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    Gavekal Research

    Rotating Into US Small Caps

    Despite some states seeing a worrying rise in Covid-19 cases, a US economic recovery is gaining strength as lockdowns are lifted. Barring unforeseen setbacks, there are reasons to think that the US recovery sustains itself and the equity rally continues. There is, however, a solid macro argument for rotating to a different class of US stocks.

    2
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    Gavekal Dragonomics

    The Beginnings Of A Plateau

    China’s economic data for May continued April’s wider recovery; however, Thomas, Rosealea and Xiaoxi argue that this upward momentum is losing steam. Weak external demand, tapering industrial production and Beijing’s aversion to further monetary easing all support the idea that China’s post-Covid bounceback is starting to plateau.

    2
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    Gavekal Research

    The Froth Comes Off

    Recent weeks saw telltale signs of markets getting silly: firms with no sales reaching U$26bn valuations; airline-focused exchange traded funds jumping from US$50mn in size in January to US$1.5bn, and bankrupt firms becoming five and 10 baggers. This kind of activity may lead to one of three conclusions.

    4
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    Gavekal Research

    Wicksell And The Market Logic Of A New Inflationary Era

    On Wednesday, Charles argued that policy responses to the Covid-19 crisis may be forcing the US economy into an inflationary boom. In this piece, he deploys the Shiller P/E as a tool for assessing US equities. He connects these findings with his tried-and-tested Wicksellian macro approach to reach a set of portfolio construction recommendations.

    0
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    Gavekal Dragonomics

    Can Small-Business Lending Be Fixed?

    As China tries to get the economy back to normal, it is focusing more on the plight of small businesses, who have lost weeks or months of revenue to the pandemic. Yet it has resisted offering the loan guarantees other countries have employed. In this piece, Xiaoxi assesses the other tools China is using to boost lending to the smallest firms.

    4
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    Gavekal Research

    The Derating Of The Dollar

    In the last four weeks as market participants have reassessed relative risk premiums, they have found it increasingly easy to identify currencies which at the margin are looking more attractive than the US dollar. As a result, the dollar has weakened both against developed world and emerging market currencies. This weakness is acquiring momentum, and may have further to run.

    0
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    Gavekal Research

    Video: The Threat To Chinese Tech

    The US is deepening its effort to limit Chinese technology giant Huawei’s access to components that rely on American design, which may prevent Huawei from rolling out 5G networks. The US is also broadening its efforts to constrain Mainland tech firms by using sanctions that impact suppliers to China’s government and military.

    0
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    Gavekal Dragonomics

    The Property Balancing Act

    Local governments are balancing between encouraging housing construction and containing excess housing inventory. Although they have struck a balance so far, Rosealea argues that the growing vacancies in lower-tier cities coupled with depressed household consumption render current policies unsustainable in the long run.

    0
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    Gavekal Research

    Accelerating Into Inflation

    Long-time readers will be familiar with Gavekal’s Four Quadrants framework, which describes how the economy alternates between periods of inflation and deflation, and cycles from boom and bust and back again, and which we use to illustrate which asset classes investors should favor and when. Although this is one of Gavekal’s oldest frameworks, it provides an extremely useful way to think about how the macroeconomic environment is set to evolve...

    5
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    Gavekal Research

    US Reopening Tested By Regional Covid Outbreaks

    Many US states begun to re-open their economies without getting their Covid-19 outbreaks firmly under control. They initially did this without experiencing a spike in infection levels, but the situation has now changed, writes Arthur. The question is whether this new wave of the epidemic proves severe enough to compel states to roll back economic reopening.

    4
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    Gavekal Research

    A Fed Reality Check

    Ahead of the FOMC meeting that concludes Wednesday, there has been a growing volume of chatter that the Federal Reserve is moving to scale back its easing measures. The talk has been further amplified by May’s surprisingly strong employment report, with some commentators even warning of an imminent taper tantrum in the markets.

    0
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    Gavekal Dragonomics

    US Politics Versus Chinese Stocks

    Financial markets are the latest field in which US-China political tensions are playing out. Thomas describes two lines of attack US hawks are pursuing against China: blocking Chinese firms from US equity markets and pressuring US asset managers to avoid Chinese equities. The risk associated with Chinese stocks has therefore materially increased.

    2
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    Gavekal Research

    What US Payrolls Do And Do Not Mean

    May’s US payrolls report clearly came as a shock to many. Non-farm jobs climbed 2.51mn month-on-month, and the unemployment rate fell to 13.3%. Wrong-footed by the stronger-than-expected figures, investors rushed to bid up US equities. But while the payrolls are good news at the margin, it should not be taken as a reason to rush into equities.

    0
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    Gavekal Dragonomics

    A Charm Offensive For Supply Chains

    As multinationals in China face growing pressure to shift their supply chains elsewhere, China’s government is doing everything it can to hold on to them. As Dan explains in this piece, China’s ability to get businesses back on their feet after the Covid-19 lockdown is a great advertisement for its attractiveness as a place to do businesses.

    4
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    Gavekal Research

    Europe’s Big Guns

    If the worry was that European Central Bank activism was threatened by German judicial chastisement, Christine Lagarde yesterday showed no sign of being cowed. The Pandemic Emergency Purchase Program was topped up to an almost bazooka-qualifying €1.35trn from €750bn and extended a further six months to June 2021. The move added fuel to the rally in euro assets. Rightly so.

    0
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    Gavekal Research

    Picking Winners In Asian Currencies

    A terms of trade improvement and the relative resilience of electronics demand have helped support Asian currencies through the coronavirus crisis despite the deep contraction in world trade. Now as the world emerges from lockdown, any recovery in external demand, coupled with any revival of risk appetite that sees capital flow out of the safe haven US dollar, will be positive for Asian currencies.

    5
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    Gavekal Research

    Video: The Upsurge In Oil

    The price of Brent crude oil has doubled in the past six weeks, supported by the beginning of a recovery in demand as economies come out of lockdown and by expectations that the Opec+ cartel will extend the deep production cuts it agreed in April. Tom weighs the forces likely to drive the oil market over the coming months.

    0
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    Gavekal Research

    Europe Flexes Its Fiscal Muscles

    Another day, another big fiscal expansion from Germany. Yesterday, Berlin outlined a €130bn stimulus package, representing 3.8% of GDP. If there was any doubt, Europe has clearly ditched its decade-long infatuation with austerity and is back in the Keynesian camp. This situation is bullish for eurozone stocks and in time could yet spur a long-forgotten problem—inflation.

    0
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    Gavekal Research

    To Rotate, Or Not To Rotate?

    This week readers have heard a variety of views from Gavekal partners on the outlook for equity markets. What is not in doubt is that since hitting a peak on February 20, US growth stocks have outperformed value plays by a whopping 17%. Wherever one stands on the macro situation, there certainly seems to be an argument for rotating.

    4
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    Gavekal Research

    India Macro Update: End Of The Growth Story

    India has experienced a draconian lockdown that could result in output shrinking by -25-45% in the second quarter of the year. The result will be a sharp worsening in the fiscal deficit and a low structural growth rate that leaves India as just another emerging market rather than a growth story to rival China’s. Udith and Tom consider what it means for asset markets.

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