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Gavekal Dragonomics
Long Chen
Oct 05th 2016
The Foreign Debt Drawdown Stops
One of the big drivers of recent capital outflows—Chinese companies paying down foreign-currency debt—seems to have stopped, or at least paused, in the second quarter. While China still has net capital outflows, the scale is manageable given the still-high level of reserves, giving the central bank space to pursue its preferred currency policy.
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Gavekal Research
Nick Andrews
Oct 04th 2016
The Pain Behind The Agony
The agony at Deutsche Bank is overshadowing the pain elsewhere in the European banking system—but pain there is. Last week Commerzbank, Germany’s second largest bank and biggest Mittelstand lender, announced 9,600 job cuts and sold its Frankfurt headquarters to Samsung of Korea. Yesterday ING said it would lay off some 20% of its Dutch and Belgian headcount and trim its branch network, while in recent days banks elsewhere in the eurozone have...
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Gavekal Research
Udith Sikand, Simon Pritchard
Oct 04th 2016
Staring Into The Abyss
Since Rodrigo Duterte became president of the Philippines in May, he has sanctioned the extra-judicial killing of some 3,600 petty criminals and drug users, graphically insulted the US president, favorably compared himself to Hitler, and threatened to switch his country’s allegiance to China and Russia. As he has ripped up behavioral norms for democratic heads of state, investors have yanked out at least US$500mn of capital over the last two...
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Gavekal Research
Anatole Kaletsky
Oct 03rd 2016
A Hardening Brexit And Softening Sterling
The second phase of the post-Brexit sterling devaluation probably started this weekend. Theressca May's announcement of March as the deadline for Britain to launch the “Article 50 process” of formally withdrawing from European Union achieved its immediate objective of averting a battle between the Hard Brexit and Soft Brexit factions at this week’s Conservative Party Conference. Unfortunately, May’s party management success is likely to...
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Gavekal Research
Arthur Kroeber, Tan Kai Xian, Joyce Poon, Tom Miller, Udith Sikand
Oct 03rd 2016
The Gavekal Monthly: What Price On A Trump Victory?
Markets seem sanguine about the prospect of a Donald Trump victory in next month's US presidential election—too sanguine. Expert opinion gives Hillary Clinton a 75% chance of winning. But remember that four months ago in the UK, expert opinion discounted polls showing a strong chance of Brexit, and the experts were proved wrong. And the consequences of a Trump win are so huge and potentially destabilizing that even a 25% chance means...
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Gavekal Research
Joyce Poon, Tom Holland
Sep 30th 2016
That Sinking Feeling
You almost have to feel sorry for poor Haruhiko Kuroda. Just over a week after the Bank of Japan governor announced his intention to overshoot the central bank’s 2% inflation target, it is painfully obvious that investors believe he will fall short. That much is clear from the Japanese government bond market. At last week’s meeting the BoJ announced that from now on it will tailor its JGB purchases to target a 10-year yield of zero. In the days...
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Gavekal Research
Cedric Gemehl
Sep 30th 2016
The Eurozone Construction Revival
The eurozone’s construction sector is on the turn as super low interest rates feed through to improved housing demand and as infrastructure building starts to pick-up. The implication is that a reliable new driver of growth should help sustain a moderate eurozone recovery. Investors are advised to take note as the sector has a decently investable universe, which is generating not too shabby earnings growth.
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Gavekal Dragonomics
Long Chen
Sep 29th 2016
Macro Update: Delivering Reflation
In our latest quarterly review of China's economy, Chen Long assesses the reflation in the industrial sector. Although the credit cycle has peaked, policy remains very loose, and property prices are surging. Financial markets and capital flows are stable, but private investment has not improved, and depreciation is not helping exports that much.
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Gavekal Research
Romain Metivet, Tom Holland
Sep 29th 2016
When Cartels Become Impotent
Opec has become impotent. Despite the 6% overnight rally in oil triggered by news that the exporters’ cartel has struck an agreement in principle to make modest production cuts, the group’s members no longer have the ability, or even the desire, to maintain crude prices substantially above present levels. As a result, even if the proposed production cuts are confirmed, yesterday’s deal will be no game-changer for the international oil market.
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Gavekal Research
Nick Andrews, Simon Pritchard
Sep 28th 2016
The German Banking Problem
These are not happy times for Europe’s commercial bankers. The adoption of negative interest rates may have averted the slide into a deflationary abyss, but the policy has hit lending margins, and with them profits. Exhibit A is Deutsche Bank, the dominant financial institution in Europe’s largest and most dynamic economy. Deutsche, whose market value has shrunk to just US$14bn, has problems of its own making in the US, yet its plight has been...
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Gavekal Research
Will Denyer, Tan Kai Xian
Sep 28th 2016
Wicksell's Guide To A Better Portfolio
With the recent US economic data worryingly soft, and with no convincing drivers of earnings growth to be seen, how should investors position their portfolios? Will and KX set out their methodology for structuring a dynamic Wicksellian portfolio to generate superior returns at reduced levels of volatility, and determine the optimum allocation mix for the current troubled environment.
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Gavekal Research
Tom Miller
Sep 27th 2016
Modi Finds His Mojo
India, according to its many skeptics, will never change. It is too messy, too unwieldy—perhaps too democratic—to emulate China as an engine of global growth. For all the hoopla that greeted Narendra’s Modi election in 2014, very little changed for the better in Modi’s first two years in charge: his new government failed to pass its “big bang” reforms, banks stopped lending, and investment slumped. Critics accused Modi of being all talk and no...
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Gavekal Dragonomics
Ernan Cui, Andrew Batson
Sep 27th 2016
Is Internet Growth Really Slowing Down?
Often overlooked in the hype around China’s internet boom is the downturn in some key indicators: growth in internet users and in online retail has slowed. How to reconcile this with an apparently thriving internet economy—can the internet’s growth really be slowing down? The answer is yes, and no; it’s how the internet is growing that’s changing.
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Gavekal Research
Sep 26th 2016
Singapore Seminar—September 2016
Audio and video from the latest Gavekal seminar in Singapore is available here. Louis Gave explains why financial markets have recently behaved predictably, and why that is about to change. Andrew Batson explains why Chinese policy making is in a holding pattern until next year's party congress is settled. Udith Sikand explains why this year's emerging market outperformance is likely to continue, as bonds and especially equities have...
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Gavekal Research
Louis Gave
Sep 26th 2016
Will Low Volatility Get Trumped?
As we enter the final stretch of the exhausting US electoral cycle, the single most important question confronting investors may well be whether the current low volatility environment for equities, bonds, and exchange rates is dependent on politicians or not. Clearly, with the VIX hovering around 12, and with volatility in exchange rates barely noticeable (see Forget Central Banks, Watch Foreign Exchange Volatility), financial market...
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Gavekal Research
Louis Gave, Anatole Kaletsky, Arthur Kroeber, Charles Gave
Sep 26th 2016
Debate: A Trump Win And The Dollar
As the world seriously tunes into the US presidential election, four Gavekal partners debate the outlook for the US dollar should Donald Trump emerge victorious and set about his promised remaking of the international security order and global trading system.
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Gavekal Research
Cedric Gemehl
Sep 23rd 2016
Why The ECB Will Not Turn Japanese
European bank stocks have enjoyed a near 5% bounce in the last two trading sessions on hopes that the European Central Bank will follow its Japanese counterpart by explicitly adopting policies that help steepen the yield curve and so lessen the squeeze on bank lending margins. There are reasons to be more cheery about the outlook for European financials, but a Japanese-style rescue mission may not be one of them.
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Gavekal Research
Louis Gave
Sep 22nd 2016
Forget Central Banks, Watch Foreign Exchange Volatility
While taking some time away from the daily grind of markets over the summer (to deal with my overheating, dehydration and pneumonia), two features of today’s markets kept gnawing away at me as somewhat “unnatural”:
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Gavekal Dragonomics
Andrew Batson
Sep 22nd 2016
The Holding Pattern
Market worries about China have gone very quiet lately—and this is no accident. In this presentation, Andrew argues that China is in a holding pattern of steady growth and cautious policy ahead of the 2017 Party Congress. While China probably won’t be forced out of the holding pattern, financial stress and structural problems continue to build.
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Gavekal Research
Tan Kai Xian
Sep 21st 2016
Don’t Count On US Profits Riding To The Rescue
A funny thing happened to US equities once the dust cleared after the late June sell-off that was sparked by the UK’s Brexit vote. As yields of most income earning assets fell on hopes of yet more central bank easing, equity investors discarded growth concerns and engineered a multiple expansion which drove the market to new vertigo-inducing highs (see Real Yields In The Driving Seat). The big question now is whether a profits boost can keep the...
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