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    Gavekal Research

    After Constructive Engagement

    Separating signal from noise in the ongoing US-China trade dispute continues to be a thankless task. Trade war fears rose late last week thanks to an offhand threat from President Donald Trump to impose tariffs on another US$100bn of imports from China. They ebbed early this week when Trump reversed course and said a deal was likely soon, and Chinese president Xi Jinping delivered a speech promising a reduction in automobile tariffs and market...

    0
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    Gavekal Research

    The New Source Of Market Risk

    Believe it or not, there was good news, as well as bad, from the US markets last Friday. The bad news was obviously Donald Trump’s threat to escalate the trade war with China and the equally aggressive response from Beijing. The good news was the fall in March’s US payrolls growth to just 103,000 from February’s upwardly-revised 326,000. This slowdown has eliminated, at least until after the summer, the risk of an unexpected Federal Reserve...

    0
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    Gavekal Research

    Why To Buy India’s Battered Banks

    India’s central bank surveyed the landscape and yesterday painted an upbeat picture. It argued that the investment cycle may be turning, while inflation, the sub-continent’s constant bugbear, is becalmed. With Indian equities off -6% in 2018, this would seem a decent reentry point. The problem is public sector banks, for even as a US$32bn recapitalization is rolled out and bad debt is cleaned up, investors remain spooked by an outlandish scandal.

    0
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    Gavekal Research

    Reasons To Buy The Dip

    After spending many years as Gavekal’s equity permabull, I joined Charles and Louis last December in warning of the risks to what was then a roaring, and accelerating, bull market. But my way of thinking about these risks was rooted in a different analytical framework, and so I have come to a different conclusion about how investors should respond to this latest sell-off (for Louis’ take, see Following Yesterday’s Pullback). With the lows of mid...

    0
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    Gavekal Dragonomics

    Video: Making Sense Of China's New Era

    In this lively presentation from our recent London seminar, Tom Miller outlines the dramatic political changes that have been taking place in China. He explains what Xi Jinping’s new status means for economic policy and governance, and how the links between the Communist Party and the state are being strengthened.

    0
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    Gavekal Research

    US Auto Sales: No Longer A Growth Driver

    Strong US auto sales in March mask a stagnating longer term trend and rising auto loan delinquencies. Happily, as KX explains, neither has broader implications for overall US consumer demand. Although auto sales may no longer be contributing to US growth, rising bad loans in the sector do not prefigure a wider consumer credit crisis.

    0
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    Gavekal Dragonomics

    How Steel Survived The Battle For Blue Skies

    It’s been a wild winter for China’s steel industry, with huge swings in output and prices. The main culprit is the aggressive official campaign to reduce air pollution—and the industry’s creative responses to it. Their back-and-forth has not hurt underlying growth much, but the resulting volatility in steel prices is not going away.

    1
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    Gavekal Research

    Ready For A Further P/E Derating

    I see but through a glass darkly. Sometimes, however there are glimmers of light. Four months ago, in early December, I examined the signals being broadcast by the various investment rules I have long followed and concluded that: “While global markets have been stable for the past 18 months, we may soon be entering a period of greater instability.”

    6
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    Gavekal Research

    Following Yesterday’s Pullback

    Two weeks ago I looked back at Enron’s collapse in 2001 and asked whether a crash-and-burn at Tesla or Uber would be this cycle’s catalyst for a fundamental re-assessment of business models. But perhaps my sights were set too low, as this roll-over was triggered not by a cash-burning profligate flaming out, but by turmoil engulfing the Facebook gorilla, and by extension the likes of Google and Snap, which rely on “the user being the product”.

    2
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    Gavekal Research

    Strategy Monthly: Navigating In Choppy Waters

    With its latest sell-off, the S&P 500 capped two months of volatility by moving officially into correction territory: down -10% from its January high, and below its 200-day moving average for the first time in two years. Is this the end of the long US equity bull market? In this edition of our Strategy Monthly, we offer three perspectives on how investors should position themselves in these more volatile times.

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    Gavekal Research

    Abenomics After Abe

    It’s been a rough few weeks, both for Japanese prime minister Shinzo Abe and for the Japanese stock market. Reelected just five months ago, Abe is facing growing demands for his resignation after an influence-peddling scandal that has been bubbling away for the last year boiled over with leaks about an official cover-up. In response, Abe’s approval rating has slumped towards 30%, traditionally a level from which Japanese prime ministers struggle...

    0
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    Gavekal Research

    Video: Can The EM Run Last?

    In this video interview Joyce discusses why profits should drive a maturing cycle in EMs that increasingly favors commodity-focused markets outside of Asia, and the risks to such a benign scenario.

    0
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    Gavekal Research

    Can EMs Survive A Trade War And Keep Thriving?

    A US-China trade war would disrupt trade, likely drive up inflation and potentially spark a general risk-off move in markets. This scenario would be pretty terrible for emerging markets, but Joyce reckons it is a tail risk and the general outlook remains decent. In this chartbook, she reviews EMs' vulnerability to a trade bust and explains why profits should drive a maturing cycle that increasingly favors commodity-focused markets outside...

    0
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    Gavekal Dragonomics

    Macro Update: Centralization Amid Conflict

    In our latest chartbook, Chen Long outlines a relatively positive cyclical economic picture for China, with steady macro policy, strengthening financial regulation, and further political centralization. The risks to this outlook are tightening property policies, a local government funding squeeze and the looming threat of a US-China trade conflict.

    5
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    Gavekal Research

    On Protectionism

    As the US toughens up its negotiating stance on trade, it seems that ghosts from the Great Depression haunt the land. The men of Davos can be heard to intone gravely that President Donald Trump is aping Herbert Hoover, and as in the 1930s, the global economy may go into a tailspin. I am struck that our cherished elites have discovered a form of government intervention that they do not like, especially given their support for so many other “...

    2
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    Gavekal Dragonomics

    The Pain Of Power Producers

    The rebound in commodity prices since 2016 has been a boon for much of China’s industrial sector—but coal-burning power plants have been big losers. Coal prices cannot go much higher without causing serious financial distress. This means that policy should now be shifting to favor power producers, by ensuring coal prices do not climb further.

    1
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    Gavekal Research

    Don’t Fret About Libor

    A disproportionate increase in Libor relative to other benchmark short term rates over recent months has got many observers flustered. In this concise paper, Will and KX dig down to the cause of the increase, and explain what it does and doesn’t mean for portfolio investors.

    0
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    Gavekal Research

    Why Aren’t Bond Investors Panicking?

    Once again, the volatility that rocked global financial markets in recent days was at least as interesting for what it didn’t tell us as what it did. Amid growing protectionism, rising rates and fiscal irresponsibility in the US government, the biggest and most important financial market of all—the US treasury market—isn’t bothered.

    7
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    Gavekal Dragonomics

    Trade Wars: A China Expert Roundtable

    Last week’s sharp equity market sell-off followed the US effectively threatening China with a trade war. In this report, Arthur, Long and Andrew address China’s capacity to strike back and explore what it means for the relationship between the world’s two biggest economies.

    1
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    Gavekal Research

    Farewell My Lovely Bull Market

    No doubt market pundits will go on discussing the trigger of last week’s sell-off in equity markets and debating its implications ad nauseam. But whatever the proximate cause of the latest risk-off, it is looking increasingly as if the uncomplicated, low volatility bull-market-in-everything that prevailed through much of last year is now no more than a pleasant memory. With markets apparently intent on retesting the lows set in early February,...

    2
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    Gavekal Research

    Trade Wars: Advantage China

    In the US-China trade war, China is skillfully playing Go while the US is playing tic-tac-toe, badly. Arthur analyses the announcement of US$60bn worth of tariffs by the US on Chinese imports and finds the US flailing without a firm strategy. But behind the news, a dangerous consensus has emerged among America’s elites which holds that China’s rise comes at the US’s expense, and must be checked.

    2
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    Gavekal Research

    London Seminar — March 2018

    In our seminar in London this week Charles pondered the investment consequences of the US moving back into an inflationary period. Tom discussed Chinese politics in light of Xi Jinping’s elevation. Cedric presented on how investors can best benefit from the diversity of the European economy. Anatole explained why the long-running global bull market is likely to continue, but also where the risks are buried.

    0
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    Gavekal Research

    A (Slightly) Different Wicksellian Analysis

    In developing “Wicksellian” theory and applying it to portfolio management, readers may have noticed that Charles and Will Denyer have plowed slightly different furrows. The aim of this piece is to clarify points of agreement and highlight differences in their methodology. In so doing, Charles hopes to illuminate both approaches and help readers to navigate a subject that is fairly central to Gavekal research.

    5
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    Gavekal Research

    Focus On Corporate Yields, Not Policy Rates

    There were no big surprises at yesterday’s Federal Reserve meeting, but in offering a slightly more hawkish tone, policymakers have amped up market anxiety. I must admit to not being in this crowd, for the perhaps heretical observation that the future of this bull market may not be decided at the Fed.

    13
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    Gavekal Research

    Don’t Wade Into Treasuries

    Leading up to today’s Federal Reserve meeting, long-dated treasuries have slipped back into their trading range. There are two reasons to think this offers a good opportunity to “buy the dip”. First, global growth has eased off as shown by our diffusion index of OECD leading indicators, which tends to lead year-on-year changes in 10-year treasury yields by about four months. Second, investors overreacted to January’s spike in US wage growth data...

    0
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    Gavekal Research

    Giving Up Value Investing For Lent

    A client recently told me that he had wanted to give up “value investing” for Lent. Unfortunately, his priest pointed out that this was like forgoing boiled spinach as Lent commemorates Christ’s 40 days in the desert and requires doing without something that feels good: think of giving up Amazon, Nvidia or Tencent (at least until this week) for energy stocks, Japan and emerging market financials. Our client chose self-flagellation and stuck with...

    3
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    Gavekal Dragonomics

    Beyond Anti-Corruption

    China’s legislature has approved the creation of a national “supervision” system, an arm of government equal to the executive, legislative and judicial branches that is charged with overseeing the vast public sector. As Yanmei explains, the new system transforms Xi Jinping’s signature anti-corruption crusade into something even more ambitious.

    2
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    Gavekal Dragonomics

    The New Economic Team

    China’s top economic team for the next five years was released this morning, and the theme seems to be “steady as she goes”, with a vote of confidence for experts in their fields. Chen Long has looked at the list, which includes a new PBOC governor, and offers his take on what this means for financial policy in the years ahead.

    2
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    Gavekal Research

    The Ogre Eating His Own Children

    Our regular Loser Reports are based on the premise that good money management can be as much about “avoiding losers” as “picking winners”. This month, Louis looks at the (worrying) direction of US fiscal policy and wonders whether the next shoe to drop could be defense contractors and energy producers in the US, and even municipal bonds.

    3
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    Gavekal Research

    Video: Fixing The Model

    Earlier this week Will issued a mea culpa report that explained why he was revising his Wicksellian asset allocation model and substantially changing his recommendations for the US market. In this video interview he explains the story behind this revision.

    0
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    Gavekal Research

    The Corporate Bond Play

    With high-yield and investment grade spreads having shrunk to historically low levels, US corporate bonds are hardly cheap. Yet the combination of favorable tax policy and fiscal incontinence recommends them to any US bond portfolio. As the US economy is likely in the dog days of this cycle, the tricky question is what duration investors should focus on.

    0
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    Gavekal Research

    Why Does India Have No Clothes?

    Given its size and comparative advantages, India should have more than a hundred million people working in the garment industry. Bad policies and missed opportunities means it has about half that number. The government has big plans to fix this situation and Tom recently spent time meeting with textile entrepreneurs in and around Delhi to see if this is changing. This is his report card.

    3
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    Gavekal Dragonomics

    Cold Weather, Hot Data

    China’s first data release of 2018 delivered a couple of surprises, with a big jump in industrial value-added and a pickup in real-estate investment. But neither amounts to a convincing signal that the economy is actually re-accelerating. The most likely outcome is still a moderate growth slowdown driven by a shallow downcycle in property.

    2
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    Gavekal Research

    Legitimacy Versus Legality

    France’s top central banker yesterday called for the nations of the eurozone to cease bickering over ideological questions, and instead get things done. National leaders should stop wasting time on “theoretical debates” that pitted “risk reduction against risk sharing”, said Francois Villeroy de Galhau. They should, instead, tackle real problems like the half-built capital markets union. It was the authentic voice of the European technocracy and...

    2
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    Gavekal Research

    A Fork In The Road For European Equities

    In the first half of last year making money in European stocks was easy as benchmarks steamed higher on hopes that less political risk would allow an economic surge into sunlit uplands. It has not exactly worked out that way. Such has been the loss of momentum that both the MSCI EMU and broader MSCI Europe indexes have plunged below their 200-day moving averages (just as worrying for tea leaf readers, the 50-day moving average for the narrower...

    3
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    Gavekal Research

    Stuck In The Middle-Income Trap

    Three years ago Malaysian prime minister Najib Tun Razak faced the kind of graft allegations that would ultimately defenestrate heads of government in Brazil and South Africa. His political fortunes were further imperiled by Malaysia’s highly trade-dependent economy staggering trough the 2014-15 commodity bust. Yet, remarkably, Najib survived and now seems set to be reelected at an upcoming general election. His Houdini-like escape is bad for...

    0
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    Gavekal Dragonomics

    A New Organization Chart

    China yesterday unveiled a sweeping plan to reorganize its central government. In this piece, Yanmei explains how Xi is streamlining administration and empowering new agencies to carry out his distinctive domestic-policy priorities of environmental protection, risk control, and poverty alleviation, as well as his assertive foreign policy.

    6
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    Gavekal Research

    The Curious Case Of The HK Dollar

    One of the longest awaited adjustments in financial markets may finally be about to happen. Last year, betting that Hong Kong dollar interest rates would rise to converge with US dollar rates was reckoned to be among the surest trades in world markets. Yet the convergence never happened. Over the last 12 months, one-month Hong Kong dollar Hibor has consistently traded at a discount to one-month US dollar Libor of more than 30bp. And since the...

    0
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    Gavekal Research

    Turning 90% Bullish

    Over the last three years, Will has developed his own version of Charles's Wicksellian framework to analyze the US economic cycle. His approach has been to gauge the difference between the private sector’s return on invested capital and its cost. In this candid report, he explains why he is overhauling his model and how this has substantially changed his recommendations.

    12
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    Gavekal Research

    The Curiously Weak Dollar

    Since early February, global markets have had a volatile ride. The big exception has been the US dollar, which has stayed stoically range-bound. This is odd considering the Federal Reserve’s fairly hawkish outlook for monetary policy and the fact that imposing tariffs on metal imports should lessen the US trade deficit. Not to pat ourselves on the back, but the general Gavekal view on the US dollar has in recent times been fairly bearish (see...

    4
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    Gavekal Research

    Playing Russia’s Continued Recovery

    The result of this weekend’s Russian presidential election is not in doubt. But investors in Russia face considerable uncertainty. Despite monetary policy and exchange rate liberalization, Russia has made little progress towards the structural reforms needed to boost its potential growth rate above rock-bottom levels. Nevertheless, cyclical tailwinds mean there are still some attractive pockets of opportunity for international investors.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call March 2018

    In last week’s Research Conference Call Cedric Gemehl and Nick Andrews presented a thematic approach for playing the European growth story. Cedric explained why the major stock indexes fail to capture the geographical and sectoral potential in Europe, and Nick proposed specific investment themes that should allow investors to benefit from Europe’s continued expansion.

    0
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    Gavekal Dragonomics

    Zhou Xiaochuan’s Legacy

    Zhou Xiaochuan is expected to retire this month after 15 years heading the People’s Bank of China, during which he oversaw both major reforms and an explosion of debt. Chen Long argues that Zhou’s successor faces three main challenges: completing interest and exchange rate reform, managing financial risk, and adapting to a bigger global role.

    0
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    Gavekal Research

    Trade Wars: The Phantom Menace?

    In the aftermath of the past week’s to-ing and fro-ing over steel and aluminum tariffs, there is one thing we can be certain of this year: we are going to see a lot more protectionist theatrics coming out of the White House. What is much less certain is how worried we should be.

    0
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    Gavekal Dragonomics

    The Property Tax Is Back

    A property tax is back on the Chinese government’s agenda: after being postponed in 2017, the long-discussed tax was brought up again at this week’s legislative session. The draft law could come in 2018, with actual taxes being levied by late 2019 at the earliest. But Rosealea expects this to be largely a non-event for the property market.

    0
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    Gavekal Research

    Making In Delhi

    Narendra Modi’s “Make in India” initiative is supposed to transform India from an industrial laggard into a global manufacturing hub. Tom and Udith recently kicked the tires in the industrial heartlands surrounding Delhi and can confirm that China, for now, does not have serious competition. Yet they found some surprisingly encouraging developments that point to the policy in pockets displaying genuine success.

    0
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    Gavekal Research

    What A Trade War Means For Europe

    The departure of free-trader Gary Cohn from the Trump administration has investors rightly concerned that a global trade war may loom. Markets rallied yesterday on reports that the US may carve out exclusions for its steel and aluminum tariffs, but President Donald Trump seems set to announce a punitive package as early as today. The European Union has taken a tough stance against the US threat, and yesterday added orange juice and peanut butter...

    1
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    Gavekal Dragonomics

    The New Challenger In Memory Chips

    China is making an expensive new push to crack the market for memory chips, now dominated by a South Korean-led oligopoly. In this piece, the first in an occasional series looking at China’s technological ambitions and the Made in China 2025 plan, Dan assesses whether and how China can succeed in this drive to gain semiconductor market share.

    0
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    Gavekal Research

    Housing And The US Economy

    The last economic cycle in the US was marked by excesses in residential investment and a dearth of business investment, which proved negative for productivity growth. As the current cycle gets a pro-cyclical boost in its mature phase from last year’s tax reforms, that imbalance will be at least partially reversed.

    2
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    Gavekal Research

    Another Finest Hour

    At Gavekal, we have no house view, but in recent weeks something of a united front has formed among my erudite colleagues on the subject of Europe and her politics. Just to be sure that clients don’t conclude that we have all imbibed the Brussels-dispensed Kool Aid, let me offer my take on the situation and the implication for financial asset values.

    1
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    Gavekal Research

    Change And Stasis In Italy

    In Italy’s general election on Sunday, the anti-establishment Five Star Movement emerged as the largest single party in each chamber of parliament, and the populist Lega eclipsed Silvio Berlusconi’s Forze Italia to dominate the right of Italian politics. Following these changes, it is hard to see how any plausible combination of parties can secure a stable majority in both houses of parliament. As Cedric and Anatole explain, the most likely...

    0
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    Gavekal Dragonomics

    The Meaning Of ‘High-Quality’ Growth

    According to Xi Jinping, China’s high-speed growth is over, and it is pursuing “high-quality” growth instead. With today’s publication of official targets for 2018, the real impact of that rhetorical change is getting clearer. In practice, the focus on “quality” will not end pressure to deliver economic growth, nor reduce government intervention.

    0
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    Gavekal Research

    Time To Stop Worrying About EU Political Risk

    Is it time for investors to finally forget about “political risk” in the eurozone? Judging by the weekend’s events in Germany and Italy the answer is an emphatic “Yes”. The big event was the overwhelming vote by Germany’s Social Democratic Party to participate in a “grand coalition” with the center-right. This means that Angela Merkel will be reappointed for a fourth term as chancellor. Thus Germany will have a stable government with no serious...

    6
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    Gavekal Research

    The US Current Account, Trump’s Trade War And Equities

    US president Donald Trump’s announcement last week of tariffs on imports of steel and aluminum are just the first salvo of a trade war aimed at reducing the US$566bn annual US trade deficit. Yet even far more extensive tariffs than those announced on Thursday will do nothing to narrow the US trade gap. As KX argues in this report, more powerful economic forces are working to widen the US trade and current account deficits over the coming...

    2
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    Gavekal Research

    Video: Surviving China's Regulatory Storm

    Scarcely a week goes by without word of some new regulatory crackdown on China’s financial services industry. After years of financial liberalization, runaway growth in the shadow banking market, and rampant regulatory arbitrage, the authorities are now moving to unify a fragmented regulatory regime and contain the risks posed by excessive leverage and complexity. In this video interview, Chen Long makes sense of the about-face and explains what...

    0
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    Gavekal Research

    The First Casualty In Trump’s Trade War

    Donald Trump has finally delivered on his long-delayed promise of trade protectionism, and in the worst possible way. By promising to impose tariffs on metals imports (25% on steel, 10% on aluminum) on “national security” grounds, he addresses a problem that doesn’t exist, and creates a host of new ones. All this assumes, of course, that the tariffs are not watered down or more narrowly targeted when they are formally announced next week—a real...

    0
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    Gavekal Research

    How Much Risk Of A US-China Economic Cold War?

    Donald Trump’s announcement of tariffs on US imports of steel and aluminum looks like the first salvo in a new trade war. But while Thursday’s measures will mostly affect America’s closest allies, behind the scenes the US administration appears to be preparing a more focused campaign directed against China. In this analysis, Arthur examines the political maneuvering over trade within the Trump team, explains why the hardliners are now in the...

    6
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    Gavekal Research

    The Surprising Upside Of Yen Strength

    The best performing currency in the world so far this year is... the Japanese yen. Over the first two months of 2018, the yen has climbed 5.5% against the US dollar, remaining well bid even as the US dollar itself has found support in recent days. At the same time, the Japanese equity market has taken a beating, falling -4.3% in local currency terms over the year to date. As a result, even though Japanese stocks are still up in US dollar terms...

    0
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    Gavekal Research

    Strategy Monthly: Trading On European Diversity

    The European economic recovery has matured into a sustained, broad-based expansion, and the risks from politics and ECB policy normalization are modest. But eurozone equity indexes have not done well. In relative terms, they started trading sideways after Macron's victory in the French election last May, and for the past several months they have underperformed. The fault lies in the indexes, not in Europe's corporate sector. The...

    0
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    Gavekal Dragonomics

    Is Construction Preparing An Upside Surprise?

    Since markets reopened after the Chinese New Year holiday, the prices of commodities tied to China’s construction cycle have been picking up. This optimism could be justified: construction fundamentals are solid and policy interventions are mostly positive. In this piece, Rosealea explains the upside risks for construction activity in early 2018.

    0
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    Gavekal Research

    The Dollar’s New Crush

    The foreign exchange market, I’ve often said, is a serial monogamist. There are multitudes of potential drivers out there. But the market likes to step out with just one at a time. Its relationships can last anywhere from a few quarters to a couple of years. But sooner or later, it gets bored and switches its affections. So, in 2005-07, the main driver was the growing US current account deficit and the perception that the US was flooding the...

    2
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    Gavekal Research

    The New Challenge Confronting Investors

    Few in the markets will be sorry to see the back of February. But as a tough month draws to a close, this seems a reasonable time to take stock and draw lessons for the future. It is perturbing that lesson Number One must be that there really was nowhere to hide. Geographical diversification served little purpose, as all markets fell and then rebounded in unison. The same held with sectors, for those that performed worst in 2017 (energy and...

    1
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    Gavekal Research

    India Macro Update: Politics Trumps Economics

    Indian growth in the fiscal year ending March 31 should top 7%, before accelerating to nearer 7.5% in FY18-19. Yet Indian equities failed to rebound with other emerging markets after this month’s correction, and the rout in bonds since last summer is continuing. In the latest edition of Gavekal’s India Macro Update Udith and Tom assess what this muddled picture means for investors.

    0
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    Gavekal Research

    What Lies Beneath

    As liquidity in the global financial markets tightens, Louis turns to Gavekal’s longstanding dynamite fishing analogy in a speculative exercise that attempts to identify some of the “whales” that might just go belly up in the squeeze.

    6
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    Gavekal Research

    Emperor Xi Is Not So Far Away

    By removing term limits from his office of president, Xi Jinping has shown there are no constraints left on his political power. As he strengthens his grasp on the top of China’s political pyramid, he is also enforcing his will more effectively at the bottom. For better or for worse, he is moving China to a more centralized and top-down system.

    8
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    Gavekal Research

    The Most Important Chart Today

    In a development uncomfortably reminiscent of the breakdown of the 1987 Louvre Accord, recent US dollar weakness has propelled a marked outperformance of Chinese government bonds in US dollar terms relative to treasuries. This potentially leaves Chinese policymakers facing a tricky choice: Will Beijing repeat the BoJ’s great mistake of the late 1980s, or will it prefer the Bundesbank’s hard line?

    0
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    Gavekal Research

    Eurozone Growth: Blip, Peak Or Plateau?

    European growth was always going to soften at some point; the question is whether this week’s squishy data releases reflect a fizzling out of the upswing, or merely an inevitable maturing of the cycle. The fact that the deterioration unfolded during a market dislocation that did not originate in Europe certainly gives succor to skeptics who see the single currency area as the soft underbelly of the current global synchronized upturn.

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    After The Yellen And Bernanke Puts, The Pavlov Put

    Last Monday, I pointed to three reasons why the recent turmoil in global equities would probably prove nothing worse than a counter-trend “buy on dips” correction, rather than the start of a serious bear market. That's not to say that worries about inflation and overheating are unfounded. But investors are still quite relaxed about both growth and inflation, as evidenced by historically modest bond yields.

    3
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    Gavekal Dragonomics

    Taming The Inflation Risk From Pork

    What are the odds that China has a surprise jump in inflation this year? In China, surges in the CPI are usually driven by food—particularly highly cyclical pork prices. But while food inflation is likely to turn positive this year, Ernan argues that the odds of an inflation spike are low, as farm consolidation has tamed the pork price cycle.

    2
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    Notes On An Indian Scandal

    As most emerging equity markets have clawed back a good portion of the losses they suffered in early February’s risk-off, there has been one notable exception. Far from rebounding, Indian stocks have taken another leg down following revelations of a US$1.7bn fraud at Punjab National Bank, the country’s second-largest state-owned lender. The scale of the fraud—roughly twice the amount promised to the bank by the government in the first tranche of...

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    Bond Market Risks

    Charles is bemused by the cacophony of commentary on the apparent bursting of a US government bond bubble. By his reckoning, treasuries are at about fair value. The same cannot be said for certain other big bond markets, where far bigger risks lurk. In this short piece, he updates his broad view on risks in the global bond market.

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    Gavekal Dragonomics

    Local Infrastructure Feels The Chill

    China’s financial crackdown is now extending to the funding tricks that local governments use to pay for infrastructure projects, which have long been tolerated in the name of economic growth. This report explains why this crackdown will put more of a chill on infrastructure spending—but also why public-works investment is unlikely to collapse.

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    Gavekal Research

    Gauging The Strength Of The Oil Bid

    It made headlines around the world earlier this month when the US government’s Energy Information Administration announced that US oil production had hit 10.25mn bpd in the last week of January. At that rate, the US was not just pumping more crude than at its previous production peak in 1970, it was very likely pumping more than Saudi Arabia, lifting the US into second place in the global production league table behind Russia.

    5
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call February 2018

    In last week’s Research Conference Call Andrew Batson outlined the risks—both downside and upside—to the Chinese economy in 2018. Yanmei Xie focused on the risk of overzealous implementation of policy. This is especially the case for environmental regulations, which gave Beijing an uncharacteristically smog-free winter, but at the cost of a natural gas shortage.

    0
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    Gavekal Research

    How To Play An EM Rebound

    On Thursday, my colleague Joyce Poon argued that strong global growth and favorable financial conditions should allow emerging markets to sustain their outperformance. In the immediate run-up to the recent global sell-off, Latin American markets like Brazil and Mexico had charged hardest on the back of higher commodity prices and an incipient global shift from growth stocks toward value plays. But once the dust settles and EMs get their mojo...

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    A Very British Tightening

    Last week, the Bank of England upped its UK growth forecast and signaled that interest rates may be raised harder and faster than expected. This week, Theresa May’s government maintained its muddled passage towards a European Union exit, which has increasingly fretful multinationals warning that Britain’s economy could be headed for the rocks. Even, if like me, you think the UK will secure an eventual squishy-type deal with the EU that involves...

    0
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    Gavekal Research

    CSI Wall Street (Part II)

    On Monday, in CSI Wall Street Anatole morphed into Sherlock Holmes to investigate the crime scene following the market correction. He concluded that: “There’s nothing to see here. Please move along.” And the markets promptly did. Over the past week, equities have rallied around the world while volatility has gradually ratcheted down. A few more weeks like the past one, and the market moves of late January and early February will quickly be...

    5
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    Gavekal Research

    EMs And The Global Cycle

    The market correction of the last two weeks has been centered on the US, but also hit emerging markets pretty hard. A year ago, I argued that the sustainability of the EM run-up depended on continued strong global growth, more oil price gains and a further fall in tail risks associated with the financial system. The issue is whether the newly volatile conditions in global markets are a game-changer for the emerging world. That conundrum depends...

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    Deficits And Bondholders

    Economics 101 says that when there is more of something, then other things being equal its price should go down. That is worrying for US bond investors as US lawmakers last week passed a budget deal that may raise deficits by US$320bn over the next 10 years (any new infrastructure spending will be extra). Interestingly, and perhaps not entirely coincidentally, just as debt-fueled big-government becomes the new normal in Washington, November’s...

    0
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    Gavekal Research

    Video: Freeze-Thaw Conditions In Korea

    It has been a week of confusing signals from the Korean peninsula. Even as North Korea has paraded its missiles, and the US and its allies have sworn to exert “maximum pressure” against Kim Jong-Un’s rogue regime, both sides have hinted at their readiness to return to the negotiating table. Yanmei cuts through the fog to assess the future trajectory of North Korean event risk.

    0
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    Gavekal Research

    Chinese Equities: Marching To A Different Drum

    Though onshore Chinese stocks did not escape the rout of global markets in recent weeks, the real trigger for the meltdown onshore was heightened investor anxiety over Beijing’s financial regulations. Thomas and Ernan reckon that after the dust settles, benign fundamentals and attractive valuations should set the market back on its upward track.

    0
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    Gavekal Research

    Five Ways To Play European Equities

    After a traumatic couple of weeks in the equity markets, Nick and Cedric take this opportunity to revisit their longstanding advice that investors should overweight European mid-caps exposed to the eurozone’s cyclical upturn. As they explain in this report, that call still holds, and they suggest three sectors where investors should look to buy the dip, and two that portfolio managers would do well to avoid.

    0
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    Gavekal Research

    CSI Wall Street

    Bear market massacre or harmless buy-the-dip correction? Financial investigators have spent the weekend sifting through, dismantling and reassembling dozens of clues to determine the true nature of the shocking crime committed on Wall Street last week, as stock prices suddenly went down instead of up. But amid the righteous indignation inspired by this offence against morality and natural law, possibly the most important forensic evidence has...

    5
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    Gavekal Research

    Behind The Market’s Inability To Rally

    “A week is a long time in politics”, Harold Wilson was said to have once quipped to a young aide. The former British prime minister should have tried working in the US equity market. In recent days, it has sometimes felt as if time stood still. So what should we make of stocks’ inability to mount a rally after they again closed on their lows?

    0
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    Gavekal Dragonomics

    A Reversal In The Renminbi?

    The renminbi’s 0.8% fall against the US dollar on Thursday was an unusual move for a managed exchange rate. But what was even more unusual was the preceding run-up: before that drop, the renminbi was up 2.8% YTD in trade-weighted terms. This overshooting the official goal of trade-weighted stability was what set the stage for the correction.

    0
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    Gavekal Research

    The End Of Germany’s ‘Nein’ Policy?

    On the face of it, yesterday’s coalition deal between Angela Merkel’s center -right grouping and the Social Democratic Party differed little from that agreed last month. In addition to domestic stimulus measures it backed more European integration. Yet look closer and the German political landscape may just have been roiled by an earthquake, for while Merkel should stay chancellor the new man at the finance ministry is set to be Olaf Scholz, the...

    3
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    Gavekal Research

    Nobody Rings A Bell At The Top Of A Market

    Let’s start with a hypothesis. For the purposes of this note, let’s assume that the bull market that started in the second half of 2011 ended in January 2018, and that a bear market is now under way. The obvious follow-on question is what variety of the Ursus genus is emerging from its lair.

    3
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    Gavekal Dragonomics

    The Secret Ingredient For Financial Stability

    China’s regulators have done a remarkable job of de-leveraging the financial sector without hurting economic growth or disrupting markets. But was this smooth trajectory due to luck or skill, and can it continue? In this piece, Chen Long explains how the central bank used its monetary policy tools to defuse the risks from tighter regulation.

    0
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    Parsing The Market Sell-Off

    One of the first things Charles taught me is that in a bear market you should never do on the Monday what you wish you had done on the Friday. As bad news piles up, investors brood, sleep poorly, snap at their spouses or children, and go in first thing Monday morning and start to liquidate positions. Undeniably the picture for the now rather stretched equity bull market has been deteriorating for a while, with spiking bond yields, creeping...

    2
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    Good News Is Bad News?

    The US posted a solid employment report on Friday, and the markets didn’t like it one bit. Some 200,000 jobs were added in January, better than the expected 180,000 and prior month gain of 160,000. But what really spooked investors was the faster than expected pickup in wage growth to 2.9% YoY. On the face of it, this is good for economic growth (certainly in nominal terms) and top-line corporate revenues. The worry is that without productivity...

    2
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    A Very Indian Budget

    New Delhi swung into election mode yesterday, a full 15 months before the election. Finance minister Arun Jaitley pledged his budget for 2018-19 would build a “New India,” but it was really a populist ploy to buy votes. After a tough economic year and a disappointing election result in Modi’s home state of Gujarat, the ruling BJP needed to shore up its core support.

    0
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    Take Profits On US Homebuilders

    Our view that real growth in the US will remain supported this year at a similar level to 2017’s 2.5% rate is based on three main elements: rising business investment following December’s tax cuts; a moderation in consumption growth as labor market tightness slows job ceation, and a neutral to mildly positive view on residential investment (see The Outlook For US Growth And Prices). The third element—our neutral view on homebuilding—merits...

    0
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    Gavekal Research

    Video: Playing The US Growth Picture

    Will outlines his view that real growth in the US will remain stable this year and that inflation will pick up, and discusses what this means for asset prices and portfolio construction.

    0
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    Gavekal Research

    The Sustainable Rise In US Inflation

    In her valedictory meeting yesterday, Janet Yellen presided over a slight tightening of language to indicate that the Federal Reserve’s official inflation target of 2% should be hit some time this year. Investors were not surprised as break-even inflation rates have risen to 2% from about 1.8% late last year, while the chance of four rate hikes materializing in 2018 is now priced at 22%. The fly in the ointment is still sluggish wage growth,...

    0
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    Gavekal Research

    Strategy Monthly: Portfolio Strategy For An Inflationary World

    Most money managers today have spent their entire careers in the disinflationary environment that has prevailed since the mid-1980s, in which equities prospered and bonds were an ideal hedge. This may soon change. A growing number of signals point to rising inflation and tighter liquidity. If we really do move into an inflationary era, managers will have to rethink their portfolios from the ground up. In the latest Strategy Monthly, Louis and...

    0
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    Gavekal Dragonomics

    Tightening The Grip On Urbanization

    The populations of Shanghai and Beijing, China’s two largest cities, declined in 2017, in a clear sign that urbanization policies are being enforced more strictly under Xi Jinping. In this piece, Ernan explains how planners have gotten more effective in restricting growth of the largest cities, how controls on almost all cities have tightened.

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    Relief At Hand For UK Consumers

    “I can’t stand London,” one US economist who last year relocated to the UK capital recently complained to Gavekal. “It’s grey and miserable, and all anyone ever talks about is Brexit.” It’s easy to sympathize. Political infighting over the Brexit process dominates UK headlines. However, there are growing reasons to feel more positive about the outlook for UK consumers.

    0
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    Gavekal Research

    Real Yields, The Euro And The Dollar

    The global bear market in bonds growls on. Yesterday the yield on 10-year US treasuries climbed to a new 45-month high at 2.7%. Even more striking, the yield on five-year German bunds rose to zero for the first time since November 2015, marking the beginning of the end of an era for eurozone negative yields as market expectations grow that the ECB will reduce its monetary accommodation sooner rather than later.

    4
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    Gavekal Research

    US Budget Deficits, The Falling US$ And Growth Stocks

    In emerging economies, rising yields and a falling currency invariably signals market concern over fiscal policy. The US, of course, is different. Nonetheless, Louis examines how projected increases in the US budget deficit in coming years will weigh on the dollar, and could make investors reconsider holding richly-valued US growth stocks.

    2
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    Gavekal Research

    The Outlook For US Growth And Prices

    The first estimate for real US GDP growth clocked in at 2.6% for the fourth quarter, bringing full-year 2017 growth to 2.5%. Policymakers at the Federal Reserve forecast the same rate of growth for 2018, together with a moderate pick-up in consumer inflation from 1.7% to 1.9%. At Gavekal we try to avoid making such specific numerical forecasts; as the great Danish physicist Niels Bohr used to say, “It’s very hard to make predictions, especially...

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