Gavekal Research

Louis Gave

Jun 23rd 2017

Years ago, when Charles attempted to retire, my mother promptly decided that retirement was the “worst of both worlds”: more husband and less money. She quickly put the kibosh on the idea. The US government is a little more complicated to run than the Gave household, yet health care policy also offers a “worst of both worlds” outcome—profligate spending and rising bureaucracy (from government interference) and eye-watering prices (from the...

Gavekal Research

Nick Andrews

Jun 22nd 2017

The eurozone’s rising tide is floating Italy’s boat. Earlier this month, the national statistics agency revised the country’s first quarter growth up from 0.2% on the previous quarter to 0.4%, marking nine consecutive quarters of economic expansion. This equals the longest stretch of continuous growth since the mid-1990s. What’s more, with unemployment down steeply to a five-year low of 11.1% in April and the composite PMI at a buoyant 55.2, the...

Gavekal Research

Nick Andrews

Jun 20th 2017

Last week the Bank of England left interest rates unchanged, but three out of eight policymakers voted for a hike. In the past any weakness in UK consumption has been met with a soothing monetary response. The fact that the consumer looks increasingly forlorn, yet the BoE is hanging tough suggests the game has changed.

Gavekal Research

Cedric Gemehl

Jun 19th 2017

French voters have handed President Emmanuel Macron a clear parliamentary majority after his La République en Marche party yesterday secured an estimated 360 out of 577 seats. He will also get support from many of the 170 or so Republican and Socialist party deputies who were just elected. After a record low turnout, critics may question his moral authority, but there is no doubting that Macron is now the master of French politics. Hence, he is...

Gavekal Research

Louis Gave

Jun 16th 2017

Three prices have a disproportionate impact on global financial prices: the oil price, the price of the US dollar, and US interest rates. Often the rest is just noise. In the long term, it is shifts in these three prices that drive economic cycles and determine the performance of almost any investment strategy. Take this year as an example. The investment environment has been dominated by:

Gavekal Research

Will Denyer

Jun 15th 2017

As universally expected, the Federal Reserve raised interest rates by another 25bp yesterday. It also published details about its plan to start shrinking its balance sheet before the end of this year. While this too was widely expected, there remain plenty of questions about how the markets will respond. With no precedents for the Fed’s impending move to contract its bloated balance sheet, no one can be entirely confident how the market will...

Gavekal Research

Tan Kai Xian

Jun 13th 2017

The US economy is offering up conflicting signals. Recent manufacturing survey data has been soft, auto sales have slowed and the rate of job creation has markedly reduced. At the same time, inflation expectations have dipped after their bolt upwards earlier this year. Yet, redirect the gaze and the same US economy shows distinct signs of waddling towards a late cycle denouement with the labor market, in particular, looking tight. Put another...

Gavekal Research

Anatole Kaletsky, Louis Gave

Jun 12th 2017

Anatole Kaletsky responded to the British Conservative Party’s shock loss of their electoral majority by arguing that the UK is now likely to end up with a soft Brexit and may even end up rejoining the European Union. Louis Gave looked across recent market moves and argued that the case for emerging markets remains exceptionally strong.

Gavekal Research

Charles Gave

Jun 09th 2017

I know, or I believe I know, that over thelong term equity returns follow one thing only: corporate earnings. As an example, look at Japan. If I rebase both the Topix price index and corporate earnings to 100 in 1978, I find that today the market is at at 385, and earnings are at... 385. Spot on!

Gavekal Dragonomics

Hugh White, Agatha Kratz, Jude Blanchette, Simon Cartledge

Jun 08th 2017

China is attempting to become Asia’s new leader. The high costs of confronting it mean that the US’s regional influence is likely to dwindle. But widespread distrust of China means that many countries will continue to prefer investment from the EU, US and Japan. This issue of China Economic Quarterly investigates China’s role in the Asia-Pacific.

Gavekal Dragonomics

Tom Miller

Jun 08th 2017

China’s Belt and Road Initiative elicits widespread skepticism and concern, while the Regional Comprehensive Economic Partnership is often seen as a poor cousin of the aborted Trans-Pacific Partnership. But they are currently the only credible plans for greater Asian integration.

Gavekal Dragonomics

Agatha Kratz

Jun 08th 2017

While China’s trade with Southeast Asia flourishes, a lack of experience has left its investment in the region lagging far behind. For now, Southeast Asian countries will continue to work with Japanese, EU and US institutions—regardless of how attractive China’s initial bids are.

Gavekal Dragonomics

Arthur Kroeber, Dan Wang

Jun 08th 2017

Shifting China’s industrial production from low-margin assembly to high-value, technology-intensive goods has long been the Holy Grail for planners. Export data show a lot of progress, but also an enduringly high reliance on foreign components, technology and management.

Gavekal Dragonomics

Simon Cartledge

Jun 08th 2017

Its return to China was greeted with cautious optimism, but Hong Kong’s past 20 years have disappointed. Tepid growth amplified inequality and bred political dissatisfaction. What happened since 1997? And what can we expect for the future?

Gavekal Research

Udith Sikand

Jun 08th 2017

The Asian trade cycle, having perked up notably since mid-2016, shows worrying signs of rolling over. Korean export growth in May halved from a month earlier, while Taiwan has seen the same measure steadily slow since February. Today, China reported a reduction in export growth to single digit levels, while import demand growth for May fell to 15% YoY, compared to 38% in February. To an extent, this can all be explained by flattering base...

Gavekal Dragonomics

Rosealea Yao

Jun 07th 2017

China’s iron ore price is now down by about a third from its peak in February. In this piece, Rosealea reassesses the market in light of this correction, and argues that the price is unlikely to stay substantially below US$60 per ton for long. That’s because domestic miners responding to low prices by cutting output, helping rebalance the market.

Gavekal Research

Louis Gave

Jun 06th 2017

Rugby players fall into one of two categories: the forwards, who typically go where the ball is (and in the process put their heads in places most sane people wouldn’t put their feet), and the backs, who try to go where the ball will be, which enables them to look good and keep their kit clean, but earns them the scorn of the forwards. Peter FitzSimons, the first Aussie to play for a French club (Brive), once remarked: “Come the revolution, the...

Gavekal Research

Arthur Kroeber

Jun 02nd 2017

After a week spent in Europe antagonizing fellow democratic leaders, conspicuously failing to reaffirm the US’s commitment to defend its NATO allies, and driving Angela Merkel into an uncharacteristically histrionic speech about Europe’s need to go it alone on security policy, Trump came home and announced he is pulling the US out of the Paris Agreement on climate change.

Gavekal Research

Charles Gave

Jun 01st 2017

My career in financial markets started in January 1971, half a year before Richard Nixon changed the basis of the post-WWII financial order by ending gold convertibility for US dollars. Hence, I thought that readers may be interested in a chart below that tells a simple story of those years, while also offering an asset allocation tool that for me has proven invaluable. In short, it is the story of running a balanced portfolio.

Gavekal Research

Tom Holland

May 31st 2017

In mid-April, when UK prime minister Theresa May took the decision to call a general election for June 8, she did so because she was confident her Conservative party would be returned to government with a massively increased parliamentary majority. Six weeks later, and with just one week of campaigning still to go, that confidence is a distant memory.

Gavekal Dragonomics

Long Chen

May 30th 2017

Driven by a reflating economy and tightening financial conditions, Chinese bond yields have now risen back to their levels of late 2014. For foreign investors, the combination of higher yields, less currency risk, and some additional opening of the domestic market could make the second half of 2017 an attractive time to get into renminbi bonds.

Gavekal Research

Louis Gave

May 30th 2017

Three months ago, I took over the management of our global equities managed accounts and our global equities fund (GAVPLAT:ID for those who care to follow its progress). And so, like every equity manager out there, I was forced to confront the single most important question in the markets today: Does one buy into the “hot” tech stocks that keep on pushing higher? Or does one give the Amazons, Facebooks, Googles and Alibabas of this world a wide...

Gavekal Research

Long Chen

May 26th 2017

When Moody’s downgraded China’s credit rating this week, it also downgraded Hong Kong. Although Hong Kong is fiscally autonomous, and has seen no rapid build-up in leverage comparable to the mainland, Moody’s still downgraded the territory from Aa1 to Aa2. In explanation, the agency cited Hong Kong’s “tightening economic, financial and political linkages with the mainland,” which it warned “risk introducing more direct contagion channels”...

Gavekal Dragonomics

Rosealea Yao

May 25th 2017

Coal was the most volatile commodity price in China last year, but it has been remarkably stable in 2017. In this piece, Rosealea explains how the government has revived a contract system of regulating coal prices, in the place of campaigns to cut or raise coal output. Coal prices are thus likely to stay at their relatively high levels for longer.

Gavekal Dragonomics

Tom Miller

May 24th 2017

China wants to build a new satellite city to take over Beijing’s “non-capital functions,” and their associated workers. In this piece, Tom Miller examines the Xiong’an New Area and the government’s grand plans to cap Beijing’s population and spread wealth to surrounding regions. He finds the economic benefits are unlikely to outweigh the costs.

Gavekal Research

Udith Sikand

May 24th 2017

In this interview Udith discusses the key developments in India’s macro economy and markets, which have been clouded by the demonetization episode and yet more changes to national economic statistics. The fog may not be about to clear as the government prepares to roll out a new national goods and sales tax with the potential for significant economic disruption.

Gavekal Research

Anatole Kaletsky

May 23rd 2017

The US Federal Reserve will almost certainly announce the second of this year’s rate hikes at its next policy meeting on June 14. The week before, on June 8, the European Central Bank will probably state for the first time in years that the risks to the eurozone are now balanced “symmetrically” instead of tilting unequivocally downwards. If they were brave they might even echo Benoit Coeuré, the French governing board member who in an interview...

Gavekal Dragonomics

Thomas Gatley

May 22nd 2017

The recent financial crackdown may give the impression that “China is finally getting serious about corporate deleveraging.” This impression is wrong: while leverage is already declining, this is likely to stop in 2017. Worries about zombie companies have also faded as rising profits and falling rates make it easier to service corporate debt.

Gavekal Research

Neil Newman

May 19th 2017

In this interview Neil explains why the oft repeated line about Japanese couples not wanting to have many kids is a huge exaggeration. The problem is bizarre government regulations and a drastic shortage of childcare facilities. Such inhibitors to tiny feet pattering are about to get a major government-induced overhaul, and a Japanese baby boom may be around the corner. If correct, this shift in Japan’s demographic curve could have profound...

Gavekal Research

Tan Kai Xian

May 18th 2017

After weeks of ignoring ever wackier White House shenanigans, investors yesterday focused on US political risk. The revelation of memos that seem to offer prima facie evidence of the president obstructing justice means the chance of an impeachment has jumped from improbable to possible. As the government’s investigative machinery cranked up a notch yesterday, US equities experienced their worst day since last September and treasury yields fell...

Gavekal Research

Cedric Gemehl, Nick Andrews

May 17th 2017

What does Germany want? That was a question we asked in January as sabre rattling by the new US president unnerved Europe’s instinctive mercantilist. Our answer was that Germany was at a cross-roads in its modern history and could either double down on a narrow pursuit of surpluses, or instead embrace its European Union members with a fresh push to federalism. Monday’s meeting between Emmanuel Macron and Angela Merkel confirmed that the latter...

Gavekal Research

Nick Andrews

May 15th 2017

European Union membership entails four core freedoms—goods, services, capital and people. To keep the first three, but not the last one as the UK wants has been dubbed “having one’s cake and eating it”. The UK also wants to be exempt from the European Court of Justice’s control and to exit the EU customs union, opening the way for free trade agreements to be made elsewhere. The assumption is that these demands will ensure the UK ends up with a “...

Gavekal Research

Nick Andrews

May 15th 2017

The consensus is for a tortuous few years of negotiations between the UK and the European Union over the terms of Brexit and any subsequent free trade agreement. Following up on today’s Daily, Nick argues in this video interview that a deal may be easier than most people think. Moreover, the template for an FTA may already be in place.

Gavekal Research

Neil Newman

May 12th 2017

The international media have been full of headlines recently about how the Japanese are failing to make enough babies. But the reason for Japan’s failing fertility is not some lack of libido. Instead, as Neil explains, the government's antiquated policies towards women and families have proved a remarkably effective—if inadvertent—form of contraception.

Gavekal Research

Udith Sikand

May 10th 2017

South Koreans went to the polls yesterday and elected a special forces soldier turned human rights lawyer as president. Moon Jae-in will need both skillsets in dealing with a belligerent North Korea, distrustful China and saber-rattling US. Yet an even tougher ask may prove delivering on his promises to shake up collusive ties between big business and the government, and so unleash animal spirits. I would argue, however, that for once the...

Gavekal Dragonomics

Long Chen

May 09th 2017

The renminbi has had a surprisingly good year, thanks in large part to the weakness of the US dollar. In this piece, Chen Long argues that dollar weakness will likely continue—and with it a benign environment for capital flows and China’s currency policy. Even a rise in the renminbi is a prospect that can no longer be dismissed out of hand.

Gavekal Research

Tan Kai Xian

May 09th 2017

After seven steady years of decline, the US unemployment rate fell further in April to a 10-year low of 4.4%—the same as in May 2007 immediately before the onset of the credit crunch. At the same time, the number of job openings has exceeded its 2001 high, emphasizing the increasing tightness of the US labor market. Yet despite this tightening, increases in wage growth have been remarkably modest for this late stage of the cycle.

Gavekal Research

Charles Gave

May 08th 2017

The French presidential election did not play out as Charles had expected. With Emmanuel Macron having achieved a decisive victory, he concedes that the En Marche! Party is likely to carry the momentum into next month’s parliamentary elections. What this means for investors is that France is likely to be politically stable in the coming few years and will not be the focal point of eurozone ructions.

Gavekal Research

Tom Holland

May 05th 2017

Once again, commodity prices are taking a beating. Since Wednesday the price of Brent blend crude oil has slumped by 7%. Over the last two months copper has slipped 8%, and iron ore futures traded in China are down a precipitous 30%. Coming on top of data that showed the US economy grew by a meager annualized 0.7% in the first quarter, and the recent tightening in China’s credit conditions, the latest slide in commodity prices has been...

Gavekal Research

Cedric Gemehl, Nick Andrews

May 04th 2017

For many investors, last night’s televised debate will have removed any lingering fears about French political risk, freeing them to focus on the eurozone earnings picture—which is increasingly rosy. The majority of pundits awarded the debate on points to centrist candidate Emmanuel Macron. Their verdict was that the performance of far-right Euroskeptic Marine Le Pen was insufficiently “presidential” to sway undecided voters. As a result,...

Gavekal Dragonomics

Andrew Batson

May 03rd 2017

Optimism about China’s growth is now higher than it has been for years, after the notable recovery in the last couple of quarters. But in this piece, Andrew argues China still can’t escape a further growth slowdown, because its continued reliance on state-driven investment is sapping productivity growth and undermining the private sector.

Gavekal Research

Louis Gave

May 02nd 2017

Charles likes to say that good money management often involves taking a few key decisions and sitting on them for a decade. In 1982, for example, the avoidance of energy and material stocks ensured almost 10 years of outperformance. In 1990, avoiding Japan paid off for two decades. In 2000, sidestepping TMT and underweighting the US dollar worked for almost a decade. In 2006, avoiding financials also paid off for a decade, as did underweighting...

Gavekal Research

Tan Kai Xian

May 01st 2017

Recent days have not been good for US treasury bears betting on higher yields. First, Donald Trump’s much hyped tax reform plan proved thin on detail and lacking in credibility. Then Friday’s weak US GDP release for 1Q17 showed an economy facing a notable softening in consumption demand. The one factor offering succor to treasury shorts has been reduced political risk in Europe after a centrist made it through to the second round of France’s...

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Udith Sikand

Apr 28th 2017

Year-to-date, the yen is the best-performing of the G10 currencies. Over the last four months it has appreciated 5.2% against the US dollar, lifted by abating enthusiasm for the Trump trade and safe haven flows into Japan. Given the tight inverse correlation between the yen and Japanese equities, it is therefore no surprise that the Japanese stock market has underperformed its developed market peers so far this year.

Gavekal Research

Will Denyer

Apr 27th 2017

The big news this week is the lack of news. Tectonic changes—that inspired both hope and fear—now look less likely to materialize. The first round result in France’s presidential election suggests that the centrist, pro-euro Emmanuel Macron will be the next head of state, rather than the disruptive Marine Le Pen—no révolution in Europe. Then yesterday Donald Trump revealed his much anticipated tax plan. It only served to show how little progress...

Gavekal Dragonomics

Long Chen

Apr 26th 2017

Chinese financial officials are stirring up a regulatory storm with their new crackdown on various forms of speculation, arbitrage and risky behavior. Though much is still unclear, the campaign is likely to lead to tighter liquidity and slower credit growth. But the more immediate risk is its impact on the domestic equity and bond markets.

Gavekal Research

Cedric Gemehl, Charles Gave, Anatole Kaletsky

Apr 25th 2017

In a special Gavekal Research Conference Call following the results of the first round of the French presidential election, Charles Gave and Cedric Gemehl presented their analysis of Marine Le Pen and Emmanuel Macron’s prospects in the second round in two weeks. Anatole Kaletsky presented his view of British politics and the future of the Brexit process following Theresa May calling for a snap election in June.

Gavekal Dragonomics

Yanmei Xie, Andrew Batson

Apr 24th 2017

China’s free-spending local governments have a new way to get money. Raising equity, not just debt, is how many localities are financing the current wave of infrastructure and industrial projects. In this piece, we explain how a new model of government-led funds began as a replacement for local borrowing, but ending up only adding to liabilities.

Gavekal Research

Cedric Gemehl

Apr 21st 2017

Going into Sunday’s first round vote in France’s presidential election, it is widely assumed that yesterday’s tragic events on the Champs Élysées will boost nationalist-populist candidate Marine Le Pen. What is clear is that the race has tightened: centrist outsider Emmanuel Macron is polling at 24%, Le Pen at 22.5%, Republican François Fillon at 19% and firebrand socialist Jean-Luc Mélenchon at 18.5%. Here are some final thoughts for navigating...