Angry rhetoric between the US and Iran reached blood-curdling intensity after the US announced in late April that it wouldn't grant waivers for sanctions on Iran's oil exports. While this caused a short term spike in the oil price, it has since fallen about -8% from its high. Are oil traders too complacent about the risks, or does the market have it right?
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Gavekal Research
May 24, 2019
Video: Iran And The Oil Price
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Gavekal Research
May 24, 2019
India After The Victory Party
After Narendra Modi’s landslide victory in India’s general election, the economic issues that must be tackled quickly are stacking up. Tom runs through the Indian leader’s inbox and concludes that the scale of the short term problems he faces rules out a 2014-style euphoric run-up in Indian equity.
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Gavekal Research
May 24, 2019
A Change In The Market Mood
Thursday was an ugly day for global equity markets, with losses that brought total returns on US equities almost back to their January 2018 level, and non-US equities to the brink of bear market territory. It is hard to shake the feeling that the investment environment has changed. What lessons should we draw from the tumultuous trading session?
Global Strategy
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Gavekal Research
May 7, 2019
A Reverse-Engineered US Inflation Indicator
In the Strategy Monthly I presented a fairly simple rule to show whether an economy is in the top, or the bottom half of the Four Quadrants framework. To show that the rule worked, I laid out relationships between the "rule" and a range of other useful indications of a price environment shift.
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Gavekal Research
May 3, 2019
Inflation And The Gold Fix
When the market rate of interest for a long period has been held abnormally low relative to returns on invested capital, financial engineering takes off with huge debt issuance, making a chaotic denouement of the credit cycle unavoidable. To prepare for such an event, an equity portfolio hedged with gold can reduce volatility and raise returns.
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Gavekal Research
April 29, 2019
Managing Today’s Biggest Risk
The US first quarter GDP data released on Friday proved consistent with the picture of slower—but still positive—growth through 2019, and a continuation of the Goldilocks tailwind for asset markets.
Trade wars
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Gavekal Research
May 10, 2019
The Motivation Behind Trump's Tweets
Since becoming president, Donald Trump has made it clear that he sees the S&P 500 as the real-time judge of his White House performance. Why, then, did Trump on Sunday send a tweet alleging that China had backed off from agreed positions in the US-China trade talks, and in so doing rattle a market priced for Goldilocks?
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Gavekal Research
May 9, 2019
A Better Time For A Trade War
For equity investors, there is a never a good time to have a trade war. Nevertheless, if there must be one, the US stock market is now better placed to ride out a US-China tariff conflict than it was a year ago. That’s just as well.
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Gavekal Research
May 6, 2019
Trade Deal Delayed, Not Yet Denied
Any trade negotiator will tell you that the last yard is always the hardest. That is obvious now in the US-China trade talks, which were thrown into doubt by Donald Trump’s weekend tweets threatening to hike tariffs on US$200bn of imports from China from 10% to 25% this Friday if a deal is not done.
The US economy and markets
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Gavekal Research
May 6, 2019
How Long Can Productivity Contain US Inflation Pressure?
April’s US payrolls report showed job creation was stronger than expected and unemployment lower, yet wage pressures were softer. This suggests weaker unit labor costs will allow the Fed to remain dovish, at least for now. All else being equal this is positive for equity investors. The question is: How long can this benign combination persist?
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Gavekal Research
April 15, 2019
Inflation Is The Real Risk
Happy days seem to be here again as risk assets soar on a dovish Federal Reserve and better growth outlook. Yet, investors should take note. The Fed has three official mandates; namely, to keep inflation low and stable, keep unemployment down, and keep interest rates low and stable.
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Gavekal Research
April 10, 2019
A New Look At The Housing Market
When the US slides into recession, it generally does so because of a contraction in investment, either in the corporate sector or in the housing market. Today, returns on capital invested in housing exceed the cost of capital, signalling a positive outlook for US residential investment, construction, house prices, and the shares of homebuilders.
The eurozone's political agonies
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Gavekal Research
April 24, 2019
A Fire-Tested Macron
Tomorrow will see Emmanuel Macron deliver the big national address that got upended by the Notre Dame inferno on April 15. His speech will outline a mix of tax breaks, constitutional modernizations and symbolic grand gestures. The broad story, however, is that the effort to reform France remains broadly on track.
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Gavekal Research
February 14, 2019
What Europe’s Political Ructions Mean
European politics is again heating up. Yesterday saw the Spanish government fail to pass its budget in a move likely to spur fresh elections. Populists in Italy and yellow vests in France are keeping up their campaign of disruption.
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Gavekal Research
January 15, 2019
Macron Is Muddling Through
As the economy weakens, yellow-vested agitators show no sign of giving up on their campaign to block President Emmanuel Macron’s effort to change the way France works.
China Tech
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Gavekal Research
April 12, 2019
The End Of The Smartphone S-Curve
Smartphones are a maturing industry. Sales in China, the US, Europe and Japan are declining, and demand growth in India and Africa is not fast enough to drive a new surge in global sales. The industry is hoping that 5G and foldable phones will trigger a fresh upgrade cycle. But neither will drive a significant increase of sales in the near term.
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Gavekal Dragonomics
April 9, 2019
Don't Believe The 5G Hype
5G mobile is the technology of the future, and the US and China are now in a life-or-death struggle to dominate it. That anyway is the story used to justify the US government’s campaign against Huawei—but as Dan argues in this piece, this is mostly alarmism disconnected from reality. It’s best not to get caught up in the politicized hype about 5G.
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Gavekal Dragonomics
March 26, 2019
The New Internet Regime
For the freewheeling Chinese internet sector, regulatory risk arrived with a vengeance in 2018. Government actions hurt companies including Tencent in gaming, Didi Chuxing in ride-hailing, ByteDance in online media, and others. In this piece, Dan and Yanmei explain what drove these moves and how the new online regulatory environment will work.
China's economic cycle
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Gavekal Dragonomics
May 7, 2019
Xi's Pivot To The Private Sector
The improved economic outlook for China in 2019 owes a lot to an effective stimulus and progress toward a trade deal. But it has also been driven by top leader Xi Jinping’s surprising political pivot from champion of state enterprises to patron of the private sector. In this piece, Andrew examines how sincere Xi’s new stance will prove to be.
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Gavekal Research
April 26, 2019
The Least Ugly Duckling
In a year marked by unexpected US dollar strength, the renminbi is one of the few major currencies to be up against the dollar. The reason is simple enough: the resumption of trade talks between the US and China. Yet although a trade pact is now substantially priced in, there are reasons to believe the renminbi has further upside potential.
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Gavekal Dragonomics
April 25, 2019
The Property Cycle Perks Up
China’s property market data has been surprising on the upside. Thanks to easier credit and looser administrative restrictions, sales volumes picked up in March and prices rose. In this paper, Rosealea examines whether the upturn can last, and assesses what it means for land sales, construction activity, materials prices and the broader economy.
Europe's softening growth picture
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Gavekal Research
May 2, 2019
The Message In Eurozone Money
The advanced estimate of first quarter eurozone GDP released on Tuesday came as a pleasant surprise. Growth came in stronger than generally expected, while Italy emerged from recession. With the MSCI EMU equity index up almost 17% YTD in local currency terms, the question is whether growth can be sustained over the coming quarters.
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Gavekal Research
April 12, 2019
Europe's Cruel Summer
The eurozone is rapidly becoming the Errol Flynn of global economies: it just never fails to disappoint. From weak German PMIs, through falling French industrial production, to Italy slipping back into recession, it is hard to think of a single European data point over the past 12 months that gave any reason for cheer.
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Gavekal Research
April 9, 2019
Europe's China Syndrome
Chinese premier Li Keqiang is in Brussels on Tuesday for the 21st EU-China summit, and the talks are likely to be testy. After much dithering and in response to much pressure from Washington, the EU has begun to take a more hardline posture towards China. The core EU countries share many of the concerns that motivate the US trade war with China.
Energy and commodities
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Gavekal Research
April 23, 2019
The Case Of The Missing Inflation: Energy’s Impact
When the Fed launched QE2 in 2010, there was widespread fear that a great inflation beckoned. It has not exactly worked out that way. Louis considers the role energy played in a decade of becalmed US consumer prices.
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Gavekal Research
April 23, 2019
Iran Waivers And The Oil Price Spike
US Secretary of State Mike Pompeo has announced that the US will not roll over waivers on its sanctions on Iranian oil exports when they expire in May.
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Gavekal Research
April 2, 2019
Good News For Goldilocks
Last Thursday, with the price of oil approaching a four-and-a-half month high, Donald Trump took to Twitter. “Price of Oil getting too high.” Trump’s tweet had little effect, with Brent crude hitting US$69/bbl on Monday. Prices are likely to continue to push higher over the coming months towards 2018's highs—a troubling prospect.
India
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Gavekal Research
April 17, 2019
Modi And The Markets
Indian markets are pricing in a victory by the ruling BJP in this year’s general election, a six-week process of mindboggling complexity that started on April 11. But while this will be the most likely single outcome when results are announced on May 23, nothing is a foregone conclusion under India’s unpredictable first-past-the-post system.
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Gavekal Research
February 28, 2019
Crisis And Opportunity In Kashmir
India and Pakistan engaged in air-to-air combat yesterday, raising the prospect of war between the two nuclear powers. Markets fell only marginally but are vulnerable if the conflict escalates, which for the moment looks unlikely.
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Gavekal Research
February 20, 2019
India Macro Update: Pre-Election Jitters
In India, all eyes are focused on May’s general election. In the lead-up, the government has turned on the spending spigots and the central bank has obliged with a recent surprise interest rate cut. However, in this quarterly update Udith and Tom argue that such measures may not be enough to restart the stalled capital spending cycle.
Video
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Gavekal Research
May 3, 2019
Video: India’s Acceleration Phenomenon Explained
Multinationals and investors are looking to India to deliver the next great surge in sales of consumer goods and services. But demand will not expand in a linear fashion as GDP increases.
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Gavekal Dragonomics
April 26, 2019
Video: Is The Worst Behind Us?
At our seminar in Shanghai, Chen Long presented the outlook for China’s economy and markets. Crucially, the credit cycle appears to have bottomed out, and credit growth should accelerate towards the end of the year. He expects the overall economy to follow suit. He also covered the outlook for capital markets, equities and the renminbi.
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Gavekal Research
April 18, 2019
Video: India's Hard-To-Call Election
India’s cacophonous exercise in democracy is well underway and polling suggests there is only a 50% chance of a Narendra Modi-led BJP holding onto power. Tom dives into the details of why the “bear-hugging” reformer has electoral problems this time around. Tom also considers the likely outcome of the election for Indian asset markets.
Brexit and the UK economy
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Gavekal Research
April 11, 2019
Brextension And The Gilt-Edged Opportunity
The latest act of the Brexit tragicomedy has played as expected—and market reactions should follow, as the risk premium on sterling and UK assets is substantially reduced.
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Gavekal Research
April 8, 2019
And The Brexit Winner Is...
With the Brexit deadline in the rear view mirror, Britain's leave voters have are left with the impression that they have been taken for a ride by the UK’s political class, and in particular by their representatives in parliament. So who is the real sovereign power in the UK? The people or parliament? Charles sees three possible outcomes.
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Gavekal Research
March 26, 2019
The Hard Logic Of A Long Brexit Extension
By removing the hard deadline for Brexit negotiations the EU has avoided the disaster of a 2008-style sudden stop in business with its second largest trading partner. This decision reinforces the bullish momentum for sterling, which remains undervalued especially against the US dollar.
US dollar liquidity and emerging markets
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Gavekal Research
May 8, 2019
Gauging The EM Collateral Damage
After Donald Trump’s weekend tweets, trade war is once again the center of attention for investors. The perceived probability of an escalation has risen sharply, and risk assets have sold off. Asian emerging markets have not escaped the rout, but it would be a mistake for investors to treat all Asian emerging markets equally.
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Gavekal Research
May 1, 2019
Look Through The Trade Data
After rallying 10% in 1Q19, emerging market equities have hit an air pocket as investors worry about global growth. Given the link between EM profitability and global trade, data showing that activity shrank in both volume and value terms in the three months to February has raised concerns.
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Gavekal Research
April 16, 2019
The Populist Challenge In Indonesia
These are populist times. After the elections of Duterte in the Philippines, Trump in the US, Bolsonaro in Brazil, and the return to power last year of Mahathir Mohamad in Malaysia, investors would do well to take note of the last minute opinion poll gains made by another rabble-rousing populist seeking election to high office in Indonesia.
Deep Dives
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Gavekal Research
May 9, 2019
Audio & Transcript — Gavekal Research Call May 2019
Investor concern this week is centered on the US-China trade negotiations, but Charles Gave and Louis Gave wonder if investors aren’t missing another risk, namely, that the world might be shifting from a deflationary to an inflationary environment.
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Gavekal Research
May 2, 2019
Strategy Monthly: The Inflation Shift And Portfolio Construction
Despite inflation remaining muted, Wednesday saw the Federal Reserve stand pat on interest rates. Having switched to an overly dovish stance early this year, Fed Chairman Jay Powell remains wary of changing tack and easing policy as he worries about inflationary pressure bubbling up from an economy that looks to be fully occupied.
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Gavekal Research
February 20, 2019
India Macro Update: Pre-Election Jitters
In India, all eyes are focused on May’s general election. In the lead-up, the government has turned on the spending spigots and the central bank has obliged with a recent surprise interest rate cut. However, in this quarterly update Udith and Tom argue that such measures may not be enough to restart the stalled capital spending cycle.
Chinese property
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Gavekal Dragonomics
April 25, 2019
The Property Cycle Perks Up
China’s property market data has been surprising on the upside. Thanks to easier credit and looser administrative restrictions, sales volumes picked up in March and prices rose. In this paper, Rosealea examines whether the upturn can last, and assesses what it means for land sales, construction activity, materials prices and the broader economy.
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Gavekal Dragonomics
February 20, 2019
The Sunset Of Housing Subsidies
China’s local governments are cutting back their slum redevelopment plans, which points to lower government subsidies for housing in 2019. As a result, Rosealea argues, housing sales are likely to have a deeper decline this year, although Beijing will manage the phase-out of subsidies with a careful eye on how it affects the market.
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Gavekal Dragonomics
January 30, 2019
The Long Plateau In Housing Demand
While many forecasters had expected China’s steel demand to enter long-term decline as housing construction peaks, in fact it has stayed surprisingly strong. In this piece, Rosealea revisits her housing model, and finds it is consistent with recent trends. Construction should peak in 2020-22, so steel demand can stay elevated for a few more years.
From the archives: oldies but goodies
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Gavekal Research
November 23, 2012
Deficit Deniers Of The World Unite
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.
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Gavekal Research
July 20, 2011
Are We Entering Into Revolutionary Times?
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.
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Gavekal Research
February 28, 2011
The High Cost Of Free Money
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’.