It took a while, but fear of contagion is gripping Wall Street. In the last week, the S&P 500 has fallen -8%, while 10-year US treasury bills have hit a new all-time low. Yet the risk-off move in US asset markets triggered by worries the coronavirus epidemic is turning into a global pandemic is at odds with underlying US fundamentals.
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Gavekal Research
February 27, 2020
Video: Still The Safest Port In A Macro Storm
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Gavekal Dragonomics
February 27, 2020
The Next Infrastructure Stimulus
As size of China’s growth shock from the coronavirus shutdown becomes clear, yet another infrastructure stimulus looks to be on the way. In this piece, Wei assesses the scale of the possible boost. The most likely outcome is that public-works spending accelerates to 8-9% in 2020 from just 3.3%, a nice boost but still well below historical peaks.
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Gavekal Research
February 27, 2020
The Fragility Of A Complex World
When, a couple of lifetimes ago, I played rugby, I never got injured. That’s because I was a little overweight, and slow, while the fast and agile players ended up with injuries. Why do I bring this up? The question investors must confront is whether the global economy is a slow but resistant beast of burden, or a finely tuned machine which has now been thrown off its axis.
The Coronavirus
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Gavekal Research
February 17, 2020
The Risk Of Falling Behind The Epidemic Curve
China’s government was slow off the mark in responding to the initial outbreak of the new coronavirus. Although the government is now fully mobilized to fight the outbreak, it risks falling behind the curve again—this time in responding to the economic damage wrought by its extended shutdown of normal life and business activity.
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Gavekal Dragonomics
February 13, 2020
The Hit To Consumer Durables
The government’s drastic measures to contain the coronavirus are certain to deliver major blows to the auto and smartphone markets. Fortunately, Thomas, Ernan and Dan report that a V-shaped recovery is the most likely scenario for both sectors. Neither will meet pre-virus growth expectations, but both will likely still see an improvement from 2019.
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Gavekal Dragonomics
February 12, 2020
The Lingering Impact On Property
While the 2003 SARS outbreak had only a transitory impact on China’s housing market, the 2020 coronavirus episode is proving to be much more serious. In this piece, Rosealea argues that the big hit to housing sales will leave developers short of cash and limit their ability to keep projects going. This points to a lingering drag on construction.
Global Strategy
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Gavekal Research
January 27, 2020
The Fourth Horseman?
It is unlikely Xi Jinping has spent much time studying Christian eschatology. But if he has, the Chinese president might be forgiven for thinking that after (trade) war, conquest (in Hong Kong) and famine (African swine fever), he now has to deal with the fourth horseman of the Apocalypse: Death (in the unwelcome shape of the Wuhan coronavirus).
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Gavekal Research
January 22, 2020
How Sturdy Are The Zeitgeist's Five Pillars?
The investment zeitgeist can be thought of as a set of assumptions that investors hold about structural growth drivers, key prices and policy approaches. An investment manager should understand what makes up the zeitgeist and how it is changing. Louis outlines five foundational pillars that he considers integral to the current situation.
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Gavekal Research
January 9, 2020
Ten Bears That Could See Off Goldilocks In 2020
With interest rates low, and growth that is neither too hot nor too cold, Anatole remains firmly in the “Goldilocks lives on” camp. But while a continued bull run is the most probable outcome for 2020, bears still lurk in the shadows.
Trade wars
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Gavekal Research
January 16, 2020
A Tough Ask On Trade, Trouble Brewing On Tech
The story we’ve been telling for the past few months is that the conclusion of the US-China trade deal will reduce global macro risk in 2020, but tech-specific risk will still be an issue because of continued efforts by the US to constrain the rise of China’s technology sector and in particular Huawei.
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Gavekal Dragonomics
January 13, 2020
Defense Drives US Decoupling
Although US President Donald Trump has called a truce in his trade war with China, the strategic tensions in the US-China relationship still remain. Therefore, as Lance explains in this piece, the US defense sector is already taking concrete steps to reduce its reliance on China for some products with direct military applications.
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Gavekal Research
January 2, 2020
What The Trade Deal Won't Change
President Trump has confirmed he will sign his trade deal with China on January 15, and the PBOC has reinforced its tilt to more dovish policies. This combination of events means the macro factors that drove December’s rally—a receding trade war and a global easing of monetary policy—are still in place for January, if increasingly priced in.
The US economy and markets
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Gavekal Research
February 13, 2020
The Dial Moves Against US Growth Stocks
The outperformance of growth over value continues, yet an increasing number of serious US managers are making the case for value. On the macro front the worry is of a strong economy that continues to have an inflationary vibe. Over the last five years, I have taken an equity growth bias. Now I’m shifting towards the value camp.
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Gavekal Research
February 10, 2020
A Sweet Spot For US Jobs
US non-farm payrolls came in stronger than expected in January. Examining more forward-looking data, such as job openings, many observers suspect the US jobs market may be heading for slower job creation and weaker wage growth in the coming quarters. These worries are likely misplaced.
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Gavekal Research
February 7, 2020
Bad Shocks Can Have Benign Effects
There are few people outside Donald Trump’s administration who think the US-China trade war was a good thing. There are surely even fewer who think the Wuhan coronavirus outbreak has any positive aspects at all.
Hong Kong
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Gavekal Research
January 14, 2020
Causes And Consequences Of Hong Kong Dollar Strength
Last summer, as Hong Kong’s police seemed set to run out of tear gas, betting against the Hong Kong dollar peg seemed like a safe bet. It hasn’t exactly worked out that way, and in recent weeks the Hong Kong dollar has strengthened to the strong side of its limited trading band. In this piece, Louis explains why.
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Gavekal Research
November 29, 2019
An American Intervention
After easily passing both houses of Congress, Donald Trump had little choice but to sign bills dictating the US government’s treatment of Hong Kong. Its significance will be determined by Beijing’s response, and for now that is likely to stay focused on achieving an interim trade deal that delivers a roll-back on US import tariffs.
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Gavekal Research
November 25, 2019
The Hong Kong People Speak
The last 15 years has seen pro-government parties in Hong Kong rely on voter apathy and division across the democratic camp to often rule the roost. That changed yesterday, with establishment parties getting thumped in local council elections as voters expressed anger at the government’s handling of violent street protests in the last six months.
China Tech
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Gavekal Dragonomics
January 30, 2020
Huawei Comes Out Ahead, For Now
American attempts to kneecap Huawei have run into several setbacks. Internationally, Europe is pushing back on demands to exclude Huawei from 5G networks; domestically, further sanctions have been stymied by bureaucratic infighting. Dan reports that the war is hardly over, and we are likely to see broader rules limiting Chinese access to US tech.
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Gavekal Dragonomics
January 13, 2020
Defense Drives US Decoupling
Although US President Donald Trump has called a truce in his trade war with China, the strategic tensions in the US-China relationship still remain. Therefore, as Lance explains in this piece, the US defense sector is already taking concrete steps to reduce its reliance on China for some products with direct military applications.
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Gavekal Dragonomics
December 5, 2019
The Pitfalls Of Beijing’s AI Strategy
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.
China's economic cycle
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Gavekal Dragonomics
January 8, 2020
The Mortgage Rate Reset
China’s central bank is moving forward with its interest-rate reforms, ordering mortgages to be reset based on the new loan prime rate. Rosealea explains that this shift will make monetary policy more transparent and effective by re-linking mortgage rates to official policy rates, but it does not herald a cycle of major cuts in mortgage rates.
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Gavekal Dragonomics
December 17, 2019
Stable Growth Without Undue Stimulus
China's latest economic figures show continued growth into the end of this year. In this report, Thomas outlines how these data points, combined with the fragile US-China trade truce, might give Chinese policymakers the space they need to achieve their goal of maintaining stable growth without resorting to excessive stimulus.
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Gavekal Dragonomics
December 11, 2019
Scenarios For 2020
Beijing has been largely successful in balancing a response to China’s economic slowdown with a need to continue its financial cleanup, but how sustainable is this delicate status quo? In this report, Andrew lays out different scenarios and the likelihood of policymakers being able to maintain their “selective easing” strategy through 2020.
Europe's economy
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Gavekal Research
February 6, 2020
Just When Things Were Looking Up
It seems the European economy can’t catch a break. After a grim year in 2019, especially for the manufacturing sector, the old continent entered 2020 with reasons for cautious optimism. Survey-based indexes of business optimism appeared to bottom out late last year. Then the Wuhan coronavirus hit China.
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Gavekal Research
January 13, 2020
The European Recovery Lives, Just
On the face of it, Germany’s industrial slump is still worsening. The worry has been that a cratering of Europe’s industrial economy proves bad enough to reverse the “internal” recovery spurred by super-easy monetary policy.
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Gavekal Research
December 12, 2019
Towards A Green Supply Shock
The “European Green Deal” announced with much fanfare on Wednesday was long on ambitious targets, short on implementation details about how they will be achieved. The lack of detail leaves investors to ask how Brussels’ green deal will affect the continent’s growth prospects. Here it is possible to set out some pointers.
Energy and commodities
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Gavekal Research
February 5, 2020
Don't Count On Oil To Fall Further
Nowhere in markets has the impact of the Wuhan flu made itself felt as forcefully as in the oil price. The price of Brent crude has fallen -24% in just four weeks to US$54.58/bbl on Wednesday morning in Asia on fears of massive demand destruction in disease-hit China. WTI has fallen by a similar amount.
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Gavekal Research
January 8, 2020
The Message Behind The Missiles
At very first glance, the Iranian missile attack on two US airbases in Iraq early Wednesday might appear to confirm worst case fears that the US and Iran are heading irreversibly towards all-out war.
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Gavekal Research
January 6, 2020
A Dispassionate View Of The Iran Crisis
To judge by the tone of the media coverage and much of the analysis since Friday, the world is teetering on the brink of an apocalyptic war in the Middle East between the US and Iran. But a dispassionate examination of the US-Iran confrontation indicates that the probability of an all-out shooting war between the two sides remains small.
India
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Gavekal Research
January 27, 2020
Cardiac Arrest In India’s Body Economic
Bad debts are clogging the arteries of India’s financial system. Two policy developments at the end of 2019 raised hope of recovery. A Supreme Court judgment set a precedent for resolving bankruptcies more quickly. And the insolvency code was extended to cover non-bank financial companies.
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Gavekal Research
January 7, 2020
Expensive And Vulnerable
Few major economies and markets are more exposed to a possible Middle Eastern conflict than heavily oil-import-dependent India.
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Gavekal Research
December 4, 2019
India Macro Update: Stuck In A Rut
After India’s economic growth rate slumped to a six-year low in the third quarter, the government of Narendra Modi is throwing fiscal caution to the winds in an attempt to juice up growth.
Video
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Gavekal Research
February 19, 2020
Video: Will The Economic Contagion Hit Europe?
Europe’s financial markets are sending mixed signals. On one hand, fears about the eurozone's exposure to China’s coronavirus-hit economy have pushed the euro to a 21-month low against the US dollar. On the other, euro-denominated stocks are hitting record highs. In this interview Nick examines the mixed message.
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Gavekal Research
February 14, 2020
Video: Hong Kong's Viral Woes
For Hong Kong’s economy, already in recession after eight months of anti-government street protests, the Chinese coronavirus outbreak comes as a fresh blow falling on the existing bruise. Inevitably, the effect will be painful. Yet as Vincent explains, the Hong Kong economy has considerable resilience.
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Gavekal Research
February 6, 2020
Video: When Oil Hits The Floor
No financial market has been hit more heavily by the Wuhan coronavirus than oil, with the price of crude falling by more than -20% from its early-January high on fears the outbreak will crush China’s demand for fuels.
Brexit and the UK economy
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Gavekal Research
February 14, 2020
The Downing Street Putsch
Ever since turning negative on sterling and the UK economy when Boris Johnson dropped his post-election bombshell announcing a new “No Deal” deadline of December 2020, I have been waiting for a chance to double-down on this bearish position. On Thursday, Johnson provided such an opportunity to extend short positions in sterling.
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Gavekal Research
February 13, 2020
Paying Your Way In The UK
A triumphant Boris Johnson is set on consolidating a new electoral coalition through big infrastructure projects that help “level up” forgotten regions, but he faces a weak economy and tough negotiations with the European Union over Britain's trading relationship.
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Gavekal Research
January 31, 2020
Britain’s Soggy Prospects
Despite a worsening coronavirus situation and worries that a Brexit bounce could be short-lived, the Bank of England defied the expectations of many by not cutting interest rates.
Emerging markets
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Gavekal Research
February 12, 2020
Opportunities In Asian Easing
Economists are still trying to assess how severe the economic fallout from China’s coronavirus outbreak will be for the rest of the region, but local central banks are not waiting to find out, and are already either cutting interest rates or promising to cut them.
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Gavekal Research
January 14, 2020
Asia's Currency Manipulators
The US decided on Tuesday to drop its designation of China as a currency manipulator. Beyond the short term politics of US-China bilateral relations, the Treasury's report was also notable for the countries named on its “monitoring list” of potential currency manipulators.
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Gavekal Research
January 9, 2020
Embrace The EM Rally, Selectively
Washington and Tehran are dialing down the geopolitical tensions, at least for now. The US and China are about to sign a trade deal. Big central banks are spraying around liquidity. And the mighty US dollar is looking mortal.
Deep Dives
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Gavekal Research
February 7, 2020
Audio & Transcript — Gavekal Research Call February 2020
In yesterday’s research call, Vincent Tsui and Tom Holland joined Arthur Kroeber to discuss the coronavirus outbreak, what it means for Chinese and regional economic growth, and how investors should position themselves during this period of rapid news flow and high market volatility.
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Gavekal Research
February 3, 2020
Strategy Monthly: The Wuhan Virus And Emerging Markets
The rapid spread of the Wuhan coronavirus has spooked investors and triggered steep sell-offs in Chinese and Asian markets. But there are good reasons to hope the spread of the disease will be contained in the coming weeks, at which point Chinese and regional equities can recover.
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Gavekal Research
December 4, 2019
India Macro Update: Stuck In A Rut
After India’s economic growth rate slumped to a six-year low in the third quarter, the government of Narendra Modi is throwing fiscal caution to the winds in an attempt to juice up growth.
Chinese property
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Gavekal Dragonomics
February 12, 2020
The Lingering Impact On Property
While the 2003 SARS outbreak had only a transitory impact on China’s housing market, the 2020 coronavirus episode is proving to be much more serious. In this piece, Rosealea argues that the big hit to housing sales will leave developers short of cash and limit their ability to keep projects going. This points to a lingering drag on construction.
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Gavekal Dragonomics
January 8, 2020
The Mortgage Rate Reset
China’s central bank is moving forward with its interest-rate reforms, ordering mortgages to be reset based on the new loan prime rate. Rosealea explains that this shift will make monetary policy more transparent and effective by re-linking mortgage rates to official policy rates, but it does not herald a cycle of major cuts in mortgage rates.
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Gavekal Dragonomics
November 21, 2019
The Crackdown On Developer Financing
China’s financial regulators are squeezing funding for property developers in order to discourage land speculation and cool down property prices. In this piece, Rosealea argues the crackdown has been fairly successful, and does not pose a big risk to construction. Slightly easier demand-side policies will help offset tough supply-side restrictions.
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’.