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    Gavekal Research

    Gold For Japan's Confidence Game

    The Tokyo Olympics 2020 celebrations were so extensive and jubilant, that some commentators said it all seemed rather “un-Japanese.” But this is exactly what Prime Minister Shinzo Abe is looking for—a new kind of Japan. Tokyo’s hosting of the 2020 games offers much more than the limited economic boost directly attached to the Olympics: more importantly it raises the odds that Abenomics will continue to enjoy a popular mandate. This is an...

    0
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    Gavekal Research

    5C Asia: Time For The Yield Hunt To Recommence?

    With US 10 year government bond yields stabilizing at around 3%, QE tapering expectations appear broadly priced in. As such, bargain-hunters have already returned to emerging market bonds, nudging down yields. There is still plenty of opportunity left for those who think the worst of the tapering storm has passed.

    0
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    Australia's Next Era

    Australia’s doomsayers love to focus on high foreign liabilities and household debt ratios, calling up the ghosts of America’s housing bust and emerging market sudden stops. Such risks are heavily overstated. With the opposition conservative coalition expected to win tomorrow’s national election, the new government’s greatest challenge will be to reverse a 15 year trend of deteriorating productivity growth and position Australia as a prime high-...

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    Gavekal Research

    India’s Mess And How To Clean It Up

    How fast fashions change: in 2012 India had one of the world’s best performing stock markets, despite abundant evidence that the country’s growth momentum was slowing. But since June of this year, India has been the hottest flashpoint in the emerging-markets meltdown that began after Ben Bernanke started his QE taper-talk: the rupee dropped by 20%, capital outflows accelerated and GDP growth fell to 4.4% in the most recent quarter, the worst...

    0
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    Gavekal Dragonomics

    Korea And China: Rhyme Or Repeat?

    Stop me if you’ve heard this one before. An Asian country emerges from a period of internal strife to take global markets by storm. Sweeping domestic reforms and a hands-on industrial policy result in a surge in manufacturing capabilities and exports, which in turn drive years of sustained and rapid economic growth. But once exports start to slow, the government tries to keep growth going by pushing up investment. This works for a while, but...

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    Gavekal Dragonomics

    CEQ Q3 2013 - Books

    Stop me if you’ve heard this one before. An Asian country emerges from a period of internal strife to take global markets by storm. Sweeping domestic reforms and a hands-on industrial policy result in a surge in manufacturing capabilities and exports, which in turn drive years of sustained and rapid economic growth. But once exports start to slow, the government tries to keep growth going by pushing up investment. This works fora while, but...

    0
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    Gavekal Research

    Can Rajan Rescue India From Disaster?

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    Gavekal Research

    Winners And Losers In China's Rebalancing

    Investors may have noticed that Asia is having a pretty rough run. Capital is leaving the region and, unlike after the 1997 crisis, it is uncertain whether nations can “export” themselves back to health (see It’s Not A Balance Sheet Problem). Indeed, China has been the region’s key export growth market in recent years, and as we all know, her era of investment-fuelled hyper-growth is giving way to a slower, more balanced growth model. This...

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    Gavekal Research

    It’s Not A Balance Sheet Problem

    There is a growing fear that emerging markets could be on the cusp of a general crisis of the type seen in the early 1980s or late 1990s. The concern is that too much debt was racked up during an easy money phase and chickens are coming home to roost as the US moves toward a tightening cycle (see Resetting Expectations For Emerging Markets). Attention has understandably focused on those emerging economies with sizeable current account deficits,...

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    Gavekal Research

    Asia's Naked Swimmers

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    Gavekal Research

    Can Growth Save The Rupee?

    With the rupee skidding to a new low, India on Monday announced its latest round of measures aimed at stemming the currency's decline. By curbing “non-essential” imports and easing regulations for overseas borrowings to attract inflows, the government continues its patchwork approach to solving its balance of payments problem. But the measures unveiled over the past few weeks do little to address the structural issues plaguing the Indian...

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    Gavekal Research

    Iron Ore Hits The Floor

    As China’s economy slows, the price of iron ore has been sliding. In early 2011, it peaked at US$187 per ton. Since then, bar a brief rally in the final months of 2012, it has been heading downward, and many investors are convinced that weak demand in China and the opening of new mines abroad mean it is only a matter of time before the US$100 threshold is breached. But we think expectations of an extended slump are wrong—and indeed, iron ore...

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    Gavekal Research

    Buy The Lion, Sell The Baby Dragon

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    Gavekal Research

    5C Asia: Japan's Third Arrow Dilemma

    Abenomics may go down in history as the one of the most mysterious economic stimulus plans of all time. So far Prime Minister Shinzo Abe’s platform has invigorated markets, delivered soaring corporate profits, boosted consumption and lowered deflation—all this, and yet Japan’s bonds are the only ones in the region to have gained this year.

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    Gavekal Research

    An Emerging Market Reform Wave

    We know that rising bond yields have been tough on emerging market asset prices. What remains to be seen is the real economic impact that results from this changed market landscape. If Indonesia, which just reported 2Q13 GDP is an example, then we can perhaps expect an era of reform and newfound policy discipline. We have argued that a mini crisis may be just the thing a number of emerging markets need to nudge them into making painful reforms...

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    Gavekal Research

    Look To EM For Real Yield

    Tomorrow is the big day. Market participants have their microscopes out to scrutinize the FOMC’s statement for any tonal change regarding the Bernanke put. Judging from the narrowing spreads over US treasuries in global bond markets, no major surprises are expected. However the yield-chasing game is not back in full swing: many emerging market bonds, which suffered a scorching sell-off earlier in the summer, have lagged the recent recovery....

    2
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    Gavekal Research

    Japan: Keep Following The Yen

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    Gavekal Research

    India: A Smart Muddle-Through Story

    4
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    Gavekal Research

    Game Over For Austerians

    Margaret Thatcher used to say that “There Is No Alternative” to whatever policy she believed in. But there is always an alternative to banging your head against a brick wall—you can stop banging your head against a brick wall. The G20 meeting in Moscow last weekend may have marked such a moment of revelation.

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    Gavekal Research

    Short-Term Japan, Long-Term China

    The weekend news from Asia featured two big items. On Friday night, China’s central bank announced the abolition of all controls on bank lending rates. On Sunday, Japanese PM Shinzo Abe’s coalition won a majority in the upper house of Parliament big enough for Abe to push through major economic reforms, (but too small for him to re-militarize the country). Both of East Asia’s biggest economies seem primed for major structural reforms under new...

    1
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    Gavekal Research

    Japan’s Consumption Tax Imperative

    For Japan’s Prime Minister, Shinzo Abe, much is at stake in Sunday’s upper house elections. Victory would give the Liberal Democratic Party control of both parliamentary chambers and remove an inevitable veto to contentious policies that challenge vested interests. This is the hope of investors who have bid Japanese shares sharply higher in recent weeks on the bet that an LDP electoral victory will break the policy logjam and allow Abe to...

    0
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    Gavekal Research

    Five Corners (17 July 2013)

    In the latest Five Corners biweekly review of global economics and investment:

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    Gavekal Research

    The Other Emerging Markets Story

    Investors have had a harsh reminder of the risks presented by high growth developing economies with rudimentary financial systems. And yet for every manager who tells us that they will never again take the call of a Singapore or Sao Paulo-based equity broker, we cannot but feel that the current gloom is overdone. Indeed, we are seeing encouraging signs of reforms that could serve as the basis for the next phase of EM growth.

    1
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    Gavekal Research

    Good Omens

    Two months ago I gave ten reasons for believing that April’s break-out of the S&P 500 from its 13-year trading range “could mark the start of a secular bull market in global equities”. This piece, which came out on May 20, was singularly ill-timed, since equity markets peaked the very next day and then plunged on May 22, after Ben Bernanke’s tapering comments (see Goldilocks And The Ten Bears). Luckily for my credibility, I did end this...

    5
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    Gavekal Research

    Australia And The China Syndrome

    So for the satellite supplier economies to the Chinese juggernaut, is it simply a matter of following the leader? This morning it was announced that China’s economic growth duly slowed to an annual rate of 7.5% in 2Q13 from 7.7% in the previous period. Moreover, the latest credit data shows that China’s credit cycle has decisively turned, implying that last month’s interbank rate spike was no aberration. Dragonomics will publish a detailed look...

    2
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    Gavekal Research

    Asia Between A Rock And A Hard Place

    Asian central banks have had a painful reminder of their dependence on external (in particular US) monetary conditions. Despite their economies’ facing far tighter financial conditions than a few months back, central banks in Korea and Malaysia yesterday left key interest rates on hold, while Indonesia tightened by 50bps. As the Federal Reserve prepares to wind-down unconventional monetary policies (yes, we did see the chairman’s latest “...

    0
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    Gavekal Research

    Bad Omens

    In late May we published a debate piece on the near-term outlook for equity markets. Since then, emerging markets have once again lived up to their name by proving themselves hard to emerge from during an emergency (in USD terms, Brazil is down –35% year to date while Chinese valuations are back to 2008-crisis levels); for their part, European and US equity markets have pulled back, while the only salvation has come from Japan (the one market...

    10
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    Gavekal Research

    Counter-Balancing Market Trends?

    Over the past decade, investors needed to come up with one of two ideas to ensure outsized success: “front run the Chinese” or alternatively "front run the Fed".

    5
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    Gavekal Research

    Nuclear Decision Nears

    We have argued that Japan was persuaded to join the currency devaluation race less by any innate desire to pursue structural reform than a fear of becoming dependent upon foreigners. Japan runs the biggest fiscal deficit among rich nations and when its current account fell decisively into deficit last year, alarm bells went off in Tokyo. Concern morphed into paranoia as it became clear that regional rival China was one of biggest incremental...

    2
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    Gavekal Research

    Falling Rupee A Knife Worth Catching

    India’s release of quarterly balance of payments data tomorrow will be more than usually scrutinized. In the last month, emerging markets which depend on capital inflows to offset current account deficits have been given the cold shoulder. India has been especially shunned because its combined current and fiscal deficits exceed 10% of GDP, a level frequently cited as a critical threshold. And in the stampede out of “twin deficit” economies few...

    2
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    Gavekal Research

    Five Corners (19 June 2013)

    In the latest Five Corners biweekly review of global economics and investment:

    0
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    Gavekal Research

    Who Is Liquidating?

    Short-term pullbacks of 10% or more are nothing out of the ordinary for Asian equity investors. However, the sell-off that started on May 22nd is troubling. It is occurring on no major news (no Fukushima disaster, no SARS-type health scare, no Sino-Forest corporate scandal, etc); and it is rather indiscriminate, with the correlation among all stocks, and all asset classes, shooting up. Even the safest of the region's government bond markets...

    1
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    Gavekal Research

    The Incredible Deflating Gas Market

    Emerging markets are taking a pounding with commodity-producing centers worst affected. Everywhere we look we see resource markets that are either over-supplied or have the potential to be so. The old market adage that the best cure for high prices is high prices would seem as relevant as ever. But it isn’t just iron ore and copper stocks which are bulging; LNG prices have plunged almost 25% in the last couple months.

    6
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    Gavekal Research

    Not All Emerging Markets Are Equal

    Emerging markets suddenly face a perfect storm of fleeing capital and shrinking demand for their wares. The proximate cause is the global bond market sell-off, which has sucked hot money back home. And the hardest hit markets are those commodity-heavy exporters which hitherto benefitted from rapidly expanding Chinese demand. But while it may seem like a time to circle the wagons, this sell-off is most likely a healthy realignment of winners and...

    0
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    Gavekal Research

    Asia And The Dollar

    Asian risk assets have been sucked into the volatility vortex since the latest panic started over the end-game for the Federal Reserve's quantitative easing program.

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    Gavekal Research

    Japan Misses The Target

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    Gavekal Dragonomics

    China Economic Quarterly June 2013 - Southeast Asia

    Deng Xiaoping used to say that the foreign policy breakthrough he was most proud of was the full normalization of China’s relations with the countries in Southeast Asia. In the 1980s, Deng’s policies helped China transform itself from a deadly enemy of its southern neighbors to a potential partner. Over the next two decades, China nurtured relationships in its backyard. Yet over the past few years many of these efforts have gone to waste: from...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Indonesia

    Gandaria City is the largest retail mall amid the growing high rises of south Jakarta,but for many years it stood as a half-finished skeleton. Its Indonesian-Chinese developer, Pakuwon Group, racked up huge debts during the Asian Financial Crisis of 1997 and was unable to complete the project. Yet soon after making forays into China during the mid-2000s, the firm suddenly found itself in aposition to finish the massive complex—supported, it is...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Vietnam

    “Follow America and save the country; follow China and save the Party.” This saying, ubiquitous in Vietnam, distills the geopolitical dilemma facing its ruling Communist Party. Forty years after the last American troops left Vietnam, the Party thatwon independence and unified the nation has lost much of its legitimacy. No amount of harking back to the virtues of Ho Chi Minh and his comrades canrestore its élan nor, it seems, root out systemic...

    0
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    Gavekal Dragonomics

    DragonWeek - A Respite For Japan

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    Gavekal Research

    Can Japan Stop The Rout?

    The sudden collapse of Japanese equity prices last month had many possible explanations (see An Odd Divergence) but one that deserves more attention is the simplest—there were more sellers than buyers. What makes this banal observation potentially useful in Japan’s case is the possibility that the imbalance between buyers and sellers may be about to shift. More precisely this imbalance may soon be affected by a change in government regulation...

    5
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    Gavekal Research

    An Odd Divergence

    In recent weeks, the JGB market has broken down, with 10-year bond yields almost doubling. The Nikkei has fallen more than -15% from its peak and thus technically entered bear market territory (even if, in fairness, the past ten days' pullback only brings the Nikkei back to where the index was at the beginning of the month!). But, over the same period, in a surprising turn of events, the yen has barely budged, staying well anchored in the...

    9
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    Gavekal Research

    It's The Volatility That Matters

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    Gavekal Research

    Five Corners (22 May 2013)

    In the latest Five Corners biweekly review of global economics and investment:

    2
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    Gavekal Research

    The Arithmetic Of Abenomics

    The 3.5% GDP growth announced this morning suggests that Japan may be the fastest growing economy in the G7. Since the Tokyo stock market hit bottom exactly six months ago, the Nikkei share index has soared 72%. Meanwhile, the yen has experienced its biggest ever six-month move against the dollar. All these events appear to be linked to Shinzo Abe and the new regime he has installed at the Bank of Japan.

    0
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    Gavekal Research

    Has The AUD Met Its Wooloomooloo?

    Much like your average marsupial, the Australia dollar is a strange creature. As a commodity exporter whose biggest customer is China, Australia’s currency has tended to appreciate during periods of brisk economic activity and muscular risk appetite. But in the aftermath of the 2008-09 crisis Australia also became a safe haven, which explains why the AUD remained strong in the past 18 months, even as China’s appetite for commodities started to...

    2
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    Gavekal Research

    Japan Exports Ready To Rumble

    Could it be a case of ‘buy the rumor, sell the fact’? Japanese exporters have seen their share prices soar following the yen’s more than 20% depreciation against the dollar since late last year. The real world impact has been far more muted; Japan’s exports rose only slightly in March, while those of rival industrial powerhouse economies – South Korea and Germany – have remained relatively steady.

    4
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    Gavekal Research

    A 'Perfect Score' For Abenomics

    Japan’s beggar-thy-neighbor monetary goals got a perfect score yesterday—of 100. Indeed, after breaching the resistance level of 100 against the US dollar, the yen kept falling, to finish the day at ¥101. This comes in the midst of an earnings season that has put on full display Abenomics’ potential for boosting company fortunes. More than half of Topix companies have reported, with 1Q13 earnings rising an average of 10% YoY, compared to 5% in...

    0
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    Gavekal Research

    Don't Miss Out On Asia

    The spectacle of daily new highs on US equity markets, combined with continued euphoria in Japan, makes it hard to notice anything else going on in global stock markets. But stocks in Asia ex-Japan are humming along at a pretty decent clip as well. Lost in the fanfare of the Dow Jones Industrial Average’s 15,000 milestone, hit yesterday, is that MSCI Asia ex-Japan has outperformed the DJIA so far this quarter, returning 5.5% in USD compared to...

    0
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    Gavekal Research

    Malaysia’s Longer Term Debt Riddle

    The razor-thin victory of Malaysia’s ruling Barisan Nasional has prompted a relief rally in financial markets. But the result could prove a pyrrhic victory for the country’s long term growth prospects. Accusations of widespread voting irregularities can only exacerbate the country’s polarized social divide, and perpetuate an economic structure that ensures growth is bought with escalating debt levels.

    0
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    Gavekal Dragonomics

    The Myanmar Dilemma

    Follow the old Burma Road from Mandalay through the rolling hills to China’s southwest border, and you will catch glimpses of narrow strips of freshly dug farmland, scattered with white marking posts. Underneath the deep-red earth lie twin pipelines, each a meter in diameter, that will carry oil and natural gas 1,000 km from Myanmar’s western coast to the Yunnan border town of Ruili, and then on to the provincial capital of Kunming.

    1
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    Gavekal Research

    Implied Assumptions

    Financial markets operate on a number of implied assumptions about growth, policy direction and other factors. Experience tells us that these assumptions often turn out to be erroneous. The goal of this paper is simply to test the rationality of the current set of assumptions.

    9
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    Gavekal Research

    Will India Rise As Commodities Fall?

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    Gavekal Research

    A Way Out For Japan?

    After two lost decades, Japan is trying something radical. There are three pillars to Abenomics: aggressive monetary policy, an expansionary fiscal policy and structural reforms to ensure a sustainable growth strategy.

    2
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    Gavekal Research

    Indonesia's Version Of A Great Rotation

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    Gavekal Research

    A First Non-Euro Currency Debate

    Last Thursday the Bank of Japan stunned investors with a muscular monetary response that aims to break a deflationary cycle that had seemed to condemn Japan to permanent economic decline. In this piece we debate what the new policy settings mean for investors and crucially, seek to answer the trillion-yen question of where the Japanese currency is headed.

    3
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    Gavekal Research

    Nikkei: Far From A Crowded Trade

    The GaveKal view is for 2013 to be the year when the main driver of markets shifts from government policy to economic fundamentals. We never expected this to be a smooth ride and the global economy continues to throw up contradictory signals (see today’s Daily Riding A Bull Market With No Conviction). The big exception to this conceptual framework was always going to emanate from Tokyo. Unlike the US, China and (even) Europe, it has been clear...

    2
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    Gavekal Research

    Riding A Bull Market With No Conviction

    The Irish poet WB Yeats wrote, “The best lack all conviction, while the worst are full of passionate intensity.” We see something similar in equity markets. With the S&P 500 on Tuesday hitting a new all-time high, we clearly remain in bull market territory. Central bank easing measures such as that just announced by the Bank of Japan mean we could push higher. And yet we see plenty of evidence that these new peaks have come on the back of...

    4
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    Gavekal Research

    Australia Is Lucky, But China Might Be Luckier

    Australia apparently suffers from a “two-speed” economy, where a booming resource sector drives up both borrowing costs and the value of the currency, thus crowding-out other activities. But any day of reckoning resulting from such an unbalanced economy has been deferred in large part due to the blow-back effects of the post-2008 global financial crisis. It could just be argued that the crisis which hurt so many other big economies was, in fact...

    3
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    Asia's Underperformance

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    A Recantation

    Over the years a number of economists and political scientists have seen the error of their ways and come clean with a reasoned recantation. The mid-19th century British thinker John Stuart Mill famously changed his mind on the divisive question of industrial wages. My contribution to political economy hardly matches Mill’s, but I have spent my adult life pondering the linkages between economics and markets. However, in recent times I have come...

    11
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    Gavekal Research

    A Brief Overview Of Global Equities

    As we never tire of pointing out, equity bull markets rest on three pillars: attractive valuations, decent economic growth, and excess liquidity (to push valuations higher). Looking at global markets on the basis of these three pillars, we find that:

    2
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    Gavekal Research

    Storm In A Masala Tea Cup

    India yesterday got the rate cut many were hoping for—but also a political squabble no-one wanted. The Sensex tumbled -1.5% for the day, bringing year-to-date losses to -2%, amid concerns that parliamentary infighting will derail a hard-won reform push that began late last year.

    1
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    Gavekal Research

    Breaking Asia Into Digestible Pieces

    One of our long-held beliefs is that bull markets rest on three pillars: attractive valuations (so that multiples can expand), excess liquidity (to push up multiples) and decent economic growth (to ensure no disappointments in earnings). In our recent meetings with investors in Australia, we were asked where Asian equity markets stood along this grid and, to be honest, we were hard pressed to answer. Now, with the hair-raising news out of Cyprus...

    0
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    Look Forward, Not Back In ASEAN

    Southeast Asian economies have had a strong run on decent export performance and solid consumption spending. A key structural concern, however, is that this recovery has occurred on a thin capital stock that has barely grown since the late 1990s Asian crisis. For this reason, an increasingly vocal group of bears argue that payback for under-investment is coming due in the shape of overheating pressures—in particular they cite worsening current...

    0
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    Japan: Bowing To The Dow

    The Dow Jones Industrial Average is the best performing major index year-to-date, in US dollar terms. But Japan is not far behind, with the Topix up 9% in USD terms, trailing the DJIA by just about -80bp. This is not random. If the US continues to do well, so will its major trading partner and competitor across the Pacific. Those optimistic that the US recovery story will continue to fly, should also put Japan on their radar screen.

    0
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    Gavekal Research

    Of Auto Sales And Smog Clouds

    To make up for weak external markets since 2008, Asian policymakers have sought to boost domestic demand. Judging by passenger car sales, they have done a pretty good job. Boosted by financing conditions and tax incentives, car sales have taken off in China and in Southeast Asia.

    6
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    Gavekal Research

    Not Deja Vu Again In Asia

    For plenty of Asia watchers there is an uncomfortable familiarity with the boom conditions that have gripped Southeast Asia in recent years. Capital is pouring into the region, risk premiums have collapsed and domestic demand is galloping ahead. Manila suddenly has aspirations to be a financial “hub,” Thailand has just racked up a record trade deficit and even Anwar Ibrahim, the enfant terrible of Malaysian politics is back, suggesting he can...

    0
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    Gavekal Research

    The Next BoJ Head's Tough Mandate

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    Gavekal Research

    Betting On The Indian Budget

    After shooting out of the starting gate with a 5% bounce in January, Indian equities have given up all their gains and are flat year to date. The proximate cause is poor earnings reports and downgrades. But the broader story is the fading of the reform euphoria that helped push up Indian markets 25% last year. Negative economic news flow, from a record current-account deficit to major growth estimate downgrades, indicate that India is now...

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    Walking On Egg Shells In Japan

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    Quality vs Trash In Japan

    It has become the world’s favorite momentum trade as shown by today’s 3.8% rise in the Nikkei 225. Japan’s avowed yen depreciation policy has prompted a rush into exporter stocks with little regard for their underlying quality—the yen has depreciated 16% against the dollar since November, while a broad index of exporter stocks is up 38%. Global fund providers are seeing big flows into products offering exposure to Japanese exporter stocks while...

    8
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    Gavekal Research

    India’s Easing: Baked In The Baseline

    Tomorrow, the Reserve Bank of India is set to decide on what may be the first in a series of interest rate cuts. Investors should stay tuned because, absent a strong economic growth story, we expect monetary policy to be the main news influencing Indian equities this year.

    0
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    ASEAN And Modern Political Risk

    Southeast Asian countries’ recent success in grabbing direct investment and portfolio inflows is rightly attributed to positive growth dynamics, good policy and moderate aggregate debt levels. Less often mentioned is the role of stable politics and stronger democratic institutions in securing this growth dividend. Viewed in these terms, governments in Indonesia the Philippines and even rambunctious Thailand are being financially rewarded for...

    0
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    Gavekal Research

    BoJ's Latest Currency War Salvo: A Dud

    When Bank of Japan officials convened around a table for a policy discussion this week, they had to pull up extra chairs: two top ministers from Shinzo Abe’s government joined the discussions. This alone would seem to justify protests from the Bundesbank and other central banks that monetary policy independence is dead in Japan. Yet outgoing BoJ governor Masaaki Shirakawa, whose term expires in April, did not completely cave under the pressure—...

    5
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    Gavekal Research

    Japan Reflation Trade: 2.0

    “Buy the rumor, sell the fact” is never a bad trading maxim—except perhaps when the main actor on the stage is a central bank. Over the last three years the Federal Reserve has reminded us of the money printers’ potent capacity to depreciate a currency. Similarly, with the Bank of Japan expected on Monday to formalize the move to an aggressive monetary easing program and the upping of its inflation target from 1% to 2%, the tailwinds for a weak...

    0
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    Gavekal Research

    Stick With The Manila Thriller Ride

    The Philippine benchmark index rose 42% in US dollar terms last year and despite being the most expensive equity market in Southeast Asia, it has started 2013 on a tear. The concern, however, is that a booming economy may be starting to get bubbly. When one market watcher recently intoned gravely that Manila was like “Dubai on steroids” we drew breath. After all, construction cranes cover large areas of the city’s prosperous middle class...

    0
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    Gavekal Research

    Is Japan Gunning For Europe?

    It almost looks like Japan has Europe’s export champions in its cross hairs. Yesterday saw another significant bout of yen weakness and this time it was particularly pronounced against the euro. Indeed, the yen lost 1.8% against the single currency, the biggest one-day drop since mid-September last year and is now trading at ¥117.8/€, the lowest level since May 2011. Given that Germany is a major trade competitor, and that Japan recently...

    0
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    Gavekal Research

    Stay Long The High-Beta Asia Ride

    Asia is usually an easy, no-brainer, high-beta play on the return of global growth. Which explains why Korean and Chinese cyclicals, our favorite growth-focused proxies, have run up 10-20% in USD terms since November, outpacing the World MSCI’s 5% return. But after two months of lively momentum, growth-focused assets seem to have lost impetus. This can partly be explained by normal technical retracements after a heated run-up. But it may also...

    1
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    Gavekal Research

    Japan Shakes The World?

    The themes that obsessed financial markets in 2012 emanated from the US, Europe and China, and they were all largely negative. Now that the US fiscal cliff and a euro breakup have been averted, and China’s economy again proved it was not a massive investment bubble on the brink of implosion, attention should turn elsewhere. In 2013, Japan—where politics and monetary policy have suddenly got exciting—could prove to be a major story.

    10
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    Gavekal Research

    India: Growth & Reform For Re-Election

    With inflation still high, the Reserve Bank of India yet again refused to cut rates yesterday. Investors may be disappointed, but the RBI made the right choice. Though inflation has begun to decelerate, the fact is that India’s real interest rates are not particularly high in historical terms (see chart below). India’s major problem in 2012 has been a government paralysis on policy, or even the most basic economic actions like approving...

    0
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    Gavekal Research

    Thai Equities: The Burma Warrant

    Thai equities have saved the bacon of more than a few emerging market fund managers this year, due to a strong recovery from the 2011 flood disaster. But with the benchmark SET index up 32% YTD, valuations are looking a little rich at 15x earnings compared to 13x for MSCI Asia ex Japan. Since the domestic credit cycle is starting to get long in the tooth, investors will be looking for a fresh catalyst. Arguably, such a kicker lies across...

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    Japan's Big If

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    Gavekal Research

    What Kind Of Victory For The LDP?

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    Gavekal Research

    Indonesia Running Against The Clock

    Indonesia may not be partying like it was 1996, but the economic cycle looks to be increasingly mature. Swinging Jakarta has benefitted from cheap money, a bubbly property market and bulging shopping malls. And yet a sharply deteriorating trade balance suggests that Southeast Asia’s comeback kid may be nearing its near term growth limits.

    0
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    Gavekal Research

    The End Of Japan As A Global Shock Absorber

    5
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    Gavekal Research

    Japan: Good For A Bounce

    Japanese equities are rallying. The Nikkei gained over 8% in the last week, a relative outperformance of 5 percentage points compared to the US and key markets in Asia, while the yen has fallen 6%. Investor interest has been revived by hopes of an aggressive monetary and fiscal easing if the LDP returns to power in upcoming snap elections (see Sayonara Deflation...). We expect further upward pressure on equities, and downward pressure on the yen...

    1
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    Gavekal Research

    India's Fiscal Fantasies

    After a fall full of hope that reforms would put India back into the stratosphere of growth, it is time to get real. Measures announced in September may have boosted sentiment, but they have a negligible impact on growth (see India: Reforms On A Knife Edge for details). Now focus has shifted to new promises to rein in the fiscal deficit, a vital economic issue as the ballooning deficit has stoked inflation and the cost of money. But these...

    0
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    Gavekal Research

    Sayonara Deflation, Konnichiwa Yen Carry-Trade? - by Louis Gave

    Jesper Koll of JP Morgan once wrote that there are two simple rules to remember when investing in Japan. The first is to never underestimate the amount of pain that the Japanese population can endure. The second is to never underestimate the Japanese policymakers' ability to test the first rule. Nothing that has occurred in recent years challenges this observation. From the Japanese government’s hapless reaction to last year’s tsunami, to...

    3
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    Gavekal Research

    Bubble Trouble Averted-- Maybe

    The spillover effect of extraordinarily loose US monetary policy has provided a similar dilemma for both the Hong Kong and Singapore governments. Over the last two years, property prices in both financial centers have hit new highs, resulting in increased social tensions and fears of brewing bubbles. Added to the mix, money has poured into bricks and mortar from well-heeled investors in their immediate economic hinterland regions. As a result,...

    2
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    Gavekal Research

    The Other Election To Watch

    For 55 years the hegemony of the Liberal Democratic Party meant that Japan was effectively a one-party state with awfully predictable politics. Parliament was occasionally rocked by scandal or factional disputes, but the core business of government was stitched up over a cognac by like-minded officials, business leaders and party bosses. While it is easy to dismiss the Democratic Party of Japan as old wine in a new bottle, it is clear that the...

    0
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    Gavekal Research

    Goodbye Default Risk, Hello Volatility

    The global scramble for yield has caused investors to pour billions into emerging market bond funds. In a remarkable twist on recent history, markets such as Mexico and Indonesia have started to look like havens in the storm. Yet investors would be wrong to conclude that risk has been removed from emerging market fixed income investing. While solid fundamentals and lower total indebtedness has undoubtedly cut the chances of default, we would...

    1
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    Gavekal Research

    Asia's Equity Dispersion Stretched

    Sun drenched southern economies do not always do worse than their more regimented northern neighbors. Just look at Asia where the heavily-industrialized, and more export-orientated north has struggled since early 2011, while the ASEAN markets have had their best streak since the late 1990s Asian crisis. A dollar invested in the ASEAN markets in early 2011 would have generated 29 percentage points more return than one invested up north. But with...

    0
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    Gavekal Research

    Indonesia Asks Foreigners To Dig Deeper

    Indonesia’s resource exports have slumped and mining FDI has fizzled after the government earlier this year imposed tough new regulations on foreign investors. That, at least, would be a conventional interpretation of the resource sector’s weak performance following the imposition of export taxes and new government control measures. This simple narrative, unfortunately, ignores the reality that weak global demand has caused mining investments...

    0
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    India: Reforms On A Knife Edge

    India’s stock market soared last month after the government announced a slew of market openings for foreign investors as well as a long-awaited diesel price hike. But enthusiasm is already waning, and earlier this week the RBI hit the nail on the head when explaining why: sentiment will only hold if the announced reforms are followed up with deeper action. Unfortunately, it is by no means confirmed that India has embarked on a new era of...

    0
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    Gavekal Research

    BOJ Meets, But Does Not Exceed Expectations

    An investor once told us “I keep a special day to remind me how much I dislike investing in Japan. I call it “Monday”. And it is true that, with an equity market not that far off its 1982 levels, this widespread disdain is understandable.

    3
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    Gavekal Research

    ASEAN Is (Really) Working

    The apparent resolution to a long running secessionist struggle in the southern Philippines has spurred the way for development in the resource-rich but impoverished province of Mindanao. A festering dispute, whose origins date to the period of US colonial occupation, was brokered by the Malaysian government which has also promised to help Mindanao develop plantations, build infrastructure and mine commodities. Such an engagement was unthinkable...

    0
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    Gavekal Research

    Will China Spur An Asian Rally?

    Overseas appetite for Chinese assets has been firing up Hong Kong this month. Capital inflows have forced the de facto central bank to twice intervene in order to alleviate appreciation pressure on the Hong Kong dollar. This hot money surge looks to be the result of investors betting on a stabilisation in the China growth outlook and improved domestic liquidity conditions—Chinese H-shares, quoted in Hong Kong are almost 8% higher on the month...

    4
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    Gavekal Research

    China And India's Outperformance

    One of our fears in the days that followed the QE3 announcement (see The Markets Since QE3) was that a lot of ‘weak hands’ would get ‘sucked in’ to purchasing risk assets; i.e. fairly uncommitted investors who nonetheless felt that, because of the Fed’s unorthodox actions, the risk of sitting on the sidelines was simply too great. Our concern was that if markets failed to sustain upside momentum, such investors would likely be the first to rush...

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    Gavekal Research

    China Is Changing Fast

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