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    Gavekal Research

    Four Quadrants For Emerging Markets

    Last week, Charles Gave updated his Four Quadrants view. Udith takes it a step further, combining the quadrants with another two-by-two framework by Michael Power of Ninety One to gleam insight into what the changing macroeconomic environment means for emerging markets, and who will be the winners and losers.

    5
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    Gavekal Research

    Video: Musical Chairs At The Fed

    After the resignation of two regional Federal Reserve branch presidents over potential conflicts of interest, the knives are out in Washington for Jay Powell. In this video interview, Will assesses what personnel changes at the Fed may mean for the trajectory of US monetary policy and for the Fed’s role as US banking supervisor.

    0
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    Gavekal Dragonomics

    The Sun King

    As the US and Europe pursue more serious green agendas, they are wondering if they can wrest back production of solar power from China. The answer: probably not. China is not just the low-cost producer, but also the technological leader. In this piece, Dan explains why the global deployment of solar energy will depend heavily on China.

    0
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    Gavekal Research

    Energy And The Euro’s Exchange Rate

    It will come as news to no one that energy prices and exchange rates are intimately connected. Historically, over the last 20 years, the euro has tended to be positively correlated with the price of oil, while the broad US dollar exchange rate has tended to be inversely correlated. So, over the first half of 2008 as the price of oil surged to a record high, the euro hit its all-time high against the US dollar. And in 2014 as the oil price...

    0
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    Gavekal Dragonomics

    What's Next For Internet Platforms?

    With the results in for China’s antitrust investigation of food-delivery giant Meituan, Ernan writes that the direction of China’s antitrust policy is now becoming increasingly evident, with clear guidance from regulators reducing uncertainty. However, platform profits should continue dwindling as their business models are chipped at by regulators.

    0
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    Gavekal Research

    Labor And The Age Of Shortages

    The leader of the British Labour Party, Keir Starmer, missed a political trick at his party conference in late September when he failed to quote Labour’s late deputy leader, Aneurin Bevan, who told the party’s 1945 conference, “This island is made mainly of coal and surrounded by fish. Only an organizing genius could produce a shortage of coal and fish at the same time.”

    2
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    Gavekal Research

    London Seminar — September 2021

    In our recent London seminar, Thomas Gatley addressed China's changed business environment and Tom Miller unpicked US-China geopolitical tensions. Charles Gave and Anatole resumed their dialogue about the future of the world economy in their first in-person sparring session since the pandemic started.

    0
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    Gavekal Research

    Video: Entente Discordiale

    As if a tight labor market, rising inflation and widespread fuel shortages weren’t enough to contend with, the United Kingdom is also seeing a sharp deterioration in its relations with the European Union, and France especially. Nick examines what worsening cross-Channel relations could mean for the economies of the UK and EU.

    0
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    Gavekal Research

    A Temporary Respite

    Going into 4Q21, a worry for Will had been that asset prices faced the prospect of two tightening moves to US liquidity. Yet, with Congress now punting a debt-ceiling reckoning to December, this could, in turn, delay the Fed’s taper announcement to December, or even January. Thus, yesterday’s deal on Capitol Hill could allow temporary relief on the liquidity front.

    2
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    Gavekal Research

    Webinar: Global Investment Roundtable, October 2021

    In Thursday's Global Investment Roundtable, Louis argued that shortages of everything from microchips to natural gas are structural in nature and augur a radical change in the investing environment. Anatole, in contrast, said that current supply disruptions are likely transitory and the inflation panic should pass relatively soon.

    0
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    Gavekal Research

    What, Me Worry?

    There is a growing drumbeat of commentary arguing that today’s shortages of everything from microchips to natural gas must end in an inflationary blowout and a return to the lascivious 1970s. Anatole thinks that today’s shortages are likely to correct relatively quickly, and for investors the coming period is more likely to resemble the 1950s.

    2
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    Gavekal Dragonomics

    Housing & Construction Review 2021

    China’s post-Covid property boom has unwound more rapidly than expected this year as the government’s tough policies drive developers into distress. In her annual chartbook, Rosealea explains the outlook for the rest of 2021 and 2022. Further declines in housing sales and construction will come, but policy adjustments can limit their magnitude.

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    Gavekal Research

    A Shifting Economic State

    Regular readers may be familiar Charles's my longest-serving analytical tool, the Four Quadrants framework. It aims to represent the four economic states that at different times can exist in a market economy. Through this prism, he examines current market conditions to figure out where in the quadrants we are, and where we're headed.

    3
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    Gavekal Research

    The Price Of Policy

    Wherever you look, energy prices are shooting up, and shortages abound. The global economy, it seems, is in the grip of a full-blown energy crisis. Drill down, and it appears this is not one crisis, but many. The effects—worsening shortages and surging prices—are much the same in differentregions. But the immediate causes of the crunch seem to differ widely.

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    Gavekal Research

    Fixing Italy

    The results of this weekend's municipal elections in Italy look to have buttressed Mario Draghi’s national unity government, which is half way through an ambitious overhaul of core institutions that have failed the country for decades. With 70% of Italians favoring Draghi’s initiative, and no general election due until mid-2023, the betting is that he gets to finish the job.

    1
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    Gavekal Research

    A Crabwise ‘Recoupling’

    The Biden administration continues its crabwise efforts to craft a China strategy balancing national security and economic interests. The challenge is that Biden wants to maintain the basic stance established by Donald Trump—“strategic competition”—while satisfying a wider range of interest groups and setting more realistic policy targets.

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    Gavekal Research

    Strategy Monthly: The Macro Risks Of Xi Jinping’s Agenda

    China’s leaders sought to use the country’s post-Covid boom to press ahead with reforms aimed at furthering Xi Jinping’s political goals. The resulting property slowdown, China Evergrande’s financial troubles and the flight out of internet stocks have hit both economic growth and financial markets. Despite this, no overt U-turn is likely.

    0
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    Gavekal Research

    The Least Bad Energy Policy?

    Today, policymakers in western countries and China are facing similar problems, including growing disparities in wealth between those who own assets and those who do not, and worsening energy shortages. So will policymakers in western countries, and especially in Europe, who are facing similar shortages follow China and impose energy rationing?

    2
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    Gavekal Research

    The Coming UK Recession

    Thursday saw UK GDP growth for 2Q21 revised up to a perky 5.5% from a previous 4.8%. Yet all is not well in shortage-plagued Britain. While other economies facesupply chain disruption and energy shortages, the “just in time” UK economy looks to be facing a perfect inflationary storm that could deliver a recession in 2022.

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    Gavekal Research

    Webinar: Having It Both Ways In Emerging Markets

    The question for emerging market policymakers is: do they follow the Federal Reserve and tighten monetary policy in anticipation of "taper tantrum II"? Or do they, instead, try and stimulate their weakened economies by keeping money cheap and hope this does not prompt a disorderly exit of capital?

    0
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    Gavekal Research

    The Chinese Power Problem

    The power shortages rippling across China threaten to weigh on economic growth that was already slowing more than previously expected. Manufacturing firms in provinces from Ningxia to Henan are being told they can only have limited electricity supply, and many are having to cut production in response. This combination of supply- and demand-side problems is clearly negative for growth, but if the current sharp slowdown in heavy industry continues...

    0
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    Gavekal Dragonomics

    Cauterizing Evergrande

    Chinese property developer Evergrande announced that it will sell a portion of its minority stake in Shenjing Bank to a local state-owned enterprise in Liaoning province. In this Quick Take, Xiaoxi explains that while the deal wont save the firm, it exemplifies how local officials can work to soften the impact of Evergrande’s unwinding.

    0
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    Gavekal Research

    Avoiding Sequels

    Like many other parents, Louis has seen his share of kids' movie sequels, which unfortunately fall much too short of the of the first installment. This reminds him of two “curve-balls” that investors are now having to digest. The first is the China Evergrande debt debacle. The second is the looming shortage of energy across most of the industrialized world.

    1
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    Gavekal Research

    Q&A: China’s Investibility

    In the last few weeks, as China Evergrande’s financial troubles have deepened, Louis and Gavekal’s China team have fielded a spate of questions from clients about China’s investibility. In this paper, Louis offers a distillation of these conversations, presented in a question-and-answer format.

    16
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    Gavekal Research

    The German Interregnum

    Germany is headed for a three-party coalition for the first time since Konrad Adenauer’s governments of the 1950s. Multiple options remain on the table but a center-left figure should eventually be sworn in as chancellor. The issue is that material differences over fiscal policy mean that coalition talks could drag out well into 2022. How these divisive issues are bridged will determine the way that Germany and Europe react to growing economic...

    0
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    Gavekal Research

    Video: The Divergence In Central Banking

    A material difference has opened up in both the actions and signaling of global central banks, as they exit from pandemic-era monetary policy settings. On the hawkish side is the likes of the Federal Reserve and on the dovish side the European Central Bank and a raft of Asian policymakers. The question is who could be on the verge of making a policy mistake.

    0
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    Gavekal Dragonomics

    Developers Need Loans

    How much financial stress can China’s developers take? Thanks to strict financial regulation and slowing sales, every channel of financing for developers is now tightening simultaneously. In this piece, Xiaoxi explains how this puts pressure on policymakers to ease those financing restrictions, and why bank lending is the most likely beneficiary.

    0
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    Gavekal Research

    The Times They Are A-Changin’

    Despite widespread fears that the troubles of property giant Evergrande will cause China's "Lehman moment", the renminbi's exchange rate against the US dollar has barely blinked, while Chinese government bonds continue their strong outperformance. Louis examines the facts and outlines the likely consequences that matter for investors.

    3
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    Gavekal Dragonomics

    Completing The Bond Connection

    The southbound channel of the Bond Connect program linking mainland China and Hong Kong debt markets started trading on Friday. In this Quick Take, Wei explains that although outflows are unlikely to be large in the early stages, the program should eventually carry major flows and help grow Hong Kong’s offshore bond market.

    0
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    Gavekal Research

    After The German Election

    The results of this Sunday’s German federal election are unlikely to generate any shocks when markets reopen on Monday. Nonetheless, the precise colors of the coalition that eventually emerges will matter a great deal to investors. Cedric reviews the possible coalition compositions and outlines what they will mean for fiscal policy, European integration and China.

    0
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    Gavekal Research

    Webinar: European Course Correction, Or Steady On Ahead?

    Germans will soon go to the polls, while the European Central Bank has denied media reports that it is considering raising interest rates early. In other words, there is no shortage of news and events that may make markets jittery. In this webinar our Europe team attempt to make sense of it all and plot Europe’s likely fiscal and monetary course.

    0
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    Gavekal Research

    Volatility In A Changed Economy

    It’s been a chastening, if not decisive, month for investors in US equities. The S&P 500 index has recovered ground, but still endured a -4% fall from its September 2 peak. On a historic basis, the drawdown was small but we have not seen many of them in the last 18 months. Bulls hope that having weathered worries about China and the Federal Reserve’s asset purchase taper, the ground has been set for US equities to hit new highs. My aim today...

    0
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    Gavekal Dragonomics

    Don’t Call It A Tech Crackdown

    China’s regulatory onslaught against companies like Ant Group, Didi Chuxing and Tencent has been widely referred to as a “tech crackdown.” In this piece, Dan argues that the government’s actions are less a sign that it has turned against tech than they are a rejection of the idea that the consumer internet is the peak of technological achievement.

    6
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    Gavekal Research

    Liquidity And Shortages

    It is possible the US equity market was simply confused on Wednesday, when it rallied after the Federal Open Markets Committee unfurled its communiqué. Or perhaps it was just oversold. Either way, the Federal Reserve revealed itself to be as hawkish as could have been expected. Asset purchases will be tapered “soon” and likely occur at a faster pace than last time around. Interest rates could be hiked next year and the Treasury will soon become...

    0
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    Gavekal Research

    Video: Asia’s Diverging Covid Strategies

    Asian economies are often lumped into the collective bucket of following “zero-Covid” elimination strategies. That has certainly been the case in most of the region’s big economies. However, there is increasingly an impetus by the better-vaccinated countries to fully reopen. Vincent surveys the landscape and draws some conclusions regarding preferred currency plays.

    0
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    Gavekal Dragonomics

    Webinar: The Evergrande Crisis

    Markets have reacted violently to China Evergrande Group starting to default on US$300bn of obligations. The worry is that a disorderly failure causes a systemic crisis that dents Chinese growth and upends other emerging markets. Our team of analysts think such a chaotic denouement is unlikely and a managed solution remains the most likely outcome. In this webinar, they explain their thinking.

    0
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    Gavekal Research

    The Anglosphere Doubles Down

    The “Aukus” security partnership sparked a diplomatic explosion when it was unveiled by Australia, the United Kingdom and the United States last week. As the smoke clears, America’s strategy to counter China is becoming clear. But the diplomatic fallout from Aukus also reflects a new reality. How does Europe fit into this brave new world, and how will China respond?

    10
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    Gavekal Dragonomics

    The Reversal In Iron Ore

    Over the past two months, iron ore prices have tumbled as China’s property market slows and local authorities expand restrictions on steel output. In this report, Rosealea explains why falling steel demand should cause prices to continue their decline, eventually settling at around levels of US$70-80/ton.

    0
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    Gavekal Research

    Evergrande’s International Risks

    The troubles of debt-laden Chinese property developer Evergrande are no Lehman moment, but they do pose a significant risk of international contagion across emerging markets, which investors would be rash to ignore.

    0
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    Gavekal Research

    Investing In Today’s Inflationary Environment

    Investing in a topsy-turvy macro environment can feel like a crapshoot. One way to seek order among chaos is to draw lessons from economic history. Louis examines the underlying causes of financial crises since the late 1990s and applies the lessons to consider the way in which the global economy and markets emerge from the pandemic.

    2
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    Gavekal Research

    No Escape From The Evergrande Effect

    Fears about the potential systemic risks posed by troubled property developer Evergrande reverberated through global financial markets on Monday. Unless China’s regulators seriously mismanage the situation, a systemic crisis in the country’s financial sector is not on the cards. Nevertheless, lenders will not be able to escape the costs.

    1
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    Gavekal Research

    Out Of The Congressional Quagmire

    Eight months after Joe Biden’s inauguration, the US president’s economic agenda remains bogged down, with two flagship spending bills stuck in Congress amid infighting among Biden’s fellow Democrats. In the coming weeks, however, there is a good chance of a compromise that will see one of the two cleared through the House of Representatives.

    0
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    Gavekal Research

    Going Electric In The Land Of The F-150

    The US government and the auto industry are now pulling in the same direction of decarbonizing transportation. In this piece, Yanmei asks if the emerging government-industry alliance can accelerate vehicle electrification, where the US has fallen behind Europe and China, and whether they can catch up to Tesla and foreign competitors.

    3
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    Gavekal Research

    Squeaky Bum Time For The US Economy

    As Covid cases rise in the US, most indicators point to a slowing economy. After August’s payrolls came in weak, activity measures and nowcasting readings have softened, while conditions in leading sectors like housing and autos have worsened. With the Citi US economic surprise index having fallen to -44.6 from close to zero a month ago, forecasters have been caught off guard by the slowdown. As Sir Alex Ferguson, the former Manchester United...

    0
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    Gavekal Research

    Webinar: Questions Arise As US Growth Slows

    As renewed Covid outbreaks curtail activity and the labor market starts to normalize, the US economy is no longer generating big upside growth surprises. Will the Federal Reserve defer its retreat from super-easy monetary policy, and what will come of the Biden administration's fiscal strategy?

    0
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    Gavekal Research

    Europe’s Energy Headwinds

    The United Kingdom got a sharp lesson in the perils of energy dependence on Wednesday. A fire shut down its imports of electricity—mostly nuclear-generated—from France, pushing domestic natural gas prices up by as much as 20% in intraday trading. The fire may keep as much as a third of the UK’s capacity to import power from France closed through the winter months. Given that the UK has the capacity to import 3MW from France and on average...

    2
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    Gavekal Research

    Video: Cryptos, NFTs And CyberPunks

    As investors have flipped between euphoria and dejection over the future of crypto-currencies and related digital assets, prices have had a crazy ride. In this video Will outlines a framework for thinking about valuations. Even if digital art sold as NFTs sticks around, the basic economics of their use case means they probably won't be great stores of value.

    0
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    Gavekal Dragonomics

    No Profits From Payments

    Online payments were one of the first and most prominent victims of China’s regulatory onslaught against internet platforms. In this piece, Xiaoxi explains how a combination of both tighter oversight and the pending launch of the digital renminbi is limiting platforms’ ability to monetize their payments businesses.

    0
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    Gavekal Research

    ‘Transitory’ Inflation And Government Intervention

    Tuesday’s US CPI release shed little light on the “transitory versus persistent” inflation debate. Airfares and hotel rates weakened on the delta outbreak. And surprisingly, rents remained muted, while used car prices rolled over even as new car prices surged. Still, US CPI gained 5.3% YoY, while core CPI rose 4% YoY. By the standards of recent decades, these are big numbers.

    5
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    Gavekal Dragonomics

    The Window Is Closing For Structural Reform

    China’s dismal August economic figures suggest that the “window of opportunity” identified by the Politburo in April, when officials hoped to take advantage of China’s post-Covid rebound to focus on longer-term structural priorities, is now closing. However, it is still too early to expect policymakers to shift gears into a supportive stance.

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