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Gavekal Research
Anatole Kaletsky
Feb 22nd 2018
After The Yellen And Bernanke Puts, The Pavlov Put
Last Monday, I pointed to three reasons why the recent turmoil in global equities would probably prove nothing worse than a counter-trend “buy on dips” correction, rather than the start of a serious bear market. That's not to say that worries about inflation and overheating are unfounded. But investors are still quite relaxed about both growth and inflation, as evidenced by historically modest bond yields.
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Gavekal Dragonomics
Ernan Cui
Feb 22nd 2018
Taming The Inflation Risk From Pork
What are the odds that China has a surprise jump in inflation this year? In China, surges in the CPI are usually driven by food—particularly highly cyclical pork prices. But while food inflation is likely to turn positive this year, Ernan argues that the odds of an inflation spike are low, as farm consolidation has tamed the pork price cycle.
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Gavekal Research
Udith Sikand
Feb 21st 2018
Notes On An Indian Scandal
As most emerging equity markets have clawed back a good portion of the losses they suffered in early February’s risk-off, there has been one notable exception. Far from rebounding, Indian stocks have taken another leg down following revelations of a US$1.7bn fraud at Punjab National Bank, the country’s second-largest state-owned lender. The scale of the fraud—roughly twice the amount promised to the bank by the government in the first tranche of...
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Gavekal Research
Charles Gave
Feb 21st 2018
Bond Market Risks
Charles is bemused by the cacophony of commentary on the apparent bursting of a US government bond bubble. By his reckoning, treasuries are at about fair value. The same cannot be said for certain other big bond markets, where far bigger risks lurk. In this short piece, he updates his broad view on risks in the global bond market.
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Gavekal Research
Tom Holland
Feb 20th 2018
Gauging The Strength Of The Oil Bid
It made headlines around the world earlier this month when the US government’s Energy Information Administration announced that US oil production had hit 10.25mn bpd in the last week of January. At that rate, the US was not just pumping more crude than at its previous production peak in 1970, it was very likely pumping more than Saudi Arabia, lifting the US into second place in the global production league table behind Russia.
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Gavekal Dragonomics
Yanmei Xie, Rosealea Yao
Feb 20th 2018
Local Infrastructure Feels The Chill
China’s financial crackdown is now extending to the funding tricks that local governments use to pay for infrastructure projects, which have long been tolerated in the name of economic growth. This report explains why this crackdown will put more of a chill on infrastructure spending—but also why public-works investment is unlikely to collapse.
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Gavekal Research
Udith Sikand
Feb 19th 2018
How To Play An EM Rebound
On Thursday, my colleague Joyce Poon argued that strong global growth and favorable financial conditions should allow emerging markets to sustain their outperformance. In the immediate run-up to the recent global sell-off, Latin American markets like Brazil and Mexico had charged hardest on the back of higher commodity prices and an incipient global shift from growth stocks toward value plays. But once the dust settles and EMs get their mojo...
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Gavekal Research
Feb 19th 2018
Audio & Transcript — Gavekal Research Call February 2018
In last week’s Research Conference Call Andrew Batson outlined the risks—both downside and upside—to the Chinese economy in 2018. Yanmei Xie focused on the risk of overzealous implementation of policy. This is especially the case for environmental regulations, which gave Beijing an uncharacteristically smog-free winter, but at the cost of a natural gas shortage.
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Gavekal Research
Nick Andrews
Feb 16th 2018
A Very British Tightening
Last week, the Bank of England upped its UK growth forecast and signaled that interest rates may be raised harder and faster than expected. This week, Theresa May’s government maintained its muddled passage towards a European Union exit, which has increasingly fretful multinationals warning that Britain’s economy could be headed for the rocks. Even, if like me, you think the UK will secure an eventual squishy-type deal with the EU that involves...
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Gavekal Research
Joyce Poon
Feb 15th 2018
EMs And The Global Cycle
The market correction of the last two weeks has been centered on the US, but also hit emerging markets pretty hard. A year ago, I argued that the sustainability of the EM run-up depended on continued strong global growth, more oil price gains and a further fall in tail risks associated with the financial system. The issue is whether the newly volatile conditions in global markets are a game-changer for the emerging world. That conundrum depends...
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Gavekal Research
Charles Gave, Didier Darcet
Feb 15th 2018
CSI Wall Street (Part II)
On Monday, in CSI Wall Street Anatole morphed into Sherlock Holmes to investigate the crime scene following the market correction. He concluded that: “There’s nothing to see here. Please move along.” And the markets promptly did. Over the past week, equities have rallied around the world while volatility has gradually ratcheted down. A few more weeks like the past one, and the market moves of late January and early February will quickly be...
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Gavekal Research
Tan Kai Xian, Will Denyer
Feb 14th 2018
Deficits And Bondholders
Economics 101 says that when there is more of something, then other things being equal its price should go down. That is worrying for US bond investors as US lawmakers last week passed a budget deal that may raise deficits by US$320bn over the next 10 years (any new infrastructure spending will be extra). Interestingly, and perhaps not entirely coincidentally, just as debt-fueled big-government becomes the new normal in Washington, November’s...
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Gavekal Research
Yanmei Xie
Feb 14th 2018
Video: Freeze-Thaw Conditions In Korea
It has been a week of confusing signals from the Korean peninsula. Even as North Korea has paraded its missiles, and the US and its allies have sworn to exert “maximum pressure” against Kim Jong-Un’s rogue regime, both sides have hinted at their readiness to return to the negotiating table. Yanmei cuts through the fog to assess the future trajectory of North Korean event risk.
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Gavekal Research
Thomas Gatley, Ernan Cui
Feb 13th 2018
Chinese Equities: Marching To A Different Drum
Though onshore Chinese stocks did not escape the rout of global markets in recent weeks, the real trigger for the meltdown onshore was heightened investor anxiety over Beijing’s financial regulations. Thomas and Ernan reckon that after the dust settles, benign fundamentals and attractive valuations should set the market back on its upward track.
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Gavekal Research
Anatole Kaletsky
Feb 12th 2018
CSI Wall Street
Bear market massacre or harmless buy-the-dip correction? Financial investigators have spent the weekend sifting through, dismantling and reassembling dozens of clues to determine the true nature of the shocking crime committed on Wall Street last week, as stock prices suddenly went down instead of up. But amid the righteous indignation inspired by this offence against morality and natural law, possibly the most important forensic evidence has...
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Gavekal Research
Nick Andrews, Cedric Gemehl
Feb 12th 2018
Five Ways To Play European Equities
After a traumatic couple of weeks in the equity markets, Nick and Cedric take this opportunity to revisit their longstanding advice that investors should overweight European mid-caps exposed to the eurozone’s cyclical upturn. As they explain in this report, that call still holds, and they suggest three sectors where investors should look to buy the dip, and two that portfolio managers would do well to avoid.
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Gavekal Research
Louis Gave
Feb 09th 2018
Behind The Market’s Inability To Rally
“A week is a long time in politics”, Harold Wilson was said to have once quipped to a young aide. The former British prime minister should have tried working in the US equity market. In recent days, it has sometimes felt as if time stood still. So what should we make of stocks’ inability to mount a rally after they again closed on their lows?
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Gavekal Dragonomics
Long Chen
Feb 09th 2018
A Reversal In The Renminbi?
The renminbi’s 0.8% fall against the US dollar on Thursday was an unusual move for a managed exchange rate. But what was even more unusual was the preceding run-up: before that drop, the renminbi was up 2.8% YTD in trade-weighted terms. This overshooting the official goal of trade-weighted stability was what set the stage for the correction.
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Gavekal Research
Cedric Gemehl
Feb 08th 2018
The End Of Germany’s ‘Nein’ Policy?
On the face of it, yesterday’s coalition deal between Angela Merkel’s center -right grouping and the Social Democratic Party differed little from that agreed last month. In addition to domestic stimulus measures it backed more European integration. Yet look closer and the German political landscape may just have been roiled by an earthquake, for while Merkel should stay chancellor the new man at the finance ministry is set to be Olaf Scholz, the...
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Gavekal Research
Charles Gave
Feb 07th 2018
Nobody Rings A Bell At The Top Of A Market
Let’s start with a hypothesis. For the purposes of this note, let’s assume that the bull market that started in the second half of 2011 ended in January 2018, and that a bear market is now under way. The obvious follow-on question is what variety of the Ursus genus is emerging from its lair.
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Gavekal Dragonomics
Long Chen
Feb 06th 2018
The Secret Ingredient For Financial Stability
China’s regulators have done a remarkable job of de-leveraging the financial sector without hurting economic growth or disrupting markets. But was this smooth trajectory due to luck or skill, and can it continue? In this piece, Chen Long explains how the central bank used its monetary policy tools to defuse the risks from tighter regulation.
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Gavekal Research
Louis Gave
Feb 06th 2018
Parsing The Market Sell-Off
One of the first things Charles taught me is that in a bear market you should never do on the Monday what you wish you had done on the Friday. As bad news piles up, investors brood, sleep poorly, snap at their spouses or children, and go in first thing Monday morning and start to liquidate positions. Undeniably the picture for the now rather stretched equity bull market has been deteriorating for a while, with spiking bond yields, creeping...
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Gavekal Research
Will Denyer, Tan Kai Xian
Feb 05th 2018
Good News Is Bad News?
The US posted a solid employment report on Friday, and the markets didn’t like it one bit. Some 200,000 jobs were added in January, better than the expected 180,000 and prior month gain of 160,000. But what really spooked investors was the faster than expected pickup in wage growth to 2.9% YoY. On the face of it, this is good for economic growth (certainly in nominal terms) and top-line corporate revenues. The worry is that without productivity...
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Gavekal Research
Tom Miller
Feb 02nd 2018
A Very Indian Budget
New Delhi swung into election mode yesterday, a full 15 months before the election. Finance minister Arun Jaitley pledged his budget for 2018-19 would build a “New India,” but it was really a populist ploy to buy votes. After a tough economic year and a disappointing election result in Modi’s home state of Gujarat, the ruling BJP needed to shore up its core support.
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Gavekal Research
Will Denyer
Feb 02nd 2018
Video: Playing The US Growth Picture
Will outlines his view that real growth in the US will remain stable this year and that inflation will pick up, and discusses what this means for asset prices and portfolio construction.
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Gavekal Research
Will Denyer, Tan Kai Xian
Feb 02nd 2018
Take Profits On US Homebuilders
Our view that real growth in the US will remain supported this year at a similar level to 2017’s 2.5% rate is based on three main elements: rising business investment following December’s tax cuts; a moderation in consumption growth as labor market tightness slows job ceation, and a neutral to mildly positive view on residential investment (see The Outlook For US Growth And Prices). The third element—our neutral view on homebuilding—merits...
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Gavekal Research
Tan Kai Xian
Feb 01st 2018
The Sustainable Rise In US Inflation
In her valedictory meeting yesterday, Janet Yellen presided over a slight tightening of language to indicate that the Federal Reserve’s official inflation target of 2% should be hit some time this year. Investors were not surprised as break-even inflation rates have risen to 2% from about 1.8% late last year, while the chance of four rate hikes materializing in 2018 is now priced at 22%. The fly in the ointment is still sluggish wage growth,...
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Gavekal Research
Louis Gave, Charles Gave
Feb 01st 2018
Strategy Monthly: Portfolio Strategy For An Inflationary World
Most money managers today have spent their entire careers in the disinflationary environment that has prevailed since the mid-1980s, in which equities prospered and bonds were an ideal hedge. This may soon change. A growing number of signals point to rising inflation and tighter liquidity. If we really do move into an inflationary era, managers will have to rethink their portfolios from the ground up. In the latest Strategy Monthly, Louis and...
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Gavekal Research
Nick Andrews
Jan 31st 2018
Relief At Hand For UK Consumers
“I can’t stand London,” one US economist who last year relocated to the UK capital recently complained to Gavekal. “It’s grey and miserable, and all anyone ever talks about is Brexit.” It’s easy to sympathize. Political infighting over the Brexit process dominates UK headlines. However, there are growing reasons to feel more positive about the outlook for UK consumers.
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Gavekal Dragonomics
Ernan Cui
Jan 31st 2018
Tightening The Grip On Urbanization
The populations of Shanghai and Beijing, China’s two largest cities, declined in 2017, in a clear sign that urbanization policies are being enforced more strictly under Xi Jinping. In this piece, Ernan explains how planners have gotten more effective in restricting growth of the largest cities, how controls on almost all cities have tightened.
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Gavekal Research
Tom Holland
Jan 30th 2018
Real Yields, The Euro And The Dollar
The global bear market in bonds growls on. Yesterday the yield on 10-year US treasuries climbed to a new 45-month high at 2.7%. Even more striking, the yield on five-year German bunds rose to zero for the first time since November 2015, marking the beginning of the end of an era for eurozone negative yields as market expectations grow that the ECB will reduce its monetary accommodation sooner rather than later.
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Gavekal Research
Louis Gave
Jan 30th 2018
US Budget Deficits, The Falling US$ And Growth Stocks
In emerging economies, rising yields and a falling currency invariably signals market concern over fiscal policy. The US, of course, is different. Nonetheless, Louis examines how projected increases in the US budget deficit in coming years will weigh on the dollar, and could make investors reconsider holding richly-valued US growth stocks.
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Gavekal Research
Will Denyer, Tan Kai Xian
Jan 29th 2018
The Outlook For US Growth And Prices
The first estimate for real US GDP growth clocked in at 2.6% for the fourth quarter, bringing full-year 2017 growth to 2.5%. Policymakers at the Federal Reserve forecast the same rate of growth for 2018, together with a moderate pick-up in consumer inflation from 1.7% to 1.9%. At Gavekal we try to avoid making such specific numerical forecasts; as the great Danish physicist Niels Bohr used to say, “It’s very hard to make predictions, especially...
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Gavekal Dragonomics
Thomas Gatley
Jan 29th 2018
Mixed Consequences From The Profit Boom
2017 was a great year for China’s industrial sector, with profits up 21%, but the gains were highly concentrated in mining, metals and materials. This pattern has a mix of important consequences, as Thomas explains in this piece: it’s good news for financial risk, less good news for households, and bad news for corporate investment.
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Gavekal Research
Arthur Kroeber
Jan 26th 2018
The US-China Economic Rivalry Is About To Heat Up
Economic conflict between the US and China was the dog that didn’t bark in 2017. This year it has begun to bark loudly and will soon bite deeply. The short-term macroeconomic consequences will be modest, beyond putting more downward pressure on the dollar. But the potential long-run impact on trade and investment flows, and on power relations in the Asia-Pacific, could be large.
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Gavekal Research
Tom Holland
Jan 25th 2018
Mnuchin’s Weak Dollar
If Robert Rubin were dead, he would be turning in his grave. Speaking in Davos yesterday, US Treasury secretary Steven Mnuchin shook markets by declaring: “A weaker dollar is good for us.” His remark broke the precedent set by Rubin in 1995 and adhered to by Treasury secretaries ever since, of insisting: “A strong dollar is in the best interest of the US.”
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Gavekal Research
Cedric Gemehl
Jan 25th 2018
Eastern Europe's Equity Sweet Spot
The big issue facing investors globally is whether inflation makes a Lazarus-like comeback. But in one significant economic region, it is already alive and kicking. Eastern Europe experienced a painful deflation and repricing after the 2008 crisis, but inflation is now well above 2.5%. Having underperformed for many years, Cedric argues that its financial-heavy equity indexes should continue to do well in an environment of strong domestic demand...
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Gavekal Research
Long Chen
Jan 24th 2018
Overbought But Still Undervalued
Chinese stock markets are on a tear, with large cap A-shares up 8.9% and Hong Kong-listed H-shares up a thumping 16.3% year-to-date. After such a rapid rise, the markets are vulnerable to a near-term pull-back. But Chen Long explains that economic fundamentals, valuations and flows all suggest the bull market still has further to run.
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Gavekal Research
Charles Gave, Louis Gave
Jan 24th 2018
A “Once In A Generation” Shift
There is a contradiction at the heart of the current bull market in pretty much all assets. On one hand, investors believe that firms can optimize their operations and keep doing more with less. Yet on the other hand, they assume that the global economy will remain awash with excess capacity. Charles and Louis argue that as such cognitive dissonance may get a reality check, investors may need to radically rethink their portfolio architecture.
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Gavekal Research
Will Denyer
Jan 23rd 2018
Keep Duration Short
Washington may have temporarily sorted out its spending plans, but the bigger news for investors is the apparent breakout in 10-year treasury yields. The benchmark-of-benchmarks has risen to 2.65%, exceeding highs recorded in the months right after the Republicans’ election wins in November 2016. This can be ascribed to strong global growth, higher commodity prices, US tax cuts and tighter monetary policy. Hence, with US long-rates now offering...
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Gavekal Research
Nick Andrews, Cedric Gemehl
Jan 23rd 2018
When Political Stagnation Is Benign
Last week, European economic affairs commissioner Pierre Moscovici declared Italy a “political risk” for the European Union. Some of the Euroskeptic campaign rhetoric has certainly been alarming. But in this paper Nick and Cedric delve into Italy’s electoral arithmetic to conclude that no incoming government is likely to have the will or capability to act on such combative promises.
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Gavekal Research
Nick Andrews, Cedric Gemehl
Jan 22nd 2018
The German Coalition And Europe
Late Sunday, party delegates of Germany’s social democrat SPD voted 362 to 279 to begin formal coalition talks with chancellor Angela Merkel’s CDU/CSU conservatives. Hurdles still remain, but our base case is that the weekend’s vote paves the way for the formation of a Grand Coalition by April. After months without a stable government, any reduction in uncertainty will naturally be positive for markets. But for investors, the most significant...
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Gavekal Dragonomics
Rosealea Yao
Jan 22nd 2018
Fewer Surprises From Supply-Side Reform
China’s “supply-side reform” in coal, steel, and other products been a major swing factor for markets over the past two years. And Chinese officials started off 2018 by doubling down on their rhetoric about supply-side reform. But as Rosealea explains, there are good reasons to think the upside risk to commodities prices will be low this year.
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Gavekal Dragonomics
Andrew Batson
Jan 19th 2018
Reviewing The Risks For 2018
After a solid performance in 2017, worries about China have broadly receded, and our view is that 2018 should see continuity in economic policy and only a moderate slowdown in growth. In this piece, Andrew assesses the state of four major risks to this sanguine outlook, based on the latest economic data and a flurry of recent policy statements.
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Gavekal Research
Tan Kai Xian
Jan 19th 2018
Taxes And Yields
US equity markets have started 2018 committed to the idea that Goldilocks is alive and well. Although no clear picture has emerged of its impact, the passage of the most significant tax reform since the 1980s has had S&P 500 firms opining publicly that they hope to invest more and treat staff better. The corollary is that this cycle might be getting a second wind. The fear is inflation, as shown by yesterday’s move in treasury yields to...
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Gavekal Research
Cedric Gemehl
Jan 18th 2018
Video: The Next Phase Of Europe's Recovery
Cedric expects 2018 to confirm the eurozone economy as moving from recovery to expansion. Hence, four key macroeconomic trends that emerged in 2017 should become paramount this year.
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Gavekal Research
Cedric Gemehl, Nick Andrews
Jan 18th 2018
From Recovery To Expansion
Perception is a funny thing. Yesterday President Emmanuel Macron pitched up in London and wowed the British by loaning them a 70 meter piece of embroidered propaganda that celebrates their conquest 950 years ago. By contrast, the last French president to visit Britain had a pint of warm beer with David Cameron in a pub and no one noticed. A similarly discombobulated dynamic can be seen in European equity markets, where years of pessimism have...
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Gavekal Research
Tom Miller
Jan 18th 2018
Securing The Indo-Pacific
Forty years after the Southeast Asia Treaty Organization was dissolved, Tom argues that an expanded version of that “Asian NATO” concept may be developing, but this time the potential theater of operations stretches across the Indo-Pacific and includes the full panoply of great powers. What has not changed is that China remains the protagonists’ key bogeyman.
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Gavekal Research
Tan Kai Xian
Jan 17th 2018
Stick With Dollar Depreciation Plays
The last year has seen a rare outbreak of consensus at Gavekal. Since last January partners and analysts have been almost universally bearish on the US dollar. In that time, the DXY dollar index has slumped some -12% from its heavily overvalued level at the beginning of 2017. Now the first 12 trading days of 2018 have seen the DXY slide -1.9%, breaching September’s support level to sink to its lowest since the end of 2014. This latest...
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Gavekal Research
Anatole Kaletsky, Louis Gave, Arthur Kroeber
Jan 17th 2018
Audio & Transcript — Gavekal Research Call January 2018
In Gavekal’s monthly research call yesterday, Louis Gave reviewed evidence that the investment environment is experiencing a once-in-a-generation shift from a deflationary environment to one that is broadly inflationary. Anatole Kaletsky argued that this metamorphosis will likely be an orderly affair. Arthur Kroeber updated his view on China’s likely impact on global commodity markets.
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