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    Gavekal Research

    Sell A-Shares Into Strength

    Over the last month, onshore Chinese equities have got swept up in the global rally. The CSI 300 gained 7% in November, surpassing July’s peak to set a new high for the year this week. And the broader Shanghai index is on the cusp of following. However, this is a rally running on fumes.

    6
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    Gavekal Research

    Webinar: Global Investment Roundtable, December 2020

    The US equity market is seeing a switch from the winners of the pandemic like technology and online retail, to the beaten-up losers such as travel plays. At the same time, hopes for a strong economic recovery in 2021 are juicing up value stocks. Similar dynamics are being seen in other major markets. Our team of analysts discussed what happens next, and what’s in store in 2021.

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  • Gavekal Research

    Video: The Treasury’s Liquidity Programs And Markets

    US Treasury Secretary Steven Mnuchin has come under fire for failing to extend a number of the Treasury’s liquidity support programs into 2021. But as Will outlines in this short video interview, while the existence of the facilities that are set to expire helped to shore up sentiment back in March and April, they have been little used, and are now largely irrelevant in practical terms.

    0
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    Gavekal Research

    Tail Risk Insurance: Financials And Gold

    US equities have just had a record month on hopes that a successful rollout of vaccines will allow the world economy to return to normal. The questions is what that will look like in financial markets, especially given that the US government is spending record sums.

    3
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    Gavekal Dragonomics

    Access To Global Capital Has Peaked

    After years of inflows via IPOs and foreign portfolio investment, the US is now moving to deny Chinese firms access to global capital. As a result, Thomas explains that the firms will instead have to rely on domestic markets for equity fundraising, which could cause a liquidity drag in onshore and Hong Kong equities.

    0
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    Gavekal Research

    The ECB And Euro Strength

    In the last couple of days the euro has broken higher against the US dollar. The last time the euro hit US$1.20, European Central Bank officials led by president Christine Lagarde emerged to talk the currency down, worried that euro strength would import deflation and erode European competitiveness. The question now is whether the ECB will again come out to jawbone the euro lower.

    0
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    Gavekal Research

    Asian Bonds Remain Attractive

    Two weeks ago, the central banks of Indonesia and the Philippines each lowered their policy rates by 25bp, making their first rate cuts since the summer. Although the moves came as a surprise to the markets, they should not have done. Across Asia real interest rates are generally positive, and in some cases are above their long term averages, while inflation rates are modest. This gives central banks plenty of room to reduce nominal rates to...

    0
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    Gavekal Research

    Georgia On My Mind

    In the four weeks since the US election, the S&P 500 has climbed 7.5%. The bulk of that run-up can be attributed to hopes for an early vaccine roll-out, but at least some is due to the perceived decline in US political risk, Yet although US electoral risk may have diminished, it has not disappeared, and may yet return to affect investor positioning in markets over the coming weeks.

    0
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    Gavekal Research

    Strategy Monthly: Two Equity Rotations For A Post-Covid World

    The impending rollout of vaccines in the United States is spurring two big equity rotations. With investors looking ahead to a post-Covid world, a rotation has begun from stocks that thrived in the pandemic to those that merely clung on. Second, the expectation that a robust economic recovery will push interest rates up has caused beaten-down value stocks to recover some mojo. Investors should play these rotations at a granular, sub-sector level...

    0
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    Gavekal Dragonomics

    Eroding The Implicit Guarantee

    China’s financial regulators recently stepped in to calm a corporate bond market roiled by the unexpected default of a local state-owned enterprise. In this report, Wei argues that this reassurance does not translate to a reassertion of the implicit sovereign guarantee for local SOE debts; in fact, more local SOE defaults look likely for 2021.

    0
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    Gavekal Research

    The Fate Of Chinese Listings In The US

    Today, there are 365 Chinese companies listed on US markets. A handful of these have dual listings in Hong Kong, but for most, the US is their sole listing. Together, these 365 companies account for US$1.92trn of market capitalization. This increasingly looks like an anomaly. Why should Chinese companies choose to raise capital on Wall Street when they can tap the capital market in Hong Kong?

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    Gavekal Dragonomics

    Huawei's Slow Strangulation

    The US government’s August decision to deny Huawei access to every advanced chip in the world was a death sentence for the firm, but its execution has not been swift. In this report, Dan outlines the uneven effects of the decision on Huawei’s different business lines and explains why any solution to the firm’s troubles will have to be political.

    0
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    Gavekal Research

    The Importance Of The Renminbi

    In days long gone by, the yen’s exchange rate affected asset prices around the world. Today, it is not the yen that investors need to watch, but the renminbi. And in the last few months the renminbi has been strengthening, with important implications for everything from global bond yields, through energy prices, to the relative performance of US growth and value stocks.

    15
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    Gavekal Research

    Yield Curves, The Euro And The Dollar

    The balance of probability points towards a steeper US yield curve over the short to medium term as US short rates remain pinned at zero and long-dated US treasury yields push higher. One might think that higher US long rates should attract capital inflows, but what matters is the relative shift in gradients, notably between the US dollar and euro yield curves.

    0
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    Gavekal Research

    A Bridge Too Far?

    The Reserve Bank of New Zealand was the first central bank to successfully argue that being independent from government direction would let it foster better economic outcomes. Yet the RBNZ still seems one to break down barriers—or perhaps have them broken down for it. On Tuesday the Kiwi finance minister proposed that control of house prices should be added to its inflation remit.

    14
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    Gavekal Research

    Webinar: Hong Kong Under The National Security Law

    Hong Kong has spent five months living under a tough national security law imposed on it from Beijing. The direct impact has been a sharp curtailment of opposition political activity that has sparked sanctions from the United States. Now, China has plans for more changes to Hong Kong's legal system, with a requirement for judges to be patriots. In yesterday’s webinar, Vincent Tsui, Dan Wang, Tom Holland and Simon Pritchard discussed the...

    0
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    Gavekal Research

    Two Equity Rotations In The Making

    Investors are bulled up on hopes that successful vaccine roll-outs will end the Covid-19 pandemic before next spring and the US will get a smooth transition of power that leaves an investor-friendly divided government. Since Pfizer announced its successful stage-three vaccine trials on November 9, managers have been forced to reassess their US portfolio positioning. That process has likely only just got going.

    2
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    Gavekal Dragonomics

    How Covid-19 Changed Chinese Consumers

    China’s consumer recovery from lockdown initially lagged other economies, but now looks more sustainable. Discretionary goods are booming, and the online shakeout of retail continues, though other services and staples are less exciting. In this chartbook, Ernan presents a special Covid-19 edition of her annual review of the Chinese consumer.

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  • Gavekal Research

    Video: What Prospect US Fiscal Support?

    Investors in the US are displaying signs of euphoria as they anticipate the end of the pandemic due to the roll-out of vaccines. But is this shortsighted given the lack of agreement over fiscal stimulus? Our US policy analyst Yanmei thinks the market has it about right, as the political stars are aligning for some kind of accommodation on a new spending package.

    0
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    Gavekal Dragonomics

    This Time Is Different For Industrial Policy

    Chinese bureaucrats are now busily drafting plans to achieve self-reliance in high technology. But as Dan argues in this piece, this latest industrial-policy push will be different. Thanks to US restrictions on Chinese firms, notably Huawei, the private sector is already convinced that developing substitutes for imported technology is necessary.

    0
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    Gavekal Research

    The Realignments Begin

    It was no coincidence the first-ever visit to Saudi Arabia by an Israeli prime minister took place a day before US President-Elect Joe Biden announced his choice of Antony Blinken as Secretary of State, indicating a conciliatory stance towards Israel and Saudi's mutual enemy Iran. It was, however, coincidence that the price of oil should advance to its highest since early March on Tuesday.

    0
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    Gavekal Research

    Three Strikes And Still In

    In the last three weeks, investors in Chinese assets have suffered a series of shocks, with the suspension of the Ant IPO, antitrust actions against China’s tech giants, and the high-profile default of a local state-owned enterprise. Louis examines what may be going on behind the scenes, and sets out how investors should interpret these successive shocks.

    11
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    Gavekal Research

    A Boost From US Restocking

    As the latest wave of US coronavirus infections continues to worsen, the probability of a modest contraction in fourth quarter GDP is rising. However, there are solid arguments for believing that the worst case scenario for 4Q remains no worse than a mild contraction in output.

    3
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    Gavekal Research

    Dear Cedric And Nick, Allow Me To Disagree...

    ...in Thursday’s Daily you argued that Hungary and Poland’s effort to veto yet another power grab by Brussels represents a mere hiccup in the march towards a European nation state. You can add Slovenia into that basket of recalcitrants. I believe that these three countries are posing an essential question: where does the legitimacy of a government come from?

    6
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    Gavekal Research

    The Scars Beneath India’s Cheer

    As India celebrated Diwali this month, there was some reason for cheer on the economic front. After a deep downturn, demand has picked up, the economy is primed to return to growth in the fourth quarter, and the manufacturing sector is firing on all cylinders. Nevertheless, the scars from this year’s contraction will take a long time to heal.

    1
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    Gavekal Research

    Webinar: Europe And The Second Wave

    European markets were ebullient earlier this week on news that an effective Covid-19 vaccine may be approved for use early next year. In the meantime, regional lockdowns aimed at curbing the escalating pandemic threatens Europe's economic recovery. This all but guarantees loose monetary and fiscal policy for the foreseeable future. In yesterday's webinar Nick and Cedric discussed how this shakes out for investors.

    0
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    Gavekal Dragonomics

    The Macro Implications Of Microfinance

    The surprise suspension of Ant Group’s IPO on November 4 was caused by the publication of new rules on online microfinance—a tiny sector that accounts for just 0.3% of China’s banking system. In this piece, Xiaoxi explains why microfinance is of so great macro importance to China’s financial regulators, and what they will do next.

    0
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    Gavekal Research

    Limits To EU Solidarity

    This week, Hungary and Poland vetoed the European Union’s €750bn recovery fund in a fit of pique at a new mechanism that will stop money going to “bad boy” states deemed to impede the rule of law. With southern Europe waiting for EU cash to support its post-Covid recovery, the two eastern bloc countries hope to force a compromise that will stop outside interference in their domestic affairs. The issue tops the agenda of today’s EU leaders’...

    2
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    Gavekal Research

    Video: EU Summit Tensions

    European Union leaders are today sitting down for a high stakes summit. Poland and Hungary are threatening to scupper the EU’s budget and grandly-announced Recovery Fund if they are further penalized for becoming authoritarian and eroding the rule of law. The pandemic continues to demand leaders’ attention and Brexit lurks as the ugly beast in the background.

    0
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    Gavekal Dragonomics

    The Second Wave Of Bond Inflows

    There was a record increase in foreign holdings of Chinese bonds in the second and third quarters of 2020, almost all of it from private-sector investors. In this report, Wei explains why foreign investors will likely continue to buy up Chinese bonds and why Chinese authorities appear relaxed about this second wave of inflows to the bond market.

    8
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    Gavekal Research

    The Upside For Asian Currencies

    As global uncertainty has started to recede following the US election result and on the promise of effective coronavirus vaccines, so the skies have begun to clear for Asian currencies. Recently the components of the East Asia ex-China currency complex have begun to appreciate across the board at an accelerating rate. The conditions are ripe for this to continue.

    4
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    Gavekal Research

    The Brake On US Growth

    Hopes for effective coronavirus vaccination programs in 2021 propelled both the S&P 500 and the Russell 2000 small cap index to record high, but on the ground in the US, accelerating infections and rising hospitalization rates prompted more state and local governments to order additional restrictions in a bid to slow the spread of the virus.

    0
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    Gavekal Dragonomics

    Cracks Appear In Local Support For Bonds

    A missed debt payment last week by a local state-owned enterprise in Henan province has created turmoil in China's corporate bond market. In this report, Xiaoxi and Wei explain why the default undermined one of the market's fundamental supports and why investors are now likely to be more discerning between provinces.

    7
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    Gavekal Dragonomics

    Full Steam Ahead

    Economic data released on Monday showed China’s continued economic normalization, with property sales and infrastructure investment outperforming expectations, industrial activity staying strong and the consumer recovery picking up. In this Quick Take, the Dragonomics team outlines why this environment is favorable for bonds and risky for equities.

    2
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    Gavekal Research

    After RCEP: A Tough Ask For Pivot 2.0

    On Sunday, China signed the Regional Comprehensive Economic Partnership. With the 15-nation trade agreement, Beijing has successfully positioned itself at the center of the region’s trade and investment networks. This will make it hard for US President-Elect Joe Biden to fulfill his pledge to place “America back at the head of the table” in international relations, at least in Asia.

    3
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    Gavekal Research

    Are The Markets Trying To Tell Us Something?

    I am not a technical analyst, but I am an avid consumer of charts, which I often use to check if my overall view is confirmed, or not, by the markets. Having undertaken this exercise recently, I have two strong convictions.

    2
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    Gavekal Research

    Biden And Brexit

    Despite the UK enduring another Covid lockdown and facing a key Brexit deadline on November 15, its political class spent this week obsessing over a personality struggle inside the prime minister’s office. The real significance of a Brexit-supporting aide to Boris Johnson quitting his post may be that the UK is about to accept a trade deal will leave it as an effective satellite of the European Union. After all, hopes for a plucky Britain going...

    3
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    Gavekal Dragonomics

    Another Trump Attack On Chinese Stocks

    President Trump signed an executive order on Thursday barring US investments into a list of 31 Chinese firms, 13 of which are publicly listed. In this Quick Take, Dan and Thomas outline what obstacles the order faces before implementation, what impact it would have for investors and what the move means for Chinese equities both on- and offshore.

    0
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    Gavekal Research

    Webinar: China After The Recovery

    Having gone into lockdown first, China was also the first economy to emerge, and has since enjoyed a rapid rebound in industrial production and exports, reflected in financial markets. But now that the economy is back to “normal”, policymakers have returned to a conservative stance which focuses on financial stability.

    0
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    Gavekal Research

    After Consolidation, A Further Rerating

    Given the violence of Monday’s rotation-driven rally on soaring hopes of an early coronavirus vaccine rollout, it is small surprise that equity markets are now giving back some of those gains. Expectations are still high that developed economies will be able to begin vaccination programs as early as the first quarter of next year. But the intervening days have given investors a keener appreciation of the challenges involved. Meanwhile, the...

    0
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    Gavekal Dragonomics

    The Internet Is No Longer Exempt

    Recent major regulatory actions have sent a strong message to Chinese internet companies: you’re not special anymore. In this report, Andrew, Dan and Ernan explain why anti-competitive practices, prudential risk and the pandemic are now prompting policymakers to regulate online firms on the same basis as their offline counterparts.

    2
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    Gavekal Research

    Time To Look Beyond The US

    Heading into the US elections, there were three big reasons to be bearish on the US dollar. With the results as they stand, one of those concerns has diminished. But the other two continue to weigh on the US currency. Meanwhile, the US equity market is looking extremely expensive compared with equity markets elsewhere. Together, these factors favor unhedged positions in selected non-US equity markets.

    8
  • Gavekal Research

    Video: Politics And Pandemics—The US After The Election

    The last week has seen two big developments affecting the US economy and markets: effective confirmation that Joe Biden has won the presidency, and a surge in hopes for the early rollout of a coronavirus vaccine as infection rates continue to accelerate. Will examines how the last week’s news affects the US growth outlook, and outlines what it means for US bonds, equities and the dollar.

    0
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    Gavekal Research

    China’s Departure From Past Standard Operating Procedures

    China is emerging from the pandemic stronger than its big economic rivals in the West. It is an irony that the US and Europe are applying expansive Keynesian-type solutions of the type China has deployed in recent crises, but now seems to be rejecting. The result, Louis argues, may be that China starts to enjoy a "triple merit" scenario.

    2
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    Gavekal Dragonomics

    The Race To Decouple

    Both the US and China now seem eager to reduce their mutual economic dependencies. However, such a process is different for either country: Dan explains that China’s reliance on the US is narrow and technical in scope while American dependence on China is more wide-ranging. The US therefore faces more complex challenges in the “race” to decouple.

    7
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    Gavekal Research

    Either Steeper, Or Much Steeper

    Hopes of an early vaccine rollout mean that investors are now looking beyond rising coronavirus infection rates in the US towards an end to the pandemic in 2021. The resulting improved business and consumer confidence will favor stronger activity next year, and therefore a steepening of the US yield curve driven by higher long term bond yields. On top of this, there is an appreciable probability that the Democrats could yet capture the Senate in...

    9
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    Gavekal Research

    Turning The Page On 2020?

    Monday’s vaccine news from Pfizer raises the prospect that along with the US election, investors will soon be able to stop worrying about Covid-19. Suddenly the hope that economic activity can return to normal no longer sounds absurdly Pollyannaish. This about-turn not only triggered a sharp reversal in a bunch of market prices, it also raised a host of questions.

    0
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    Gavekal Dragonomics

    Housing & Construction Review 2020

    China’s property sector led the rebound from Covid-19 lockdown, but how long can the new boom last? In her annual chartbook, Rosealea explains the outlook for 2021 after a very volatile 2020. Housing policy has turned tighter after signs of overheating, which points to sales flattening and construction activity declining next year.

    0
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    Gavekal Research

    Markets And The Split Between American Trees And American Boats

    The aftermath of the US election points to deep distrust between America’s two great political tribes that could yet become a concern for investors. Charles worries that betrayal narratives in the US may lead to the Federal Reserve printing even more money in order to paper over the cracks of division.

    7
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    Gavekal Research

    Pricing The Post-Election World

    For once, everything went according to plan. The US election has passed without any big surprises—and the initial market reaction has been exactly what would be predicted in any textbook of finance, when a centrist and predictable conventional politician replaces an extreme and erratic populist as US president.

    2
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