E.g., 21-10-2021
E.g., 21-10-2021
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    Gavekal Dragonomics

    Huarong Comes Up For Air

    Huarong Asset Management announced in a press conference on Wednesday that it had reached a recapitalization agreement with government-backed investors. In this Quick Take, Wei and Xiaoxi explore the consequences for Huarong investors and the government’s wider battle against the implicit guarantee.

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    Gavekal Research

    Housing’s Different Drivers

    High house prices may be making headlines in the US, but the homebuilding sector faces headwinds. In July, housing starts and building permit issuance for single family dwellings fell -1.7% month-on-month and -4.5%, respectively. Mortgage applications also fell, which points to weaker construction ahead (see chart below). A positive factor for US housing has been the recent decline in long-term treasury yields, yet there are good reasons to...

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    Gavekal Research

    Asia’s Asset Quality Problem

    Economies with low vaccination rates across emerging Asia are tightening their restrictions on activity once again. So far, the economic and financial impact of the latest cycle of restrictions has been cushioned by exports and government support, but domestic demand remains depressed, private sector balance sheets have sustained damage and bank asset quality is deteriorating.

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    Gavekal Research

    The Taper Is Coming

    In less than two weeks, Jay Powell will get up to make his speech at the annual Jackson Hole gathering of central bankers. Investors should position for a clear signal that in the coming months the US will begin to taper. It is possible, even likely, that the ever-cautious Federal Reserve chief may decide to delay a few weeks, perhaps until the conclusion of the Fed’s next policy meeting on September 22. But his signal is only a matter of time....

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    Gavekal Dragonomics

    Loan Demand Becomes A Problem

    China’s restrictions on borrowing by the property sector and local governments are proving so effective that total demand for credit is weakening. It now looks like loan growth could undershoot official expectations in the remaining months of 2021, which is raising pressure on the PBOC to cut reserve requirements or policy rates.

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    Gavekal Research

    Saigon, Mosul Or Suez?

    The images of US diplomats scrambling onto jets at Kabul airport, of Afghan refugees fleeing to Iran, Pakistan and Tajikistan, and of the Taliban entering Kabul with barely a shot fired are disturbing viewing. For investors, the question is which is the closest historical parallel. The flying helicopters and evacuated embassies recall Saigon in 1975. The speed of the humiliation evokes the 1956 Suez Crisis. And the images of the Taliban parading...

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    Gavekal Dragonomics

    A Bumpy Slowdown

    Chinese economic data weakened across the board in July as disruptions caused by extreme weather exacerbated the country’s wider economic slowdown. In this report, the Dragonomics team explain why policymakers are expected to offer limited support in H2, support which will likely be insufficient to counteract the slowdown in exports and property.

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    Gavekal Research

    Where There Is A Risk Of A Wage-Price Spiral

    After the United Kingdom released data on Thursday showing GDP grew 4.8% quarter-on-quarter in the second quarter, markets are now pricing in a near-100% chance of a rate hike by mid-June next year. In the event, 2Q21 GDP growth was a shade below the Bank of England’s forecasts. And unlike the US, the UK’s output remains below its prepandemic baseline—by 4.4%. Nevertheless, because of a contraction in the UK’s pool of potential labor following...

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    Gavekal Research

    The Coming Decline In Earnings Growth

    After 453 of the S&P 500’s constituent companies have reported for the second quarter, aggregate earnings are up 99% year-on-year. Much of this jump is attributable to base effects; the second quarter of 2020 was when lockdowns hit hardest. But not all; even stripping out base effects, earnings growth has been strong. This growth is destined to fade over the second half, as the impact of economic reopening and government stimulus abates, and...

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    Gavekal Dragonomics

    Don't Count On An Infrastructure Boost

    With China’s government sounding more worried about growth, hopes are rising that infrastructure spending will get a boost in coming months. In this piece, Wei explains why new funding for projects will be slow to arrive. More of a boost will come by early 2022, but the upside will still be modest by historical standards.

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    Gavekal Research

    Understanding Asia’s New Monetary Order (Part II)

    Last month, Charles reviewed the efforts China has made to build an alternative to Asia’s US-dollar-based trading system. Today, he peers into the future, and looks at what China is doing, not just to offer an alternative to the US dollar or euro, but to build a new monetary order for Asia.

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    Gavekal Dragonomics

    The Delta Stress Test

    The rapid spread of the Delta variant across China is posing the biggest challenge yet to the government’s zero-tolerance policy toward Covid-19. In this report, Ernan explains why officials are confident in the policy and will likely keep it in place for the indefinite future—at the cost of depressed travel and consumer services.

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    Gavekal Research

    Video: India Backs Off Foreigner Tax

    India has been a tough place for multinationals to make big capital investments. Just this week the country’s highest court cleared the way for anti-trust action against Amazon and Walmart’s online retail platforms. However, a counter-trend move has been the government backing away from a retrospective tax that has been deployed against foreign investors.

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    Gavekal Research

    The Consequence Of The IPCC Report

    The quote I over-use most is probably Charlie Munger’s “show me the incentives and I will tell you the outcome.” With this in mind, it is no surprise that the IPCC report makes for a harrowing read. Whether you agree with its conclusions is neither here nor there. The key question is this: what will policymakers do, or want to be seen to do, in response?

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    Gavekal Research

    The Gavekal V-Indicator And Tactical Asset Allocation

    The Gavekal velocity indicator has lately begun to send some potentially alarming signals. If in the next four weeks the daily indicator does not swing back to positive, then the three-month moving average will turn negative, raising a red flag. To explain why, it is first necessary to remind readers what our V-indicator is, and why it can be useful.

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    Gavekal Research

    Building A High-Pressure Economy

    With the Biden administration’s US$550bn infrastructure bill all but clearing the Senate on Sunday, more stimulus is set to hit the US economy. Assuming the House of Representatives approves the plan, hard-hatted government contractors will soon be upgrading transport, broadband, water, and power facilities. The effect of this largely debt-funded spending will be to fuel growth in a US economy that already packs heat and faces a tightening labor...

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    Gavekal Research

    The Yen As An Antifragile Asset

    Over the last 12 months, the world’s best-performing major currency has been the renminbi, returning 10.6% against the US dollar. The second best has been the British pound, up 6%. The worst has been the yen, which is down -4%. Over the last 24 months, the best-performing two currencies were again the pound and the renminbi, which both gained 15.1%. The worst, again, was the yen, down -3.4%.

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    Gavekal Research

    Why Commodities Trump Politics

    On the eve of the pandemic, anger at stagnant incomes, high inequality and failing institutions spurred political protests across Latin America. Then came Covid-19. The political price of these events is coming due as left-wing leaders promise voters redistributive policies. For investors, the worry is of a lurch towards unsustainable public spending.

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    Gavekal Research

    Webinar: Global Investment Roundtable, August 2021

    The US growth outlook may be softening as the reopening boom weakens but equity markets seem relaxed as this outcome could delay the day when monetary stimulus is withdrawn. In our sign-off webinar for August, Gavekal partners asked if markets are right in their benign assessment, or whether a nasty surprise could emerge over the usually quiet summer months.

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    Gavekal Research

    Video: A Healing US Labor Market

    Since the depths of the pandemic, the US labor market has recovered remarkably quickly. A key question for investors is how long strong job creation can be sustained before upward wage pressure returns. Ahead of Fridays’ payrolls report, Kai Xian outlines the key drivers of the US labor market.

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    Gavekal Dragonomics

    Another Squeeze For Steelmakers

    Steel futures are on the rise again after several provinces announced plans to cut production. This might sound familiar: prices spiked in April and May following similar announcements. Rosealea writes that this time is different, as slowing construction activity in 2H21 should lower steel demand, making production easier to control.

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    Gavekal Research

    The Sobering Signal In Lumber

    Back in May, an internet meme suggested that if you wanted to impress your date by taking them somewhere really expensive, you should go to a lumber yard. No longer, as the price of US two-by-four has since cratered by two-thirds. KX examines what commodity-price moves such as this can tell us about the broader economy.

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    Gavekal Research

    The European Rotation

    As Europe returns towards something approaching normality, the eurozone is undergoing a rotation in economic leadership from goods to services. This rotation will go on through the second half of 2020.

    0
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    Gavekal Dragonomics

    Getting Kids Off Screens

    Digital gaming stocks tumbled yesterday after an editorial published in state media criticized the social consequences of video games. In this Quick Take, Ernan explains how regulators are tackling the perceived social ills of China’s youth, and why the dramatic market reaction underscores how sensitive investors have become to official guidance.

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    Gavekal Dragonomics

    The Capital Markets Balancing Act

    The pace of financial decoupling between the US and China has quickened, with regulators in both countries tightening requirements for Chinese firms seeking to list in US markets. With the SEC likely to push ahead with the delisting of Chinese firms, Thomas writes that Chinese companies will rely on Hong Kong to access global capital.

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    Gavekal Research

    Is The Reflationary Trade Back On?

    Forget the recent easing signals sent by the Chinese Politburo (and consequent drop in Chinese bond yields). Forget fears about the “Delta variant” giving Western central banks cover to keep extremely loose monetary policies even as inflation rises. Forget also the upcoming US stimulus bill, or the unleashing of European fiscal expansion. A positive signal that no one is yet talking about is the deflationary signal that could have materialized,...

    1
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    Gavekal Research

    Strategy Monthly: The Global Monetary Divergence

    As the world’s three big economies—the US, the eurozone and China—recover at different speeds from the shock of Covid, their monetary policy paths are diverging. This divergence will have major implications for bond investors and foreign exchange markets.

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    Gavekal Research

    Risks To The Rally

    US equities have ground higher on strong demand, easy monetary policy, and unattractive bond yields. As long as this situation remains, investors should remain moderately overweight US equities. But they should also carefully monitor three key macro risks that could upend this fairly benign investing environment.

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    Gavekal Research

    Breaking Down European Inflation

    Two weeks ago, after US consumer price data for June showed inflation had climbed to a 13-year high of 5.4%, my colleague Tan Kai Xian examined the three main drivers of this year’s rise in US inflation: base effects, supply-side constraints and demand-pull factors. He concluded that base effects have started to wear off and supply-side constraints will soon begin to ease. However, demand-pull factors are set to strengthen over the coming...

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    Gavekal Research

    Webinar: Europe Caught Between Stools

    The US has taken an approach to the pandemic that involves reopening and “living with Covid”, whereas most East Asian economies are heading down the "zero-Covid" path. Europe seems to be caught between these two stools. Which way Europe turns could have a big impact on global growth, the value of the euro and key asset values.

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    Gavekal Research

    When Will The Regulatory Rout End?

    Investors in China’s offshore-listed stocks have suffered multiple regulatory shocks. But with both onshore and Hong Kong equities now suffering, the crackdown is hitting domestic investors. Thomas explains why this will likely change the calculus for China’s policymakers, and why regulators are now likely to adopt a more constructive tone.

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    Gavekal Research

    Video: The Semiconductor Crunch And Asian Exports

    Apple's Tim Cook warned investors that it would face microchip shortages in the second half of the year. Yet last week, Taiwan Manufacturing Semiconductor said that it saw an abatement of the great chip shortage. In this video interview, Vincent seeks to reconcile these two statements, and explain what it all means for Asian exports.

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    Gavekal Research

    The Evergrande Drama Plays Out

    Investor confidence in Evergrande Group, China’s second-largest property developer, has been pummeled in recent weeks. While Evergrande has managed to put out the latest round of fires, and a collapse is unlikely, Rosealea argues in this piece that market volatility for developers will probably continue as financial regulators keep on squeezing.

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    Gavekal Research

    Strange Times And The Return Of TINA

    Fresh Covid-19 outbreaks, stunning Chinese regulatory actions and worries over global growth are causing US real bond yields to plumb new depths. So what is the humble investor to do? After all, historically tight US credit spreads means corporate credit is unattractive, while equities keep making new highs, pushing the S&P 500 index up 18% year-to-date. The answer may not be that complicated, as current growth data and market pricing...

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    Gavekal Research

    Behind China’s Corporate Clampdown

    Private education is the latest sector to draw fire from the Chinese authorities. Their action has precipitated an abrupt slide in Hong Kong’s equity indexes as international investors bale out, alarmed at what they see as official caprice. It has also triggered a spate of questions about what lies behind the crackdown, and what the action means for the future of investing in China.

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    Gavekal Dragonomics

    The WMP Countdown

    The clock is ticking for China’s banks to restructure the wealth-management products they have long used to evade financial regulations. Progress has been slow, but regulators have signaled they will not extend the end-2021 deadline again. However, as Xiaoxi argues in this piece, regulators will end up having to grant banks plenty of exceptions.

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    Gavekal Research

    A Glass Less Full

    The eurozone’s economy has continued to pick up in July, with the flash composite PMI released on Friday beating expectations to hit a 21-year high. The manufacturing component continued to fire strongly, and notably the services index topped 60 for the first time since May 2006 as governments relaxed Covid restrictions and the summer tourist season got under way. However, after nine months in which eurozone data has consistently come in ahead...

    0
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    Gavekal Dragonomics

    Class Is Over For Tutoring Firms

    Policymakers launched a massive crackdown against Chinese education companies over the weekend that will likely mean the end of these companies as they are currently structured. In doing so, Ernan writes that China has signaled it is not afraid to simply shut down a large and profitable industry in order to achieve its social and political goals.

    14
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    Gavekal Research

    Low For Even Longer

    On Thursday, the European Central Bank’s decisionmakers sat down for their first monetary policy meeting since they ditched their longstanding inflation target of “below, but close to 2%” in favor of a new symmetrical target centered on 2%. That decision formalized the ECB’s shift away from its Bundesbank-style focus on price stability and enshrined its role as the guardian of eurozone financial stability.

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    Gavekal Dragonomics

    Macro Update: Easing Into The Slowdown

    China's post-Covid boom peaked in H1 and the beginnings of a slowdown are now obvious. Although growth momentum is still quite solid, policymakers have moved pre-emptively to start a monetary easing cycle. In the latest edition of our regular chartbook, the Dragonomics team explains the outlook for the economy and markets.

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    Gavekal Research

    Webinar: The State Of Global Growth

    The reflation trade has ebbed in recent weeks as investors have gotten more comfortable with the trajectory of US monetary policy and concerns have risen over the Delta variant of Covid disrupting economic opening. At the same time, China continues to crack down on its high-growth internet sector. Our team assessed the market implications of these trends.

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    Gavekal Research

    Did The Equity Rotation And Bond Sell-Off End In May?

    The arrival of Covid-19 vaccines in November sparked a selloff in bonds and significant outperformance of value stocks, at least until mid-May. Having advised a bias to value stocks and keeping duration short in bond portfolios since last November Will was wrong-footed by the market moves of the past two months. Will the new trend last?

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    Gavekal Research

    The Fiscal Effect Of Zero Covid

    As a resource-rich economy, Malaysia has been buoyed by strong commodity and energy prices, yet the effect of the pandemic has been to create an unstable political situation. The governing coalition fell apart on July 8 and a new one has not been formed. Ordinarily, the way out of such a parliamentary impasse would be for an election to be held, yet with the country in a fresh lockdown due to surging Covid-19 cases, that will be difficult.

    0
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    Gavekal Research

    Video: The Debt Ceiling Is Back

    After a two-year suspension, the US debt ceiling will soon be reimposed at current levels. Official estimates suggest that the Treasury can delay defaulting on its debt for three to four months. That is shorter than the five months the Treasury was able to delay during a similar standoff over the debt ceiling in 2019. Ultimately, Congress should act and default will be avoided.

    0
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    Gavekal Research

    A High-Pressure Business Cycle

    The US economy may have suffered one of its biggest ever contractions last year, but at just two months, it was one of the shortest due to aggressive policy reactions that spurred an unlikely economic boom. A worry for investors is that late-cycle stresses now emerging cause this expansion to fade as quickly as it started.

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    Gavekal Research

    China’s Afghan Quandary

    For China, the only thing worse than having the United States Army on your border is not having it there at all. When the US completes its withdrawal from Afghanistan this summer, China will have to fill the ensuing power vacuum to stave off terrorism and Islamic extremism at home, as well as protect its Belt and Road Initiative investments.

    0
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    Gavekal Dragonomics

    The PBOC’s Pre-Emptive Strike

    China’s surprising decision this month to cut banks’ reserve requirement ratios has upended the consensus on its policy trajectory and sown confusion in the market. In this piece, Wei explains the move was neither a panicked attempt to jump-start growth, nor a minor technical adjustment, but a pre-emptive start to a different kind of easing cycle.

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    Gavekal Research

    The World Becomes More Fragile

    In a July 2 paper, Didier Darcet explained how after seven months of being positive, the market reading from our Paris-run quant system had turned negative. The takeaway was that equity market volatility had “more than ever” become the indicator signaling a downturn. Watch any move in the Vix above 27 as a signal that US markets are entering the "tails" of the risk curve.

    3
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    Gavekal Research

    How Monopolies Behave

    The economy is simply energy transformed. Today, we have a situation where governments in the West are attempting to kill off energy derived from fossil fuels, to which end they are subsidizing new forms of energy. The trouble is that demand for energy is growing faster than the ability of these new forms of energy to meet it.

    3
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    Gavekal Dragonomics

    A Carbon Market's Slow Start

    China launched the world’s biggest carbon market last week to great fanfare. Unfortunately, Rosealea writes that it will not do much to slow China’s CO2 emissions growth, at least not initially. While the market's impact will be small at first, its architecture can be gradually strengthened to achieve more ambitious goals.

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