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    Gavekal Research

    The German Consumer Lives

    By most measures, the eurozone remains unbalanced, with a competitive north eating the lunch of a productivity-challenged Latin periphery. Germany’s current account surplus stands at 8.6% of GDP and its banks are stuffed with excess deposits, suggesting that thrift remains the Teutonic economic passion of choice. Yet look closer at Germany and it is clear that domestic demand, not exports, is driving growth—household spending accounted for about...

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    Gavekal Research

    India’s Significant Step Forward

    When Narendra Modi took over as Indian leader nearly two years ago, he promised to deliver higher growth by making the world’s most bureaucratic large economy more business friendly. It has been a hard slog, with a slew of failures along the way: the BJP-led government’s attempts to push through tax, land and labor reforms have all been hobbled by opposition in parliament. But with the passing of a new bankruptcy code last week the fog of...

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    Gavekal Research

    The End Of The US Credit Cycle?

    As a reflection of the US economy’s steady if unspectacular recovery, bank loan growth has averaged a solid 7.8% YoY since early 2015. The biggest recipients of this expansion have been commercial and industrial firms followed by real estate developers, with consumer lending sitting some way back. Since 3Q15, however, the Federal Reserve’s senior loan officer survey has signaled a sharp tightening in standards for both C&I and commercial...

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    Gavekal Research

    Here Comes US Deflation

    Regular readers will be aware that I expect the next big move in prices to be down rather than up and that this shift will occur against the backdrop of a weakening US economy, possibly one that is contracting. Consider the chart below and my contention is that we may be close to that point.

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    Gavekal Research

    No More Easing Likely

    The latest dump of monthly Chinese economic data was generally soft, but what grabbed headlines was an apparent sharp slowdown in broad credit growth. In fact, a closer inspection shows that the pace of credit expansion remained robust in April and the real issue looking forward is whether policymakers respond by dialing back stimulus policies.

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    Gavekal Research

    Portfolio Construction For Fence-Sitters

    Just over six months ago, I published a Daily note in which I quoted the late American sage Yogi Berra: “When you come to a fork in the road, take it!” My thesis was simple. At the time, the world had reached the point when—in a normal cycle—investors would tend to sell the US market, preferring instead to buy into non-US markets (see The Gavekal Ethos).

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    The Chinese Debt Resolution

    China’s chosen development approach of investment-led industrialization meant it was fated to face an eventual debt crisis. Like Taiwan 30 years ago, China has moved from an export-driven economy to one motored by domestically-focused investment spending. Its challenge has been to “rebalance” toward consumption and in the process stop an escalating build-up of debt which funds projects with ever lower returns. Yet so long as China has a...

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    Gavekal Dragonomics

    The Glory Days For Affluent Consumers

    While China’s economy is slowing, growth in some consumer markets is booming. The cause is what we call the “acceleration phenomenon” of rapid growth in affluent households, which is driving surging sales of goods and services they favor. The flipside of the affluent growth story, however, is that more mass-market consumer goods are slowing down.

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    Gavekal Research

    Growth Slows, Affluence Accelerates

    The Chinese economy continues to slow, but the Chinese consumer is alive and kicking. The affluent population continues to grow much faster than either GDP or average household income, fueling rapid expansion in sales of SUVs, foreign travel and affordable luxuries like chocolate, yoghurt and coffee. At the same time, though, the shift into affluence means that growth in demand for more basic consumer goods is slowing from the rapid rates seen...

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    Gavekal Research

    Risk On? Maybe Not

    Equity and oil prices have rallied in true risk-on fashion since the February 11 market trough, and are now back near their highs of late last year. Given this apparent rebound in risk appetite, one might have expected US government bonds to sell off in equally dramatic fashion, with yields climbing back to the 2.2-2.3% levels seen at the end of last year. Instead, there has been no rebound at all. Today, 10-year treasuries yield 1.75%, much the...

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    Gavekal Research

    Heading Passively To The Poorhouse

    It is astonishing the number of articles one can read all claiming to “show” that passive investments consistently outperform active money managers. Their conclusion is always the same: savers should invest in indexes or tracker funds rather than actively-managed funds, and that as a result they will be much better off. This claim has been repeated so often it has become received wisdom. Alas, in this case, as in so many others, the received...

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    Gavekal Research

    The Calm Before The European Storm

    A deal with Turkey to ease Europe’s refugee crisis is close to collapse, Greek bailout negotiations are set to test German political resolve and Britain’s referendum on European Union membership is too close to call. Europe’s “project” has been held together since 2012 by extraordinary monetary policy which has spurred a mild economic recovery, observable in the latest data. The concern now is that growing centrifugal forces—mostly political in...

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    Gavekal Research

    Trump And The Tree People

    Recently I reada bookcalled Je n’ai plus peur (I am not afraid any more)by the French writer Jean-Claude Guillebaud. I do not know Guillebaud personally, but even though he is very much on the left of the French political spectrum, I must confess that I have read all his books, and that I have always liked what he has to say.

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    Gavekal Dragonomics

    Is The Rumpus In The Bond Market Over?

    After a long rally, China’s onshore bond market has finally had a correction. Corporate bonds are experiencing a repricing of credit risk after a recent jump in defaults, and this could go on for a while. But the rise in government bond yields should be a buying opportunity, as China’s interest rates are still headed down over the medium term.

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    Gavekal Research

    Disaster Averted Is Not Success

    This week Atlante, Italy’s new private sector bail-out fund, swung into action for the first time, supporting an equity issue by the troubled Banca Popolare di Vicenza. But although Atlante’s market debut could be said to have averted a potential systemic disaster, it was hardly the success either the politicians of Rome or the financiers of Milan had been hoping for.

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  • Gavekal Research

    Asia’s Best Market Reaches A Precipice

    The Philippines has since 2011 morphed into a balanced development story with growth averaging about 6% Growth has been underpinned by robust domestic demand, and it has also benefited from a long period of fairly trouble-free governance so when Filipinos go to the polls on Monday to elect a replacement for the President, much is at stake.

    1
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    Gavekal Research

    Peak Hubris?

    With a few notable exceptions, it’s been a tough few weeks for technology firms; the likes of Microsoft, Intel, Alphabet, TSMC, Sony, Panasonic, Fanuc, Murata and, of course, Apple all released weak earnings and guidance. Behind the disappointments sit different causes, ranging from weak capital spending across Asia (Fanuc), to a less eager Chinese consumer (Apple), to a still prudent Japanese consumer (Sony) and a stronger yen (Murata,...

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    Gavekal Dragonomics

    AMCs Are Back: More, Smaller, Shadier

    As the bad loans of China’s banks mount, many wonder how the government will deal with the problem. In the 1990s, four big asset management companies led the bank cleanup, and recently a new crop of smaller local AMCs has emerged. Yet these AMCs do not seem to be helping banks resolve bad loans, but instead are helping them hide problem debts.

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    Gavekal Research

    US Homebuilders Hit A Speed Bump

    Homebuilding has been a reliable contributor to US growth over recent years. Now tighter lending standards for new construction projects and commercial real estate loans are threatening a slowdown. But, as KX and Will argue, as long as mortgage rates remain low and demand robust, the sector should only hit a speed bump, not a wall.

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    Gavekal Research

    Making Sense Of The Rally In Cyclicals

    By all accounts, 2016 has so far proved to be a challenging year for “market neutral” funds, and “smart beta” strategies, along with various quant funds. Before we have even reached the seasonally-challenging part of the year—sell in May and go away, and all that—a quick glance at year-to-date returns for “low volatility” hedge funds illustrates that the pain is pretty widespread. In a sense, this is surprising; after all, spreads are tighter...

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