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E.g., 20-09-2020
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    Gavekal Research

    Do Bubbles Predict Or Project?

    With the second quarter data season now in full swing, the rebound in equity prices that followed the Covid-19 panic seems to have stalled. So, what happens now? In this piece, Anatole follows up on Louis’s recent efforts to define reasons for the surge in equity values and proposes a fresh explanation centered on the nature of bubbles.

    5
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    Gavekal Research

    Video: A Fiscal Cliff Approaches

    With the Covid-19 outbreak in the US still worsening, special unemployment benefits that have provided a lifeline for 17mn Americans stand to expire at the end of next week. Yet unlike in March, there is scant appetite in Washington DC for a swift bipartisan deal to extend support for the jobless. In this video interview, Yanmei explains what is at stake for the US economy if politicians cannot make a deal before heading off for their summer...

    0
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    Gavekal Research

    Living With Hard Times

    Even as the Covid-19 outbreak materially worsens in the US, the pricing of financial assets remains benign. Is this equanimity justified or are we just waiting for the next shoe to drop? Myself and Will Denyer have been in the constructive camp on US equities, even if we are now squeamish about valuations, and continue to think that markets have it about right.

    0
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    Gavekal Dragonomics

    The Marginal Impact Of Housing Renovation

    The State Council recently announced a nationwide target to renovate 39,000 antiquated residential compounds in 2020, improving accommodation for 7mn total households. In this Quick Take, Rosealea explains how the target will provide space for local governments to further tighten property policy without upsetting China’s economic recovery.

    0
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    Gavekal Research

    The US Dollar Starts To Break Down

    The US dollar is back to the panicked lows of March when Western economies were being locked down. Back then the prices of financial assets reflected a lack of liquidity, rather than fundamentals. Today central banks have ensured ample liquidity, so Louis explores various reasons that could explain the US dollar’s apparent breakdown.

    0
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    Gavekal Research

    Webinar: The Direction For Europe

    Anatole Kaletsky, Cedric Gemehl and Nick Andrews joined Louis Gave to talk about what lies in store for the European Union in light of Tuesdays agreement on a €750 billion Covid-19 recovery fund.

    0
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    Gavekal Research

    Europe's Deal

    Most of the attention paid to the European Union’s recovery fund deal, secured in the early hours of Tuesday morning, focused on how much of the agreed €750bn would be distributed as grants and how much as loans. That’s understandable. Haggling over this balance was one of the main reasons the talks dragged on into their fifth day. But as far as investors are concerned, the relative size of grants and loans is among the least significant aspects...

    1
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    Gavekal Research

    The Consequences Of ‘Worthless Cash’

    In the second quarter of this year, global equity markets registered their best quarterly performance in two decades. In this, the third paper of a series about the record-breaking rebound, I will consider the possibility that the present growth in monetary aggregates is leading investors to conclude that they have no alternative.

    5
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    Gavekal Dragonomics

    The Next Steps In US-China Decoupling

    As the US election approaches, the Trump Administration is intensifying pressure on China on all fronts. In this report, Dan outlines the executive-branch agencies tasked with implementing sanctions and restrictions, what they have accomplished so far, and what tools are at their disposal should Trump decide to further escalate the situation.

    0
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    Gavekal Research

    Toward A Renminbi-Gold Standard

    As the international trading and monetary order of the last 50 years continues to crumble, the endgame must be the US dollar losing its lofty position at the apex of the system. Louis and I have argued that this process began in and around 2005 as the US moved to “weaponize” the dollar, thereby ensuring the renminbi’s emergence as a competitor.

    5
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    Gavekal Research

    What Will Stop The Gold Bull Market?

    The sustained outperformance of very large-cap tech stocks means that any manager who substantially underweighted the sector has likely lost clients. The exception may be those who favored gold and gold miners, which have experienced a “stealth” bull market. I say stealth because the precious metals rally has garnered limited headlines, scant investor interest and fewer reflections on either its causes, or consequences.

    2
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    Gavekal Research

    Unpicking The Tourism Effect

    Despite a worsening Covid-19 situation in many big developing economies and concerns over central banks’ monetization responses, emerging market investors continue to climb the wall of worry, betting that a putative “second wave” does not stymie the recoveries of developed economies and China. But another challenge for EM economies is a collapse in foreign tourism.

    0
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    Gavekal Research

    A Long Autumn For Covid In The US

    Covid-19 has largely gone into the rear-view mirror in East Asia, and has been tamped down in Europe, but keeps dominating the headlines in the US. Infections in the current US wave are likely to peak in the first half of August, while deaths will peak in late August or early September. Recovery in sectors with high levels of human contact will continue to be retarded through the summer. About one-eighth of GDP, and a quarter of the workforce,...

    4
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    Gavekal Dragonomics

    The Recovery Tapers Off

    Although Q2 GDP growth rebounded strongly after Q1’s significant contraction, sequential growth slowed considerably into June. In this Quick Take, Thomas, Rosealea, Wei and Xiaoxi report on why despite this latest rebound it will be difficult for the country to maintain its upward momentum as it moves into Q3.

    0
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    Gavekal Research

    From Temporary To Permanent

    “Nothing,” Milton Friedman famously declared, “is so permanent as a temporary government program.” He was right, which is one reason Wednesday saw the euro climb to its highest against the US dollar since the first days of the international Covid outbreak in early March, while 10-year Italian government bond yields fell to their lowest. Investors are betting that the European Union’s €750bn “Next Generation EU,” proposed as a temporary facility...

    0
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    Gavekal Research

    Video: Singapore's Policy Path

    Just days after securing another five years in power at the ballot box, Singapore’s government announced that the island republic’s gross domestic product contracted a worse-than-expected -12.6% year-on-year in the second quarter. However, with large accumulated fiscal reserves, the government has considerable scope to spend in order to stimulate Singapore’s economy.

    0
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    Gavekal Research

    A Simmering War Over Digital Taxes

    The US and Europe are in a standoff over how to tax digital companies. The US Trade Representative on Friday announced tariffs on French cosmetics and handbags, to take effect next year unless France drops plans to tax American tech giants. The worry is that such a dispute spirals, causing a further degradation of the global trade architecture.

    0
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    Gavekal Research

    Pick Your Side

    The British government’s decision to block Huawei from the UK’s 5G mobile network, confirmed yesterday, is further evidence that the post-Covid world is splitting into two opposing security blocs. International distrust of China is hardening along ideological lines, spurring liberal nations to prioritize national security over economic growth.

    0
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    Gavekal Research

    Oil’s Unintended Consequences

    On Wednesday, ministers from the Opec+ oil exporting cartel will meet to decide whether to begin scaling back their production cuts, but with the prospect of a renewed increase in infection rates, it's safe to say they will adopt a cautious approach. More interesting is whether they will err on the side of excess caution, causing the oil price to rise.

    0
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    Gavekal Dragonomics

    A Bumpier Road To Semiconductor Supremacy

    The Chinese semiconductor industry has made substantial progress over the last year, making credible gains in both design and production—despite attempts by the US to stymie China’s advancement. In this report, Dan explains how the US has escalated its anti-China campaign and outlines the rough road ahead for the industry.

    2
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    Gavekal Research

    India’s Pharma Problem

    India, the world’s pharmacy, is in danger of running out of drugs. The source of the danger is India’s deteriorating relationship with China, which provides up to 70% of the bulk ingredients for India’s pharmaceutical industry. Most Indian pharma makers hold at least two months of stock, but if the situation is not resolved, the global pharma supply chain could be disrupted.

    0
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    Gavekal Research

    Webinar: China's Capital And Bond Markets

    On Tuesday morning Thomas Gatley and Wei He joined Arthur Kroeber to discuss the Chinese equity bull market and the major reversal in the bond market.

    0
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    Gavekal Dragonomics

    How To Burst A Bubble

    Chinese equities surge ahead, and officials are worried that markets are coming dangerously close to resembling the dramatic boom and bust of 2015. In this report, Thomas makes the case that the current rally has no basis in fundamentals and outlines how regulators are trying to guide equities back to reality without causing a panic.

    0
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    Gavekal Research

    Beyond Second Quarter Earnings

    The US 2Q20 reporting season gets into its stride this week, and for all but a fortunate few the earnings numbers will be abysmal. But abysmal numbers will come as no surprise to investors, and will have little impact on the market. A reasonable prospect of upside earnings surprises in 2H and upward revisions in earnings estimates will help support equities.

    0
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    Gavekal Research

    Buy Europe, Sell The UK

    In past crises the UK has emerged more quickly than the eurozone. In 2008-09, it restructured its banks, slashed interest rates and embraced quantitative easing before European policymakers had eaten breakfast. As a result, UK domestically-focused stocks outperformed those in the eurozone. Don’t count on a rerun in the aftermath of the Covid-19 crisis.

    0
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    Gavekal Research

    Have Equities Become A Bubble?

    Two weeks ago, Louis proposed three possible explanations for the exceptional performance of equity markets in the second quarter, one of which was that investors have taken leave of their senses. In this, the second paper of a three-part series, Louis asks if equity markets are in a bubble. And if so—crucially—what sort of bubble is it?

    13
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    Gavekal Dragonomics

    The Monetary Policy Emergency Is Over

    The Chinese government bond market has seen its biggest reversal in more than three years. Conflicting policy signals have made the priorities of China’s central bank difficult to decipher; in this report, Wei explains why it has now clearly returned to its “selective” easing mode of delivering targeted rather than broad-based economic support.

    2
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    Gavekal Research

    Testing The Boundaries Of QE

    One major emerging market central bank this week sailed boldly into waters others have so far feared to navigate, when Bank Indonesia agreed to buy IDR574trn (US$40bn or 3.6% of GDP) of government bonds in the primary market at below market interest rates, so beginning the direct monetary financing of the Indonesian government’s fiscal deficit.

    0
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    Gavekal Research

    Video: What To Make Of Britain’s £30bn Stimulus

    This week UK Chancellor of the Exchequer “Dishy” Rishi Sunak lived up to his media nickname, dishing out an additional £30bn in fiscal support and stimulus measures. In this short video interview, Nick assesses their likely impact.

    0
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    Gavekal Dragonomics

    Local Support For Housing Is Peaking

    National housing sales growth is likely to accelerate in June following May’s rebound on the back of supportive measures from local governments and easier access to credit. In this report, Rosealea outlines how the surge in sales might peak soon due to diminishing returns from local government stimulus as well as more cautious monetary easing.

    0
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    Gavekal Research

    Germany's Moment

    Could this be Germany’s moment? The prospect of a disgruntled Italy walking away from the European Union spurred a German move towards new burden-sharing arrangements, but the conditions have been brewing within Germany for a few years as it became clear that its old export-led development model was cooked. Such existential fears are driving a newly creative approach to Europe at a time when the EU’s biggest economy may be set to benefit from...

    0
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    Gavekal Research

    Webinar: A New European Dawn?

    Yesterday Nick and Cedric presented on the topic of their latest Strategy Monthly: A New European Dawn. In this they argue that Europe is finally embracing fundamental reform that should change the investment environment. Anatole offered his take on why the European Union is heading in a “Hamiltonian” direction.

    0
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    Gavekal Research

    Learning To Transact Through Covid

    The Covid-19 flare-up in the southern and western United States threatens to slow the country’s recovery, but it is unlikely to be a rerun of the severe economic contraction seen in March and April. Since Americans are learning to maintain economic activity during Covid-19, a Nike swoosh or “stairstep” recovery seems more likely than the feared W-shaped outcome.

    2
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    Gavekal Research

    Is This What Capital Flight Looks Like?

    The bearish scenario for Hong Kong was that a combination of protests and Beijing’s heavy hand would trigger the flight of capital—financial and human—jeopardizing the peg and the financial system. Yet despite months of protests, and Beijing’s subsequent clampdown, the financial elements of this doomsday scenario have completely failed to materialize.

    1
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    Gavekal Research

    India Eyes Up Uncle Sam

    After the border clash with Chinese troops on June 15, India is on the verge of a strategic reorientation towards the United States that will reshape security in Asia. A full formal military alliance with the US would be a red rag to the Chinese bull, and therefore remains unlikely. But India is set to deepen its strategic partnerships with the US and other like-minded countries, especially Japan and Australia. It will also weaken its ties with...

    0
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    Gavekal Research

    Behind The Bull Run In Chinese Stocks

    Chinese equity markets are bounding higher on ebullient animal spirits. The CSI 300 index is up some 12.5% YTD in renminbi terms Monday morning. While the sequential rebound in profits from the first quarter’s dire situation has been heartening, the prospects for year-on-year earnings growth cannot justify this exuberance.

    9
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    Gavekal Research

    An Upgrade For The Jeep Portfolio

    In the Covid-19 crisis, Charles’s “Jeep” portfolio, introduced at the end of 2017 and expounded on in mid-2019, has amply demonstrated its worth, outperforming a pure equity portfolio, but with much lower volatility. In this paper, Charles reviews the Jeep portfolio once again, upgrading its components to navigate a post-Covid world.

    0
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    Gavekal Research

    Time To Run With The Herd?

    When a herd of cattle is being hunted by a pack of wolves, the worst thing any cow or bull can do is show individualism and originality by running off in a different direction from the rest of the herd. In financial markets, “the trend is your friend” expresses the same evolutionary logic. Are markets now displaying non-rational herd behavior?

    4
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    Gavekal Dragonomics

    Japan And Korea Split On China's Rise

    Japan and South Korea have responded differently to China’s attempts to peel them away from the US. Japan continues to align closely with its ally, while South Korea is more ready to accept that China as the regional power. In this report, Yanmei and Dan explore the logic behind these decisions and what they mean for the regional power balance.

    6
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    Gavekal Research

    The Rising US Covid Risk

    In the coming weeks, the headlines about Covid-19 in the US are all but certain to get much worse as case numbers rocket in many southern and western states. Higher case numbers will be accompanied by more hospitalizations, stories of overloaded hospital systems and (probably) rising death tolls.

    0
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    Gavekal Research

    Strategy Monthly: A New European Dawn?

    European nations have managed to lay the ground for a putative fiscal union. In a change of tack, Germany has changed tack by embracing demand management policies. Its new approach should drive a more balanced and domestically-focused recovery that may lift the eurozone-wide return on invested capital. Nick and Cedric argue that this changed dynamic is likely to attract foreign capital and lift the euro against the US dollar.

    0
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    Gavekal Dragonomics

    The Uneven Rebound In Consumption

    The recovery of consumption in China is coming, but it will be an uneven one. In this piece, Thomas explains how the combination of recent negative surprises on public-health restrictions with positive surprises on jobs and income will shape the trajectories of different consumption categories, from food to autos to electronics.

    0
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    Gavekal Research

    Competing Reserves Of Value

    In order to function properly, any economic system must have one or more trusted reserves of value, so that participants can factor time into their calculations. In recent decades the world has offered investors three principal reserves of value:

    6
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    Gavekal Research

    Video: Singapore Beyond July's Election

    Although a new opposition political party is making Singapore’s current election season somewhat more interesting than past campaigns, the outcome is not in doubt: the ruling People’s Action Party will be confirmed in power for another five-year term. In this short video interview, Vincent looks beyond the July 10 poll to survey the economic and market outlook for the island republic.

    0
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    Gavekal Research

    A Rare Growth Story

    Economic good news stories are almost as rare as hens’ teeth these days—almost, but not quite. On Tuesday Vietnam’s General Statistics Office released its advanced 2Q20 GDP estimate showing 0.36% YoY growth, meaning Vietnam is likely to be one of the very few countries in the world to register any growth at all during the second quarter.

    0
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    Gavekal Research

    Webinar: Global Investment Roundtable, June 2020

    Yesterday Louis Gave, Will Denyer and Andrew Batson joined Arthur Kroeber at the Global Investment Roundtable. They discussed the economic growth and market situation in the US, the state of the Chinese recovery, and what a post-Covid-19 world might look like.

    0
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    Gavekal Research

    From Bullish To Neutral

    There has been a lot of talk about how the rally in US markets has been driven entirely by irrational sentiment. We disagree, and have since late March argued that the rebound in risk assets was rational. Our assessment rested on four financial and economic pillars. Today a reexamination of these pillars suggests a moderation of our bullish stance.

    0
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    Gavekal Dragonomics

    The US Takes Action Against Military Fusion

    New regulations from the US Department of Commerce which go into effect on Monday could deny US-origin technologies to a broad swath of Chinese companies. In this Quick Take, Dan explores which firms are most at risk of falling afoul of these regulations and how their supply chains might be affected.

    0
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    Gavekal Research

    Towards More Of The Same?

    Investors looking at the impressive rally in global equities since mid-March have been forced to come to one of three conclusions: (i) the Covid-19-induced halt to our economies will soon fade away like a bad dream, (ii) equity investors are crazy, or (iii) a growing number of investors think the cash they hold is bound to become worthless.

    13
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    Gavekal Research

    What's US$1.6trn More Or Less?

    As three months ago, the prime case for holding US risk assets is the liquidity support provided by policymakers. But while liquidity conditions remain extraordinarily easy, and will continue to do so as long as inflation expectations remain depressed, in one respect at least the potential of surplus liquidity to push asset markets higher may have been exaggerated.

    6
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