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    Gavekal Research

    Gold As An Emerging Market Play

    Spare a thought for gold bugs. At the beginning of 2021, their reasoning was clear. With all the money-printing and fiscal stimulus across the rich world, inflation would breeze past 2%. From there, it would be just a short skip and a jump to higher gold prices. Inflation did indeed breeze past 2%. But gold prices fell. So, what went wrong? As Gavekal has long maintained, investors should look at gold as a derivative play on emerging markets.

    0
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    Gavekal Research

    Webinar: Global Investment Roundtable, January 2022

    In the US and Europe, the new year has begun with a huge wave of workplace absenteeism due to surging omicron Covid cases. In China, policymakers are adopting a whack-a-mole approach to multiple Covid outbreaks, while other emerging economies are curtailing market opening measures. Our team outline their base case views for growth, inflation and markets in 2022.

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    Gavekal Research

    Video: The Quirinale Question

    The possibility that Italian prime minister Mario Draghi could be installed as the country’s largely ceremonial president when parliament chooses a new head of state next month has raised fears of a new period of political instability. In this video interview, Nick Andrews assesses the implications for Draghi’s ongoing structural reform program, and for Italian asset prices.

    0
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    Gavekal Research

    Playing Emerging Markets In 2022

    It is a significant signal for emerging market investors that the one big market move on Wednesday’s news that US CPI inflation hit a year-on-year rate of 7% in December was a sell-off in the US dollar. There was nothing surprising about the CPI print itself, which was in line with expectations; US equity and bond markets took the release in their stride. However, the US currency sold off on the news, with the DXY falling by -0.6% and the US...

    2
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    Gavekal Research

    Investing Through Inflation

    When assessing the impact of inflation on US markets, Charles has long believed that its actual level is irrelevant. Instead, it is necessary to determine whether price growth is accelerating or decelerating. He uses this insight to present a new framework for investing in inflationary times.

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    Gavekal Dragonomics

    Behind The Incredible Export Boom

    Chinese export growth ostensibly continues to outpace the rest of the world this year, but Thomas believes this could in part be due to misleading data. Exporters have been incentivized to reduce their under-invoicing, which has in turn materially inflated China’s export growth over the past three years.

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    Gavekal Research

    Breakout Time... Again

    In early 2021 US bond yields charged higher, and oil and gold both looked poised to break out decisively to the upside. The underperformance of value stocks seemed to be coming to an end. Then two developments pulled the rug out from under the cyclical trade. Fast forward, and today we might be back in early 2021. Louis asks what could shock markets this time.

    1
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    Gavekal Research

    Four Reasons To Buy The Dip

    Is it time to buy the dip in global equities? One reason might be the absurdly panicky headlines that preceded Monday’s possible reversal of the global equity correction. But beyond the hysterical headlines, I can see four reasons to increase equity exposure, even though the S&P 500 is just -3% and the Nasdaq only -7% off their all-time highs.

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    Gavekal Dragonomics

    Housing Demand Begins To Stabilize

    Chinese policymakers are scaling back their crackdown on real estate, having signaled a pivot towards prioritizing stable growth. The change in rhetoric has had a visible effect on the housing market, with a particularly sharp pickup in sales volumes in late December. This should lead to a further sequential improvement in sales and prices in Q1.

    0
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    Gavekal Research

    The Labor Market, The Fed And Asset Prices

    The first week of January drove home the extent to which investors and the US Federal Reserve have both lost faith in the “transitory inflation” story. The US unemployment rate fell to 3.9% in December—tight by any standard. As a result, investors have concluded that the Fed cannot stay loose forever, and that tightening is likely sooner rather than later.

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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.

    0
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    Gavekal Dragonomics

    Covid Containment Evolves

    After a string of outbreaks, China’s Covid strategy is evolving. No longer aiming for zero cases, authorities are focused on quickly containing local outbreaks. This has mostly worked well, and travel will be less restricted over the Lunar New Year holiday. But the harsh lockdown in Xi’an shows what can go wrong if the virus gets out of hand.

    3
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    Gavekal Research

    Implications Of The Kazakhstan Protests

    Violent protests triggered by rising energy prices have rocked Kazakhstan in recent days, prompting President Kassym-Jomart Tokayev to call in the Russian military in an attempt to restore control. Tom examines what the current unrest means for energy prices and the region’s power balance.

    1
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    Gavekal Research

    Video: The Case For US Bank Stocks

    As the Federal Reserve dials back its quantitative easing program, the US economy is back to relying on banks as the main agents of credit creation. And as US yields move higher, Will is convinced that large-cap bank stocks offer one of the best bets in the US market. In this video interview, he explains why.

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    Gavekal Research

    Peak Inflation, Peak Rotation

    As investors reassessed the risk of central bank hawkishness, European equity markets took a hit on Thursday, with the MSCI EMU index falling -1.4% to wipe out almost all the gains made in the first three trading sessions of the year. The sell-off was not universal, however.

    0
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    Gavekal Research

    SWOT Analysis For 2022

    Despite a spate of exogenous shocks in 2021, currency markets largely remained placid, bonds barely sold off and the US equity market continued to scale new heights. This year, however, the global policy backdrop is shifting. Clearly, 2022 will be different from 2021. But how different? Louis analyzes the strengths, weaknesses, opportunities and threats in the new year.

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    Gavekal Research

    As January Goes

    We are only six days into the year, but most investors must hope that the adage “as January goes, so goes the year” does not hold true for 2022. After all, the S&P 500 is down -1.4% and the Nasdaq has shed -3.5%. And behind this pullback in the broader indexes, pain in the more speculative parts of the market is starting to add up. Since early November, the bitcoin price has fallen -36.5% and the Russell 2000 growth index is flirting with...

    3
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    Gavekal Research

    Validation For VIEs

    China’s policymakers have given foreign investors in Chinese internet firms an unexpected gift: regulatory validation for the variable-interest entity, a corporate structure which allows firms to skirt a prohibition on foreign investment. Thomas explains that while regulatory uncertainty remains for restricted sectors, a key risk has been removed.

    0
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    Gavekal Research

    Of Prices, Profits, Energy And Markets

    In various pieces over recent years, I have tried to show that most economic activity is nothing but energy transformed, and that economic value derives from "scarcity" or "efficiency". Further, US stock market returns can tell us a lot about "efficiency values" deployable in the future. These broad concepts can be tied together to assist in investment decisions.

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    Gavekal Research

    US Equity Transitions

    Despite huge supply chain disruption, rising inflation and a more-hawkish-than-expected central bank, the S&P 500 index rose a whopping 27% last year and along the way suffered a maximum fall of -5%. Going into 2022, investors may conclude that US equities have hit “escape velocity” and nothing will spoil the rally.

    0
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    Gavekal Research

    Bring Out The Usual Suspects

    As we approach the end of 2021, two questions come to mind for next year: Will the US tighten in 2022, and if so, by how much? And will China ease policy in the face of its slowing economy, and if so, how? In addition to these two established founts of uncertainty, two new sources have reared their heads in recent days.

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    Gavekal Research

    Rethinking The International Liquidity Crisis

    In recent weeks Charles has published a series of reports assessing changes in the reserve of value that underpins the global financial system. In this report, he returns to one of his older frameworks for the US-dollar-centered system to see if it still has explanatory power. He concludes that it does, but he is not reassured by the findings.

    7
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    Gavekal Research

    The European Inflation Split

    Europe is again being split along eastern and western lines. To the West, the European Central Bank is holding fast to its belief in the transitory inflation narrative, with Christine Lagarde barely acknowledging upside risks. Yet to the East, the CEE-3 countries—Hungary, the Czech Republic and Poland—are taking inflation as a serious threat. The Hungarian National Bank recently hiked interest rates for the seventh time in less than six months,...

    3
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    Gavekal Research

    Are Rock-Bottom Bond Yields ‘Irrational’?

    What has been the most surprising financial event of 2021? The 20% gain in equity prices, the 40% jump in oil prices and even the fivefold leap in US inflation may all have been bigger than expected, but they were at least directionally understandable consequences of the fastest growth in the world economy for 40 years. That explosive growth, in turn, was a predictable response to last year’s unprecedented monetary and fiscal stimuli, magnified...

    0
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    Gavekal Dragonomics

    One Small Cut For Lending

    China announced a 5 bp cut to its one-year loan prime rate on Monday, the latest in a series of supportive measures enacted by officials to ease policy following China’s sharp slowdown in growth. In this Quick Take, Wei explains why future rate cuts are likely on the way, and why the cuts will be positive for Chinese bonds.

    0
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    Gavekal Research

    A Tale Of Two Central Banks

    On Wednesday, the Bank of England ended its expansionary £895bn asset buying program, only to raise its key interest rate by 15bp a day later. In contrast, the European Central Bank stuck to its cautious script, saying it would buy bonds through 2022 and beyond if necessary. Of the two, the UK’s tightening approach’ looks most prone to a forced reversal.

    0
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    Gavekal Research

    Video: The Struggle For Self-Sufficiency

    US efforts to slow the development of China’s domestic semiconductor industry through export bans on US-origin technology has duly stymied its leading chipmakers. As a result, Beijing is working hard to achieve some form of technological self-sufficiency. In this interview, Gavekal Fathom China’s Tilly Zhang outlines two prongs of the effort.

    0
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    Gavekal Dragonomics

    Securing The Western Frontier

    China looks like a winner from the US withdrawal from Afghanistan, now free to tighten its grip on Central Asia. In this DeepChina report, Tom explains the complex reality of the latest round of the "great game." China is getting closer to Russia, skeptical of Afghanistan and Pakistan, and consolidating its economic hold on Turkmenistan.

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    Gavekal Research

    Never Mind The Fed Hawks

    Even as the Federal Reserve chairman went out of his way to sound hawkish on Wednesday, risk assets rallied. On the basis that truth often hides in plain sight, the most obvious explanation is that the Fed had well telegraphed an accelerated taper to its asset purchases from US$15bn a month to US$30bn. A faster wind-down to the quantitative easing program means the Fed will be unencumbered in hiking interest rates sooner, if needed. That is a...

    2
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    Gavekal Dragonomics

    A Welcome Reprieve For Property

    Chinese economic data stabilized in November as exports strengthened and the deep declines in property showed signs of narrowing—a welcome respite from the sharp drops in September and October. Even so, the sector is stabilizing at a low level rather than rebounding to previous highs, underscoring the need for continued policy support.

    0
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    Gavekal Research

    India Macro Update: Not Quite Normal

    India’s economy is normalizing but is still smaller than it was before the pandemic began. Looking forward, changes induced by the pandemic point to a continued uneven recovery. In this quarterly update, Udith and Tom assess what this environment means for Indian asset values at a point when the United States is tightening monetary conditions.

    0
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    Gavekal Research

    The US Infrastructure Conundrum

    As the central bank pulls away the punch bowl and the fiscal authorities push for a boozy top-up to give the party fresh impetus, the US economy faces an odd moment. With inflation near a 40-year high, opposition to the Biden administration’s sprawling US$1.75trn “Build Back Better” bill is partly focused on its inflationary impact. Critics point to the White House’s infrastructure spending program, passed last month, as having already given an...

    0
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    Gavekal Research

    Missing The Forest For The Trees

    In these strange times, I have recently published a few pieces looking at money’s “reserve of value” function. Yet in preparing these papers, I came to realize that over the last decade I made the classic mistake of focusing too much on what was visible, and missing what was obscured.

    3
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    Gavekal Research

    A Green Light For Onshore Chinese Equities

    Chinese officials are signaling a shift in policy to counter downward pressure on growth, a move which Thomas and Wei believe will set the stage for a rally in onshore equities through 1Q22. The main risk is that policymakers under-deliver on their new rhetoric of stability. Meanwhile, the outlook for offshore Chinese equities is more mixed.

    2
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    Gavekal Research

    Money Supply, Reconsidered

    Money sits at the heart of the economy and financial markets. At a time when inflation is taking off and the US Federal Reserve is starting to scale back its money printing, investors badly need a single reliable gauge of US money supply—not a dozen or more. In this report, Will offers a new measure of money supply that he believes is suitable for today’s conditions.

    19
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    Gavekal Research

    Webinar: Global Investment Roundtable, December 2021

    Our senior team consider the big strategy questions that should be vexing investors in 2022. This includes an assessment of potential positive surprises that could present opportunities for investors who are positioned ahead of time. Our team also consider prospects for the undersupplied and underinvested global energy market.

    0
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    Gavekal Dragonomics

    Currency Policy Gets More Hands-On

    The People’s Bank of China raised its foreign-exchange reserve-requirement ratio for the second time this year, a clear signal to markets that it wants to cool down currency appreciation. Wei explains that that the central bank is less worried about speculative market action and more concerned that the renminbi is simply getting too strong.

    2
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    Gavekal Research

    Asia’s Manipulative Havens

    In early December, the US Treasury published its half-yearly report card on currency manipulation, in which it softened its criticism of offenders’ foreign exchange policies. When it comes to East Asia, the softening of US criticism is a sign that the Treasury is encouraged the targeted countries are intervening less heavily, allowing their currencies to appreciate.

    0
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    Gavekal Research

    Video: Pricing French Political Risk

    With four months to go before France’s 2022 presidential election, the lion’s share of publicity has so far been captured by the populist rightCedric assesses whether a right-wing Euroskeptic could really capture the Elysée palace come April, to what extent polling gains by populist candidates icould destabilize Europe’s financial markets.

    0
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    Gavekal Dragonomics

    Big Blades, Big Dreams

    China is the largest market for wind power and the biggest producer of wind turbines. Yet turbines cannot easily be exported, and Chinese firms have found themselves mostly confined to the domestic market. In this report, Dan explains why China’s large presence in wind power development does not mean that it will be globally dominant.

    0
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    Gavekal Research

    Growth Stock Relative Performance

    In Monday’s Daily, I pondered the odd outperformance of US growth stocks at a time of upside inflationary surprises. A sharp-eyed client noted that this outperformance depended on the part of the market under review. In fact, the relative performance divergence between US large-cap growth stocks and US small-cap growth stocks is unprecedented.

    6
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    Gavekal Dragonomics

    After The Squeeze Comes The Consolidation

    The financial woes of China’s property developers are piling up and the government is offering only limited support. In this report, Xiaoxi explains why the tight regulations on developer fundraising will gradually force private firms to transfer assets to state-owned firms—which appears to be exactly what policymakers are hoping for.

    0
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    Gavekal Research

    Behind The Absence Of Asian Consumer Inflation

    At a time when headline inflation is running at 30-year highs in both the US and the eurozone, Asia stands out for its absence of abnormal consumer inflation. Now admittedly, emerging Asia is not uniform, yet it is fair to say that across the segment as a whole, consumer inflation is the dog that has failed to bark.This is not necessarily the benign picture it may appear.

    0
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    Gavekal Research

    The Evolving China-Africa Nexus

    China struck a blow in its battle with the United States for global influence last week. As the US and Europe slapped travel bans on African countries over omicron fears, China’s foreign minister was in Africa pledging 1bn Covid vaccines, US$40bn in credit and investment, and greater access to the Chinese domestic market.

    0
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    Gavekal Research

    A Cautious Easing

    China’s recent cut to its reserve-requirement ratio is another signal that policymakers are becoming more willing to ease policy to counter the sharp slowdown in growth. But will it be enough? Wei argues that, while positive for equities, the modest easing set to occur in 2022 will at best stabilize growth rather than drive a cyclical rebound.

    0
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    Gavekal Research

    Beijing Seminar & Webinar — December 2021

    In our recent live-streamed seminar in Beijing, Anatole presented his case for why markets are right not to panic about high headline inflation numbers. Louis cast doubt on claims that this current bout of inflation is transitory. Arthur and members of the Dragonomics team presented on China's economy, policy goals and asset markets.

    0
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    Gavekal Research

    What If Inflation Had Not Appeared?

    If inflation had stayed roughly at the level of the previous decade, one would have expected long-term bond yields to stay contained, large-cap US growth stocks to outperform and the US dollar to remain well bid. Yet, all this came to pass even as inflation soared to generational highs. So Louis asks: what would have happened if inflation hadn't soared?

    0
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    Gavekal Research

    Ripple Effects On The Supply Chain

    A year after a handful of auto manufacturers first began to complain about difficulties sourcing integrated circuits from component suppliers, the global semiconductor shortage has broadened to affect the sales outlook of high-end industry segments—such as premium smartphones—that until recently have remained largely immune. This is causing ripple effects far back along Asia’s hardware supply chains, which is bad news for the region’s export...

    0
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    Gavekal Research

    Webinar: Europe's Winter Troubles

    As winter sets in, Europe seems beset with uncertainties: around Covid, energy prices and inflation. Anatole Kaletsky, Cedric Gemehl and Nick Andrews weigh these and other forces that will be at work in 2022 to assess the outlook for Europe’s economy and markets in the new year.

    0
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    Gavekal Dragonomics

    Regulatory Risks Remain

    China’s crackdown on internet companies is far from over. The government is pursuing a broader rectification of internet business practices, and regulators have been given tougher enforcement powers and broader reach. Ernan and Thomas explain that while this environment may not be terrible for all internet companies, it is still a risky one.

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