As more and more government bonds around the world slide into negative yield, investors can draw one of two conclusions: either the world faces an economic meltdown, or there is a buying panic in safe assets. But although there is indeed a synchronous global slowdown in growth, Louis favors the latter explanation.
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Gavekal Research
August 23, 2019
Video: The Anatomy Of The August Panic
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Gavekal Research
August 23, 2019
Making Biarritz Great Again
Some readers may know that my family is the majority shareholder in Biarritz Olympique Pays Basque, one of France’s oldest rugby clubs. Through this connection, I have had a front-row seat to the organization of the upcoming G7 meeting to be held in Biarritz over the next three days. When the city was chosen, I naively thought this was good news.
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Gavekal Research
August 22, 2019
India Macro Update: Hardly A Growth Agenda
India’s economy is weak across the board, weighed down by lackluster investment, anemic consumption and soft external demand. Deep reforms are needed to unlock the country’s economic potential. In this quarterly report, Udith and Tom offer a check-in on India’s growth outlook, explain why equities may be de-rated further and worry about the bond rally fizzling out.
Global Strategy
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Gavekal Research
August 12, 2019
Asian Currencies Remain A Shock Absorber
It has often been said that when the US sneezes the rest of the world catches a cold. In Asia, a similar link exists between the behemoth China and other regional economies. Hence when Beijing unexpectedly let the renminbi weaken through CNY7.00 to the US dollar last Monday regional currencies fell by 1.6% in the following five days.
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Gavekal Research
August 5, 2019
The Renminbi Devaluation’s Fork In The Road
Following the surprise renminbi devaluation of August 2015 policymakers in the world’s major financial powers acted to calm markets in what came to be known as the “Shanghai Agreement” of February 2016.
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Gavekal Research
July 31, 2019
Darwin Or Keynes?
Keynes advised that at the outset of a recession, policymakers should drive down market interest rates in order to borrow from future demand. Today’s central bankers have adopted this approach as permanent policy.
Trade wars
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Gavekal Research
August 9, 2019
A Trade Equilibrium Of Sorts
After a week of trade war scares, things have settled down into an equilibrium that is uneasy, but likely to last several weeks. The central question now is whether the new tariff on US$300bn of Chinese exports to the US will go into effect on September 1, or if Trump’s team will find some graceful way to back down from that threat.
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Gavekal Research
August 6, 2019
The Renminbi, Manipulation And The Trade War
Monday’s actions on the Chinese currency—Beijing’s decision to let the renminbi’s exchange rate weaken past CNY7.00 to the US dollar, and Washington’s decision to label China a currency manipulator—signal that the US and China are close to throwing in the towel on a trade deal. Trade war escalation should now be the base case.
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Gavekal Research
July 30, 2019
Shanghai Talks Now A Sideshow
Trade talks between the US and China resume today after a three-month hiatus. This meeting may or may not pave the way for a deal in the next several months, but it no longer matters much. The global macro risk from the trade conflict has ebbed dramatically.
The US economy and markets
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Gavekal Research
August 15, 2019
Panic Stations
I always try to be a rules-driven investor. And when the US stock market is down -3% in a day, taking it to -6% from its peak in three weeks, when 10-year US treasury yields have halved in nine months to just 1.55%, and when gold is up 20% in three months, it is a good time to review those rules to see what they can tell me.
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Gavekal Research
August 13, 2019
Joining The US Recession Camp
To listen to current commentary, you would think that US capitalism faced a Marxist end-of-times reckoning. Hence, it is noteworthy that the share of sales going to profits is now falling, while that going to labor is rising. Yet the latest US GDP report is still alarming for what it tells us about the state of the economy.
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Gavekal Research
August 5, 2019
The Long Term Impact Of Trump’s Latest Tariffs
Aftershocks from Donald Trump’s August 1 tweets promising new tariffs on US imports from China continued to reverberate through Asian markets on Monday morning.
The eurozone's political agonies
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Gavekal Research
July 3, 2019
The Meaning Of The EU's New Lineup
After three days of intense maneuver and counter-maneuver, on Tuesday the European Union’s heads of government announced their choice of names to lead the EU’s central institutions for the coming years. The result is a remarkable clean sweep for the favored candidates of French president Emmanuel Macron.
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Gavekal Research
June 18, 2019
The ECB After Draghi
At the ECB's annual shindig in Portugal this week, two questions matter. Given negative interest rates and capital key constraints over asset purchases, how does the ECB fight the next downturn? And who will replace Mario Draghi?
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Gavekal Research
May 27, 2019
Parliament Of Losers
For anyone who did not grow up in a Commonwealth country, one of the most perplexing things about the game of cricket is that matches can last for as long as five days, and at the end of it all still end up in a draw.
China Tech
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Gavekal Dragonomics
July 18, 2019
Huawei’s Path To Survival
The future of Huawei, China’s most successful electronics manufacturer, has looked bleak ever since the US put it on an export blacklist in May. But with the Trump administration proving willing to soften its export controls, and companies being able to find loopholes in them, it now looks like Huawei has a decent chance to survive.
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Gavekal Dragonomics
July 5, 2019
The Future Of Forced Technology Transfers
As China and the US restart their trade talks, negotiators face a daunting list of issues to resolve. One of the stumbling blocks is the US allegation of “forced technology transfer.” In this piece, Dan explains what China is doing to address the problem, how that might not be enough—and why forced transfers of technology don’t even always work.
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Gavekal Dragonomics
June 17, 2019
Taking Intellectual Property Seriously
It is easy to forget that the US trade war with China is founded on the issue of intellectual property—and to miss the fact that, despite the breakdown in trade talks, China is pushing through many legal changes to improve IP protection. But as Dan explains, while the technical improvements are real, so is political pressure on the legal system.
China's economic cycle
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Gavekal Dragonomics
July 9, 2019
The Emissions Mess In Autos
China’s auto market is still locked in the worst downturn in its history. In this report, Ernan explains how the government’s rushed transition to new vehicle-emissions standards worsened that downturn, and why it hasn’t reversed course. Though an end-year recovery for auto sales is still likely, 2019 will be a second bad year for the industry.
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Gavekal Dragonomics
July 3, 2019
Housing Policy Turns Cautious
Housing policy in China has taken a cautious turn, with policymakers more concerned about potential overheating in prices than worried about a downturn in sales and construction. In this piece, Rosealea explains how this shift is playing out through cuts in housing subsidies and changes to local policies, and evaluates the risks to the market.
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Gavekal Dragonomics
July 1, 2019
Macro Update: Trade Truce, Growth Tremors
It was a rocky second quarter for China, with trade tensions escalating and then easing, and domestic growth disappointing. In his latest chartbook, Chen Long assesses the current lay of the land. The growth slowdown is not over yet as macro policy has stayed relatively cautious, but easing trade tensions should boost equities and the currency.
Europe's softening growth picture
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Gavekal Research
July 11, 2019
France's Industrial Resilience
France is bucking the downturn in European—and global—industry. In May, French industrial production confounded expectations by rising an impressive 4% year-on-year. And crucially, French industry is creating jobs again after a brutal 17-year contraction. Cedric examines the reasons for France’s industrial health.
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Gavekal Research
July 4, 2019
Betting Against The Gods Is Now Impossible
Recently I made my usual remark to a European client about the stupidity of negative interest rates. My host told me a sobering story. He manages a pension fund and received a call by a regulator who said funds shouldn't hold too much cash because it's risky.
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Gavekal Research
July 3, 2019
An Asymmetric Opportunity In BTPs
The yield on 10-year BTPs has fallen below 2% for the first time since Italy’s populist government took office, yet investors continue to demand high premiums to hold Italian debt.
Energy and commodities
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Gavekal Research
June 25, 2019
The Iran Wildcard
Of the many risks besetting investors right now, the hardest to assess is the confrontation between the US and Iran. Should tensions escalate into a shooting war, the consequences would be far-reaching and severe.
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Gavekal Research
May 24, 2019
Video: Iran And The Oil Price
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.
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Gavekal Research
May 17, 2019
Oil Market 1, Commentariat 0
As if the macroeconomic impact of a full-blown US-China trade war weren’t enough to worry about, over the last couple of weeks investors have also had to contemplate the risk of a real shooting war between the US and Iran, the effect it would have on the price of oil and the threat that would pose to a fragile global economy and jittery world marke
India
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Gavekal Research
June 14, 2019
India Macro Update: Post-Landslide Lethargy
After the victory party, Narendra Modi’s reelected government's focus is shifting to structural reform, but Udith and Tom have fairly low expectations that this will materialize anytime soon and hold a cautious view on Indian risk assets. Such an environment should offer a reasonable outlook for government bonds.
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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
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.
Video
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Gavekal Research
July 12, 2019
Video: Modi's Second Term Challenges
Indian prime minister Narendra Modi faces some daunting economic challenges in his second term. As Udith explains in this interview, the biggest is to create new jobs India needs. In the coming decades, India must generate some 10mn new jobs every year simply to provide employment for the cohort of young Indians set to enter the workforce.
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Gavekal Research
July 5, 2019
Video: What Is Libra, And Will It Work?
Facebook will have an uphill battle trying to convince consumers to adopt its announced digital currency, libra. As it will be backed by a basket of assets denominated in different currencies, the prices of goods and services will be more volatile in libra than in existing local currencies, even in emerging markets.
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Gavekal Dragonomics
June 28, 2019
Video: What Drives Chinese Equities
Chinese equity markets are up around 26% for the year. Yet there has been no recovery in earnings growth, and the trade war and shaky domestic economic momentum continue to loom. The reason for the market optimism is expectations of supportive government policies, whether or not those expectations are valid.
Brexit and the UK economy
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Gavekal Research
May 22, 2019
May's Last Stand
When something unexpected happens and the market moves against you, it is usually best to cut your losses. But sometimes it is worth indulging the contrarian instinct. This month most of the pound's gains in the first quarter have been given up and sterling’s position looks dicey. But sterling bulls should not cut their losses.
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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.
Emerging markets
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Gavekal Research
July 17, 2019
No Time To Be Chicago Trained
Technocrats globally are under the cosh from populist politicians who have tired of doing the sensible thing. In the developed world, checks and balances have insulated most big agencies, but the story is different in developing economies.
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Gavekal Research
July 12, 2019
Normalizing Tech Disruption
Investors have been cheered by the US and China deescalating a trade dispute that has focused on China’s use of US technology. So what to make of a stand-off between two US allies in North Asia that could disrupt highly integrated technology supply chains?
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Gavekal Research
July 9, 2019
Emerging Markets After The Trade War
Emerging markets did nicely out of the rumor, less well from the fact. As hopes grew through June for some form of trade détente between the US and China, EM assets staged a broad rally. Similarly, EM currencies pushed broadly higher, on the back of a wider US dollar softness.
Deep Dives
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Gavekal Research
August 2, 2019
Strategy Monthly: Focus On The Fed, Not On US Tariff Threats
Trade war fears are once again front and center of investors' minds. But the reduced magnitude of pledged US tariffs indicates that Trump is anxious to avoid damaging the US economy and financial markets. This leaves the focus on the Fed, and how much it is likely to cut interest rates.
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Gavekal Research
July 12, 2019
Audio & Transcript — Gavekal Research Call July 2019
In yesterday’s Gavekal Research conference call, Louis-Vincent Gave, Anatole Kaletsky and Arthur Kroeber conducted a mid-year review of the investment environment and outlined their expectations for the rest of the year onward.
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Gavekal Research
July 2, 2019
Strategy Monthly: Should We Believe Equities, Or Bonds?
Record-high US equity prices seem hard to reconcile with the message sent by the lowest bond yields since 2016. Should investors hunker down due to the inverted yield curve, or jump aboard the equity bandwagon? In fact, both markets may be right in their own way.
Chinese property
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Gavekal Dragonomics
July 3, 2019
Housing Policy Turns Cautious
Housing policy in China has taken a cautious turn, with policymakers more concerned about potential overheating in prices than worried about a downturn in sales and construction. In this piece, Rosealea explains how this shift is playing out through cuts in housing subsidies and changes to local policies, and evaluates the risks to the market.
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Gavekal Dragonomics
May 23, 2019
The Household Debt Service Burden
The rapid rise in China’s household debt has become a major concern for markets and policymakers. While most analysis looks at the household debt-to-GDP ratio, in this report Ernan calculates the household debt service ratio for a better angle on the problem. She finds that the debt burden on household budgets will keep increasing in 2019.
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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.
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’.