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    Gavekal Research

    India Macro Update: Down But Not Out

    India’s economic recovery was hit by the April-May surge in Covid-19 infections, with the only silver lining being that the second wave was less economically damaging than the first one. With cases now declining and many states opening up, the worst of the economic disruption should be over. However, the outlook for investors in the key asset classes is challenging.

    0
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    Gavekal Research

    A Different Kind Of Inflation

    China’s producer price gauge is surging, stoking fears that the country is both succumbing to global inflationary pressures and stirring them up. However, such fears are misplaced, writes Thomas, since China does not face the kind of bottleneck problems blighting the supply-side of the US economy.

    0
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    Gavekal Research

    The One For All Problem

    Now that a deal has been done on corporate taxation, this weekend’s Group of Seven summit will focus on helping low-income countries roll out Covid-19 vaccination programs. Given inevitable production and distribution problems, the world is unlikely to be fully vaccinated before the end of 2022.

    0
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    Gavekal Research

    Video: Weighing The Fed’s Unconventional Options

    The Federal Reserve’s next move is likely to be verbal guidance over a tapering of asset purchases, argues Will. That is increasingly a consensus market position, so in this interview he explores other policy options that the Fed could choose to pursue.

    0
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    Gavekal Research

    When To Fade The Chinese Equity Rally

    After officials moved against crypto-currency and commodity speculation a few weeks ago, investors jumped back into equities, perking up a market that had been moribund since March. However, on balance, this looks like a counter-trend rally that should ultimately be faded, as the corporate profit cycle is starting to roll over.

    1
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    Gavekal Research

    Why Am I Hearing This Now?

    Two big storylines have recently emerged in Western media and Louis is not convinced this is down to editors stumbling on new information. In the case of the Wuhan “lab leak” theory and China’s suddenly challenged demography, he thinks that both the US and Chinese governments have an interest in spinning new narratives.

    21
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    Gavekal Research

    Thin End Of The Corporate Tax Wedge

    Counterintuitively, the agreement on a global minimum corporate tax rate struck at the weekend by G7 finance ministers may in the near term prove positive at the margin for global equities in general. In the longer term, however, the weekend’s agreement is likely to prove the thin end of the corporate taxation wedge.

    0
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    Gavekal Dragonomics

    The Urbanization Surprise

    China’s 2020 census revealed that urbanization has been faster over the past decade than official statistics showed. That means the fundamentals for housing demand are stronger than most had realized. As Rosealea argues in this piece, the census should drive an upward reassessment of long-term trends in China’s urbanization and commodity demand.

    0
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    Gavekal Dragonomics

    Video: Fixing China’s Population Crunch

    China’s latest census revealed a low fertility rate, pointing to the population soon topping out. In response, the government has said that couples can now have up to three children but, as things stand, there is no reason to think that they will. In this video interview, Gilliam assesses the various policy levers that the authorities can pull to stop the Chinese nation getting smaller.

    0
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    Gavekal Research

    Supply Squeezes ≠ Consumer Inflation

    As the eurozone’s economy reopens, supply squeezes are intensifying at the same time that producer price inflation is rising rapidly, sparking fears that pandemic-induced supply chain disruptions at a time of booming demand will soon feed through into a sustained rise in the consumer inflation rate. These fears are overstated.

    0
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    Gavekal Research

    Webinar: Global Investment Roundtable, June 2021

    The big question is still about how durable the current burst of inflation will prove to be. Anatole and Louis joined Arthur to debate this—and everything else going on in the world economy—at our monthly global investment roundtable.

    0
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    Gavekal Dragonomics

    The Xinjiang Pressure Test

    The US government’s criticism of China’s treatment of the Uyghur minority in Xinjiang, and China’s government’s tough response, is a very public test case for multinationals with China operations. They don’t want to take sides. But as Dan explains in this piece, foreign companies will, if forced to choose, move closer to the US position.

    0
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    Gavekal Research

    Strategy Monthly: Tapering Without The Tantrum?

    The US Federal Reserve’s April minutes revealed that some policymakers are keen to begin talking about tapering the Fed’s assets purchases. In 2013, talk of Fed tapering triggered a traumatic sell-off in emerging market assets and currencies. So how great is the risk of a similar emerging market rout this time around?

    0
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    Gavekal Research

    Here Comes The US Capex Boom

    Amazing as it sounds given all that has happened in the last 15 months, the US economy is already entering a “mid-cycle” phase that should change the drivers of growth. Sectors like housing and durable goods have enjoyed double-digit growth over the last year, but now face head winds. In contrast, firms across the US seem set to go on a capital spending binge.

    0
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    Gavekal Dragonomics

    Striking A Balance On Steel Restrictions

    China’s steel output restrictions are softening following a sharp downward price correction. Rosealea writes that while environmental targets prevent officials from abandoning production curbs altogether, they will need to introduce demand-side constraints to match these supply-side measures and to avoid a repeat of the recent price dislocations.

    0
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    Gavekal Research

    When Money Becomes Spending Coupons

    Something is changing in the way our capitalist systems create money. For at least 200 years, Charles argues, money-creation began with a request for credit by an economic agent. In the new system, we are seeing the issuance of what amount to “spending coupons”. These coupons will never be retired, and he worries that over time their numbers will rise exponentially.

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    Gavekal Research

    Europe’s Savings Fuel

    Like their American cousins, Europeans are itching to cast off their pandemic shackles, have fun and go shopping. But when and how much? The first point will depend on the threat posed by new Covid variants, but the news there is cautiously encouraging. As for the quantum of the comeback, a useful gauge lies in eurozone household savings levels.

    0
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    Gavekal Research

    Asia’s Big Fiscal Shift

    The lesson Asian policymakers learnt from the 1997-98 financial crisis was the importance of self-reliance. In its aftermath, they deployed undervalued exchange rates to pursue export-led growth and secure big current account surpluses that gave central banks ample forex reserves. To cut their reliance on foreign capital for deficit financing, they limited both public spending and domestic demand. The effort ensured a stable macro environment...

    0
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    Gavekal Dragonomics

    Seriously, Cool It With Currency Appreciation

    China’s central bank responded to the renminbi’s continued appreciation by raising the foreign-currency reserve requirement ratio from 5% to 7% effective June 15, the first change since 2007. Wei explains why this policy shift makes it clear that officials are becoming increasingly uncomfortable with the renminbi’s trade-weighted exchange rate.

    0
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    Gavekal Research

    A Resounding “Nein” To European Inflation

    Inflation rates are popping higher all over the world. Even in the eurozone, consumer inflation is set to exceed the European Central Bank’s target in the coming months. Yet like previous spikes in European inflation over the last two decades, this one too is set to prove short-lived. In the eurozone’s largest economy, powerful disinflationary forces are at work.

    0
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    Gavekal Research

    Accomplishing The Fed’s Mission

    Another week, another discourse on US inflation, this time triggered by the personal consumption expenditures index rising 3.6% year-over-year in April, the fastest gain since 2008. Some of that is base effects, but not all: since the Federal Reserve refined its 2% inflation target to an “average” 2% last August, the PCE index has risen at an annualized 3.5%. The point of the Fed’s change was to “make up” for misses and better anchor long-term...

    1
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    Gavekal Research

    The Slow-Motion Reverse Asian Crisis

    With hindsight, the key event impacting the global investment environment in 2020-21 may not have been the Covid pandemic but the renminbi’s strengthening. This is the first global crisis of the modern era when China has reacted by allowing its currency to appreciate. In this report, Louis outlines likely reasons for this change of policy in Beijing and the investment implications.

    6
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    Gavekal Research

    The Odds Of Oil Breaking Out On The Upside

    Since January, most commodity prices have ripped higher, with materials and energy among this year’s best performing sectors. So where do we go from here? Obviously, the price of energy marks the spot where current supply meets current demand. And when looking at oil prices today, there are both bullish and bearish arguments to be made on either side.

    4
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    Gavekal Research

    Webinar: The Commodity Spiral

    Global commodity prices have been on a tear in recent weeks due to strong global growth prospects and constricted supply. The macro picture, however, is murky, with China simultaneously being the driver of soaring iron ore prices while moving to tighten controls over property and infrastructure spending. Rosealea and Louis explained the overall outlook for metals and energy.

    0
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    Gavekal Research

    Further Upside For Eurozone Equities

    Year-to-date, the MSCI EMU index has recorded a total return of 15% in US dollar terms. The MSCI US has managed only 12%. Go back to the beginning of November, when hopes for Covid vaccines began to boost markets, and the performance differential is even more pronounced. Eurozone equities have returned 44%, compared with 31% for US equities. The eurozone has outperformed even though it was late to start vaccinating and slow to bring vaccination...

    0
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    Gavekal Dragonomics

    The China Inc. Annual Report 2021

    China’s companies are enjoying a historic boom as domestic and global demand bounces back from the shock of Covid-19. But how long will it last, and what will the longer-term effects be? In this annual chartbook, Thomas lays out the fundamentals of China’s corporate sector through a detailed examination of income statements and balance sheets.

    0
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    Gavekal Research

    A Cooling Market For Cars and Houses

    With stimulus checks having been sent and the jobs market recovering, last month saw the biggest jump in US car sales for at least 35 years. Will Denyer and I have been bullish on autos (and for similar reasons, housing) for the last year. Yet just as the punch bowl fills up, it looks time to get more cautious.

    4
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    Gavekal Research

    Red Alert In Southeast Asia

    As the global contest between China and the United States intensifies, Southeast Asia is on the front line. Investors should pay attention to this test case of superpower rivalry as the region is home to 650mn people, a US$3trn economy and critical global supply chains. Any substantial disruption would have a material knock-on effect for markets outside of the region.

    0
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    Gavekal Dragonomics

    After The Vaccine

    China’s Covid-19 vaccination program has significantly accelerated in May, bringing it on track to reach its target of administering at least one dose to 40% of the population by end-June. In this report, Ernan explains why this achievement does not mean the country will be opening its borders or removing domestic precautions this year.

    1
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    Gavekal Research

    EMs And The Inflation Equation

    A defining reason to hold emerging market risk assets is their better growth prospects relative to more stable developed economies. Over the last year, this premise held true as pandemic-induced domestic economic weakness in emerging economies was offset by strong external demand. Yet as Europe and the US hurtle towards a full opening, EM economies’ relative growth prospects have dimmed, while inflation pressures threaten a possible Federal...

    0
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    Gavekal Research

    Video: Buy The Crypto Dip?

    Crypto-currency prices have plunged in the last two weeks on a bad brew of news. Will wants to believe in crypto-currencies as an alternative form of money. However, he has struggled to see how such tokens make the jump to being “money”, with all that entails. The question is whether after such a big price drawdown, this skepticism is now discounted into the price.

    0
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    Gavekal Research

    No Reason To Reverse A Weak Dollar Call

    The US dollar is nearing the bottom of its trading range, so does it bounce back, or break lower? In 1Q21, the US’s rapid vaccination rollout and improving economic outlook spurred the dollar’s rebound. In early April KX argued that as other nations followed a similar path, the relative strength of these factors would wane. This has played out, and there are other reasons to fade the dollar.

    0
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    Gavekal Dragonomics

    Calm Down About Currency Appreciation

    The People’s Bank of China reiterated that its exchange-rate policy has not changed, a signal to markets that they should not get too excited by speculation that officials will tolerate greater appreciation of the renminbi. Instead, Wei believes the PBOC is hoping for the currency to appreciate less against the dollar than against other currencies.

    0
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    Gavekal Research

    Profits And The US Reshoring Plan

    In selling his US$2.3trn infrastructure investment plan, US President Joe Biden says it will create millions of secure manufacturing jobs: “There is simply no reason why the blades for wind turbines can’t be built in Pittsburgh instead of Beijing,” he recently opined. While not successful, the reshoring of US manufacturing jobs was a key justification for Donald Trump’s mercantilist trade policy. Now, as Biden seeks Congressional votes for his...

    5
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    Gavekal Research

    The Market Reaction If Inflation Fears Recede

    On Tuesday I wrote a Daily note arguing that the market anxiety about US inflation is overdone, which generated a strong response from clients and Gavekal colleagues, who almost unanimously disagreed with my view. We can now be fairly sure that markets are not discounting the scenario I described. With this in mind, let me suggest some investment ideas.

    1
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    Gavekal Research

    Webinar: Inflation And Its Global Impacts

    Markets have been roiled by rising US inflation that seems to be returning sooner than expected, and similar inflationary dynamics are starting to be seen in Europe. Our team of analysts addressed the inflation outlook in the US, Europe and emerging markets, and offered views on what it means for asset prices in these markets.

    0
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    Gavekal Dragonomics

    The Consumer Recovery Is Still On Track

    April’s shaky retail sales figures have raised questions about the strength of China’s consumer recovery. Ernan explains that the figures should be taken with a grain of salt: a closer inspection of April consumption indicators reveals that these worries are unfounded, and that consumer spending is continuing to recover at a healthy pace.

    0
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    Gavekal Research

    Is This A Private Fight, Or Can Anyone Join In?

    The old rugby player in me cannot see a bar-fight without asking: “Is this a private altercation, or can anyone join in?” I feel much the same about the debate inside Gavekal about whether or not inflation is making a comeback. Here is my contribution to the brawl.

    4
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    Gavekal Research

    Trouble At The Coalface

    In April, Chinese president Xi Jinping pledged that China’s coal consumption will peak no later than 2025, and decline after that. This is good news for anyone worried about the world’s greenhouse gas emissions, but it will be a daunting challenge for Indonesia, where exports of coal to China are a major contributor to the local balance of payments.

    1
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    Gavekal Research

    Is It Gold’s Turn To Shine?

    Over the last year, the bubbles have just rolled on from one exciting asset to the next, with investors wondering which will follow. In this note, Louis explains why he thinks gold may be the next one.

    2
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    Gavekal Research

    Video: Renewed Covid Changes Asia’s Macro Drivers

    Many Asian countries face a worsening Covid outbreak, even as the region’s mostly commodity-importing economies face sharply rising prices for energy and raw materials. Asia did go into this crisis with significant policy headroom, so it retains room for action but as Udith and Vincent discuss in this video interview that is now narrowing.

    0
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    Gavekal Research

    Inflation Panic Is Another Buying Opportunity

    In recent days, Gavekal writers have outlined reasons to worry about the rise in US inflation. Anatole agrees with them that inflation will likely be higher in the next few years than in the previous decade, but he does not think that investors should worry about this. He says that the current ruction in markets is probably presenting investors with a “buy the dip” opportunity.

    19
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    Gavekal Research

    Not So Much Inflation, More Fiscal Dominance

    So far, the great inflation debate has centered on the United States. Europe has barely figured. That’s not surprising; although inflation and bond yields are both ticking higher in the eurozone, the levels are modest and the increases moderate compared with those in the US. Nevertheless, there is a debate in Europe concerning the European Central Bank’s policy priorities.

    0
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    Gavekal Research

    Q&A On The Inflation/Deflation Debate

    Last week Louis argued that each time inflation looked set to rear its head over the last 35 years, the global economy encountered a deflationary event. Yet today it’s not clear where a countervailing deflationary hit might come from. His report triggered some interesting back-and-forth with clients, and in this piece he replies to the key points raised.

    15
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    Gavekal Research

    The Data Against The Fed Stacks Up

    The US Federal Reserve prides itself on being “data dependent.” If it is truly data dependent, the Fed is going to find it increasingly difficult to justify its extremely easy monetary policy stance. The latest of the data points to stack up against it are professional forecasters’ inflation expectations, which the Fed has often lent weight to in the past. For the last two years, these have been subdued. Now—the last piece of the inflation...

    0
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    Gavekal Dragonomics

    Talking The Talk On Commodity Prices

    Domestic futures prices for iron ore, steel rebar and coal fell sharply last week after China’s government signaled concern about rising commodities prices. In this Quick Take, Rosealea and Wei explain that policymakers are counting on a mix of tougher demand and softening demand to cool down, if not reverse, the commodities spike.

    0
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    Gavekal Research

    Heading For The Med

    “Sell in May and go away,” has long been a popular adage in Europe, a continent renowned for its predilection for long summer holidays by the Mediterranean. Last year, however, “sell in May” would have proved disastrous as an investment strategy. This year too investors should treat the old saw with circumspection.

    0
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    Gavekal Research

    Webinar: The Semiconductor Endgame

    It is increasingly clear that shortages of semiconductors are both more widespread and intractable than first thought. In the near term, the fear is of cascading disruption along the Asian electronics value chain. In the medium term, however, it is possible that massive supply responses create a glut of chips that causes prices to eventually crater.

    0
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    Gavekal Research

    Hardly Transitory, But Not A Spiral

    After headline and core CPI readings hit multi-year highs for April, investors have inflation on their minds. The rise in US bond yields and continued fall in equities reflects fears that the Federal Reserve is behind the curve, and could be about to slam on the monetary brakes. My view is that these price pressures are far from transitory, but a spiral higher does not beckon.

    4
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    Gavekal Research

    The Future Of Chips Is Overcapacity

    Semiconductors are tough to come by these days, and the shortage will be deep and long-lasting. Yet chips are about to turn into more of a commoditized product, just as companies make huge investments in production capacity and governments spend big to achieve self-sufficiency on national security grounds. This will lead to permanent excess capacity.

    7
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