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Gavekal Research
Tan Kai Xian
Aug 02nd 2016
The Baleful Influence of Inventories
The reason US second quarter GDP growth was so disappointing at 1.2% QoQ annualized was a deep contraction in US business inventories, which knocked -1.16pp off the quarterly growth figure. In itself, a fall in inventories need not be such a bad thing for longer term growth. If inventories get run down because companies are unable to keep up with a surge in demand, then a fall in inventories can foreshadow increased investment to expand business...
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Gavekal Research
Charles Gave
Aug 01st 2016
Recession Or Stagnation?
On Friday US GDP data for 2Q16 was released showing an expansion that looks ever more anemic and unconvincing. Is this just the new normal in an era of stagnant global growth or is the US more perilously poised? To answer that question, imagine the US economy having two parts in the shape of “consumer GDP”, which represents about three quarters of activity, and the remainder being the non-consumer “production” portion.
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Gavekal Research
Joyce Poon, Tan Kai Xian, Neil Newman, Udith Sikand
Aug 01st 2016
The Gavekal Monthly: Shall We Dance?
In a world in which the Fed shows no inclination to get ahead of the curve on inflation and in which both the ECB and the BoJ are in full quantitative easing mode, investors everywhere are on the hunt for yield. But the chase is a nervous one. Investors are all too aware that equities and bonds are sending conflicting signals, and that the favorable trends that have lifted most assets over the last six months could be disrupted by a sudden spike...
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Gavekal Research
Nick Andrews
Jul 29th 2016
The Cracks Begin To Appear
Backward-looking data has held up surprisingly well in the UK since June’s Brexit vote. It is not that second quarter GDP growth came in ahead of expectations at 0.6% QoQ; only one week of 2Q fell after the referendum. However, despite dire warnings of the damage June’s “Leave” vote would inflict on the UK’s all-important property market, home prices proved remarkably resilient in July. The Nationwide house price index rose 0.5% MoM, an...
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Gavekal Research
Tan Kai Xian
Jul 28th 2016
There’s No Need To Fear A Tighter Fed
While the US Federal Reserve left interest rates unchanged yesterday as expected, it did revise its statement to sound marginally more hawkish. Most notably, it added the line, “Near-term risks to the economic outlook have diminished,” while tweaking its language to reflect recent relatively solid data releases. The market took the announcement in its stride. The S&P 500 ended the day little changed. Yields on 10-year treasuries fell...
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Gavekal Research
Joyce Poon, Udith Sikand
Jul 27th 2016
The EM Equity Question
Despite this year’s strong run-up, there remain good reasons to stick with emerging market assets. The twin impact of collapsed borrowing costs amid a renewed global hunt for yield, and greatly reduced exchange rate volatility has been the ideal environment for EM yield curve flattening trades.
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Gavekal Dragonomics
Thomas Gatley
Jul 27th 2016
Profits Follow Housing Up, And Down
China’s industrial profits bounced back to 6.2% growth in the first half, a stronger than expected recovery. The drivers are a boom in metals driven by the housing rebound, and continued gains in consumer sectors. But the metals boom is a temporary one, so after a couple more quarters of gains, a renewed down-cycle is likely in early 2017.
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Gavekal Research
Nick Andrews, Cedric Gemehl
Jul 26th 2016
One Certainty In An Uncertain World
In an uncertain world, in which Brexit, the US presidential elections, the future of the eurozone, are all strewn with wild cards whose potential impact is impossible to quantify, investors are left grasping for certainties. One is that whatever happens in the near term, the European Central Bank will continue to buy financial assets, including corporate debt.
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Gavekal Research
Nick Andrews
Jul 26th 2016
The Way Ahead For Italian Banks
On Friday, the European Banking Authority will publish the results of its 2016 stress tests. Although 51 banks from across the European Union have been tested, attention will focus most closely on the results of the five Italian banks covered. With Italy’s banking system widely identified as the most likely locus of a new eurozone crisis, bankers, politicians and investors are all hoping for the “best” likely result. This would see all the banks...
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Gavekal Research
Charles Gave
Jul 25th 2016
Trump And The Prisoner’s Dilemma
Let us assume that Mervyn King is right and the week-to-week strategy of major central banks has become to stop equity markets within their jurisdiction from going down. And let us further assume that markets are fully convinced of central bankers’ resolve to achieve this end. In the case of US equities, which sit at the center of the global system, such a proposition logically means that their price has two components: (i) the “intrinsic value...
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Gavekal Dragonomics
Rosealea Yao
Jul 25th 2016
Iron Ore’s Battle Of Attrition Is Over
China’s iron ore imports jumped in early 2016, finally validating global mining companies’ strategy to gain market share. As low prices continue to force domestic mines to close, iron ore imports still have a few quarters of growth ahead. But with import penetration already over 80%, there is not much market share left for global miners to grab.
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Gavekal Research
Louis Gave, Simon Pritchard
Jul 22nd 2016
The Flow Through To EM Equities
These are strange times for investors with bond yields in big developed markets plumbing new depths on dark concerns about never ending deflation and stagnation. Yet in a clearly related development, US equities are making new highs while corporate- and emerging market-bonds continue to rally.
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Gavekal Research
Tan Kai Xian, Leonor du Jeu
Jul 21st 2016
US REITs And The Rush For Yield
One of the side effects of negative interest rates and central bank asset purchases in the eurozone and Japan has been a reach for yield which has seen foreign investors rush into relatively high-yielding US assets, compressing yields and spreads to an extent that appears at odds with the late-cycle stage of the US economy. Earlier this month the 10-year US treasury yield set a new low of 1.36%, while US Baa-rated corporate bond yields fell to...
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Gavekal Research
Nick Andrews
Jul 20th 2016
The Constraints Of ECB Stimulus
Already fragile, eurozone confidence has taken a further beating in the last four weeks. In one of the first data releases since last month’s Brexit vote, the ZEW index of German economic sentiment plunged to -6.8 yesterday from 19.2 in June, its steepest fall since 2012. With growth in the eurozone’s principal economic driver likely to soften as confidence deteriorates, expectations are mounting that the European Central Bank will respond by...
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Gavekal Dragonomics
Rosealea Yao
Jul 20th 2016
The Mixed Progress On Excess Capacity
Domestic coal output has declined sharply this year, but steel production has been flat. This pattern reinforces the point that excess capacity only shuts when forced to by low prices—and steel prices were high because of the stimulus. While both excess capacity sectors will continue to contract, trade tensions are unlikely to vanish quickly.
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Gavekal Research
Charles Gave
Jul 19th 2016
Tools, Jewels And P/E Ratios
There are two basic reasons why an asset has value and this understanding should be foundational knowledge for anyone running a portfolio. They can be prized for their efficiency (a tool) or desired because of their scarcity (a jewel). Investors preferences for jewels versus tools will shift through time, but what does not change is the fact that scarcity cannot lead to economic growth.
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Gavekal Research
Andrew Batson
Jul 18th 2016
The Growth Trade-Off Gets Harder
China’s better-than-expected economic data for the second quarter underscore just how effective a jolt of stimulus to housing and construction can be. But housing is already cooling, and the rest of the economy will soon follow suit. The froth in housing prices will continue to limit the government’s ability to pump up growth to meet its targets.
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Gavekal Research
Anatole Kaletsky
Jul 18th 2016
Why Brexit Still May Not Happen
With a newly installed British prime minister gravely intoning that “Brexit means Brexit” and having just appointed a cabal of Brexiters to run the UK’s exit strategy from the European Union, it would look to be game-over. Anatole would beg to differ and explains why there remains a strong likelihood that the UK government will change tack in the face of different circumstances than prevailed at the time of last month’s referendum.
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Gavekal Research
Neil Newman
Jul 15th 2016
The JGB Endgame Approaches
Over the last couple of weeks, the world’s attention has been focused by turns on British politics, Italy’s banking crisis, the US presidential race and most recently, last night’s ghastly events in Nice. It is little surprise then, that a series of three stories from Japan (or perhaps just two and a half) has passed largely under the radar. Taken together, however, these developments bear heavily on the future of the Japanese government bond...
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Gavekal Research
Louis Gave
Jul 14th 2016
The Post-Brexit Rally: Head Fake Or Game-Changer?
Let’s face it, few expected the rally in global risk assets of the past ten days. Even investors who, like Charles, believed that Brexit was a fundamentally positive development did not expect positivity to erupt quite so suddenly. Yet, here we are, with the Nikkei up 10% since its post-Brexit low, the S&P 500 breaking out to new highs and the Shanghai benchmark above 3,000. Will it last?