictate price levels in most asset markets—US interest rates, the US dollar and energy prices. A synchronized fall in these three prices usually bodes well for emerging market assets, while a rise bodes ill.
Gavekal Research
September 9, 2019
Reports that China has signed a long term agreement to buy large quantities of Iranian oil in defiance of US sanctions will weigh on global crude prices and further complicate US-China talks, reducing the chances of a deal before the 2020 US election. In effect, the world is now facing a four-way tug of war over the oil price.
Gavekal Research
November 7, 2019
Narendra Modi’s government has set out ambitious objectives for India’s energy policy, targeting wider access to affordable energy, a greatly increased role for renewables, and stronger national energy security. The trouble is that these aims appear to be contradictory, and the government has yet to set out a coherent plan for implementation.
Gavekal Research
October 24, 2019
Experts predict that half of India’s demand for water will be unmet by 2030, threatening livelihoods and the country’s development prospects. Yet water scarcity need not be a disaster for India. With more efficient agricultural practices and better management, India has sufficient water resources both to feed itself and keep its economy on track.
Gavekal Research
September 5, 2019
They say the first step to solving a problem is recognizing that you have one. With its recent moves to shore up sagging growth, Narendra Modi’s new government has finally acknowledged that India’s economy is in trouble. But unless it quickly finds a coherent reform strategy, Modi’s second term could fizzle out into economic failure.
Gavekal Research
November 14, 2019
For the last five years, the world has lived with a strong US dollar. That may be about to change. Not only has the Fed turned dovish, its return to balance sheet expansion means it is now printing more money each month than its central bank peers, such as the ECB.
Gavekal Research
November 8, 2019
New European Central Bank boss Christine Lagarde has called on European governments to do more on the fiscal front to support eurozone growth. Only Germany has wiggle room within the EU fiscal straitjacket to launch a significant stimulus program.
Gavekal Research
October 25, 2019
Having inverted over the summer, the US yield curve has steepened sharply. In the past such a move has often presaged recession—but not always. Twice since the 1960s an inversion and steepening was not followed by recession. Then, as now, the return on invested corporate capital was higher than the cost of that capital.
Gavekal Research
October 18, 2019
Boris Johnson has secured a revised Brexit deal and the stage is set for a key Saturday vote in the House of Commons. On balance, there is a 70% chance of the vote passing as Labour leader Jeremy Corbyn seems unable to control his Brexit-supporting rebels, while Johnson looks to have persuaded his Brexiteer wing that it could be now or never.
Gavekal Research
October 14, 2019
The pound surged after Boris Johnson and Irish Prime Minister Leo Varadkar achieved a negotiating breakthrough on Thursday over arrangements for the Irish border. The question is: What next? Anatole argues that while these moves still point to a multi-pronged set of outcomes, at least there is now a measurable set of permutations.
Gavekal Research
August 2, 2019
The sterling exchange rate is going down and the usual suspects say this is bad news. But the exchange rate is merely a price that helps allocate capital between the economy’s internal and external sectors, and so set the purchasing power of rentiers and entrepreneurs.
Gavekal Research
October 16, 2019
Despite few underlying tensions being settled, the interim US-China trade deal has cheered up investors. The view has been that the US president now wants to bag a political win ahead of next year’s election and move on. This outcome should support trade-dependent Asian currencies—but perhaps not equally.
Gavekal Dragonomics
October 8, 2019
China is still signing up more countries for its Belt and Road Initiative, but money for Xi Jinping’s signature foreign policy is getting tighter. Growth in China’s overseas lending has ground to a halt, and overseas construction projects are declining. In this piece, Tom explains why a slimmer Belt and Road has become an economic necessity.
Gavekal Research
September 18, 2019
Three “master” prices tend to dictate price levels in most asset markets—US interest rates, the US dollar and energy prices. A synchronized fall in these three prices usually bodes well for emerging market assets, while a rise bodes ill.
Gavekal Research
November 1, 2019
The last five years have been an era of US dollar strength. That era may now be coming to an end. After the US Federal Reserve halted its balance sheet contraction and last month resumed buying T-bills at a rate of US$60bn a month, the Fed is now printing money faster than the other central banks.
Gavekal Research
October 11, 2019
Vincent outlined EM Asia's "great moderation", as inflation is diverging from other emerging markets, creating opportunities in bonds. Udith argued that Indian growth may be bottoming out but a bad banking picture means that equities may have more downside.
Gavekal Dragonomics
October 3, 2019
In the latest edition of his annual chartbook, Thomas outlines the fundamentals of China’s corporate sector. The latest downcycle in sales and profits was less severe than previous episodes, but private firms are still suffering from financial strains. The anemic bounce in credit growth points to little recovery in profits or capex in 2020.
Gavekal Dragonomics
October 30, 2019
China’s property market has held up surprisingly well in 2019, but will that strength last? In her annual chartbook, Rosealea examines key market trends and explains the outlook for 2020. Flexible policy can probably continue to avoid a deep decline in housing sales, but construction activity and materials demand are almost certain to slow.
Gavekal Dragonomics
September 24, 2019
China’s government has launched a new program to renovate older residential compounds, which some are touting as a massive new investment stimulus. As Rosealea explains in this piece, such hopes are misplaced. But the new spending will help cushion the impact of the cutbacks of the subsidies delivered through the slum redevelopment program.
Gavekal Research
September 6, 2019
As prospects for a quick resolution of the US-China trade conflict fade, and the data continue to soften, expectations for Chinese growth are getting marked down. As if on cue, the government has sent signals of more decisive policy support for growth.
Gavekal Research
November 23, 2012
In our politically correct age the pressure to bow down before certain popularly accepted and apparently proven “truths” can be overwhelming. In the aftermath of the US elections, two such nostrums are unnecessarily vexing investors—the urgency of deficit reduction and fear of higher taxes.
Gavekal Research
July 20, 2011
In A Study of History, Toynbee explains that the role of a society’s elite is to rise to the challenges of the times, and find solutions fitting to those times, even if this involves a radical break with the past.
Gavekal Research
February 28, 2011
Perhaps the most famous economic law is the one that there is no such thing as a free lunch. By keeping US short rates at abnormally low levels beyond the financial crisis and as growth bounces back beyond the dreams of the wildest optimists, the Fed increasingly seems to be trying to ‘feed the US economy for nothing’.