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Gavekal Research
What If The Bond Market Is Just Wrong?
Anatole Kaletsky
9 Sep 2024
With 10-year US treasury yields at around 3.75, the bond market appears priced for an imminent US recession, while US equities are priced for profits to continue compounding without interruption for years to come. Both cannot be right. In this paper Anatole considers the implications for markets of different scenarios, including the possibility that once again, the bond market is getting things wrong.
Gavekal Research
What Changed This Summer
Louis-Vincent Gave
9 Sep 2024
This summer saw four major developments, whose confluence unleashed a brutal sell-off in richly valued tech stocks, and which also hit more attractively valued deep cyclicals including energy, materials, industrials and emerging markets. Meanwhile, US treasuries and other OECD government bonds rallied, as did defensives and financials. So what could change this newly unfolding dynamic?
Gavekal Dragonomics
A Half-Hearted Turn On Urbanization
Ernan Cui
9 Sep 2024
China’s government has a new “action plan” on urbanization, released just two years after the official five-year plan for urbanization. Ernan argues that it shows a substantial shift in tone and content, focusing on accelerating the pace of urbanization after the massive slowdown caused by the pandemic. But the new policies are likely to produce only a marginal boost at best.
Gavekal-IS
Critical Avalanche
Didier Darcet
6 Sep 2024
Early August saw turbulence that caused the MSCI World index to slide -6% and the Japanese Topix to slump -20%. The episode left portfolio managers with the choice of cutting all risks and incurring losses, or instead toughing out the market adjustment. In this report, Didier explains why his differentiation between fundamental factors and incidental factors led him to sit tight.
Gavekal Dragonomics
Timing The Property Downturn
Andrew Batson, Xiaoxi Zhang
Weak Economy, Strong Industrial Policy
Thomas Gatley
Waiting For Patient Capital
Xiaoxi Zhang, Tilly Zhang
A Firmer Grip On Financial Markets
Thomas Gatley
Investing For Import Substitution
Andrew Batson
Pedal To The Metal On Autonomous Vehicles
Tilly Zhang
The Promise And Peril Of Industrial Policy
Thomas Gatley
The Wrong Way To Do Consumer Stimulus
Ernan Cui
The Silent Assault On Finance
Christopher Beddor, Xiaoxi Zhang
The Export Risk Rises
Wei He, Dragonomics Team
More Research
The Barnier Put On French Bonds
Cedric Gemehl
Webinar: Mapping US Outcomes
Will Denyer, Tan Kai Xian
Video: India Still A Bright Spot
Udith Sikand
India Macro Update: On An Even Keel
Udith Sikand, Tom Miller
A Swiss Currency Problem
Cedric Gemehl
Conversation: Judging The China Consensus
Andrew Batson, Arthur Kroeber
The Market's Rotation
Louis-Vincent Gave
An Over-Financialized Economy?
Louis-Vincent Gave
Weighing US Growth Prospects
Will Denyer
The Safety Of US Infrastructure Plays
Tan Kai Xian
Gavekal Dragonomics
The Promise And Peril Of Industrial Policy
Thomas Gatley
21 Aug 2024
Many wonder why China’s government is not doing more to stimulate growth. One reason may be that from Beijing’s perspective, industrial policy is working. In this chartbook, Thomas examines the data: corporate earnings improved in 2023, new funding is going mainly to tech-intensive manufacturing and capital is increasingly flowing to the highest-return firms, who also do most new capex and R&D. But this apparently successful industrial policy comes with significant costs.
The global view
What Changed This Summer
This summer saw four major developments, whose confluence unleashed a brutal sell-off in richly valued tech stocks, and which also hit more attractively valued deep cyclicals including energy, materials, industrials and emerging markets. Meanwhile, US treasuries and other OECD government bonds rallied, as did defensives and financials. So what could change this newly unfolding dynamic?
First Derivative Positive, Second Derivative Negative
As August draws to a close, stock indexes in the US, Europe and emerging markets are above where they were four weeks earlier, yet they have got there only by climbing a forbidding wall of worry about the health of overall global growth. How well founded are these fears?
Global Trade Scrambled
On Monday, Canada announced a 100% tariff on electric vehicles imported from China and a 25% tariff on Chinese steel and aluminum. Ottawa’s move matches the tariffs imposed by the US in May, in the latest sign that third-party countries are being forced to pick sides as the trade war between the US and China escalates and the world’s free-trade architecture crumbles.
The Asset Allocator’s Dilemma
Intuitively, most investors know that owning the world’s most expensive equity market when that market’s currency is also clearly overvalued makes for a challenging future return profile. But the common narratives about other countries' markets leave no alternatives. Louis considers the future of the US dollar and US equities, and if those narratives are about to change.
Test Your Knowledge
In 2023, China’s population was about 1.41bn. According to the UN’s base-case projection, what will China’s population be in 2100?
Post Your Answer
Chart of the Week
The single most important policy issue for markets in this US election may be corporate tax rates. Kamala Harris wants to raise the corporate tax rate, from the current 21% to 28%. Donald Trump expects to cut the rate to 20% but would go as low as 15% if possible. Corporate taxes impact the bottom line of every company in every sector, which in turn has ripple effects through other asset classes.
Open Chart
Gavekal Research
Essential Reading: A Book For Every Week Of The Year
Gavekal is often asked for a recommended reading list. So, here it is: a book a week that everyone interested in the world of macro investing—whether hoary veteran or eager apprentice—can benefit from reading.
US economy & markets
Weighing US Growth Prospects
The US economy, which grew at an annualized 3% in the second quarter of 2024, is likely to slow during the second half of the year, possibly extending into early 2025. Will weighs the factors supporting and dragging on US growth and considers the impact on US equities and bonds.
The Safety Of US Infrastructure Plays
The MSCI info tech index is still -6.5% off its July peak and the jitters suffered last week by Nvidia points to market leaders running on fumes. However, stodgy old infrastructure plays have been standout performers since mid-July, with the sector’s MSCI benchmark making new highs. Kai Xian explains the outperformance and whether this situation can continue.
The Downside Of Rate Cuts
The 1% rise in US equities on the day Federal Reserve Chair Jay Powell declared it's time "for policy to adjust" reflects investors' belief that interest rate cuts are good for stock prices. That's broadly correct—in the medium term. But in the shorter term, rate cuts will squeeze corporates’ interest income, and therefore their profits.
US Housing And Government Action
Both Democrats and Republicans have focused on housing affordability, which has become a hot-button issue for US voters. Investors, for their part, have looked through this soft patch and bid homebuilder stocks higher on the basis that anticipated interest rate cuts will gin up fresh demand. The issue that all participants in this gummed up part of the US economy must consider is how impending government action may change the equation.
Gavekal Research
Webinar: Mapping US Outcomes
Will Denyer, Tan Kai Xian
6 Sep 2024
In November, US voters will decide who controls the White House, Senate and House of Representatives. Republicans and Democrats differ significantly on key policy positions that will heavily impact the economy and markets. In this webinar, Will and Kai Xian compare the parties’ major policy stances and assess what they mean for markets—especially US equities, US bonds and the US dollar.
Emerging markets
Why This Time Has Been Different
During past episodes of risk-off volatility, the correlation between emerging market risk assets has shot up. But early August’s bout of market volatility saw a bifurcation in EMs, and no broader macroeconomic spillover effects—which speaks well of the growing maturity of emerging markets as an asset class.
Video: The Yen Carry Trade And Emerging Markets
Usually when developed market volatility spikes, the world’s emerging markets fall victim to collateral damage. Things have been less simple this time around. Although Latin American currencies, especially the Mexican peso, have been hit hard by the unwinding of the yen carry trade, East Asian currencies have risen strongly. Udith Sikand explores what lies behind the divergence.
A Budget For Modi 3.0
Concerns that Indian Prime Minister Narendra Modi would take a populist lurch were alleviated on Tuesday, as finance minister Nirmala Sitharaman pledged to reduce the deficit in the new budget, while maintaining healthy levels of infrastructure spending. But three new schemes to boost jobs, largely borrowed from opposition party policies, suggest that the government has heeded the lessons of the election.
Webinar: Into The Upswing
In this webinar Gavekal’s analysts review the themes driving growth across the world’s major economic regions, and discuss how macro developments are likely to drive financial markets over the remainder of 2024.
Latest video
Gavekal Research
Video: India Still A Bright Spot
Udith Sikand
5 Sep 2024
In this interview, Udith discusses the story behind the numbers of India’s latest GDP release and offers his views on the monetary environment for the rest of the year and what this means for Indian asset markets.
India chartbook
Gavekal Research
India Macro Update: On An Even Keel
Udith Sikand, Tom Miller
5 Sep 2024
A slowdown in India’s headline GDP masks an improvement in the underlying drivers of growth, argue Udith and Tom. Now that election-related uncertainty is over, government spending should pick up and aid the incipient recovery in private consumption and investment. Indian bonds and equities should continue to fare well, with monetary easing likely to get underway soon.
China chartbook
Gavekal Dragonomics
The Promise And Peril Of Industrial Policy
Thomas Gatley
21 Aug 2024
Many wonder why China’s government is not doing more to stimulate growth. One reason may be that from Beijing’s perspective, industrial policy is working. In this chartbook, Thomas examines the data: corporate earnings improved in 2023, new funding is going mainly to tech-intensive manufacturing and capital is increasingly flowing to the highest-return firms, who also do most new capex and R&D. But this apparently successful industrial policy comes with significant costs.
Europe's economy
The Barnier Put On French Bonds
Having consulted across the political spectrum, France’s president has decided that the common denominator in his divided country is Michel Barnier. Two months after voters returned the Fifth Republic’s most politically fragmented National Assembly ever, Emmanuel Macron appointed the arch-Gaullist and former European Union commissioner as France’s new prime minister.
A Swiss Currency Problem
It is a case of “be careful of what you wish for” in Switzerland where inflation slowed more than expected in August. The latest reading also means that inflation for 3Q24 is set to come in well below the Swiss National Bank’s own projected level of 1.5%. The problem is the strength of the Swiss franc, which is starting to look like an agent of deflation.
A Little Less Resilient
One of the outstanding features of Europe’s long stretch of sub-par growth has been the surprising resilience of the continent’s labor market. At the beginning of February, Cedric suggested three related reasons for this unexpected labor market resilience. Today, the first two explanations still stand. The third is looking shakier.
The Ebbing Of French Privilege
As French politicians try to wrangle a workable majority, investors have repriced French sovereign risk in an adverse manner relative to other eurozone economies. This is partly due to France’s worsening fiscal position, but Cedric argues that in a related development, France’s external position is also weakening even as neighboring economies see theirs strengthen.
Strategy Chartbook
Gavekal Research
US Strategy: Trading Politics
Will Denyer, Tan Kai Xian
27 Aug 2024
In November, US voters will decide who controls the White House, Senate and House of Representatives. The two parties differ significantly on key policy positions that will heavily impact the economy and markets. In this Strategy Chartbook, Will and KX compare the parties’ major policy stances and assess what they mean for markets—especially US equities, US bonds and the US dollar.
Equities
An Over-Financialized Economy?
First Derivative Positive, Second Derivative Negative
Video: Promises And Policies
Video: The Yen Carry Trade And Emerging Markets
More Questions Than Answers
The AI Hype Implosion
Oil & commodities
Will Recent Trends Last?
Confirmation Bias In Action
Energy Transformed (Again)
Trump On X, And Gold And Oil
Video: Aramco, Oil And Saudi's Economic Transition
The Relationship Between Energy And Financial Markets
China tech
Xi Goes All In On Tech
Webinar: Setting The Agenda For China's Plenum
The Localization Drive Steps Up
After The Melt-Up In Semiconductors
Vietnam’s Bamboo Diplomacy
Big Tech’s Rearguard Action
Then Yen Carry Trade Unwinds
Video: The Yen Carry Trade And Emerging Markets
Usually when developed market volatility spikes, the world’s emerging markets fall victim to collateral damage. Things have been less simple this time around. Although Latin American currencies, especially the Mexican peso, have been hit hard by the unwinding of the yen carry trade, East Asian currencies have risen strongly. Udith Sikand explores what lies behind the divergence.
More Questions Than Answers
It’s a dedicated Frenchman who consents to work in August. But the financial market volatility of the last week has seen Louis hard at it, fielding client questions about the outlook for global markets and economies. In this paper, he sets out the most salient questions, and offers his answers.
The Root Cause Of Summer Ructions
Investors are no longer seeing virtue in a Goldilocks scenario of moderating demand and easing price pressures, but having a summer freak-out over faltering global growth. Udith and Kai Xian diagnose the market jitters and say that the sell-off in high-yield currencies and tech stocks likely stems from movements in Japan rather than disappointing US economic data.
The Yen And Deindustrialization
There is a theory out there which holds that the extreme undervaluation of the yen is a consequence of Japanese deindustrialization, as Japan Inc. has shipped its factories abroad, pushing Japan's economy into an irreversible trade deficit even while it continues to run a monster current account surplus. Not so fast, says Charles, whose analysis of Japan’s external balances throws up a different explanation—and suggests a compelling investment opportunity.
