Gavekal Research

Louis Gave

Jun 25th 2018

Let us start with a simple reality: assuming the world economy avoids a 2008-type implosion, then global demand for oil should approach 100mn barrels per day by the year’s end. That represents an increase in global demand this year of roughly 1.5mn bpd—more or less the same pace of increase the world has had to deal with in recent years.

Gavekal Research

Armando Castelar

Jun 22nd 2018

After a couple of years of political stability and economic improvement, Brazil again looks like an emerging market in the cross-hairs. As measures of financial stress have risen sharply, its currency and stock market have plunged. The bet must be that Brazil muddles through, but a crisis this year cannot be ruled out.

Gavekal Research

Long Chen

Jun 21st 2018

When the White House rattled global markets earlier this week with its threat markedly to escalate the international trade war, mainland Chinese stock markets were hit the worst. That is not surprising, considering that the US administration’s threats were targeted specifically at imports from China. However, the fall in Chinese markets was so severe, and the subsequent recovery so anemic, in part because investors’ heightened fears over trade...

Gavekal Research

Charles Gave

Jun 20th 2018

The behavior of US long rates presents something of a puzzle just now. The US economy is humming along nicely for this late in the cycle, and is even booming following last year’s tax cuts. Inflation is ticking higher. And short rates are rising. As a result, I would normally expect long rates to be climbing towards the top of the reasonable valuation band dictated by my bond market model (seeBond Market Risks). But they are doing no such thing...

Gavekal Research

Louis Gave

Jun 19th 2018

Over the last 70 years the global population has tripled. Yet in defiance of every Malthusian theory out there, the average citizen of the world has never known such a high level of material comfort as today. To start with the obvious, the world has almost entirely eradicated the famines that plagued entire regions just a few generations ago (this isn’t to deny the humanitarian catastrophes unfolding today in Yemen or Syria, but these are caused...

Gavekal Dragonomics

Long Chen

Jun 15th 2018

China’s credit growth slowed to a new low in May, but the deceleration in real economic activity remains a moderate one—although sharp contrasts are now appearing among different indicators. In this piece, Chen Long explains why credit growth is likely to continue to slow, and how that will affect different parts of the economy.

Gavekal Research

Will Denyer

Jun 14th 2018

Is a crisis in US dollar bond markets really inevitable if the Federal Reserve continues on its current tightening trajectory? Some think so, including Reserve Bank of India governor Urjit Patel, who this month expressed his fears in an op-ed in the Financial Times.

Gavekal Research

Yanmei Xie

Jun 13th 2018

After the Trump-Kim summit, North Korea's commitment to denuclearization still remains a fiction. Future negotiations will be mostly about stringing along the US administration. While Washington and Pyongyang talk, Beijing and Seoul will continue to try to normalize the existence of a nuclear-armed North Korea and cement peace.

Gavekal Research

Anatole Kaletsky, Louis Gave, Charles Gave

Jun 11th 2018

During Friday’s monthly call, Louis Gave addressed the direction of the US dollar and the impact of expanding US fiscal deficits. Anatole Kaletsky focused on the rise of populist politics, which remains his major concern. Charles Gave considered the impact of resurgent nationalism on the investment environment. There was also significant discussion of the oil price with Anatole and Louis taking differing positions.

Gavekal Research

Will Denyer

Jun 08th 2018

With 10-year US treasury yields having failed so far to climb significantly above the 3% mark, investors are asking whether it is time to buy US long bonds. In this short video interview, Will presents a simple framework for approaching the bond market. With the yield curve flat by historical standards, and yields far below their natural ceiling set by returns on invested capital, investors should steer clear of long bonds.

Gavekal Research

Tom Miller, Udith Sikand

Jun 08th 2018

The summer monsoon lashed across southwest India yesterday, just a few hours after the central bank announced its first interest-rate hike in more than four years. With oil prices stoking inflation and foreign portfolio flows pouring out of the country, the Reserve Bank of India followed the lead of other emerging markets battling the global US dollar squeeze. Yet the darkest storm clouds are now political, as Prime Minister Narendra Modi...

Gavekal Research

Will Denyer

Jun 07th 2018

This weekend the people of Switzerland vote in a referendum that could upend their country’s monetary system in ways never seen before. If the “Vollgeld” initiative is approved, it will be a major event in world economic history. And even if rejected, the growing groundswell in favor of similar proposals elsewhere in the world means it is worth paying attention to.

Gavekal Research

Charles Gave

Jun 06th 2018

Bears are stealthy creatures that rarely offer much warning of their arrival. Based on my experience in the financial wilderness, I have rarely recognized the clear manifestation of a bear market until I was caught firmly in its clutches. In the US today, excitement about President Trump’s daily activities means there is a lack of clear thinking about this market’s outlook. Similarly, a meme for many investors, including Gavekal colleagues, has...

Gavekal Research

Arthur Kroeber

Jun 05th 2018

I have previously argued that Trump Administration trade policy—and specifically policy on China—should be understood as a volatile reaction among four forces: the president, the trade warriors, the national security hawks, and the business community. While all four forces are still hard at work, it’s clear that President Trump has the upper hand—as a result of which the US now seems committed to waging trade war on all fronts.

Gavekal Research

Louis Gave

Jun 04th 2018

At the beginning of 2018, one of Gavekal’s big themes for the coming year was that the liquidity environment was deteriorating. Behind this we saw three causes: 1) the US Federal Reserve’s decision to shrink its balance sheet; 2) the growing toll of rising energy prices, and 3) the coming liquidity drain from runaway US government spending.

Gavekal Research

Tan Kai Xian

Jun 01st 2018

Corporate America shot the lights out in the first quarter as tax cuts helped S&P 500 earnings soar by 23%, while macro data released this week showed profits rising an aggregate 14% year-on-year, versus 4.8% in 2017. This week also saw good news for banks, as regulatory shackles were loosened. Yet investors who think US firms are headed back to the races must convince themselves that a series of late-cycle hurdles can be overcome.

Gavekal Research

Andrew Batson

May 31st 2018

Chinese growth surprised on the upside in the early part of the year, but Andrew thinks that a gradual loss of altitude is now unfolding. This is mainly due to slowing property market activity, which increasingly displays late-cycle characteristics. This adjustment should not pose a major risk to other major economies, so long as other global factors do not become disruptive.

Gavekal Research

Anatole Kaletsky, Cedric Gemehl

May 31st 2018

On Wednesday, Louis argued that the Italian president’s rejection of a proposed coalition finance minister was “worse than a crime, a mistake”. Anatole and Cedric are not so sure. In this paper they examine the two conditions—one political, one financial—that will signal a major buying opportunity in Italy.

Gavekal Research

Pierre Gave

May 29th 2018

With the US dollar pushing towards its 2017 high, it may be time to scout out value in the currency markets. One option is the Swedish krona, which is down -7.2% against the dollar this year, making it the worst performing G10 currency. Three weeks ago Charles argued that the krona was so cheap that Swedish assets offered a “heads I win, tails I don’t lose” type of trade. I don’t disagree, yet in the intervening period, the krona has...

Gavekal Research

Charles Gave

May 29th 2018

With Italy facing a constitutional crisis and likely fresh elections within months, attention is set to again focus on Europe’s single currency system. One effect of the euro is that it distorts self-correcting price adjustments, which regulate normal market-based economies. Understanding this dynamic is crucial, argues Charles, if equity investors are not to be pulled into value-traps, of the type which are now presenting themselves.

Gavekal Research

Tan Kai Xian

May 25th 2018

Being a US dollar bear has been a humbling experience over the last few weeks. The year started well enough for bears, with the DXY dollar index declining -4.2% over the first seven weeks. But since mid-April, the US currency has staged a rebound vigorous enough to leave the DXY up 1.95% year-to-date. This rally confronts investors with a baleful prospect: any further sustained appreciation of the US dollar will have a detrimental effect on...

Gavekal Research

Charles Gave

May 24th 2018

Long and sometimes bitter experience of financial markets has taught me that when the organically-produced fertilizer hits the rotary ventilation device, a few assets go up in price, while the vast majority go down. The first list is a short one, but on it you will always find the Swiss franc. Historically, the problem with this Swiss-franc-as-safe-haven idea was that the gnomes’ currency usually tends to be something of a collector’s item....

Gavekal Dragonomics

Ernan Cui

May 23rd 2018

The story of China’s urbanization has long been the migration of people from the country to the cities. Not anymore: as Ernan explains, rural migration has slowed sharply, and is being replaced by the reclassification of rural areas into urban ones. Policymakers now prefer this “local urbanization,” even though it delivers less income growth.

Gavekal Research

Udith Sikand, Tom Miller

May 22nd 2018

Indian growth is picking up nicely just as the external financing environment gets tougher, with a strengthening US dollar, raising yields and most importantly, a sharply rising oil price. In their regular quarterly review, Udith and Tom argue that India can weather the storm, but global investors would do well to back away from the market.

Gavekal Research

Anatole Kaletsky

May 21st 2018

Political risk is now the main driving force of financial markets. In 2017 investors learned—or thought they had learned—that political upheavals just create noise, with no lasting effect on market trends that are set by economic fundamentals. But in 2018 this relationship has been reversed. Wherever we look today—at oil prices, global trade flows or conditions in Europe—politics seems to overwhelm economic fundamentals and set the market trends.

Gavekal Research

Nick Andrews

May 18th 2018

This week saw the release of moderately good news for the Brexit-bound UK economy, as wages rose the most in almost three years. With inflation moderating, real incomes have edged higher, giving hope that consumption can again fire up growth. The problem is that the UK—like the US—increasingly displays late cycle characteristics, as shown by a tight labor market and falling profit growth.

Gavekal Research

Tom Holland

May 17th 2018

The Hong Kong Monetary Authority has again been intervening in the foreign exchange market after it stepped in last month when the Hong Kong dollar fell to its weakest in 35 years. So far the HKMA has bought HKD62bn, selling almost US$8bn to defend the Hong Kong dollar’s peg to the US dollar. In this video interview, Tom Holland explains what’s going on, and why there is zero risk Hong Kong will be forced to devalue its currency.

Gavekal Research

Cedric Gemehl, Nick Andrews

May 16th 2018

During last year’s French presidential election, Emmanuel Macron opened a debate by asking “what do we want to do with the euro?” His answer was more political integration and burden sharing. Those plans must get traction at the June 28-29 meeting of European Union leaders if they are not to be crowded out by a likely messy end to the Brexit process and next year’s European Parliament elections. Right now, this seems a long shot and attention...

Gavekal Dragonomics

Long Chen

May 15th 2018

After a sharp decline in March and April, Chinese onshore bond yields have bounced back over the past three weeks. But based on the latest economic data and policy signals, Chen Long thinks that bond yields have further to fall. Growth is continuing to slow, and the central bank seems comfortable with a slightly more accommodative stance.

Gavekal Research

Nick Andrews

May 11th 2018

Political uncertainty isn’t always bad news. It is now 10 weeks since Italian voters went to the polls in a general election, and still Italy’s bickering political parties have not managed to form a stable coalition government. That hasn’t proved an obstacle for investors. Since the election, Italian equities have gained 9.7% in euro terms, 6.4% in US dollar terms, making Italy the world’s best performing major stock market over the year to date.

Gavekal Research

Anatole Kaletsky

May 09th 2018

While nobody could have been surprised by the full-scale commercial warfare launched against Iran by President Trump yesterday, his announcement raised more questions than answers. The most important question is whether this action will make the world safer or further destabilize Middle Eastern and global geopolitics. The second question is whether the US enforcement of sanctions will really be as tough as Trump’s belligerent rhetoric and the...

Gavekal Research

Louis Gave

May 08th 2018

A decade ago the US corporate bond market was about half as big as it is today, yet bond dealers held about six times more inventory than they do today. In our latest Loser Report which focuses on assets to avoid, Louis worries that the next big financial accident could happen in this aggressively priced arena.

Gavekal Research

Charles Gave

May 07th 2018

In a long career spent trying to formulate reliable investment rules, here is one I have found to work time and again without fail. If two assets show no historical trend, and if in the past their relative price has always reverted towards its historical mean, then when that relative price reaches two standard deviations away from its mean, it is time to stop thinking and just play the mean reversion. Now is one of those times.

Gavekal Research

Arthur Kroeber

May 03rd 2018

An unusually large group of senior American officials has landed in Beijing for two days of talks on the trade and technology dispute embroiling the US and China. There is no reason to think the mission will achieve much. And if it does manage to cobble together a temporary deal to forestall the tariffs the two countries have threatened against one another, it will do nothing to delay the next act in the drama: proposed restrictions on Chinese...

Gavekal Research

Tan Kai Xian

May 02nd 2018

If a week is a long time in politics, then three months is an eternity in the foreign exchange market. Three months ago, sentiment towards the US dollar reached a nadir after US Treasury secretary Steven Mnuchin expressed his desire for “a weaker US dollar”. Over the following weeks, the US currency duly weakened. But since mid-April the dollar has staged a rally, with the DXY index gaining 3.5% as the market has noted the increase in US long...

Gavekal Research

Charles Gave

May 01st 2018

Investors are increasingly obsessed about the flattening of the US yield curve, leading to talk of the dreaded “I” word. This is not surprising as inversions have usually been followed by a US recession and attendant equity bear market.

Gavekal Research

Tan Kai Xian, Will Denyer

Apr 30th 2018

It is clear from data released on Friday that the US economy remains set on an expansionary and inflationary trajectory. Growth in 1Q18 came in at a stronger-than-expected 2.3%, while the US employment cost index rose 2.8% YoY to a high for this cycle. Even as consumer spending comes off the boil, US firms, in what looks like a classic late-cycle pattern, are responding to bottlenecks by investing more in their capital stock. We continue to see...

Gavekal Research

Charles Gave

Apr 26th 2018

When President Trump was recently asked if he was starting a war in traded goods with China, he countered that the US had lost that struggle 20 years ago. As the US retains a comparative advantage in technology, such arguments have led some to conclude that the world’s two biggest economies will fight their next economic battle in this new theater. That may be true, but for me the real fight will be less about trade than a struggle for dominance...

Gavekal Research

Charles Gave

Apr 26th 2018

In today’s Daily, Charles argued that the key focus of economic conflict between the US and China may end up being over currencies rather than trade spats. He advised investors to monitor the price of treasuries as expressed in gold to see how that struggle is playing out. In this piece, he tells unconstrained investors how to hedge a portfolio in light of the US dollar being subject to inflationary policymaking. Spoiler alert: the answer also...

Gavekal Research

Tom Miller

Apr 25th 2018

India desperately needs to create jobs if it is not to squander what may be the biggest “demographic dividend” in economic history. On the face of things, it looks to be blowing that opportunity, as in recent years the size of the workforce has actually shrunk. In this piece, Tom argues that the raw data obscures a picture that while not ideal, is far better than it looks.

Gavekal Dragonomics

Tom Miller

Apr 24th 2018

In countries involved with China’s Belt-and-Road Initiative, there is a growing realization of the risks to signing up for the scheme. As debt has mounted and fears of economic dependence have increased, a backlash has begun. But as Tom explains, the lure of easy Chinese capital is a dangerous habit that many countries will struggle to kick.

Gavekal Research

Joyce Poon

Apr 20th 2018

Shinzo Abe played a fair amount of golf with Donald Trump in Mar-a-Lago, but unlike other US allies he got no trade concessions. The talk is again of the Japanese prime minister being a busted flush who may have to resign. Last month, I said such an outcome should not derail Japan’s recovery and corporate prospects (see Abenomics After Abe). The same logic applies to fears of escalating US-China trade tensions upending Japan’s recovery.

Gavekal Research

Will Denyer, Tan Kai Xian

Apr 19th 2018

Over the last three weeks US high yield credit spreads have collapsed by 100bp—a tightening that far exceeds the 10bp narrowing in investment grade spreads over the same period. Coming after a marked widening in the Libor-OIS and Ted spreads over February and March, this fall in credit spreads is clearly encouraging. It supports our contention that the widening of Libor spreads was an idiosyncratic anomaly, and nothing investors should be overly...

Gavekal Dragonomics

Andrew Batson

Apr 18th 2018

China’s central bank has tweaked monetary policy to soften the slowdown in credit growth. The RRR cut continues its strategy of managing liquidity to limit the economic impact of the campaign against financial risk. Other data for March still point to a moderate growth slowdown in 2018, particularly given the continued strength in property.

Gavekal Research

Arthur Kroeber

Apr 18th 2018

During yesterday’s monthly call, Arthur Kroeber addressed rising geoeconomic and geopolitical tensions between the world’s two biggest economies. He argued that US moves against China ran far deeper than trade tariffs as actors across the political spectrum in Washington were intent on changing China’s basic economic model, something that Beijing will likely fiercely resist. Much of his focus was on the tech sector, which is front-and-center of...

Gavekal Research

Nick Andrews

Apr 16th 2018

Even as winter descended in January, the economic climate seemed decidedly balmy. Eurozone growth for 4Q17 came in at 2.7% YoY, while the year’s first PMI peaked at a post-2006 high of 58.8. Investors liked the idea of deflation finally being slain and a possible earlier-than-expected normalization of monetary policy. Alas the fun didn’t last as a series of data disappointments punctured an equity rally that had been led by financials. My bet is...

Gavekal Research

Arthur Kroeber, Rosealea Yao, Nick Andrews

Apr 13th 2018

At Gavekal’s seminar in Hong Kong this week, Arthur Kroeber, Rosealea Yao and Nick Andrews presented their latest views on the brewing trade war between the US and China, Chinese growth and the property market outlook, and how to capture European growth.

Gavekal Dragonomics

Long Chen

Apr 12th 2018

China’s policymakers have for the first time called for reducing the total debt-to-GDP ratio. This shift has raised worries that monetary policy could get tougher, on top of the tightening of financial regulation that is already underway. In this piece, Long explains that no shift in policy is imminent; if anything, easing is getting more likely.

Gavekal Dragonomics

Thomas Gatley

Apr 11th 2018

As China’s producer price inflation cools and its consumer price inflation picks up, one might expect corporate margins to be fattening, as cost pressures wane and pricing power strengthens. In fact, the opposite is true: margins have been fat, and are now getting tighter. In this piece, Thomas explains how inflation really affects margins.