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Gavekal Research
Nick Andrews
Jun 26th 2017
Common Sense Prevails In Italy
The European Union authorities bowed to the inevitable yesterday. They agreed to let Rome spend as much as €17bn in Italian taxpayers’ cash to prevent losses among the senior bondholders and depositors in two Italian regional banks that the European Central Bank declared on Friday to be failing.
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Gavekal Research
Tan Kai Xian
Jun 26th 2017
Calm Sailing For A Reason
Those with a constructive view of quiescent asset markets say low volatility is justified by the stable economic situation. Others mutter of a looming “Minsky moment”. KX does not rule out a sharp rise in near-term volatility, but says the secular trend is down.
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Gavekal Research
Louis Gave
Jun 23rd 2017
Should Investors Chase Health Care Stocks?
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...
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Gavekal Research
Tom Holland
Jun 22nd 2017
Saudi, The Oil Price & Capital Markets
It says a lot about the dynamics currently at work in the oil market that the king of Saudi Arabia yesterday promoted his firebrand young son to crown prince, yet the price of oil still fell -2.7%. The question now is whether Saudi will double down on its current policies in a fresh attempt to goose up the oil price, whether Riyadh will be forced by its rapidly eroding finances to change direction entirely and devalue the riyal, much as Russia...
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Gavekal Research
Nick Andrews
Jun 22nd 2017
A Hard Road Ahead For Italy’s Banks
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...
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Gavekal Research
Thomas Gatley
Jun 21st 2017
A Slow Motion Game Changer
After three years of teasing, MSCI has agreed to include Chinese domestically-listed stocks, or A-shares, in its main equity indexes. Yet, hopes that MSCI inclusion will quickly spur huge capital inflows and a sustained domestic bull market, are almost certainly wide of the mark.
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Gavekal Research
Nick Andrews
Jun 20th 2017
A British Rebalancing?
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.
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Gavekal Dragonomics
Rosealea Yao
Jun 20th 2017
The Central Pillar For Housing Sales
China’s housing market is proving quite resilient this year, with sales growth perking up in May. In this piece, Rosealea argues the current sales recovery is broad-based: growth is strong in both central and coastal provinces. While restrictions on speculative purchases are spreading to some smaller cities, this should have only a moderate impact.
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Gavekal Research
Cedric Gemehl
Jun 19th 2017
The French Reset
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...
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Gavekal Research
Charles Gave
Jun 19th 2017
So We Are In Secular Stagnation...
Hand-wringing has reached new levels among economists over the somewhat nebulous concept of “secular stagnation”. Charles is not convinced by explanations which range from policymakers hitting practical limits of control, through to a technological dark age being encountered. He thinks there is a simpler answer for why some developed economies such as Germany and Canada have maintained a steady expansion, and others like France and the US have...
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Gavekal Research
Louis Gave
Jun 16th 2017
Keeping It Simple
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:
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Gavekal Dragonomics
Ernan Cui
Jun 15th 2017
The Retreat From Steady Employment
China’s troubled industrial sector shed 2.3mn jobs in 2016—but these losses were swamped by millions more new jobs created in services. The real issue in the labor market today is not how many jobs are being destroyed, but the quality of the jobs being created. Most new jobs are in small businesses that offer lower wages and less security.
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Gavekal Research
Will Denyer
Jun 15th 2017
The Fed's Balance Sheet Contraction
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...
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Gavekal Research
Charles Gave
Jun 14th 2017
Small Caps, Big Caps And US Corporate Spreads
The performance of large-capitalization US stocks relative to small caps is sending an important signal about US corporate yield spreads. In this short piece, Charles decodes the message, and advises corporate bond investors to begin seeking safety in treasuries.
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Gavekal Research
Tan Kai Xian
Jun 13th 2017
Mind The (Output) Gap
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...
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Gavekal Research
Anatole Kaletsky
Jun 12th 2017
May Day For Hard Brexit
After the Conservative government of UK prime minister Theresa May lost its parliamentary majority in last week's general election, Anatole argues that the "hard Brexit" strategy formerly pursued by May no longer looks politically viable. That means a Norwegian-style soft Brexit is more likely, which makes sterling assets look relatively attractive.
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Gavekal Research
Anatole Kaletsky, Louis Gave
Jun 12th 2017
Audio & Transcript — Gavekal Research June Call
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.
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Gavekal Research
Neil Newman
Jun 09th 2017
Video: Breaking The Yen-Equity Link
Japanese equities recently touched a 17-year high in US dollar terms and perhaps more significantly, they appear to have decoupled from their usually tight inverse relationship with the yen. In this video interview Neil considers both cyclical and structural reasons for the apparent breakout and concludes that investors should not underweight a market that has plenty of tailwinds.
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Gavekal Research
Charles Gave
Jun 09th 2017
Back To Sanity In Japan
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!
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Gavekal Research
Nick Andrews
Jun 09th 2017
Goldilocks Beds Down
Headline attention today is clearly focused on the car-crash general election result for UK prime minister Theresa May. At the time of writing, it was still unclear whether May would be able to form a viable government after the vote. Unsurprisingly, the uncertainty triggered a steep 1.6% sell-off in sterling (see Trading The UK Election).
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Gavekal Dragonomics
Hugh White, Agatha Kratz, Jude Blanchette, Simon Cartledge
Jun 08th 2017
CEQ: China In The Asia-Pacific
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.
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Gavekal Dragonomics
Arthur Kroeber
Jun 08th 2017
US-China Power Shift: Not So Fast
Do Donald Trump’s miscues ensure the eclipse of Pax Americana by a rising China? Not yet.
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Gavekal Dragonomics
Tom Miller
Jun 08th 2017
The Belt And Road To Leadership
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.
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Gavekal Dragonomics
Hugh White
Jun 08th 2017
After The Pivot, It’s Bye-Bye Asia
With the costs and risks of confronting China growing by the day, the most likely scenario for the Asia-Pacific is one of steadily dwindling US influence. This is good news for Beijing and its claim to regional leadership.
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Gavekal Dragonomics
Agatha Kratz
Jun 08th 2017
High-Speed Rail Blues
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.
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Gavekal Dragonomics
Long Chen
Jun 08th 2017
The Regulatory Storm
The past few months saw a flurry of regulatory measures to tackle risks in the financial system. Beijing is trying to avoid a credit crunch, but the effect on the economy will depend on how far these measures are implemented.
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Gavekal Dragonomics
Arthur Kroeber, Dan Wang
Jun 08th 2017
The Export Upgrade Challenge
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.
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Gavekal Dragonomics
Jude Blanchette
Jun 08th 2017
Still Holding High Mao’s Banner
Within China’s increasingly restrictive political landscape, neo-Maoists continue to thrive. Tolerated for now as Xi’s ideological allies, they could turn into his fiercest opposition should he surprisingly uphold his Third Plenum pledge to give a “decisive role” to the market.
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Gavekal Dragonomics
Simon Cartledge
Jun 08th 2017
Whatever Happened To Hong Kong?
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?
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Gavekal Dragonomics
Tom Miller
Jun 08th 2017
The East Is Rising … Isn’t It?
Will the Asia-Pacific region will shape global politics and economics in the 21st Century, as the West’s centuries-long domination of world affairs draws to a close, or will unseen threats in Asia, from economic stagnation to political unrest and growing military tensions, throw a spanner in the works? Tom Miller reviews two books that each present their case.
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Gavekal Research
Udith Sikand
Jun 08th 2017
EMs And A Chill Trade Wind
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...
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Gavekal Research
Anatole Kaletsky
Jun 07th 2017
Trading The British Election
Anyone who claims to be confident about the outcome of tomorrow’s UK election is really just guessing, which is why we have advised against taking big positions in sterling assets—either long or short—before the exit polls are released. But from 10.01pm onwards, the currency markets could start to see major moves that are very tradeable in one direction or another. So for clients who got hooked on overnight currency trading after profitable (or...
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Gavekal Dragonomics
Rosealea Yao
Jun 07th 2017
The Iron Ore Slump Nears Its End
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.
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Gavekal Research
Will Denyer
Jun 07th 2017
Policy & Productivity: How To Make America Great Again
A critical and much-debated question about the US economy is whether it is permanently stuck in a “new normal” of 2-2.5% annual growth—about a point below the 3.2% average growth rate in 1970-2000—or if it can regain its previous luster. Will assesses arguments from both the upbeat techno-optimists and the grizzled growth skeptics and updates his own view based on US policymaking in the age of Trump.
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Gavekal Research
Louis Gave
Jun 06th 2017
Figuring Out Where The Ball Will Be
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...
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Gavekal Research
Andrew Batson
Jun 05th 2017
What Is The Signal In The Renminbi’s Surprising Strength?
Over the past week and a half, the renminbi has appreciated 1.1% against the US dollar in the onshore market, and 1.5% offshore, where the PBOC has also engineered a spike in short-term interest rates. It seems China wants to send a signal about the renminbi, but markets are having trouble decoding what it is. Andrew outlines three possible strategies the central bank may be following.
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Gavekal Research
Arthur Kroeber
Jun 02nd 2017
Getting By Without Friends
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.
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Gavekal Dragonomics
Yanmei Xie
Jun 02nd 2017
Leadership Scenarios For The Party Congress
The key event in China’s political calendar is now just a few months away. The 19th Party Congress will reveal who will join top leader Xi Jinping in the ruling Politburo Standing Committee, and in the process provide clues to China’s political future. In this piece, Yanmei outlines different possible scenarios and explains their implications.
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Gavekal Research
Charles Gave
Jun 01st 2017
My Whole Career In One Chart
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.
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Gavekal Research
Louis Gave
Jun 01st 2017
Strategy Monthly: Building A Globally Diversified Portfolio
Successful money management is more about avoiding losers than picking winners. The winners of the last decade have mainly been large-cap US equities; this increases the odds that they will underperform in coming years. In this edition of the Strategy Monthly Louis Gave recommends a rotation into eurozone equities, and EM stocks and yield plays (especially in Asia).
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Gavekal Research
Tom Holland
May 31st 2017
The UK’s Pre-Election Wobble
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.
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Gavekal Research
Louis Gave, Charles Gave, Tom Miller, Arthur Kroeber
May 31st 2017
New York Seminar — May 2017
Louis Gave, Charles Gave, Tom Miller and Arthur Kroeber presented at Gavekal's New York seminar last week.
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Gavekal Dragonomics
Long Chen
May 30th 2017
Time To Buy Renminbi Bonds?
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.
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Gavekal Research
Neil Newman
May 30th 2017
Stimulus Gets More Direct In Japan
Fresh reflation ideas are back on the agenda in Japan as inflation shows no sign of rising despite record stimulus and a tight labor market. Prime Minister Shinzo Abe is focused on hard-pressed 30-somethings who continue to save furiously in part as they must fund their children's higher education. His idea is to ease the burden and hopefully spur a step change in consumption spending.
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Gavekal Research
Louis Gave
May 30th 2017
Déjà Vu All Over Again
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...
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Gavekal Research
Will Denyer
May 29th 2017
Still No Real Recovery In US Profits
After a very strong corporate earnings season, Friday delivered the first estimate of profits as tallied by the US national income and product accounts, or NIPA. Unfortunately, the NIPA data pours cold water over the notion that the US is seeing a real, widespread recovery in profitability. The nonfinancial corporate sector of the US economy (not exactly a niche segment) is experiencing nothing of the sort. Instead, real profitability continues...
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Gavekal Research
Long Chen
May 26th 2017
Decoding The HK Dollar’s Signals
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”...
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Gavekal Research
Will Denyer
May 25th 2017
What The Fed Really, Really Means
The Federal Open Market Committee has fired the starting gun on its plan to start shrinking the US central bank’s balance sheet before the year is out. The language was coy, but indicated a consensus that outright contraction will start so long as the trajectory of growth and the key policy interest rate matches the committee’s expectations.
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Gavekal Dragonomics
Rosealea Yao
May 25th 2017
The Return Of Regulated Coal Prices
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.
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Gavekal Research
Charles Gave
May 24th 2017
German Ordo-liberalism vs French Keynesianism
So I hear that happy days have returned to Europe’s single currency area as shown by improved purchasing manager readings. With German firms especially upbeat and a reassuring new fellow occupying the Élysée Palace, I understand that Berlin will soon roll over and allow a juicy fiscal expansion in return for France making its job market less rigid. I tend to be skeptical about such road-to-Damascus conversions.
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Gavekal Dragonomics
Tom Miller
May 24th 2017
Beijing’s Non-Capital Idea
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.
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Gavekal Research
Udith Sikand, Tom Miller
May 24th 2017
India Macro Update: Navigating The Fog
In this regular quarterly update, Udith and Tom survey 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 rollout a new national goods and sales tax with the potential for significant economic disruption.
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Gavekal Research
Udith Sikand
May 24th 2017
Video: India's Economic Fog
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.
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Gavekal Research
Dan Wang, Udith Sikand
May 23rd 2017
Don’t Buy The Smartphone Hype
As Apple prepares to launch its anniversary iPhone and Samsung unveils models that don’t blow up, technology equities in the US and Asia have soared on hopes for a new smartphone cycle. After 2016 saw high-end smartphone sales fall, investors are betting that consumers respond to gee-whizz gadgetry by replacing their devices more often. We are not so sure.
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Gavekal Research
Anatole Kaletsky
May 23rd 2017
ECB Normalization And Why Not To Worry About It
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...
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Gavekal Research
Armando Castelar
May 22nd 2017
Brazil: Better Than Last Time Around
A year after Dilma Rousseff’s ouster, Brazil again faces political tumult. Impeachment calls have come thick and fast following the release last week of an incriminating taped conversation between President Michel Temer and a businessman. The worry is that a fragile coalition of interests that has been inching Brazil toward meaningful economic reform falls apart, sparking renewed market panic. Such fears are overstated as this time, both left...
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Gavekal Dragonomics
Thomas Gatley
May 22nd 2017
Corporate Deleveraging Is Ending, Not Beginning
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.
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Gavekal Research
Nick Andrews, Simon Pritchard
May 19th 2017
A Less Flexible Britain
Yesterday saw the release of robust UK retail sales data for April that reversed a weakening trend and pointed to still strong consumers. So it was notable that on a day that confirmed British economic resilience despite attendant uncertainties, Prime Minister Theresa May effectively renounced free market policies that long have been core tenants of the Conservative Party credo.
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Gavekal Research
Neil Newman
May 19th 2017
Video: Japan's Next Baby Boom
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...
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Gavekal Research
Tan Kai Xian
May 19th 2017
Longer For A Reason
Could this be the US economic expansion without end? Almost certainly not, but it is starting to break some serious records for longevity. Yet as the expansion gets longer in the tooth, the obvious question is whether it simply withers due to old age. Like Janet Yellen, KX is suspicious of such a deterministic arguments and in this piece says there are very good reasons for economic cycles to be getting longer.
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Gavekal Research
Tan Kai Xian
May 18th 2017
Don’t Sweat An Impeachment
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...
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Gavekal Dragonomics
Ernan Cui
May 17th 2017
The Great Corn Crash
China’s “supply-side reform” measures have helped drive a recovery in prices of industrial commodities. In agricultural commodities, the name is the same, but the results are very different: the price of corn fell 44% from its peak after the government removed price supports. Now that prices have adjusted, quantities will follow: imports will fall.
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Gavekal Research
Cedric Gemehl, Nick Andrews
May 17th 2017
What Germany Wants
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...
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Gavekal Research
Charles Gave
May 16th 2017
Back To The Future
Back in 1947, war was over but a ruined European economy needed full-scale reconstruction: the Marshall Plan. As I look at the way China is wooing its neighbors through its Belt and Road strategy and other economic and financial linkages, the approach looks like a remarkably effective “copy-and-paste” operation.
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Gavekal Research
Nick Andrews
May 15th 2017
Why A Brexit Deal May Not Be So Hard
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 “...
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Gavekal Dragonomics
Andrew Batson
May 15th 2017
Regulatory Stress Is Still Bearable
The main source of uncertainty in the Chinese economy right now is the financial crackdown launched in March. In this piece, Andrew looks at the April data and finds that the regulatory campaign’s impact has so far been contained. This supports our call that the regulatory stress is a bigger problem for asset markets than for the real economy.
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Gavekal Research
Nick Andrews
May 15th 2017
Video: How Brexit May Work
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.
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Gavekal Research
Anatole Kaletsky
May 12th 2017
What Trump Will And Won’t Do
After President Trump’s shock firing of his top law enforcement official, this week has seen the White House scramble to keep some semblance of control over the news agenda. This means that an administration that was already dialing back the radical parts of its reform agenda will have even less room to drive change.
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Gavekal Research
Neil Newman
May 12th 2017
In Bed With The Japanese
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.
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Gavekal Research
Tan Kai Xian
May 11th 2017
The Headwinds To US Housebuilding
US home prices are on the up, having climbed 6% over the 12 months to February. Yet housebuilding has failed to keep pace with the rise in prices. Although construction has made a positive contribution to GDP growth over the last couple of quarters, activity has built from a very low base. Housing starts in March were an annualized 1.215mn, with a consensus forecast for April of 1.25mn. Both figures are well below the long term pre-crisis US...
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Gavekal Research
Udith Sikand
May 10th 2017
A Clearer Picture In Seoul
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...
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Gavekal Dragonomics
Tom Miller
May 10th 2017
Where The Rubber Meets The (Belt And) Road
Ahead of next week’s Belt and Road Forum in Beijing, Tom Miller provides an update on the progress of Xi Jinping’s signature foreign policy. More than three years after its launch, China’s Belt and Road Initiative is starting to deliver useful infrastructure, and is clearly boosting construction volumes and stimulating new investment.
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Gavekal Dragonomics
Long Chen
May 09th 2017
More Dollar Weakness Is Good News For The Renminbi
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.
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Gavekal Research
Udith Sikand
May 09th 2017
Calling Time On Indian Outperformance
Indian equities have been on a tear this year with their 22% currency-adjusted gain only bested among emerging markets by Poland. This is not surprising given that India has strong fundamentals and a reform-minded government that still enjoys popular support. Yet, while long term positive drivers for the Indian market remain intact, equities have run ahead of themselves by pricing in a swift return to robust earnings growth.
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Gavekal Research
Tan Kai Xian
May 09th 2017
Behind Weak US Wage Growth
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.
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Gavekal Research
Anatole Kaletsky
May 08th 2017
Macron And A New Europe
With the populist, anti-EU tide now clearly reversing, first in Holland, then last night in France and finally in September’s German elections, investors can put to rest their worries about a breakup of the euro or the European Union and focus instead on the continent’s economic and financial fundamentals. These fundamentals have been steadily improving since the European Central Bank began its enormous bond purchase program in March 2015.
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Gavekal Research
Charles Gave
May 08th 2017
So It’s Macron. What Next?
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.
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Gavekal Research
Cedric Gemehl
May 08th 2017
Macron And French Optionality
For investors, the great benefit of Emmanuel Macron is that even if his big plans for change fizzle a nice cyclical economic recovery will almost certainly play out. If the president-elect defies the stereotypical view of France as being basically unreformable, the kicker is huge optionality built into asset values that have non-challenging valuations. Either way, Cedric argues that France represents a stand-out investment opportunity.
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Gavekal Research
Tom Holland
May 05th 2017
The Upside Of The Commodity Downside
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...
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Gavekal Research
Nick Andrews
May 05th 2017
A New Franco-German Axis
For the last decade, pretty much every politician who counted in France has spoken of the European Union in scathing terms. That is likely to change on Sunday if the pro-integrationist Emmanuel Macron confirms poll forecasts and scores a resounding win in the French presidential election. His upbeat belief in federal solutions to Europe’s structural problems will not just change the discourse, but according to Nick could renew the Franco-German...
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Gavekal Research
Cedric Gemehl, Nick Andrews
May 04th 2017
A Positive Cycle For Eurozone Earnings
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,...
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Gavekal Research
Anatole Kaletsky
May 03rd 2017
The Flip Side Of A Hard Brexit
The pound has rallied strongly since Theresa May announced an early UK general election on April 18 and may soon break through US$1.30, opening the way for a rise back to levels not seen since last summer. This move has mostly been driven by politics in France, rather than Britain, but this may be about to change.
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Gavekal Dragonomics
Andrew Batson
May 03rd 2017
Cyclically Fine, Structurally, Well...
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.
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Gavekal Research
Charles Gave
May 03rd 2017
An Alternative Explanation For The French Split
One of the more interesting thinkers about the current political scene in France is Christophe Guilluy, an urban geographer and author of The Twilight of Elite France. His basic insight about French cities and by extension the structure of the French economy starts with the observation that most urban areas are divided into three concentric circles which contain very different social classes. Charles likes the argument which clearly illuminates...
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Gavekal Research
Louis Gave
May 02nd 2017
The Underperformance Of Energy Stocks
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...
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Gavekal Research
Will Denyer
May 02nd 2017
Strategy Monthly: Global Goldilocks And The Two Bears
Markets seem convinced that a Global Goldilocks scenario of “just right” growth and rising corporate earnings is unfolding. This is plausible, but a careful review of the US economy suggests that two far more bearish outcomes are also possible. Will Denyer reviews the case for all three scenarios and recommends reducing risk exposure, especially in the US.
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Gavekal Research
Tan Kai Xian
May 01st 2017
Don’t Bet On Another Bond Bubble
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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Gavekal Dragonomics
Rosealea Yao
May 01st 2017
How Long Can The Construction Rebound Last?
Chinese growth prospects look quite good in 2017, thanks to the recovery in construction, but how long can it last? In this piece, Rosealea unpacks the inventory dynamics behind the rebound. Given the strong start to 2017, it now looks like low inventories can support growth in construction not just in 2017, but also well into 2018.
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Gavekal Research
Udith Sikand
Apr 28th 2017
The End Of Yen Outperformance
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.
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Gavekal Research
Cedric Gemehl, Nick Andrews
Apr 28th 2017
Video: The French Election And Beyond
In these video interviews Cedric looks at likely scenarios in the second round of the French presidential election, while Nick considers the potential for a renewed Franco-German axis as the driver of progress in the European Union.
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Gavekal Research
Will Denyer
Apr 27th 2017
Taxing Times In The US
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...
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Gavekal Research
Nick Andrews
Apr 26th 2017
Europe’s Road To Reflation
With fears of a political upset laid to rest, the European reflation trade is in full swing. The flash eurozone composite PMI hit a six-year high last week, French manufacturing confidence is at its highest since June 2011, and the European Central Bank’s bank lending survey published yesterday showed that banks are continuing to relax credit standards as demand for borrowing grows. With employment growth lifting domestic demand and external...
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Gavekal Dragonomics
Long Chen
Apr 26th 2017
Riding Out The Regulatory Storm
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.
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Gavekal Research
Anatole Kaletsky
Apr 25th 2017
Stop Worrying And Buy Europe
The market reaction made good sense, assuming that the opinion polls—which turned out to be uncannily accurate in the first round of the French election—prove right again and Emmanuel Macron wins by a landslide on May 7. The polls may, of course, be completely wrong and Marine Le Pen may become the next President of France, but for this to happen the polling error would have to be many times larger than it was in the case of Brexit or Trump.
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Gavekal Research
Cedric Gemehl, Charles Gave, Anatole Kaletsky
Apr 25th 2017
Audio & Transcript — Gavekal Research Call On The French And UK Elections
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.
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Gavekal Research
Cedric Gemehl
Apr 24th 2017
Takeaways From France’s First Round
For once the opinion pollsters got things right. Although the candidates of France’s traditionally dominant left and right wing parties were both eliminated in yesterday’s first round presidential election, the political center held. Independent Europhile centrist Emmanuel Macron emerged with the largest share—23.9%—of the vote, for a second round face-off against nationalist Euroskeptic Marine Le Pen, who captured 21.4%.
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Gavekal Dragonomics
Yanmei Xie, Andrew Batson
Apr 24th 2017
Equity Is The New Debt
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.
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Gavekal Research
Charles Gave
Apr 24th 2017
French Political Trouble Just Started
Investors cheer the win of centrist Emmanuel Macron in the first round of the French presidential election, presuming a victory in the second round would mark the end of Euroskeptic populism. Charles is not so sure about this benign interpretation and argues that France may in fact be on the cusp of a new era of political instability.
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Gavekal Research
Cedric Gemehl
Apr 21st 2017
Final Thoughts On The French First Round
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...
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Gavekal Research
Yanmei Xie
Apr 20th 2017
China’s Kim Problem
Last weekend's extreme tension on the Korean peninsula is just the latest episode to severely test Beijing’s patience with North Korea. Yet even as elements of the Chinese leadership tire of Kim Jong Un’s grandstanding, China remains unlikely to make a bold move that threatens the regime. Despite acute US pressure, China will seek to preserve the status quo.