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Gavekal Research
Joyce Poon, Rosealea Yao, Udith Sikand, Tom Miller, Nick Andrews
May 03rd 2016
The Gavekal Monthly: Glass Half Full Or Glass Half Empty?
The past month has seen the US dollar seemingly top out, the oil price settle into a trading range and China’s economic outlook stabilize. Emerging markets in particular have bolted higher despite weak global trade, an oversupplied commodity complex and worries about high levels of leverage. In this edition of The Gavekal Monthly we ask a pressing question for EM investors: is the glass now half full, or half empty?
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Gavekal Research
Joyce Poon
Apr 29th 2016
Can The BoJ Ever Do The Right Thing?
Another Bank of Japan meeting, another market slump. Yesterday saw investors mortified by a BoJ tease which came to nothing, while in January the same market response followed an activist move to charge a negative interest rate on a small part of banks’ reserves. In response to the disappointment the yen soared against the US dollar with its biggest daily move in seven years, while the ensuing six hours saw a 7% peak-to-trough move in Nikkei...
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Gavekal Research
Cedric Gemehl
Apr 29th 2016
Is France “Getting Better”?
He was not quite Reaganesque in his cheery optimism, but in a recent primetime television appearance President Francois Hollande did declare to France that life was “getting better”. He could point to growth rising to 1.1% last year from a meagre 0.2% in 2014. Unfortunately, the French jobless total hit a new record of 3.6mn in February contributing to a public response of general derision, not to mention rioting at proposed labor market reforms...
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Gavekal Dragonomics
Rosealea Yao
Apr 29th 2016
The Future Of China’s Oil Demand (II)
Stockpiling has become a key driver of China’s crude oil imports, as Beijing builds up its strategic petroleum reserve and as state-owned oil companies add to their own inventories. But constraints on the capacity to store these stockpiles mean that this boost to oil imports will likely stall within the next two to three years.
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Gavekal Research
Charles Gave
Apr 28th 2016
Vertigo And The US Economy
Regular readers will be familiar with my contention that persistently low interest rates lead not to economic growth and sunlit uplands, but instead to a structural decline in the growth rate and stagnation. Based on this analysis, I have for a while expected a US economic contraction. That one has not yet materialized means there is, however, an obligation to check whether I have been barking up the wrong tree.
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Gavekal Research
Pierre Gave
Apr 27th 2016
A European Sinner Repents
When Brussels implemented new solvency rules for European insurance companies in 2014, it committed one of the five cardinal sins of government: over-regulation. Of course, stricter rules were always likely following the financial follies of the pre-crisis era, but when they drew up the new “Solvency II” regulations, the European Union’s generals were so focused on fighting the last war, they failed to realize the danger posed by their own...
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Gavekal Research
Neil Newman
Apr 27th 2016
Asian Plowshares Into Swords
Japanese Prime Minister Shinzo Abe invested time and prestige in a failed bid to supply Australia with 12 new attack submarines and service them for the next 50 years. It was announced yesterday that the approximate US$38bn contract was scooped by a rival French bidder due to its technical competence, but also after a strong lobbying effort by China which does not want to see a resurgent Japanese defense sector. Canberra’s decision represents a...
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Gavekal Dragonomics
Rosealea Yao
Apr 27th 2016
The Future Of China’s Oil Demand (I)
While China’s demand for coal and other basic commodities has gone into decline, its consumption of crude oil has continued to climb. Rosealea projects the GDP intensity of different oil products to conclude that China’s demand for crude oil is set to continue rising over the next five years, despite the slowdown in many sectors of the economy.
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Gavekal Research
Louis Gave
Apr 26th 2016
The End Of Asian Equity Market Underperformance?
With Asian equities having underperformed their global equivalents by almost 40% since 2011, the past five years have not been much fun for regional investors. Encouragingly, however, just as the panic over a possible China currency crisis and economic implosion reached its apex last summer, Asia’s underperformance seems to have abated. Over the following eight month period or so, Asian equities have held their own with a number posting decent...
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Gavekal Research
Anatole Kaletsky
Apr 25th 2016
Time To Bet On Sterling And Against Brexit
If Britain votes to remain a member of the European Union, the moment when the tide turned against Brexit will probably be remembered as Barack Obama’s London press conference on Friday. With a single phrase Obama demolished the Brexiteers’ most powerful economic argument when he noted, with a friendly but remorseless grin, that if Britain chose to detach itself from Europe it would wait “at the back of the queue” for any special US trade deal....
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Gavekal Dragonomics
Rosealea Yao
Apr 25th 2016
How Long Can This Keep Going On?
Has China salvaged growth only by inflating a housing bubble? How much tolerance the government has for a surge in housing prices and mortgage debt is a crucial question for judging how long the new construction cycle can last. History suggests the price gains are now strong enough for the government to start cooling things down at the margin.
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Gavekal Research
Nick Andrews
Apr 22nd 2016
Time Alone Is Not Enough For The ECB
Stung by attacks on his negative interest rate policy, Mario Draghi yesterday hit back at his critics in Berlin, and pleaded for patience. “Our policies work,” insisted the European Central Bank president. “Just give them time.” Draghi’s plea is unlikely to placate German finance minister Wolfgang Schäuble, who earlier this month blamed negative rates and the harm they have inflicted on savers’ incomes for the success of right-wing populists in...
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Gavekal Research
Louis Gave, Romain Metivet
Apr 22nd 2016
NIRP: Machiavellian Design Or A Policy Mistake?
In order to make money, Starbucks has little choice but to sell coffee. Ford must sell cars if it hopes to stay open. And Lockheed Martin better get orders for bombs, missiles and planes if it is to remain relevant. But banks do not need to make loans (their stated purpose) in order to make payrolls and pay shareholders a dividend, at least at certain points in the cycle. When the yield curve is steep, banks can borrow money cheaply at the...
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Gavekal Research
Udith Sikand, Joyce Poon
Apr 21st 2016
Emerging Markets Reality Check
Emerging market assets have enjoyed a powerful momentum-driven rally over the last two months. A more dovish stance from the US Federal Reserve, falling yields, acceptance that the US dollar is no longer strengthening, and a pick-up in commodity prices combined to quell the market’s worst fears and persuade investors that emerging markets were not in fact facing Armageddon. More recently last week’s release of relatively upbeat economic data...
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Gavekal Research
Louis Gave
Apr 20th 2016
The Sum Of All Fears
As “China implosion” and renminbi devaluation fears have faded, risk assets around the world have enjoyed a sustained a rally led by “China sensitive” assets such as commodities, Asian equities and emerging market high-yield debt. In short, all the assets that were priced for a scenario just short of Armageddon. But following this rebound, what next? The most obvious point is that, with the pick-up in fiscal stimulus, the rebound in construction...
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Gavekal Research
Nick Andrews
Apr 20th 2016
Eurozone Reform Update 2016
Last February we published a detailed score card of the structural reform efforts undertaken by Europe’s battered peripheral economies (see Assessing ‘Thatcherite-Keynesianism’). The last year has seen small improvements, but not enough change to warrant another box-ticking exercise. Our assessment in 2016 mostly focuses on the key relationship between the labor markets and national competitiveness. Inevitably such changes are slow moving and in...
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Gavekal Research
Will Denyer
Apr 19th 2016
Rebalance Away From US Equities
Yesterday the S&P 500 closed at a year-to-date high of 2,094, up 14.5% from its February 11 low. Now comes the real test of investor confidence. At its current level the index is just 1.7% below its all-time high, set on May 21 last year. Since then the market has tried and failed on four occasions to surpass that level, in June and July, and then following the summer’s sell-off, in November and December. With the market apparently poised...
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Gavekal Dragonomics
Rosealea Yao
Apr 19th 2016
A Regional Guide To The Property Recovery
The rebound in real-estate investment is behind China’s growth stabilization, but flies in the face of still-high inventories of unsold housing. The regional pattern is very mixed: some genuine improvement, and a lot of government stimulus. Construction in 2016 will be better than expected, but the lack of destocking will drag on future growth.
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Gavekal Research
Joyce Poon, Neil Newman
Apr 18th 2016
Worth Buying This Japanese Dip
Those with an active interest in Asian markets had much to process in early trading with shorts cheered by the hardly surprising news that Iran and Saudi Arabia could not agree on an oil production freeze, while longs could point to China whose 1Q15 GDP report on Friday seemed to confirm that the authorities will do whatever it takes to defend their near-term growth targets. But perhaps the bigger factor unnerving investors has been the fallout...
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Gavekal Dragonomics
Andrew Batson
Apr 18th 2016
The Jaws Begin To Close
China’s growth divergence in 2015 was dramatic. But that divergence is narrowing in 2016, with industry picking up as services slow. While markets have welcomed the stabilization, it’s largely the result of short-term stimulus—and it’s also becoming harder to tell a positive story about the “good” growth drivers of services and consumption.
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