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E.g., 28-10-2021
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    Gavekal Research

    What I’ve Given Up For Lent

    For Lent this year I decided to give up investing in gold miners. My priest said this was like giving up broccoli; for Lent you are meant to forgo something that feels good. I replied that the Church banned self-flagellation in the 14th century; by giving up gold, I would free my mind for higher purposes. I still ended up with three “Hail Marys” and three “Our Fathers” for penance.

    10
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    Gavekal Research

    Inflation And The Stock Market

    Despite a roiling US bond market sell-off, equity investors had until Thursday taken comfort from the Federal Reserve saying it would stay easy for longer. They were also fairly relaxed about a gentle rise in inflation, which seemed to be part of a "normalization" process as Covid-19 vaccines do their job and activity picks up. Charles and Didier are not so sure, and in this paper test the notion that limited inflation can, in fact,...

    2
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    Gavekal Research

    Webinar: Europe And The Politics Of Exiting The Pandemic

    Europe is at a strange juncture, as governments remain committed to massive fiscal and monetary support and refuse to rush into any economic reopening before Covid vaccinations are deployed. Yet despite this collective risk aversion, Italy has appointed a new technocratic government run by Mario Draghi that looks to have broad political support and a fairly radical plan for change. Our team explored Europe's exit from the pandemic and asked...

    0
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    Gavekal Research

    Video: Bitcoin—Money Or Snakeoil?

    Will Denyer examines the forces behind the eye-watering run-up and eye-popping volatility of bitcoin, and delves behind the near-term moves in crypto-currency markets to ask whether bitcoin and its ilk will ever gain traction as a unit of account, means of exchange or store of value.

    0
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    Gavekal Research

    Emerging Markets And Rising Yields

    As 10-year US treasury yields have pushed higher, investors have begun to reassess their enthusiasm for emerging market assets. Historically, rising US yields has seldom been accompanied by emerging market outperformance. Yet rising US yields are not necessarily negative for EMs, and there are reasons to think this time may well be different, at least for some EMs.

    0
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    Gavekal Dragonomics

    The Fate Of A Liquidity-Driven Rally

    The writing is on the wall for China’s post-Covid bull market as the underlying credit and profit cycles that typically drive prices over the medium term are turning down in 2021. In this report, Thomas explains why liquidity flows can trump these fundamentals for a while, but not indefinitely.

    0
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    Gavekal Research

    It’s A Policy-Driven Market

    US bond yields are rising as the growth outlook is boosted by the vaccine roll-out and sustained monetary and fiscal stimulus. US value stocks and the sectors hit by Covid restrictions are ripping. Growth investors, in contrast, are spooked about this situation, as much of their worth comes from earnings discounted far into the future. The investors' reactions to Federal Reserve Chair Jay Powell’s Congressional testimony on Tuesday reminded...

    0
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    Gavekal Research

    Beautiful In Heaven

    Like the players on a rugby team, assets in a portfolio should both be all-rounders and excel at a specific job. For four decades, US treasuries both offered a stream of positive real yields and provided an anti-fragile portfolio hedge in times of market turbulence. Now however, Louis argues that US treasuries are at risk of falling from the position of anti-fragile favor.

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    Gavekal Dragonomics

    To Hold Back The Tide Of De-Industrialization

    China’s government is focusing on a new economic metric: the manufacturing share of GDP, which looks to feature in the next five-year plan. Rather than accept de-industrialization, it wants “stability” in manufacturing. In this piece, Andrew explains why China is worried about the fall in the manufacturing share, and whether it can be stopped.

    2
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    Gavekal Research

    No Exit

    “We are not here to close spreads,” proclaimed European Central Bank president Christine Lagarde last March. “This is not the function or the mission of the ECB.” After the market took her at her word, Lagarde hastily back-tracked, and the ECB duly spent the following months doing exactly what Lagarde had said it would not.

    3
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    Gavekal Research

    Can Covid Vaccines Cure The Pound?

    The British pound has been the strongest major currency so far this year, contrary to Anatole’s expectations at the end of 2020. In this piece he outlines three reasons for sterling’s outperformance, but maintains that in the long term the pound will be forced lower.

    5
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    Gavekal Research

    The Changing Composition Of US Inflation

    Investors are all in a tizz about US inflation as the economy begins to normalize and the effect of a huge fiscal stimulus is factored into calculations. Inflation expectations are above the Federal Reserve’s target at 2.2% and energy base effects mean the personal consumption expenditure reading is sure to rise from December’s 1.3%. So far, market action has been focused in the bond market (see A Discussion On Treasury Yields) but equity...

    2
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    Gavekal Research

    Draghi’s Reform Plan And Asset Prices

    Newly installed as Italy’s prime minister at the head of a broad coalition, on Wednesday Mario Draghi outlined an ambitious agenda of structural reforms. Notably, the former European Central Bank chief wants to oversee a root-and-branch overhaul of Italy’s tax system, while investing in the education system and streamlining public administration. His first task will be to steer Italy through the pandemic. But beyond that, Draghi’s plans could...

    0
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    Gavekal Research

    A Discussion On Treasury Yields

    In recent days, long-dated US treasury yields have made a clear move higher. Unless there’s a violent turnaround in the coming days, February will mark the seventh consecutive month of flat-to-negative returns for treasuries This is an important development, with potentially far-reaching investment implications. Anatole and Louis discuss the outlook for yields, and the consequences for asset prices.

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    Gavekal Research

    Webinar: Emerging Markets In The Next Phase Of The Pandemic

    Emerging markets have had a strong run, fueled by floods of stimulus in developed markets. Much of that money has flowed to Asia, where export sectors have thrived on rich-world consumers’ demand for electronics and other goods. The question is whether Asian EMs will be able to keep up this outperformance as they lag far behind in the vaccination race. Our team addressed these issues, and considered whether commodity-based EMs can again have...

    0
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    Gavekal Dragonomics

    Stuck At Home For The Holidays

    China spent the Lunar New Year indoors and online. Travel over the seven days of the holiday declined 77% from 2019 levels, but sales of major retailers increased by 4.9%. In this Quick Take, Ernan explains how holiday restrictions and the January Covid outbreak in north-eastern China has depressed services and boosted retail sales.

    0
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    Gavekal Research

    Geared To Global Recovery

    Since the global recovery trade got going at the beginning of November, Japanese equities have performed respectably, returning some 24% in US dollar terms. But they have not outperformed. This is disappointing. With high operating leverage—the ratio of fixed to variable costs—and more than half their revenues generated overseas, Japanese corporates should be a clear play on global recovery. Indeed, the consensus-beating 3% QoQ rise in Japan’s...

    0
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    Gavekal Research

    Optimization And Fragility

    I have played rugby for most of my life, but in recent years I have seldom been injured. This is because I have grown heavier and slower. It is the guys who are fast and agile that tear knee ligaments and strain hamstrings. Why do I bring this up? Because investors need to ask whether the global economy is a slow but resistant lumbering beast of burden. Or is it a finely-tuned machine in danger of spinning off its axis? Gavekal has touched on...

    1
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    Gavekal Research

    China Versus The Anglosphere

    Beijing’s ability to weaponize its global trade power is concentrating minds from Washington to Canberra. On Tuesday it was reported that China has proposed controls on the production and export of rare earths. This threat is the latest example of why reducing critical dependence on Chinese trade is now a strategic priority for many countries, in particular those in the Anglosphere.

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    Gavekal Dragonomics

    The Next Steps On Hidden Local Debt

    In 2021, China’s central government is gearing up to once again tackle the hidden debts of local authorities, toughening its stance after a couple of lax years. As Wei explains in this piece, the solution is likely to be a mixed one, combining limits on new borrowing, partial bailouts of some debt, and a lot of kicking the can down the road.

    0
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    Gavekal Research

    The Long Bond Bait And Switch

    Ultra-long bond issuance is back in vogue in Europe. This month Spain has sold €5bn of 50-year bonds at a yield of 1.45%, while Belgium snapped out a 50-year issue at 0.69%. In January it was France, which sold a 50-year at 0.59%. Next up is likely to be Italy, which is expected to take advantage of the tightening in spreads following the appointment of Mario Draghi as prime minister (see Draghi’s Return) to come to market with a 50-year of its...

    0
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    Gavekal Research

    The Importance Of Taiwan

    Across Europe and the US, car plants are getting shuttered because of a shortage of microchips from Asia. This storm is centered on Taiwan, which for decades has been an unsung contract supplier of electronics and chemicals. For those who had not noticed, its firms now dominate high-end global chip production and current industry dynamics mean this grip is only likely to intensify.

    4
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    Gavekal Research

    Game Theory, With Complications

    Devotees of game theory are set to enjoy a rare drama playing out in front of their eyes in the oil market over the coming months. Since April last year the price of Brent crude has more than tripled. Now, with production constrained, inventories being drawn down, and vaccines promoting hopes of a return towards normal economic activity, expectations are high of further near-term price gains.

    0
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    Gavekal Research

    A New Super-Cycle?

    A surge in commodity prices has led to hopes for a new “super-cycle”. Bulls say that commodities have been in the doghouse for a decade, ensuring limited new capacity additions, yet demand is now getting supercharged globally by easy monetary and fiscal policies. Bears retort that commodity investors have a case of the vapors, as the next phase of global growth, especially in China, will be less resource-intensive.

    5
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    Gavekal Research

    The Trouble With Biden's Climate Plan

    In a frothy market, few sectors are as pumped up as green plays. Since US markets bottomed last March, the Nasdaq composite has generated total returns of 105%. Over the same period the Nasdaq Clean Edge green energy index has returned 403%. Moreover, the outperformance has accelerated since early November, which suggests the green sector’s gains are being driven in part by hopes of a favorable policy environment under Joe Biden’s administration...

    2
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    Gavekal Research

    Vaccines, Efficacy And Variants

    Despite volumes of new information and the lightning creation of vaccines promising a path out of the pandemic, uncertainty remains. Almost daily we are bombarded with a mix of good news (the vaccines work really well!) and bad (new mutations resist vaccines!) that make it hard to know whether we should rejoice or despair. This note provides a framework for assessing these persistent uncertainties.

    1
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    Gavekal Research

    Webinar: The Economic Impact Of A New Era

    Vaccines, fiscal stimulus and cheap money are working together to bolster the outlook for growth and inflation in the United States. The US is also under new leadership with new priorities. Our US team of analysts explained what this all means for the economy and asset markets.

    0
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    Gavekal Dragonomics

    Propping Up Property Sales

    Housing sales growth is holding up well despite financial tightening and hawkish policymaker rhetoric. In this report, Rosealea explains why regulators are pressuring developers to cut prices, while increased household savings means more families can take advantage of these discounts. 2021 will therefore likely be a strong year for housing sales.

    0
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    Gavekal Research

    A Canary Chirps

    In late January, just as the GameStop squeeze was beginning to attract attention, Louis advised investors “to keep European banks on their screens.” As the canary in the coal mine of global financial markets, eurozone banks would signal broader trouble ahead if they continued to fall. But if they rebounded, it would be a sign the global inflation trade was back on (see Third Time The Charm?).

    0
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    Gavekal Research

    US Inflation Has Many Fathers

    As the economics adage goes, inflation happens when “too much money chases too few goods”. This is an oversimplification but it does contain a core truth: the monetary price of goods is dictated by supply and demand factors that impact both the goods in question, and money itself.

    4
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    Gavekal Research

    US Banks And The Steepening Curve

    The brightening of the US economic outlook and the steepening of the US yield curve over the last three months have been positive for the shares of US commercial banks. The prospect of a return to normal as vaccination quells the pandemic means banks are more willing to extend credit. According to the Federal Reserve’s January senior loan officer survey, far fewer banks are now tightening their lending standards. Experience suggests this will...

    5
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    Gavekal Research

    Will Stimulus Cause US Overheating?

    The US Democrats are declining to cut the size of their stimulus proposals enough to secure bipartisan support, and are instead proposing to push the bulk of their US$1.9trn package through Congress using the reconciliation process (see The State Of Biden’s Stimulus). Their determination has raised fears that pressing ahead with such a large fiscal stimulus at a time when the US output gap appears to be closing fast could prove uncomfortably...

    4
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    Gavekal Dragonomics

    The Profit Cycle Has Peaked

    China’s corporate profits rebounded in 2H20 after a horrific start to the year, but the profit cycle is now close to its peak. Looking past huge base effects, Thomas believes underlying growth will fade toward 10% in the first half of this year and zero in the second—not a bad macro outcome, but slower profits usually weigh on equity markets.

    0
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    Gavekal Research

    Video: An Indian Blowout?

    Indian risk assets have ripped in response to last week's big-spending budget, and reports that a collapse in Covid-19 cases points to the country having achieved "herd immunity" ahead of max vaccinations. In this video, Udith considers both India's public health situation and the chances of fiscal stimulus kick-starting growth without spurring an adverse financial reaction.

    0
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    Gavekal Research

    Webinar: Uncharted Territory And Portfolio Construction

    Charles has sought to codify his many investment rules into a rigorous portfolio construction framework, which includes identifying periods when returns stop being normally distributed and move into the "tails". Right now markets could be going through a phase change, and in this webinar, he explained why. He was joined by Didier, who who heads the quant team in Paris, and Louis.

    0
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    Gavekal Research

    After GameStop

    Yesterday saw Treasury Secretary Janet Yellen chair a meeting of US financial regulators to assess the fallout of recent frenzied trading in “meme stocks”. There is unlikely to be a Dodd-Frank type response to this episode but a new administration may be motivated to act decisively. Yet the effect of GameStop may go wider, so consider the effect on the four key actors in the saga.

    1
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    Gavekal Research

    The Other Emerging Markets

    Until hit by a wobble in late January, emerging markets enjoyed heavy portfolio inflows over the last several months, and there are signs the risk aversion wobble is fading. Although the macro picture favors the currencies of Asia’s manufacturers, other less prominent forces could cause the currencies of non-Asian, commodity-exporting emerging markets to outperform.

    0
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    Gavekal Dragonomics

    Falling Behind On Vaccination

    Despite its early successes in containing Covid-19, China is lagging Western countries in rolling out a mass vaccination program. In this report, Ernan explains why Chinese policymakers are not treating mass vaccination as an urgent issue and why a slow vaccine rollout could result in a drag on economic growth in late 2021.

    0
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    Gavekal Research

    Six Reasons To Stay Bullish

    Is the recent speculative mania the beginning of the end of the post-2009 bull market in stocks? Or is it only the end of the beginning? Anatole argues that today’s speculation is reminiscent of the later stages of dot-com bubble, but he remains a confirmed bull on global equities. In this paper he offers six reasons why this is no contradiction.

    5
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    Gavekal Research

    Draghi’s Return

    Say what you like about Mario Draghi, but he’s not one to shirk responsibility in a crisis. Almost 10 years after he took the helm at the European Central Bank to steer the eurozone through its debt crisis, on Wednesday he is due to meet Italian president Sergio Mattarella, who will ask him to form a government and take over as prime minister.

    0
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    Gavekal Research

    The Cherry On The Cake

    After GameStop's wild ride, hedge fund managers must figure out where they can find "safe" shorts to counter-balance a portfolio’s longs positions. The effect of this quandary may be to change the investment environment in a way that either skews risk-taking, or just reduces it. This comes as a range of other factors, inside and outside of the US, are starting to flash red. For Louis, this all adds up to a new market mood that...

    0
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    Gavekal Dragonomics

    The Crackdown On Fintech

    Finance has been an exciting new frontier for China’s internet companies, as lax regulation and technological changes enabled a few years of rapid growth. This frontier era for fintech is now over. As Xiaoxi explains in this piece, China’s financial regulators are set on controlling what they now view as the overly risky growth of the sector.

    0
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    Gavekal Research

    India’s Go-For-Broke Budget

    Indian equities have risen 7.6% in the last two days, after the government of prime minister Narendra Modi threw fiscal caution to the winds in the 2021-22 budget it presented on Monday. India will attempt to spend its way out of economic crisis, with a five-year plan for deficit-fueled growth. “We have spent, we have spent and we have spent,” said finance minister Nirmala Sitharaman, after announcing big increases in capital expenditure with no...

    3
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    Gavekal Research

    The Real Effect Of The Vaccine Row

    The fiasco of Europe’s vaccination plan and Brussels’ retreat from its standoff with the UK and AstraZeneca have has caused the euro to weaken. While this reaction makes sense, the euro is, in fact, unlikely to fall much more against sterling, while the euro-dollar exchange rate will depend on how politicians behave in Washington, more than bureaucrats in Brussels.

    4
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    Gavekal Research

    Video: The State Of Biden’s Stimulus

    After Joe Biden set out plans for a US$1.9trn mega-stimulus, US Senate Republicans have countered with proposals for a relatively meager US$600bn package. In this video interview, Yanmei examines the options and weighs the possible outcomes.

    0
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    Gavekal Research

    Strategy Monthly: Europe’s Troubled Trajectory

    For the eurozone, it seems everything went wrong at the end of 2020—and things have only got worse at the beginning of 2021. Unfortunately, hopes for recovery are pinned on a vaccination program which has been late to start, slow to gather speed, and beset by problems. Nevertheless, despite this gloomy prognosis, there will still be opportunities for investors.

    0
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    Gavekal Research

    Vaccine Slippage

    It is looking likely that most countries will miss their Covid-19 vaccination targets for 2021. This creates a risk of slower than expected economic growth, especially in Europe which take half a year to emerge from its double-dip recession. Moreover, any activity dependent on international travel or large-scale gatherings will remain severely depressed until well into 2022.

    3
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    Gavekal Dragonomics

    Explaining The Interbank Spike

    Short-term interbank rates surged to their highest levels in more than two years on Thursday after a surprising move by the central bank to drain liquidity from the market. In this Quick Take, Wei explains why this liquidity tightening does not signal a change in monetary policy, and why rates should return to normal over the coming weeks.

    0
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    Gavekal Research

    The US Turns A Corner

    It was not surprising that the US economy grew at a mere 4% quarter-on-quarter annualized in the final period of 2020, but there was a grim recognition that the next phase of the recovery will be hard fought. There are, however, reason to be optimistic.

    0
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    Gavekal Research

    Uncharted Territories And Portfolio Construction

    In 2015, Charles turned 73 and felt it was time to decide what he wanted to be when he grew up. But before turning his back on finance, he decided to “download” as many of the rules and experiences that had guided his steps in the financial world, over the previous 50 years. He built a small “quant” team in Paris, whose goals were to filter the very best of his rules and distill these into simple software solutions. In this piece he shows how...

    5
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