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    Gavekal Research

    Five Corners (20 May): Assessing Oil's Comeback

    Overview: In light of the rebound in oil prices Anatole Kaletsky questions his own view that the oil market is becoming driven by “marginal cost producers”, rather than classic monopoly dynamics.

    0
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    Gavekal Dragonomics

    Can Wage Growth Continue To Outpace GDP?

    Labor is taking home more of China’s economic gains, and will continue to do so, though the reasons have more to do with fortunate demographic timing than brilliant policymaking. This trend, Thomas argues, will help keep consumer spending resilient amid the investment slowdown.

    0
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    Gavekal Research

    The Dissonance In Markets

    Perhaps the biggest challenge confronting investors today is the disconnect between financial markets and economic data. Indeed, despite weak readings from the growth locomotives of the global economy (China and the US), recent weeks have seen bonds selling off, commodities going on a tear, and deep cyclical equities experiencing huge rebounds. In short, while economic data is pointing towards a mediocre global growth outlook, markets are...

    1
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    Gavekal Research

    5C China: Why The Crude Buying Spree?

    China’s economic growth may be slowing, but its appetite for oil imports is undiminished. In the first quarter of 2015, China imported a record 589mn barrels of crude, up 7.5% from the first quarter of 2014. Last month alone, China imported 222mn barrels of oil, overtaking the US, which imported a relatively modest 216mn barrels, as the world’s biggest importer.

    0
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    Gavekal Dragonomics

    Property Responds To Treatment

    Although China’s economic data for April were generally mediocre, property was a bright spot. National property sales rebounded to a 7% YoY gain, after 1% decline in March, marking the first positive growth in 15 months. The latest interest rate cut is likely to further fuel the recovery, and indeed preliminary data point to continued sales gains in May. Broad-based monetary easing has proved a more effective remedy for weak housing demand than...

    0
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    Gavekal Research

    Why Asia Should Suck Up Tantrum II

    Asian currencies took a hit yesterday as the ongoing global bond market sell-off forced capital outflow. Yet unlike the “taper tantrum” of two years ago, the region has navigated this sell-off with limited collateral damage—emerging Asia’s benchmark bond index has fallen by -3% in the last two weeks compared with a -19% peak-to-trough slump in 2013. In this piece we are not going to opine on the outlook for global bond markets as our last two...

    0
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    Gavekal Research

    New York Seminar May 2015 - Anatole, Louis, Joyce & Will

    We held our US spring seminar in New York on May 11, with Anatole, Louis, Joyce & Will offering their views on the most important developments in the global economy.

    0
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    Gavekal Dragonomics

    Working Harder To Reduce Rates

    China’s central bank is about to enter uncharted territory. While the People’s Bank of China is still a long way from having to resort to unconventional monetary policy (see To QE Or Not QE), its benchmark lending rate has hit a record low after the latest cut. Yet this move is unlikely to be the last: we think the current easing cycle will deliver one more cut to benchmark rates this year, as well as substantial cuts to bank reserve...

    0
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    Gavekal Research

    A Sino-Indian Powerhouse?

    Next week the leaders of the world’s two biggest emerging economies will meet for talks in Beijing. Together, China and India have a population of 2.6bn—36% of the global total—and a GDP exceeding US$12trn. They share a border nearly 4,000km long. Yet China trades more with Thailand than with its most populous neighbor, and there are eight times as many flights between Beijing and Bangkok per week as there are between Beijing and Delhi. The weak...

    1
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    Gavekal Dragonomics

    The Emerging Strategy For Debt

    China’s strategy for managing its mountain of debt is finally becoming clear. This strategy will shape the country’s economic trajectory for years to come, and in particular will have big implications for the bond market. We see interest rates falling, bond issuance exploding, and pressure for capital-account liberalization rising.

    0
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    Gavekal Research

    Embrace The Asian Deflation

    The specter of deflation continues to threaten big chunks of the global economy and the alarm has even spread to China after the GDP deflator was revealed to have slipped into negative territory in 1Q14. Our starting point is that deflation does not have to be some grizzly beast that must end with soup kitchens, for as Charles has forcefully argued, periods of falling prices have in the past been associated with rapid capital formation and...

    0
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    Gavekal Research

    Five Corners (6 May): The Weakness In Wages

    Overview: Charles Gave wonders why in spite of policymakers having the best of intentions, their efforts have caused declining productivity, lower median incomes and fewer quality jobs. United States: The labor market is no longer a clear indicator of the US economic cycle, says Will Denyer, who looks for new insights into what variables may guide the Fed in its policymaking. Europe: Although jobless numbers have fallen across much of the...

    0
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    Gavekal Research

    Growth & Markets Monthly (May 2015)

    While our growth readings ticked higher last month, the big shift came with a sharp rise in our risk appetite indicators. We also note an easing of deflationary pressure with the US breakeven inflation level registering a nine-month high. On the liquidity side, the European Central Bank has cranked up its expansionary efforts and its balance sheet is rising at 16% YoY. Taken together, these moves have benefited equity markets (notwithstanding...

    0
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    Gavekal Research

    The World's Most Crowded Trade

    Markets are made at the margin. As a result, the key driver of prices for a given asset is the question of where the marginal buyer (or seller) comes from. This is why very crowded trades can prove dangerous: by the time every one and their dog is convinced that (i) the euro can only go down (early 2015), (ii) being short long-dated bonds is the single best trade out there (early 2014), (iii) underweighting European equities is the easiest path...

    6
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    Gavekal Dragonomics

    Property Is Still Too Big To Let Go

    While the share of China’s economy driven directly and indirectly by real estate and construction has declined over the past three years, it is still substantial at roughly one-third. This means that the government cannot afford to be relaxed about the housing market as fundamental demand starts a long-term decline.

    0
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    Gavekal Research

    5C China: Policymakers Are Concerned, With Good Reason

    China’s labor market has held up relatively well so far this year despite a pronounced slowdown in growth. But the actions of policymakers and the trajectory of the economy both suggest that there will be more bad news for the job market in the second half of the year. Official indicators of employment in China are patchy, but the published figures have been resilient.

    0
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    Gavekal Dragonomics

    The End Of The Margin Squeeze

    The profits of Chinese industry have not grown since August, but the worst of this crunch now seems to be over. The fall in industrial profits was all but guaranteed by the combination of an extended slowdown in housing construction and the aftershocks of the collapse in commodity prices in late 2014 (see Profits Under Pressure). But thanks in part to the recent stability in oil prices, China’s industrial sector is on course to avoid a worst-...

    0
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    Gavekal Research

    China: QE Or Not QE?

    Press reports that China’s central bank is preparing to launch quantitative easing may give investors the impression that the People’s Bank of China is about to join the ranks of major central banks that have embraced unconventional monetary policies. This impression would be false. The PBOC is certainly in easing mode, but its methods have been, and will continue to be, entirely conventional. With the benchmark deposit rate still at 2.5%, the...

    4
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    Gavekal Research

    The Pros And Cons Of A Bull Market

    In sharp contrast to their approach in 2007, Chinese government officials are actively encouraging the current bull market in onshore equities, repeatedly saying that rising share prices are a good thing for China. We agree that there are definite economic advantages to the run-up in stocks, but it is also worth keeping an eye on the risks.

    3
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    Gavekal Research

    No One Likes To Pay Taxes

    No one likes to pay taxes, and a good few try to find a way around it. Perhaps this is why the US tax code and associated practice notes runs to 74,000 pages. Pretty much everyone feels better equipped to spend their own money than the government, and rightly so (anyone who pretends differently is a hypocrite; or did not earn their money themselves). This is why as people pay more tax there is demand for a clear accounting of the services...

    2
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    Gavekal Research

    Maritime Silk Road Or “String Of Pearls”?

    China’s strategic expansion into the Indian Ocean is causing jitters in both Washington and Delhi. This week Xi Jinping pledged to finance a whopping US$46bn of investments in Pakistan, a large chunk of which will fund a 3,000km “economic corridor” from the Arabian Sea to northwest China. The route will begin at Gwadar, a Chinese-run port near the Iranian border, which Indian security experts fear will become a strategic base for the Chinese...

    0
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    Gavekal Research

    Five Corners (22 April): Global Trade

    Overview: Charles Gave argues that an era of globalization and expanding world trade is coming to an end. On balance, he says this is no bad thing. United States: The negative impact of the strong dollar on US exporters will become clear once disruption from the early year port strikes on the US West Coast clear up according to Will Denyer and Tan Kai Xian. Europe: Europe’s huge trade surplus is purely a German issue. François-Xavier Chauchat...

    0
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    Gavekal Dragonomics

    Trembling Giants

    Political and public pressure is building for an overhaul of China’s state-owned oil companies. China National Petroleum Corp. and Sinopec Group, formed in the 1980s from government departments, are among the largest companies in China and their influence is difficult to overstate (two other state energy firms, CNOOC and Sinochem, are smaller and less powerful). Nevertheless the political winds are now blowing against them and a change of some...

    0
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    Gavekal Research

    5C China: No Mourning For The Death Of Outsourcing

    What is China doing about the loss of a big driver of export growth? Back in the days when total exports were growing at a 20%-plus annual rate, up to half of that growth came from the outsourcing of manufacturing assembly to China (we use processing trade, a customs arrangement used by many outsourcing factories, as a proxy). But the outsourcing boom of the 1990s and 2000s has faded lately. Since 2012, processing trade has essentially stopped...

    0
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    Gavekal Research

    Fuel To The Fire

    As if the flames under Chinese equities weren’t hot enough already, Beijing is busy throwing fuel on the fire. Yesterday the People's Bank of China said it would cut the reserve requirement ratio for banks by 100bp, with an extra 100bp cut for small rural institutions. This is the greatest reduction in RRRs since November 2008 in the depths of the global financial crisis, and unlike the previous cut in February it is not intended merely to...

    1
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    Gavekal Research

    5C Overview: Why The Coming Collapse Of World Trade Should Be Celebrated

    Sustained economic growth has always gone hand-in-hand with a big rise in communications infrastructure. To explain why, assume that a country has two cities, named A and B. At the point that a modern communication infrastructure is built (road, trains, internet) then, in each case, a single line of communication is needed. Three cities implies the need for three lines; a fourth city means six lines. Ultimately, if all the cities are to...

    0
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    Gavekal Research

    The Crocodile Mouth About To Close

    What is the most significant macro event thus far in 2015? Most of our clients would likely answer the collapse in oil prices. Or perhaps the European quantitative easing program and the fall of the euro. Others, more bearishly inclined, may highlight the relentless and tedious process towards Grexit, the underwhelming US macro data or the devastating Middle-Eastern civil war. These are all perfectly valid answers—in fact, we made a number of...

    16
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    Gavekal Research

    Slumping Growth, Booming Market

    The gap between China’s booming stock markets and slumping economic growth just got a lot wider. Figures for the first quarter published today showed a picture of nearly unrelieved gloom, with most growth readings at their weakest since the first quarter of 2009 when China was suffering from the global financial crisis. This poor performance is not surprising, given the structural slowdown in the housing market, falling corporate profits, anemic...

    0
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    Gavekal Research

    The Perils Of Leadership

    Around 50 countries have signed up to join China’s Asian Infrastructure Investment Bank. A year ago, when Beijing began to draw up plans for a new multilateral lender, no one could have guessed that it would cause such a global stir. We first wrote about China’s attempt to provide an alternative to the US-dominated system of global development finance last June (see [China] A Chinese Bretton Woods?). But it is too early to conclude that the...

    0
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    Gavekal Research

    The Best Of Both Worlds In Hong Kong

    My mother often said that the main reason she pushed Charles to return to work following the sale of his previous business in the mid-1990s was that having a retired husband was the worst of both worlds: “Less money and more husband”. On this measure, Hong Kong should be happy today. In its troubled marriage with mainland China, it looks very much as if Hong Kong is about to get “more money and less mainlanders” out of its conjugal partner. In...

    1
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    Gavekal Dragonomics

    Developers Fatten Up For The Long Winter

    China’s beleaguered property developers are finding their way to a new strategy. While the real-estate boom of the past decade rewarded those who could build the most the fastest, the structural slowdown in housing demand that is now underway (see Housing’s Next Decade) calls for a different approach. Consolidation not expansion is the order of the day: in 2014, developers sharply increased their spending on mergers and acquisitions, even as...

    0
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    Gavekal Research

    Buy On China Skepticism

    Widespread skepticism about the power of monetary policy at the outset of easing cycles can provide great investment opportunities. Despite clear lessons about the effects of central bank activism in the US in 2009, Japan in 2012 and Europe in 2014, international investors still doubt the quality of the bull run in China’s onshore stock markets ignited by the People’s Bank of China. As a result, even though the Shanghai A-share market has...

    0
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    Gavekal Research

    Five Corners (8 April): The Outlook For Bank Earnings

    Overview: With banks’ earnings squeezed on one side by flat yield curves, and on the other by tech companies encroaching on their traditional consumer-facing business lines, Louis wonders where the banking sector will generate future earnings growth United States: Doing More With A Flatter Yield Curve: Now consumers have deleveraged, and with strengthening demand set to drive a pick-up in corporate investment, Will argues that earnings growth...

    0
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    Gavekal Dragonomics

    The Short Tale Of Iron Ore's Long Fall

    Commodity prices boom when supply is slow to respond to surging demand, and collapse when supply finally catches up. The iron ore market is clearly in the second phase now, with global supply surging just as Chinese demand slows. In this piece we outline the fundamentals for iron ore, which mean that prices will remain lower for longer.

    0
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    Gavekal Research

    One Belt, One Road, One Grand Strategy

    In what can only be described as a triumph for Chinese financial diplomacy, some 48 countries had defied US disapproval to sign up for Beijing’s new Asian Infrastructure Investment Bank by yesterday’s deadline. The applicants included not only Europe’s big four economies, but staunch US allies such as Saudi Arabia, geopolitical rivals like India, and even Taiwan, which China does not recognize as a separate country.

    2
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    Gavekal Research

    5C China: The Worst Is Yet To Come

    China’s banks are going through their toughest times since the central government bailed them out at the end of the late 1990s banking crisis. After 10 years of double digit growth, the earnings of China’s five largest banks grew by only 6.5% in 2014. Fourth quarter profit growth was actually negative. China’s smaller banks have performed better than their larger counterparts, but even so their profit growth has also slowed significantly. What’...

    0
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    Gavekal Dragonomics

    The Relevance Of Bank Reserve Cuts

    China is set to make further cuts in the extraordinarily high reserve requirement ratio it imposes on its banks. In early February the People’s Bank of China reduced RRRs for the first time since May 2012, cutting the ratio for all financial institutions by at least 50bps (with a bigger cut for selected banks). However, even after February’s cut, the RRR for big banks remains at 19.5%, a punishingly high level by international standards,...

    0
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    Gavekal Research

    Exogenous vs Endogenous Shocks

    Markets can be hit either by endogenous shocks (they collapse suddenly because of the build-up of internal excesses—think the 2000 tech bubble, the 2008 US mortgage crisis, or the 2011-12 eurozone crisis) or by exogenous shocks (9/11 in the US, or the price of oil shooting up from US$100/bbl to US$150/bbl in 2008 following the Sichuan earthquake and preceding the Beijing Olympics). This raises the question how investors should view...

    4
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    Gavekal Dragonomics

    Macro Update: A Broader And Deeper Slowdown

    2015 is off to a soft start for China. The housing downturn in 2014 led to economic pain that was concentrated in regions and sectors that supplied steel and other construction materials. But now the slowdown is spreading through the rest of the economy, with corporate profits and consumption starting to show weakness. Monetary policy will continue to ease in response, though neither a strong surge in credit growth nor a big depreciation of the...

    0
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    Gavekal Research

    The Divergence In Market Action

    After yesterday’s trading action, the S&P 500 is now broadly flat for the year so far, and stands at the same level as on November 21. Interestingly, over the past 26 days since February 17, the US index has not managed to string together two consecutive days of gains. In other words, US equities are now adding more volatility and less returns to portfolios. That’s hardly the combination that most investors are looking for. In contrast, the...

    3
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    Gavekal Research

    China Update: A Rare Bond Market Bright Spot

    The rule of thumb in all of our fixed income models used to be that the nominal yield on ten-year government bonds for a given country should be equal to the country’s ten-year average inflation rate plus the structural real growth rate of its gross domestic product (i.e. demographic growth + productivity gains). So, for example, if the US were to see 2% GDP growth (1.2% productivity gains and 0.8% demographic growth) and 2% inflation, then the...

    0
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    Gavekal Research

    Five Corners (25 March): Where To Find Value

    Overview: Louis deconstructs the cycle across different regions to work out what investment strategies should work best, and where. North America: David Hay argues that the Canadian dollar may be nearing its trough, and if so, that Canadian REITs offer compelling value. Europe: Turkish assets have suffered recently. But with cheaper oil and a recovery in European demand emerging, Cedric makes the case for an impending rebound. China: With yields...

    0
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    Gavekal Dragonomics

    Managing The Disappointment In Housing

    China’s housing market has gotten off to a very bad start for the year, with housing sales falling 18% YoY in January and February, the worst decline since 2009. The terrible data are another reminder that we have entered a structural downward trend in housing demand, which means that sales are more likely to undershoot than to overshoot. But the negative trend also means that previous government concerns about overheating housing prices and...

    0
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    Gavekal Research

    5C China: A Rare Bond Market Bright Spot

    The rule of thumb in all of our fixed income models used to be that the nominal yield on ten-year government bonds for a given country should be equal to the country’s ten-year average inflation rate plus the structural real growth rate of its gross domestic product (i.e. demographic growth + productivity gains). So, for example, if the US were to see 2% GDP growth (1.2% productivity gains and 0.8% demographic growth) and 2% inflation, then the...

    0
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    Gavekal Research

    5C Overview: Three Regions, Three Strategies

    Fundamentally, there are three ways to make money in financial markets: Momentum trades: ideally buying high and selling higher. Return to the mean trades: ideally buying low and selling higher. Carry trades: borrowing short to lend long.

    0
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    Gavekal Research

    All 21st Century Roads Lead To...

    With trillions of US dollars’ worth of transactions every day, the G7 foreign exchange markets are supposed to be the most liquid, least prone to manipulation, markets out there. Even so, the five day rate of change of the EUR-US$ exchange rate has lately fluctuated in the +5% to -3% range usually only seen at times of deep market crisis. As a result, most investors, or companies looking at their budgets and sales projections for the second...

    0
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    Gavekal Research

    London Seminar March 2015 - Anatole, François, Andrew & Charles

    We held our main spring seminar in London on March 17 with Anatole, François, Andrew and Charles offering their views of the global economic pulse and recent market and central bank developments.

    0
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    Gavekal Research

    Asia Is Not So Scary

    One reason we have received push-back on our call to overweight Asian equities has been the risks associated with a major US dollar spike. Asia has not racked up foreign currency debt at the rate seen in recent years since just before the region’s financial crisis in 1997. Still, we would argue that there are sufficient differences this time around to think that Asia can generate strong performance on lower volatility over the coming year.

    1
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    Gavekal Research

    Who Gains When The Fed Hikes?

    The Fed has lost patience in words only, not in deeds. In its statement yesterday the Federal Open Market Committee dropped its linguistic backstop—the word “patient”—indicating that the first rate rise since 2006 could come as early as June (remember, Fed chair Janet Yellen defined “patience” as meaning there would be no rate hike for at least two meetings after the word’s use). But the underlying message the market took away yesterday is that...

    0
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    Gavekal Research

    Don’t Bet On A Renminbi Depreciation

    A number of clients have asked recently when we think the renminbi will start to weaken against the US dollar, and how far we expect it to fall. With the euro and the yen having both recorded double digit percentage falls against the US currency over the last six months, and with the Taiwan dollar down -4% and the Korean won now down -7% after the Bank of Korea cut interest rates last week to a record low, the renminbi is a glaring exception....

    1
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