E.g., 19-01-2022
E.g., 19-01-2022
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    Gavekal Research

    Strategy Monthly: The Supply-Side Shock

    Soaring infection rates due to the omicron Covid wave are causing widespread disruption to supply chains around the globe. A resolution to global supply issues rests on Beijing maintaining this balancing act, as it also moves to shore up growth.

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    Gavekal Research

    Strategy Monthly: Europe’s Way Through The Woods

    As 2021 draws to a close, economies and markets are once again beset by uncertainty. But looking beyond the immediate short term, there are reasons for cautious optimism about the eurozone’s economic performance in 2022, although investors are advised to assume a defensive stance.

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    Gavekal Research

    Strategy Monthly: Adding Up Inflation

    Inflation is back as a major force and economic policymakers are having to reassess their crisis-period settings and plan for tighter financial conditions ahead. How these forces play out will be the key driver of markets in the coming year.

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    Gavekal Research

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

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

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    Gavekal Research

    Strategy Monthly: How To Hedge Tighter Liquidity

    So far, markets have not panicked over the prospect of the Federal Reserve tapering its asset purchases. But when it comes, the taper will materially tighten global liquidity conditions. In this calm before the storm, investors running global portfolios should focus on their hedges.

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    Gavekal Research

    Strategy Monthly: The Global Monetary Divergence

    As the world’s three big economies—the US, the eurozone and China—recover at different speeds from the shock of Covid, their monetary policy paths are diverging. This divergence will have major implications for bond investors and foreign exchange markets.

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    Gavekal Research

    Strategy Monthly: Dialing Down Expectations For US Growth

    Growth in the US economy is set to go from great to good. The easy pickings of releasing pent-up demand and re-employing idle workers are almost used up. Growth should stay above trend, but by a smaller margin. Investors should prepare for growth to undershoot expectations that are now too high.

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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?

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    Gavekal Research

    Strategy Monthly: China’s Multi-Dimensional Tightening

    China’s economic policymakers are using the space afforded them by a rapid economic recovery from the pandemic to refocus on a longer-term effort to redirect resources for strategic and political purposes. The immediate effect is a multi-faceted tightening across many sectors. For investors, this effort may upend old uncertainties and create new risks.

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    Gavekal Research

    Strategy Monthly: The Case For Ex-US Equities

    The US trade deficit cycle suggests the world is heading towards a protracted period of US dollar depreciation. With valuations outside the US relatively attractive, and deglobalization meaning ex-US equities will offer greater diversification benefits in future, investors should consider increasing their exposure to ex-US equities.

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    Gavekal Research

    Strategy Monthly: The Threat Of Rising Inflation And Yields

    The roll-out of vaccines in the US is upending the investment environment, as the focus shifts beyond the pandemic to full-throttled economic recovery. With both monetary and fiscal policy set to remain loose, nominal growth could soon rip. Hopes for “normalization” have driven up inflation expectations and freaked out bond investors. Those getting fixed interest are right to be unnerved, as production capacity is fairly tight, inventories are...

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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.

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    Gavekal Research

    Strategy Monthly: Darkness Before Dawn? The Covid Vaccine Outlook

    As a new wave of Covid infections grips major economies, and social restrictions return, the hopes for a return to pre-pandemic normal rest on the rollout of vaccines. With vaccine production ramping up, most developed economies could reach herd immunity by late in 2021. But many emerging economies will take longer, and several risk factors could still derail the rollout.

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    Gavekal Research

    Strategy Monthly: Two Equity Rotations For A Post-Covid World

    The impending rollout of vaccines in the United States is spurring two big equity rotations. With investors looking ahead to a post-Covid world, a rotation has begun from stocks that thrived in the pandemic to those that merely clung on. Second, the expectation that a robust economic recovery will push interest rates up has caused beaten-down value stocks to recover some mojo. Investors should play these rotations at a granular, sub-sector level...

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    Gavekal Research

    Strategy Monthly: Chinese Assets After The Recovery

    China was the first economy into lockdown, and the first to emerge, enjoying a rapid rebound in industrial production and exports. Uniquely among major economies, China has already regained and exceeded pre-Covid levels of output. The speed and strength of this early recovery was reflected in financial markets, with equities rallying hard, bonds selling off, and the renminbi appreciating on heightened capital inflows.

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    Gavekal Research

    Strategy Monthly: The Real US Election Risks

    Some investors worry that a contested US election may spark social and political unrest that is serious enough to threaten US risk assets. They are likely focused on the wrong risk. The US’s democracy faces heavy strains but is nowhere near a breaking point, but the differing outcomes that can occur on (or after) November 3 pose threats to portfolios.

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    Gavekal Research

    Strategy Monthly: Eight Questions, 11 Answers

    With US equities once again at record highs and the Fed promising to keep rates nailed to the floor, it is time to ask hard questions of the bull market that won’t die. That interrogation is conducted by Charles and Louis Gave. In these strange times, the case for owning anti-fragile assets has rarely been stronger, they contend. Four stand out for having weathered the pandemic and should be treated seriously.

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    Gavekal Research

    Strategy Monthly: From Bullish To Neutral On The US

    The upsurge in second-round Covid-19 infections has put the US economic recovery on hold for now. But government, businesses and consumers have got better at coping with Covid, and in contrast to the first round, the economy is not going backwards.

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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.

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    Gavekal Research

    Strategy Monthly: Recovery And Its Risks

    As economies have begun to emerge from their coronavirus lockdowns, there remain two big near-term macro risks that could derail a recovery. On one hand, solid demand on top of massive central bank monetary expansion could fuel rising inflation. On the other, a big round of permanent job losses could dent demand and slow the economic recovery.

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    Gavekal Research

    Strategy Monthly: Emerging Markets Under Pressure

    Aside from China, emerging markets have not been hit as hard as rich countries by Covid-19, but their asset markets have been hammered. An optimistic view holds that undervalued EM assets can now bounce back. Udith and Vincent are more cautious: a dollar-squeeze could yet hurt markets that have otherwise decent fundamentals and attractive valuations.

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    Gavekal Research

    Strategy Monthly: Lockdowns And Lost Output

    Markets have been upended by the twin uncertainty of Covid-19’s rapacious spread and the economic effects of stopping it. Massive policy responses have convinced investors that a V-shaped recovery is possible, but this is far from certain. As the outbreak in Europe and the US hits its peak phase over the next month, markets will swing on the timing of any proposed exit from lockdowns.

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    Gavekal Research

    Strategy Monthly: Global Virus, Local Reactions

    In the last week of February, global investors woke up to the massive effect of China’s coronavirus lockdown and the risks of a global pandemic. The resulting disruption to global supply chains will be widespread and long lasting. But not all is bleak. The Fed has promised to support the US economy, and many emerging markets have room both for expansionary fiscal policies and interest rate cuts.

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    Gavekal Research

    Strategy Monthly: Covid-19 And Emerging Markets

    The rapid spread of Covid-19 has spooked investors and triggered steep sell-offs in Chinese and Asian markets. But there are good reasons to hope the spread of the disease will be contained in the coming weeks, at which point Chinese and regional equities can recover.

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    Gavekal Research

    Strategy Monthly: China's Balancing Act Gets Easier

    In 2019, investors were cowed by the US-China trade war and Chinese policymakers’ efforts to balance growth and financial stability. This year, these factors will weigh less heavily: the US and China are set to ink a trade deal, while China is shifting more toward growth-supporting policies. Such a combination is mildly bullish for both Chinese bonds and equities.

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    Gavekal Research

    Strategy Monthly: Risk Assets In 2020

    World stock markets have enjoyed a solid couple of months as geopolitical risks have abated and the manufacturing slowdown appears to have leveled off. With major central banks all printing money simultaneously for the first time since the financial crisis, and fiscal policy easing at the same time, there are good reasons to believe the rally will be sustained into 2020.

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    Gavekal Research

    Strategy Monthly: Towards A Dollar Decline

    The last five years have been an era of US dollar strength. That era may now be coming to an end. After the US Federal Reserve halted its balance sheet contraction and last month resumed buying T-bills at a rate of US$60bn a month, the Fed is now printing money faster than the other central banks. As a result, relative liquidity growth now favors US dollar weakness.

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    Gavekal Research

    Strategy Monthly: An Asian Repricing

    Asian inflation has decoupled from other emerging market regions and may be settling at a new permanently lower level. At the same time, lower Asian inflation also reflects weak capital spending and slower economic growth due to the global trade downturn. The best way to play this new low-inflation, low-growth era is with regional bonds.

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    Gavekal Research

    Strategy Monthly: The Message From Bonds

    Record low bond yields point to a deflationary catastrophe in the making. Yet growth data in the world’s two biggest economies remain decent. Could investors be reacting to a rupture in the international order? Gavekal analysts are not persuaded by such arguments and offer four alternative explanations for the “bond bubble”.

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    Gavekal Research

    Strategy Monthly: Focus On The Fed, Not On US Tariff Threats

    Trade war fears are once again front and center of investors' minds. But the reduced magnitude of pledged US tariffs indicates that Trump is anxious to avoid damaging the US economy and financial markets. This leaves the focus on the Fed, and how much it is likely to cut interest rates.

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    Gavekal Research

    Strategy Monthly: Should We Believe Equities, Or Bonds?

    Record-high US equity prices seem hard to reconcile with the message sent by the lowest bond yields since 2016. Should investors hunker down due to the inverted yield curve, or jump aboard the equity bandwagon? In fact, both markets may be right in their own way.

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    Gavekal Research

    Strategy Monthly: Who Suffers Most In A Long Trade War?

    Markets have started to price in a long US-China trade and tech war, and we agree. The odds now favor an indefinite conflict. Damage from the trade war will vary based on a country’s trade-dependency and policy space. Big problems could emerge in Europe and in EMs exposed to China’s supply chain.

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    Gavekal Research

    Strategy Monthly: The Inflation Shift And Portfolio Construction

    Despite inflation remaining muted, Wednesday saw the Federal Reserve stand pat on interest rates. Having switched to an overly dovish stance early this year, Fed Chairman Jay Powell remains wary of changing tack and easing policy as he worries about inflationary pressure bubbling up from an economy that looks to be fully occupied. For his part, Charles is less nuanced and believes the US will shortly flip over into an environment where inflation...

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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.

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    Gavekal Research

    Strategy Monthly: China After The Trade War

    The prospect of a US-China deal on tariffs has already boosted China’s stock market and currency. But it won’t reverse China’s growth slowdown, which is largely the result of Beijing’s efforts to de-leverage the financial system. The good news is that credit growth is rebounding, which will stabilize growth in 2H18. Chinese bonds will rally a bit more, the renminbi will move up further against the US dollar, and Chinese and EM equities should...

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    Gavekal Research

    Strategy Monthly: Europe's Containable Risks

    As China slows and the US expansion limps into its dotage, a heavily export-dependent Europe looks vulnerable to another downturn. The latest growth numbers from Italy and Germany make for especially grim reading. Potential shocks loom in the shape of a hard Brexit, populist discontent in France and Italy and the threat of auto tariffs from the US.

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    Gavekal Research

    Strategy Monthly: The Hope-Vs-Despair Smackdown Of 2019

    The massive sell-off in December left global equities on the precipice of a real bear market. Hope and despair are finely poised, but we find a bit more reason for hope. The US and China will both slow, but the US should avoid recession and Chinese growth should stay above 6%. Political and trade-war risk is lower, and liquidity pressures will ease. US equities and EM assets, especially local-currency bonds, both promise positive returns.

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    Gavekal Research

    Strategy Monthly: Three Questions For The Year Ahead

    This has been a miserable year across most asset classes, with markets roiled by tighter US dollar liquidity. Looking into 2019, Louis sees the investment environment being dictated by whether the US dollar liquidity situation really is easing, the overall US policy and the possibility for the “Chimerica” relationship to rupture.

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    Gavekal Research

    Strategy Monthly: Yes, We're Still In A Bull Market

    Anatole and Will believe that continued exposure to US equities makes sense, since underlying corporate profitability remains strong. So long as one avoids the most rate-sensitive sectors, US portfolios should be 70-75% in stocks, with the rest mainly in cash. Moreover, they argue that the period of EM underperformance is now done, and emerging markets are poised for a significant rally.

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    Gavekal Research

    Strategy Monthly: Are We Still In A Bull Market?

    At the start of the year, markets seemed poised for a rotation out of US equities into non-US assets. In fact, US equities and cash are the only assets to have delivered positive returns this year. Louis examines the reasons why and concludes that portfolio managers should stay defensive, while looking for buying opportunities in oversold emerging markets, and in European assets in non-euro countries such as the UK, Sweden and Switzerland.

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    Gavekal Research

    Strategy Monthly: A Simple Guide To US Asset Allocation

    We synthesize four years of work on asset allocation and present a model portfolio built around analysis of the cost of and return on capital; the real rate of return on equities, bonds and cash; and the ideal duration of fixed-income holdings. Today we recommend that US portfolios hold 75% in equities, 25% in cash, and shun bonds.

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    Gavekal Research

    Strategy Monthly: Towards A Global Liquidity Crisis?

    In our latest outlook for global investment strategy, Charles Gave warns that the world may be heading into a dollar liquidity squeeze. There have been seven such scarce-dollar episodes since 1971, and every one produced some big financial accidents. The basic symptom today is that the US is heading into an inflationary boom, while the rest of the world is seeing slower economic growth and weaker asset prices. Investors must be defensive; but...

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    Gavekal Research

    Strategy Monthly: The Four Roads Ahead

    The first half of the year was not a great one for global equities, and the second half is clouded by risks: slowing growth, rising inflation, renewed political stress in the eurozone, and most of all the threat of massive protectionism by the United States. Louis Gave offers four scenarios of how things could play out, and Arthur Kroeber explains why it's time to start seriously worrying about a worst-case trade scenario.

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    Gavekal Research

    Strategy Monthly: Dollar + Oil + Political Risk = ?

    So far, 2018 has delivered a lot of volatility, and mediocre returns across almost all asset classes. Will the second half be any different? It's hard to sustain a high level of conviction given the resurgence of political risk. In the latest Strategy Monthly, we offer a way to think through investment decisions based on the direction of oil prices and the dollar.

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    Gavekal Research

    Strategy Monthly: Living With US-China Strategic Rivalry

    A gaggle of US cabinet officials are in Beijing this week for talks aimed at lowering the temperature on US-China trade relations. While there may be an agreement to temporarily delay the huge tariffs each side has threatened to impose on the other, there is no chance of bridging the real rift between the two countries, which arises from China's technological and geopolitical ambitions. A trio of aggressive strategies launched by Xi Jinping...

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    Gavekal Research

    Strategy Monthly: Navigating In Choppy Waters

    With its latest sell-off, the S&P 500 capped two months of volatility by moving officially into correction territory: down -10% from its January high, and below its 200-day moving average for the first time in two years. Is this the end of the long US equity bull market? In this edition of our Strategy Monthly, we offer three perspectives on how investors should position themselves in these more volatile times.

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    Gavekal Research

    Strategy Monthly: Trading On European Diversity

    The European economic recovery has matured into a sustained, broad-based expansion, and the risks from politics and ECB policy normalization are modest. But eurozone equity indexes have not done well. In relative terms, they started trading sideways after Macron's victory in the French election last May, and for the past several months they have underperformed. The fault lies in the indexes, not in Europe's corporate sector. The...

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    Gavekal Research

    Strategy Monthly: Portfolio Strategy For An Inflationary World

    Most money managers today have spent their entire careers in the disinflationary environment that has prevailed since the mid-1980s, in which equities prospered and bonds were an ideal hedge. This may soon change. A growing number of signals point to rising inflation and tighter liquidity. If we really do move into an inflationary era, managers will have to rethink their portfolios from the ground up. In the latest Strategy Monthly, Louis and...

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    Gavekal Research

    Strategy Monthly: Everything Looks Fine, But…

    The year has opened with growth expectations and risk appetites at their highest levels in years. The consensus is probably right that it will be a good year for economies and stock markets. The main thing to watch out for is a faster-than-expected withdrawal of QE and low-interest rate policies by the ECB and the BOJ, which could send US bond yields sharply higher.

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    Gavekal Research

    Strategy Monthly: The Long Cycle Continues

    As equity markets everywhere continue to trade higher, money managers are getting increasingly nervous about how long the rally can last. In December’s Strategy Monthly, Anatole argues that we are still only half-way through a secular bull market that can last through the end of the decade. With further US rate hikes on the cards, barring any nasty surprises non-US markets are likely to outperform going forward. The only fly in the ointment is...

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