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    Gavekal Dragonomics

    Market Access Widens, On China's Terms

    Over the last two years, China has announced a series of steps intended to open market access for foreign businesses and ease its inward investment restrictions. In this paper, Lance examines these reforms and assess just how far they go towards leveling the playing field for foreign companies operating and investing in China.

    0
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    Gavekal Research

    Brextension And The Gilt-Edged Opportunity

    The latest act of the Brexit tragicomedy has played as expected—and market reactions should follow, as the risk premium on sterling and UK assets is substantially reduced. The six and a half months remaining between now and the new Brexit deadline is plenty of time for Britain to decide between the three possible outcomes I have repeatedly discussed.

    10
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    Gavekal Research

    A New Look At The Housing Market

    When the US slides into recession, it generally does so because of a contraction in investment, either in the corporate sector or in the housing market. Today, returns on capital invested in housing exceed the cost of capital, signalling a positive outlook for US residential investment, construction, house prices, and the shares of homebuilders.

    3
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    Gavekal Research

    Hong Kong Seminar — April 2019

    Louis Gave examined the reasons for equity markets' good performance amid a global trade slowdown; Thomas Gatley assessed the state of the Chinese economy and whether the current Chinese equity bull market still has legs; Udith Sikand reckoned it is time to be positive on emerging markets, especially EM Asia.

    0
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    Gavekal Research

    Europe's China Syndrome

    Chinese premier Li Keqiang is in Brussels on Tuesday for the 21st EU-China summit, and the talks are likely to be testy. After much dithering and in response to much pressure from Washington, the EU has begun to take a more hardline posture towards China. The core EU countries share many of the concerns that motivate the US trade war with China.

    0
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    Gavekal Dragonomics

    Don't Believe The 5G Hype

    5G mobile is the technology of the future, and the US and China are now in a life-or-death struggle to dominate it. That anyway is the story used to justify the US government’s campaign against Huawei—but as Dan argues in this piece, this is mostly alarmism disconnected from reality. It’s best not to get caught up in the politicized hype about 5G.

    1
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    Gavekal Research

    And The Brexit Winner Is...

    With the Brexit deadline in the rear view mirror, Britain's leave voters have are left with the impression that they have been taken for a ride by the UK’s political class, and in particular by their representatives in parliament. So who is the real sovereign power in the UK? The people or parliament? Charles sees three possible outcomes.

    5
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call April 2019

    In yesterday’s Gavekal Research Conference Call, Will Denyer and Udith Sikand addressed the changing US dollar liquidity environment, and its impact on markets.

    0
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    Gavekal Dragonomics

    Video: Chinese Property Is Slowing, Not Collapsing

    Home sales in China fell by 3.6% in the first two months of 2019. This, however, was better than expected considering that this upcycle is now four years old. Lower mortgage rates and supportive policies by local governments should prop up demand, and Rosealea expects overall housing sales to decline a modest 2% for the year.

    0
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    Gavekal Research

    Europe's Export Problem

    Europe is the world’s most export-dependent big economic region. In such a precious position, the effect of external weakness can be debilitating, as shown by the eurozone manufacturing PMI having just fallen to its lowest in nearly six years at 47.5. The question is whether any respite can be found in overseas markets.

    0
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    Gavekal Research

    Auf Wiedersehen, German Competitiveness

    Behind the factors that have caused Germany’s factory slowdown, deeper structural trends are eroding the competitiveness of German industry. The gains Germany made by deploying labor more effectively since the late 1990s have now run out, and that there are few signs Germany is well positioned to deploy capital more efficiently in the future.

    4
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    Gavekal Research

    Last Lap For China's Bond Rally

    Starting from April, Chinese government and policy bank bonds are included in the Bloomberg Barclays Global Aggregate bond index. But index inclusion, while an important landmark, may not be the best guide to market timing. After a bull run that has lasted since the beginning of 2018, China’s bond market rally looks to be nearing an end.

    3
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    Gavekal Research

    Play A Longer US Cycle With Small Caps

    After a wobble late last year, the US economy looks to be stabilizing. The Atlanta Fed has revised up its estimate for 1Q19 GDP growth to 2.1%, while more timely indicators such as mortgage applications, PMI readings and durable goods orders indicate a steadying of the ship.The question is how to play this development.

    0
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    Gavekal Research

    London Seminar — March 2019

    Cedric Gemehl examined the possibility of a European rebound; Charles Gave argued the world is splitting into three distinct monetary zones; Tom Miller presented on the state of the US-China trade talks and the health of the Chinese economy; Anatole Kaletsky examined the risks to the bull market, and arrived at a bullish conclusion.

    0
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    Gavekal Research

    Good News For Goldilocks

    Last Thursday, with the price of oil approaching a four-and-a-half month high, Donald Trump took to Twitter. “Price of Oil getting too high.” Trump’s tweet had little effect, with Brent crude hitting US$69/bbl on Monday. Prices are likely to continue to push higher over the coming months towards 2018's highs—a troubling prospect.

    0
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    Gavekal Dragonomics

    A User's Guide To The Chinese Stock Market

    China’s onshore equity markets are now large and accessible enough that they can no longer be ignored by foreign investors—but idiosyncratic enough that they are hard to understand. This in-depth DeepChina report explains the fundamentals: What is there to invest in? Who owns the market? How can foreigners invest? How is the market regulated?

    0
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    Gavekal Research

    A Tactical Opportunity In Turkey

    Turkey has long been a market to steer well clear of, with investment opportunities poisoned by toxic politics and an ever-depreciating local currency. However, with the US Federal Reserve adopting a more dovish stance and following the weekend’s municipal elections, Turkish lira assets may now offer an attractive tactical opportunity.

    1
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    Gavekal Research

    Strategy Monthly: A New Liquidity Environment

    The prospect of easier liquidity conditions helped make 1Q19 one of the best ever quarters for US equities. Confirmation of the Federal Reserve’s newly dovish policy stance means that US equities should continue to do well through 2019. Other big winners in this environment may be equities in northeast Asian emerging markets that do not rely on Chinese commodity demand.

    0
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    Gavekal Research

    Beyond The Yield Curve Inversion

    The current yield curve inversion and softness in growth data are curious developments, given that the four prices that matter most for the global economy—long bond yields, corporate credit spreads, the oil price, and the value of the US dollar—are all relatively favorable. Louis and Charles weigh five different explanations for what may be going on—from bullish to highly bearish—and examine the investment implications.

    2
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    Gavekal Research

    A Week Is A Long Time

    Harold Wilson, the former British prime minister’s, quip that “a week is a long time in politics” has become an over-used cliche. Still, in the last week, there has been good reason to dust it off.

    1
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    Gavekal Research

    Among EMs, Favor North Asia

    With their high beta to global growth, emerging markets seldom outperform when investors begin to get nervous about the health of the global economy. So it is no surprise that the risk-off move of the last week has seen the Brazilian real and Argentinian peso each sold off by more than -5% against the US dollar, while the Turkish lira has been propped up only by a regulatory squeeze on liquidity. But the jitters have not affected all emerging...

    0
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    Gavekal Dragonomics

    Macro Update: Is The Worst Over?

    China has gotten off to a good start in 2019, with a stock market rally and some encouraging datapoints. In this chartbook, Chen Long surveys the economic and market outlook to determine if the worst is really over. Credit growth and infrastructure are picking up, but property, consumption and industrial profits have not bottomed just yet.

    0
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    Gavekal Research

    Video: Europe's Response To China

    Europe has an ambivalent relationship with China that is increasingly under scrutiny. The European Commission recently labelled China a “systemic rival” and France and Germany want to create corporate champions to compete against Chinese state owned enterprises. Europe, however, is not singing from the same hymn sheet.

    0
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    Gavekal Research

    The Case For A Cyclical Pick-up In Europe

    As of last week, short positions in European equities were deemed to be the world’s most crowded trade and recent news has not lightened the market mood. The question is whether such information is in the price, for any marked improvement in cyclical conditions may spark a strong rally.

    4
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    Gavekal Dragonomics

    The New Internet Regime

    For the freewheeling Chinese internet sector, regulatory risk arrived with a vengeance in 2018. Government actions hurt companies including Tencent in gaming, Didi Chuxing in ride-hailing, ByteDance in online media, and others. In this piece, Dan and Yanmei explain what drove these moves and how the new online regulatory environment will work.

    0
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    Gavekal Research

    The Hard Logic Of A Long Brexit Extension

    By removing the hard deadline for Brexit negotiations the EU has avoided the disaster of a 2008-style sudden stop in business with its second largest trading partner. This decision reinforces the bullish momentum for sterling, which remains undervalued especially against the US dollar. Ending the risk of a “No Deal” Brexit should also improve the dismal economic outlook and help stabilize political conditions in Europe as a whole.

    7
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    Gavekal Research

    Recession Warning, Or False Alarm?

    On Friday, the three-month to 10-year portion of the US treasury curve inverted for the first time this cycle, heightening investors’ fears of impending recession. But although every US recession of recent decades has been preceded by an inversion of the yield curve, not every inversion has been followed by a recession; there have been cases of false positives.

    6
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    Gavekal Research

    Vox Clamantis In Deserto

    Some say, “if at first you don’t succeed, try, try again.” Others regard repeating the same mistake over and over again, and expecting the results to change, to be the very definition of insanity. I fear that the majority of “respectable economists” (meaning they always side with the consensus) inhabit the first of the two camps.

    4
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    Gavekal Research

    Gather Round The Punch Bowl

    US monetary policy tightening is over, at least for now. While the Federal Reserve is not adding any more hooch to the punch bowl, chairman Jay Powell has promised to stop cutting his serving sizes. Although not much of a surprise, the Fed’s guidance is broadly positive for just about everything but US dollar cash—especially equities and real assets.

    0
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    Gavekal Research

    Video: Intervention To Support The HKD Signals Strength, Not Weakness

    In the last two weeks, the Hong Kong Monetary Authority has been forced to sell US dollars in the foreign exchange market to maintain the Hong Kong Dollar's peg to the US dollar. Yet far from signaling a crisis, the interventions are a symptom of confidence in Hong Kong’s financial system, which is swimming with liquidity.

    0
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    Gavekal Research

    Believe In The US Consumer, Still

    Just as the Federal Reserve eases up on monetary tightening and negotiators struggle to avert a trans-Pacific trade war, the US consumer is emerging as the next source of worry. Americans are deferring big-ticket purchases, consumer confidence readings have softened and retail sales growth has slowed. Suddenly, the picture looks similar to the 2015-16 soft patch, or worse still it resembles the phase leading up to the 2008 crisis, when an...

    0
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    Gavekal Dragonomics

    The Industrial Policy That Dare Not Speak Its Name

    The Made In China 2025 initiative was omnipresent after its launch in 2015, but it has now become officially invisible, a casualty of the vocal concerns expressed by the US and others. In this piece, Lance explains how China will pursue industrial policy in the aftermath: with less transparency, but also, perhaps, with less discrimination.

    5
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    Gavekal Research

    A New Era For European Banks

    European banking stocks have been battered for much of the last four years by negative interest rates and a Brussels plan to impose market discipline through shareholder bail-ins rather than public bail-outs. This approach is now in question as Germany embraces a new industrial strategy that will rely on strong state-backed banks taking political direction.

    2
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    Gavekal Dragonomics

    The End Of China's ODI Party

    Beijing’s decision to use foreign acquisitions as a tool of state industrial policy has badly backfired. With advanced economies stiffening their resistance to Chinese investment, China’s decade-long outward direct investment spree looks spent. In this piece, Tom explains how the boom ended and where funds will flow in the future.

    0
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    Gavekal Research

    A Marxist Take On The Gilets Jaunes

    The "yellow jackets” still protesting in France have so far received only tepid support from the country's usually vocal trade unions. Similarly, left-wing parties have also been very slow to take to the street. This begs the question of what the oracle of the French intelligentsia, Karl Marx, would have made of this protest movement.

    10
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    Gavekal Research

    The Trouble With Champions

    When last Sunday, Angela Merkel’s heir-apparent published an opinion piece on the EU’s future, she left the door open to an EU industrial strategy and competition policy focused on creating European champions intended to compete in global markets. Such a policy may be attractive to politicians, but it is less appealing to investors.

    0
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    Gavekal Research

    Video: The Fed's Potential Paradigm Shift

    The Federal Reserve is debating a fundamental shift in its inflation targeting. Right now it's targeting 2% inflation no matter what it has been in the past, a so-called "bygones" policy. In this video interview Will discusses the consequences of switching to price-level targeting, where the aim is to keep average inflation over time at 2%.

    0
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    Gavekal Research

    The Central Banker Who Cried Wolf

    In January, the BoJ governor promised more monetary easing if that was what it took for inflation to reach 2%. Investors increasingly doubt the fortitude of Japan’s financial sector as it endures the pain inflicted by the world’s easiest central bank. If that suspicion grows, the variable of adjustment may be a rising yen, which would be a big headache for the BoJ.

    0
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    Gavekal Dragonomics

    That Wasn't So Bad, Actually

    China watchers have been bracing themselves for some ugly economic indicators in January and February. Yet the first official data for 2019 were not actually that bad. As Andrew explains, the economy is clearly slowing, but it’s not going into an uncontrolled dive. The government’s moderate policy response is thus still on track to steady growth.

    0
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    Gavekal Research

    The Brexit Impasse

    Political commentators and European leaders are bewailing Britain’s descent into ungovernability after the UK parliament again rejected the new and supposedly improved Brexit deal. But markets reacted calmly. In fact, for investors, the seemingly chaotic Brexit saga is unfolding roughly along the bullish lines suggested here since early January.

    12
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    Gavekal Research

    The Locus Of Capital Destruction

    Germany is going through one of its periodic bouts of angst as its industrial economy faces up to cyclical headwinds, unwanted structural change and the threat of protectionism. I too have concerns about the fate of corporate Germany, but would approach the problem from the perspective of an equity investor.

    0
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    Gavekal Dragonomics

    Springtime For Steel

    It’s looking like a good spring for China’s steel industry. In this piece, Rosealea reports on her findings from a recent visit to the steelmaking capital of Tangshan. Steel and iron ore prices are being supported by a combination of stable demand from property, recovering demand from infrastructure and supply constraints from scrap shortages.

    0
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    Gavekal Research

    Productivity To The Rescue, For Now

    On first reading, Friday’s US payroll report for February made grim reading for most investors. The screeching slowdown in non-farm hiring seemed to point to a US economy that is flirting with recession. To compound matters, wage growth seemes to point to a very tight labor market. On closer inspection, however, a less concerning picture is revealed.

    0
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    Gavekal Research

    When You're In A Hole, Stop Digging

    The first law of holes states: when you are in one, stop digging. It’s sound advice, which central bankers would do well to heed. Unfortunately for Mario Draghi and his colleagues at the European Central Bank, things are not so simple. It is one of the quirks of negative interest rates that the longer rates remain in negative territory, the less accommodative policy becomes.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call March 2019

    In this research conference call, Andrew Batson and Chen Long discussed the improving outlook for the Chinese economy in 2019 and the implications for financial markets. Confirmation that the government is both willing and able to support growth has ignited an equity rally, while expectations of further easing measures still support bonds.

    0
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    Gavekal Research

    Not Modern, Not About Money, And Not Really Much Of A Theory

    Charles has had enough of all the talk going round about Modern Monetary Theory. In this forceful polemic he lets fly with both barrels at the proponents of MMT, arguing that they have no knowledge of financial history, little understanding of the nature of money, and are clueless about what constitutes a theory.

    7
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    Gavekal Research

    Keynes Is Dead; This Is The Long Run

    “In theory, there is no difference between theory and practice. In practice, there is,” Yogi Berra said. Take cutting interest rates as an example. According to Keynesian theory, reducing interest rates is a way to borrow from future demand in order to prevent a recession today.The theory is sound, but then comes the practice. And in Europe today, we are in practice up to our necks.

    4
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    Gavekal Research

    An Investor's Rough Guide To Modern Monetary Theory

    Modern Monetary Theory—the idea that governments can spend as much as they want, free from funding constraints—is attracting more and more attention. Will examines the precepts of the theory, explores whether it really brings anything new to the table, and outlines some of the implications for investors should it ever be applied as practical policy.

    16
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    Gavekal Research

    Video: Shifting Sands At The Fed

    The US Federal Reserve has said it is likely to end its process of balance sheet “normalization” sooner than previously planned. This sounds like an obscure monetary technicality, but it has important implications for investors. In this video interview Will explains why.

    0
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    Gavekal Research

    Towards A New Triple Merit Scenario

    Emerging market equities have benefited handsomely from the global risk-on move so far this year. With the prospect of a US-China tariff truce and the likelihood that China’s growth rate will stabilize in the coming months, EM may be on the cusp of a new “triple merit scenario” that could extend the equity rally through the rest of 2019.

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