Gavekal Research

Arthur Kroeber

Jul 20th 2017

Donald Trump came into office six months ago today promising to rip up the rules of global trade in order to put America’s narrow interests first and cut its trade deficit. So far, though, his administration’s trade policies have been more smoke than substance. Global trade volume has accelerated smartly since the US election. Threats of a trade war with the main target, China, fizzled in the face of US business interests, Beijing’s ability to...

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Tan Kai Xian, Cedric Gemehl

Jul 19th 2017

Interest rate differentials between the US and eurozone are wide by historical standards. This is no surprise. The US has enjoyed uninterrupted growth (at least in year-on-year terms) since 2010, and today the Federal Reserve stands as the most hawkish big central bank in town. In contrast, the eurozone slumped back into recession in 2012, and the European Central Bank remains in full-blown easing mode. As a result, interest rate differentials...

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Anatole Kaletsky

Jul 18th 2017

Mario Draghi’s hint last month that the European Central Bank’s bond buying may not continue forever unleashed a storm of panic among the perma-bears who still dominate the media and market commentariat. But its actual effect on markets themselves has so far been close to minimal. So should investors worry—or relax—about a repeat of the “taper tantrum” in May 2013, when Ben Bernanke first hinted that the Federal Reserve would eventually start to...

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Long Chen

Jul 17th 2017

Official statements following the conclusion of Beijing’s National Financial Work Conference signal that the recent tightening cycle has now peaked and that market interest rates are likely to fall from current levels, argues Chen Long. The story remains that while Chinese reflation has peaked, the ensuing slowdown will be moderate and gradual.

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Nick Andrews

Jul 14th 2017

Mario Draghi got people scratching their heads last month. “As the economy continues to recover, a constant policy stance will become more accommodative,” declared the European Central Bank president. “The central bank can accompany the recovery by adjusting the parameters of its policy instruments—not in order to tighten the policy stance, but to keep it broadly unchanged.”

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Udith Sikand

Jul 14th 2017

The “safety first” stance of Indonesian fiscal and monetary policies has contained the country’s budget deficit, restored its investment grade credit rating and capped inflation. Granted, these policies have come at the cost of lackluster growth. However, with the rupiah undervalued and plentiful carry available, Udith still sees opportunities in local currency bonds.

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Tan Kai Xian

Jul 13th 2017

In her testimony to Congress yesterday, Federal Reserve chair Janet Yellen attributed the weakness of US inflation to temporary factors. As a result, the Fed remains focused on tightening policy. However, given that US inflation has consistently undershot the Fed’s target, any further decline will raise concerns that the US business cycle is rolling over.

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Tom Holland

Jul 12th 2017

Sometimes financial markets can look a lot like Wile E. Coyote. So intent was the old Looney Tunes character on chasing the Road Runner, that he somehow never realized when he had shot over the cliff’s edge. For a few moments he would continue in thin air, legs a blur, supported by momentum and incomprehension. Only when he looked down... In much the same way, financial markets often continue their trend after the underlying conditions change,...

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Tom Miller

Jul 11th 2017

Last week Louis argued that the most likely growth area for richly valued defense contractors was Western-aligned powers in East Asia. The problem was that despite rising regional tensions, India and Japan were playing hard to get (see Should Investors Chase Defense Stocks?). Last week’s events on the Korean peninsula should give the merchants of death a fresh calling card in Tokyo, Seoul and Taipei. Yet while garnering fewer headlines, the...

Gavekal Dragonomics

Ernan Cui

Jul 11th 2017

When you buy a house, you also buy things to go in it—yet the rebound in housing sales over the past 18 months has not done much for sales of major home appliances. As Ernan explains in this piece, Chinese demand for washing machines, refrigerators and televisions has now more or less peaked. The main exception is the humble air conditioner.

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Nick Andrews

Jul 07th 2017

Italy’s economy is enjoying a cyclical upswing, and a long-delayed banking clean-up is finally under way. But while both these developments are welcome, they are not sufficient to change the underlying picture. Nick argues there is little chance that the general election due to be held by May 2018 will produce a government strong enough to press ahead with reform.

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Nick Andrews

Jul 07th 2017

In the Tour de France, the cyclists at the back of the peloton benefit enormously by riding in the slipstream of stronger competitors at the front of the pack. That’s fine for most of the time, but when the leaders stage a breakaway, the weaker riders can struggle to maintain the pace.

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Charles Gave

Jul 06th 2017

Sweden is a high-growth economy with competitive firms in everything from retailing to metal bashing to software. Yet, there is a time to be in Sweden—or at least overweight—and there are times to be out. Sweden and the US had two of the 20th century’s best performing equity markets and I will simplify this decision by measuring their relative attractiveness. Spoiler alert: this report has a positive recommendation.

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Yanmei Xie

Jul 05th 2017

Despite the protestations of some of the less temperate US news media, North Korea did not cross a US “red line” yesterday. However, with the successful test launch of an intercontinental ballistic missile that could, in theory, drop a nuclear warhead on the US state of Alaska, Kim Jong Un’s rogue state has brought North Asia a big step closer to the critical point at which investors can no longer rule out military action. A shooting war on the...

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Louis Gave

Jul 04th 2017

Aside from health care, the other “Trump trade” that has worked wonders since November 9 has been defense stocks. After all, with the Dow Jones sector index up some 22% in the period, what’s not to like? On taking office, Donald Trump cranked up military spending, and during his state visit to Saudi Arabia in May secured weapon sales worth US$110bn. On Friday—just hours before Xi Jinping took the stage in Hong Kong to celebrate the 20th...

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Thomas Gatley, Long Chen

Jul 03rd 2017

The doors to China’s capital markets are opening wider, with MSCI adding A-shares to its indexes, and the Bond Connect program launching in Hong Kong. In this Strategy Monthly, Thomas Gatley and Chen Long explain how foreign investors should position themselves in Chinese bonds and equities in light of these new market-opening measures.

Gavekal Dragonomics

Long Chen

Jun 30th 2017

In our latest quarterly chartbook, Chen Long assesses the effects of Chinese regulators’ surprising crackdown on the financial sector. Interbank rates and bond yields have jumped, but credit growth has slowed only modestly. While growth has clearly peaked and will slow further in the rest of 2017, a gradual slowdown still looks quite achievable.

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Cedric Gemehl, Anatole Kaletsky

Jun 29th 2017

When choosing three adjectives to describe the ECB’s evolving monetary policy stance, Mario Draghi this week alighted on confidence, persistence and prudence. Yet judging by the big reaction in currency and bond markets, traders ignored the two Ps and heard only about Draghi’s confidence in Europe’s strengthening recovery. Markets treated the speech as a unambiguous signal that the ECB is turning more hawkish.

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Louis Gave

Jun 28th 2017

A couple of weeks ago, Louis asked if the downside breakout in bond yields (touching 2.10%) could foster a stable investment environment. At the time he foresaw three possible scenarios. After yesterday's hawkish pronouncements by multiple central banks, he is not so sure and is focusing on a narrower range of possibilities which may herald a new investment environment.

Gavekal Dragonomics

Yanmei Xie

Jun 27th 2017

At the close of 2016, Xi Jinping’s government vowed to speed up economic reform, and declared “breakthroughs” would be made in overhauling state-owned enterprises. Half a year on, these bold claims have not been matched by actions. The numerous reform trials can give the impression of activity, but real change remains a distant prospect.

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Tan Kai Xian

Jun 26th 2017

Those with a constructive view of quiescent asset markets say low volatility is justified by the stable economic situation. Others mutter of a looming “Minsky moment”. KX does not rule out a sharp rise in near-term volatility, but says the secular trend is down.

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Tom Holland

Jun 22nd 2017

It says a lot about the dynamics currently at work in the oil market that the king of Saudi Arabia yesterday promoted his firebrand young son to crown prince, yet the price of oil still fell -2.7%. The question now is whether Saudi will double down on its current policies in a fresh attempt to goose up the oil price, whether Riyadh will be forced by its rapidly eroding finances to change direction entirely and devalue the riyal, much as Russia...

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Thomas Gatley

Jun 21st 2017

After three years of teasing, MSCI has agreed to include Chinese domestically-listed stocks, or A-shares, in its main equity indexes. Yet, hopes that MSCI inclusion will quickly spur huge capital inflows and a sustained domestic bull market, are almost certainly wide of the mark.

Gavekal Dragonomics

Rosealea Yao

Jun 20th 2017

China’s housing market is proving quite resilient this year, with sales growth perking up in May. In this piece, Rosealea argues the current sales recovery is broad-based: growth is strong in both central and coastal provinces. While restrictions on speculative purchases are spreading to some smaller cities, this should have only a moderate impact.