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Gavekal Research
Charles Gave
Apr 13th 2021
The Ant And The Grasshoppers
In the last few days, Chinese policymakers have stepped up the campaign to rein in their domestic tech giants, slapping Alibaba with fines of US$2.75bn and forcing the restructuring of Alibaba spin-off Ant Financial. Their action is in stark contrast to the inaction of regulators in western countries. But this is hardly the only contrast between China and the west.
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Gavekal Dragonomics
Xiaoxi Zhang, Rosealea Yao
Apr 12th 2021
Curbing Mortgage Enthusiasm
China’s regulators are strengthening their curbs on the property market as its post-pandemic exuberance continues. In this piece, Xiaoxi and Rosealea explain the central bank’s latest moves to curb disguised mortgage lending and cap overall loan growth. The main effect of these controls will be to slow lending to households and cool housing prices.
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Gavekal Research
Charles Gave
Apr 12th 2021
A Case Study: US Long Bonds
With recent moves at the long end of the US treasury curve causing consternation among investors everywhere, Charles dusts off his decision rules for US long bonds to see what they are telling us about the present state of the market and concludes that it is not yet time to lengthen portfolio duration.
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Gavekal Research
Tan Kai Xian
Apr 12th 2021
Living In A Stock Picker’s Market
When only one major factor affects equities, correlations rise. At such points, the name of the game is not to pick the best stocks, but to get the ebb and flow of that key factor right. At other times, multiple factors are in play and these affect different stocks differently; in such periods, picking winners is vital. For most of last year, the US market was macro-dominated as the Covid-induced economic collapse caused equity correlations to...
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Gavekal Research
Tan Kai Xian, Udith Sikand, Louis Gave
Apr 09th 2021
Webinar: Global Investment Roundtable, April 2021
In the long years between the 2008-09 financial crash and the 2020 Covid crisis the US stock market massively outperformed equities in the rest of the world. In recent quarters, however, the US market has lost its edge. Yesterday, Louis, KX and Udith weighed the merits of ex-US equities versus US stocks in a post-pandemic world.
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Gavekal Research
Cedric Gemehl
Apr 09th 2021
The Eurozone’s Sub-Surface Slack
At first glance, with the unemployment rate down from a peak of 8.7% last September, it looks as if the degree of slack in the eurozone’s labor market may be small by historical standards. However, a look at the level of employment (including employees and self-employed) shows that employment is down by 3.1mn compared with the pre-pandemic baseline.
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Gavekal Research
Yanmei Xie
Apr 09th 2021
Video: Procedural Shortcuts And Political Roadblocks
For a president with a scant majority of one in the US Senate, Joe Biden has an extremely ambitious legislative agenda, starting with a US$2trn infrastructure spending and tax bill. Yanmei examines the procedural shortcuts and political roadblocks that may either smooth or obstruct Biden’s proposed legislation to assess how much of the program is actually likely to make it into US law.
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Gavekal Dragonomics
Wei He
Apr 08th 2021
The Fall And Rise Of Bond Inflows
Foreign investors’ holdings of Chinese onshore bonds declined by RMB9bn in March, after rising RMB89.5bn in February. In this Quick Take, Wei explains how narrowing yield spreads and the decline of the renminbi against the dollar led to this sharp reversal, and what comes next for Chinese bond inflows.
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Gavekal Research
Tan Kai Xian, Cedric Gemehl, Udith Sikand
Apr 08th 2021
Living With The Next Covid Wave
Global markets are looking ahead to a post-pandemic world, but Covid-19 is still very much with us. Globally, new infection rates have risen sharply since late February, reversing their earlier decline. In the last few weeks, the US has experienced an alarming uptick in infections. The European Union is struggling to contain its latest Covid wave, which in several major countries compares with November’s for severity. And across the developing...
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Gavekal Research
Will Denyer
Apr 07th 2021
When Do We Begin To Worry About Cost Pressures?
For the last 13 months or so, ever since the Covid pandemic started to grip, the broad US equity market has been driven above all by fears and hopes for top-line revenue growth. Last spring, as investors anticipated a collapse in revenues, the market collapsed. Policy support halted the slide, and over recent months, as investors have looked forward to the end of the pandemic and a rebound in revenues, the broad market has scaled new highs.
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Gavekal Dragonomics
Arthur Kroeber
Apr 07th 2021
The Taiwan Risk
With the hardening of the US-China strategic rivalry and technology’s central role in that rivalry, the possibility of a war over Taiwan is one which must be considered. In this report, Arthur explains the importance of the island to both countries and concludes that while the risk of war remains low, it is likely to rise in the next several years.
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Gavekal Dragonomics
Xiaoxi Zhang
Apr 06th 2021
The Digital Renminbi Steps Out
The People’s Bank of China is getting closer to rolling out its digital currency, with ever-broader and more public trials of the technology. The focus has been mostly on domestic uses and security issues—but there is more to come. In this piece, Xiaoxi explains what the PBOC is doing to prepare the digital renminbi for use in international trade.
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Gavekal Research
Anatole Kaletsky
Apr 06th 2021
Who’s Afraid Of The Big Bond Wolf?
For the past two months, financial analysts all over the world have been obsessed by two closely related questions: (i) How much further will US bond yields rise, and how fast? (ii) Will rising bond yields kill the bull markets in global equities and other risk assets?
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Gavekal Dragonomics
Rosealea Yao
Apr 02nd 2021
A Difficult Decoupling For Australian Iron Ore
Chinese iron ore imports grew 9.5% in 2020 to 1.17bn tons despite rising tensions with Australia, China’s largest supplier. Top leaders are calling for greater supply-chain security and reduced dependence on Australian materials, but Rosealea explains that this is easier said than done given China’s immense appetite for the commodity.
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Gavekal Research
Anatole Kaletsky, Cedric Gemehl, Nick Andrews
Apr 02nd 2021
Webinar: The Macro And Market Implications Of Europe’s Pandemic Response Shambles
As the European Union’s vaccination program stumbles from one misstep to another, investors are being forced to put back their expectations for European economic recovery, while a procurement scandal in Germany raises the probability that the pandemic will have a long-term effect on the EU’s political landscape. Anatole, Cedric and Nick examined the near-term market impact and long-term economic policy implications.
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Gavekal Research
Tan Kai Xian
Apr 02nd 2021
Strategy Monthly: The Case For Ex-US Equities
The US trade deficit cycle suggests the world is heading towards a protracted period of US dollar depreciation. With valuations outside the US relatively attractive, and deglobalization meaning ex-US equities will offer greater diversification benefits in future, investors should consider increasing their exposure to ex-US equities.
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Gavekal Research
Yanmei Xie, Tan Kai Xian
Apr 01st 2021
The Costs Of Biden’s Spending Plan
On Wednesday, Joe Biden unveiled an ambitious US$2trn program of public infrastructure investment, to be funded by corporate tax hikes. In a nutshell, the plan is a proposal to transfer wealth from the broad US market to sectors favored by the government. The sectors that benefit from this largesse stand to enjoy a multi-year boom, with the cost to be borne by the rest of the market. However, the extent of this cost should not be exaggerated....
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Gavekal Research
Louis Gave
Mar 31st 2021
Abundance And Shortages
Over decades, investors have gotten used to living in a world of plenty, in which capital, labor, commodities and knowledge have all been in abundant supply. Today, however, while the world remains awash with cheap capital, there are signs that the supplies of labor, commodities and—most ominously of all—knowledge may be facing tightening constraints. In this paper, Louis asks whether, after years of abundance, the world may be facing a...
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Gavekal Dragonomics
Wei He
Mar 31st 2021
What To Do About Capital Inflows
The surge of foreign interest in China’s bond market has created a novel economic problem for its policymakers: managing sizable inflows of portfolio capital which are pushing up its currency. In this piece, Wei explains how China has tried to encourage capital outflows to balance those inflows, and why that is becoming less necessary.
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Gavekal Research
Will Denyer
Mar 31st 2021
Video: Unpacking The NFT Hype
What’s a “non-fungible token”? Why would anyone pay millions of dollars for one? And what do they have to do with blockchains? In this video interview, Will unpacks the latest craze to explain what buying an NFT actually gets you, and considers whether this is a useful new technology or yet another case of blockchain hype.
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Gavekal Research
Udith Sikand
Mar 31st 2021
Who Will Buy India Now?
On Tuesday, the US dollar index hit a five-month high and treasury yields maintained their relentless march higher. On the same day, the Indian rupee—this year’s best performing emerging market currency—plunged to a one-month low. A mix of tighter financial conditions and a worsening Covid-19 situation has investors reassessing the surprising notion of India as an EM haven. They are right to do so, for the macro tailwinds driving the rupee’s...
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Gavekal Research
Nick Andrews
Mar 30th 2021
Yield Differentials Matter—For Now
As the first quarter draws to a close, the US dollar has confounded December’s bearish consensus expectations by generating a positive total return versus the euro of 3.8%. As Louis and Will and KX explained last week, in retrospect the US dollar’s performance over the last three months is not that surprising. The question now is: how long will these near-term factors persist?
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Gavekal Research
Tom Holland
Mar 29th 2021
Like A Hell-Broth Boil And Bubble
Last week began with a -15% fall in the Turkish lira in Asian trading on Monday morning. This week started with a -16% fall in the share price of Nomura in Asian trading on Monday morning. It would be easy to dismiss the two events as entirely unrelated. At first glance they have nothing in common, but in this piece Tom takes a closer look.
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Gavekal Dragonomics
Ernan Cui
Mar 26th 2021
Speeding Ahead On Vaccination
China administered over 3mn doses of Covid-19 vaccines on Thursday, accelerating its vaccination drive from around 1mn doses per day in February and 2mn per day last week. In this Quick Take, Ernan explains why this acceleration is not enough to meet the country’s vaccination targets, as the government’s main hurdle is not production but logistics.
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Gavekal Research
Tom Miller
Mar 26th 2021
When Will Borders Reopen?
Even as a new Covid wave sweeps across Europe, the European Union has gotten to work on a Digital Green Certificate to allow resumption of travel, within the bloc and beyond. Health passports that securely document vaccines and test results for travelers are key to opening up borders again. But as Tom explains, getting countries to agree on rules and standards will be a painful slog.
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Gavekal Research
Louis Gave
Mar 26th 2021
Rewind To Look Ahead
There has hardly been a single piece of news in the last three months that could have been construed as euro-bullish. And yes, the euro has weakened. But given the newsflow, it is remarkable that the euro is not down a whole lot more. So, considering the newsflow and the 200bp spread between 10 year treasuries and bunds, why hasn’t the US dollar rallied more?
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Gavekal Research
Will Denyer, Tan Kai Xian
Mar 26th 2021
Webinar: The Future Of The Great US Rotation
Much has happened in the US in the last eight weeks. More than 80mn Americans have been vaccinated against Covid, Congress has passed a stimulus bill worth 9% of GDP, and the Fed has confirmed its determination to remain among the most peaceable of inflation doves. In response, 10-year US treasury yields have leapt, and the rotation from growth stocks to value has grown more violent even as the broad equity market has ascended new heights. In...
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Gavekal Dragonomics
Thomas Gatley, Ernan Cui
Mar 25th 2021
For Want Of A Chip
China’s car market is starting to show the first effects of the global chip scarcity, but Thomas and Ernan write that the shortage might just be starting to bite. Supply could resume by Q3, but even a temporary drag on auto production will have material consequences for China’s industrial sector and the economy at large.
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Gavekal Research
Cedric Gemehl
Mar 25th 2021
The Future’s Clear, The Future’s Green
Europe’s Green parties used to be denigrated by their political opponents as “watermelons”: green environmentalists on the surface, red hard-leftists beneath. In Germany, this attempt to marginalize the Greens by associating them with the discredited revolutionary socialists of 50 years ago failed dismally. Having established their credibility in regional politics, notably in Germany’s third richest state of Baden-Württemberg, where they have...
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Gavekal Research
Udith Sikand
Mar 25th 2021
Video: Pushing Less Hard On The String
Concluding a long-awaited policy review, last week the Bank of Japan signaled that after almost a decade of pursuing titanic quantitative easing targets, it will be looking to make fewer asset purchases from now on. In this short video interview, Udith weighs the implications for Japan’s economy, its bond market, the yen, and Japanese equities.
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Gavekal Research
Will Denyer, Tan Kai Xian
Mar 24th 2021
The Short And Long For The US Dollar
After ending 2020 amid heavily negative sentiment, the US dollar has confounded near-term bears by edging higher year-to-date. The DXY dollar index has gained 2.75%, clawing back just over a third of its -7.5% decline in 2020. Perhaps this should not be too surprising. First, by the end of 2020, the US dollar was no longer blatantly overvalued. Second, the DXY found support at 90, its low of early 2018. Third, the near-term outlook for nominal...
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Gavekal Dragonomics
Rosealea Yao
Mar 24th 2021
Slowing Down Steel Production
Policymakers have pledged to “ensure a year-on-year decline” in steel output this year to help China achieve peak carbon-dioxide emissions by 2030, but these curbs will not reduce the country’s underlying demand for steel. In this report, Rosealea analyzes the feasibility of this target and its consequences for the steel industry.
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Gavekal Research
Louis Gave
Mar 24th 2021
Financial Manias: The Crypto Craze
After scrutinizing the electric car craze last week, today Louis turns his gimlet eye on crypto-currencies. Yes, bitcoin now has a market capitalization of US$1trn, but what does it actually do? What value does it add to economies and societies? On close examination, Louis finds that the functions of bitcoin are relatively straightforward, if not particularly edifying. And more to the point, they are already attracting the sort of attention that...
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Gavekal Research
Tan Kai Xian
Mar 23rd 2021
The Strengthening Case For Value
In the last two weeks, US value stocks have given up some of the outperformance relative to growth that they racked up over the previous five. So has value’s spurt of outperformance now run its course, leaving the S&P 500 value index’s 11pp of outperformance relative to growth since the beginning of February as just a counter-trend blip against a backdrop of more than a decade’s underperformance? Or are the relative gains in value since the...
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Gavekal Research
Udith Sikand
Mar 22nd 2021
The Extent Of Turkish Contagion Risk
After four and a half months in which Turkish central bank governor Naci Ağbal had raised policy rates and restored a measure of confidence in the Turkish lira, on Saturday Turkish president Recep Tayyip Erdoğan fired Agbal and replaced him with a loyalist who has echoed the president’s conviction that higher interest rates lead to higher inflation.
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Gavekal Dragonomics
Arthur Kroeber, Dan Wang
Mar 22nd 2021
What Strategic Competition Looks Like
Last week’s diplomatic meeting between China and the US was marked by harsh rhetoric as both sides used the event to signal toughness to their home audiences. In this report, Arthur and Dan outline what policy tools Beijing and Washington have at their disposal and why the Biden administration is struggling to articulate a clear China strategy.
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Gavekal Research
Vincent Tsui
Mar 19th 2021
Weak Links No Longer
Once upon a time, a steep rise in US yields coupled with capital outflows—like those we’ve seen in recent weeks—would have led to intense financial stresses in Asian emerging markets. Weak-link economies with fragile fiscal positions and precarious external balances would have been vulnerable to abrupt sell-offs and destabilizing currency depreciation. As sentiment swung risk-off, investors would have gotten badly trampled in the rush for the...
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Gavekal Dragonomics
Andrew Batson, Thomas Gatley, Dan Wang, Ernan Cui
Mar 19th 2021
Webinar: Making Sense Of China’s Grand Plans
The annual session of China's National People's Congress has wrapped up with the approval of a new five-year plan, a sweeping document that promises not only technological self-sufficiency but a different style of economic management in coming years. In this webinar, our China experts unpacked what these grand promises really mean, and also discussed the substantial recent correction in Chinese equities and where markets are headed...
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Gavekal Research
Louis Gave
Mar 19th 2021
Financial Manias: The Electric Car Craze
Almost wherever you look today, there are bubbles: in SPACs, in crypto, and in electric vehicles. In this report, the first of a series on today’s financial manias, Louis reviews Gavekal’s tried and tested framework for analyzing bubbles, and applies it to today’s mania for electric vehicles. He concludes that the electric car bubble is unique in history, and that the prognosis for many investors in the sector is less than encouraging.
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Gavekal Research
Will Denyer
Mar 18th 2021
Markets After The Fed
The Federal Reserve saw no need to ease monetary policy any further at its March meeting which concluded Wednesday. That’s no surprise. Policy is already extremely easy, and growth and inflation are already looking up. Indeed, the Fed has pumped so much money into the system that the one policy change it felt compelled to make was to increase counterparty limits on its reverse repo facility from US$30bn to US$80bn in response to concerns that...
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Gavekal Research
Vincent Tsui
Mar 18th 2021
Video: Conflicting Forces In The Hong Kong Market
The Hong Kong stock market started 2021 as one of the world’s best performing, gaining 14% in the first six weeks of the year. In the weeks since, however, Hong Kong-listed equities have given back half those gains as sentiment has soured. In this short video interview, Vincent weighs the opposing forces at work in the local market to assess how they are likely to play out in the future.
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Gavekal Dragonomics
Ernan Cui
Mar 18th 2021
The New Plan For Urbanization
The 14th five-year plan outlines significant changes to China’s household registration (hukou) system. In this report, Ernan writes that this new policy direction is to reduce the significance of the system over time by reducing urban/rural inequality. Rural areas will benefit, but at a cost to China’s overall economic growth.
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Gavekal Dragonomics
Xiaoxi Zhang
Mar 17th 2021
Time To Fix Credit Ratings
2021 could be a pivotal year for the overhaul of credit ratings, which have long been an impediment to the functioning of China’s corporate bond market. The defaults of a few AAA-rated state firms have now pushed regulators into tackling long-standing problems, at a moment when cyclical and structural conditions are favorable for reform.
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Gavekal Research
Louis Gave
Mar 17th 2021
Attack Of The Drones
Military technology is a lynchpin of the geopolitical balance. And the superiority of US weaponry has been one of the principal factors underpinning the US dollar’s status as the world’s reserve currency. However, recent events raise important questions about whether the US can retain this superiority.
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Gavekal Research
Tan Kai Xian
Mar 16th 2021
Let's Twist Again
When they sit down on Wednesday, the members of the Federal Open Market Committee will face a couple of knotty questions. Should they attempt to do anything about rising bond yields? And if so, what?
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Gavekal Research
Cedric Gemehl
Mar 16th 2021
How Bad Is Europe’s Vaccine Problem?
The Covid news from Europe only seems to lurch from bad to worse. The suspension by several European Union countries of distribution of AstraZeneca's Covid vaccine over possible side-effects threatens to disrupt the EU’s vaccination programs and damage public confidence in vaccines in general. So how bad are things likely to get?
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Gavekal Dragonomics
Dragonomics Team
Mar 16th 2021
Looking Past The Base Effect
The collapse in activity during the Covid-19 lockdowns in early 2020 has ensured some eye-popping economic data for January-February 2021. In this report, the Dragonomics team looks past base effects to find consumption and services still on track to normalize this year, while industry and property will likely cool as policy tightens at the margin.
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Gavekal Research
Louis Gave
Mar 15th 2021
When Currencies Misbehave
In recent days, investors have had to absorb a series of troubling headlines from Europe, yet news that should be either bearish for the euro or bullish for the dollar failed to keep the euro from gaining last week. Meanwhile, the yen continues to grind lower. Why is that, and what does the inability of the dollar to rally tell us about the future?
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Gavekal Dragonomics
Andrew Batson
Mar 12th 2021
There Is No Plan To Boost Consumption
Consumption and domestic demand are everywhere in the Chinese government’s latest policy rhetoric, with high-level promises to “boost consumer spending across the board” and “create a robust domestic market.” In this piece, Andrew explains why the new five-year plan is not actually a plan to boost consumption.
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Gavekal Research
Yanmei Xie
Mar 12th 2021
The New High-Pressure US Economy
Having just signed off on US$1.9trn of Covid relief, the US government has now spent US$5trn on support measures since the pandemic began. Unfazed by warnings that it could overheat the economy and spur runaway inflation, the White House plans another big package of public investment that aims to tackle climate change, upgrade US infrastructure and revamp education. Joe Biden seems intent on spurring a “high-pressure” economy.
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Gavekal Research
Cedric Gemehl, Nick Andrews
Mar 12th 2021
The Yield Curve Control That Dare Not Speak Its Name
A year ago today, European Central Bank president Christine Lagarde said “we are not here to close spreads”. With a fair amount of water having flowed under the bridge since then, the spread between 10-year Italian BTP’s and bunds has fallen from 261bp to just 94bp. So when on the anniversary of that proclamation, she said the “ECB is not doing yield curve control”, one could be forgiven for demurring.
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Gavekal Research
Udith Sikand, Tom Miller
Mar 12th 2021
Webinar: The Shape Of India's Recovery
With the release of pent-up demand and more fiscal spending, India's economy is rebounding sharply. Its growth potential is also being raised by a new push towards privatization and an industrial policy that supports manufacturers. The question is whether India can overcome institutional lethargy and make these policies work. Tom and Udith addressed such issues and the latest market developments impacting sub-continent assets.
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Gavekal Research
Anatole Kaletsky
Mar 11th 2021
Stop Worrying About Bond Yields And Buy Equities
Is it time to buy or sell global equities? I think investors should be adding exposure for four broad reasons. As argued in February, during the last mini-correction the global bull market that began on March 20, 2020, is still in its early stages and the cyclical economic problems that usually provoke bear markets are not yet on the horizon.
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Gavekal Research
Tom Miller
Mar 11th 2021
Is The Belt And Road Turning Green?
China is trying to clean up its domestic energy sector, but critics accuse it of exporting an outmoded and dirty energy model around the world under the guise of the Belt and Road Initiative. In 2019, Xi Jinping pledged to turn the BRI “green and clean.” Tom argues that there may have been a moderate shift towards green energy, but not a decisive one.
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Gavekal Research
Louis Gave, Charles Gave, Didier Darcet
Mar 10th 2021
Gold, Renminbi Bonds And The Clash Of Empires
As the US expands its deficits to pay for pandemic relief, emerging economies that use the US dollar for reserve backing have reason to fret. China is being incentivized to accelerate development of the renminbi as both an international standard and store of value. Louis, Charles and Didier offer a potential roadmap for how renminbi internationalization may unfold.
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Gavekal Dragonomics
Thomas Gatley
Mar 10th 2021
The Capex Renaissance Is Coming
2021 is set to be a strong year for capital spending by Chinese companies. In this report, Thomas explains why solid returns on assets across the industrial sector and low borrowing costs are creating incentives for firms to invest in new capacity. This should allow policymakers to cut back on spending without tanking overall investment.
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Gavekal Research
Charles Gave
Mar 10th 2021
Updating The Malthusian Constraint
In June 2019, I argued that big shifts in the US economy and financial markets largely result from changes in the relative price of energy. If oil prices are rising faster than nominal GDP, this points to energy shortages and more of the economy’s value-added going as the “miners’ rent”. This situation points to rising inflation and contracting price/earnings ratios.
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Gavekal Research
Louis Gave
Mar 09th 2021
The Bursting Of The Electric Car Bubble, And Consequences
A friend recently sent me the following quote from the Barrow Hanley small-cap manager, Jim McClure: “Should an investment narrative become particularly disputed, the best course of action is to identify the camp that is more emotional, and bet heavily against them”. This was good advice a few years back when anti-Tesla/anti-Elon Musk sentiment was rampant. And it would have been good advice again in early January, when the pendulum had swung...
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Gavekal Research
Will Denyer
Mar 09th 2021
Video: US Equities In A Changed Macro Environment
US tech stocks have been hit hard, as attention focuses on the underlying quality of themes like the migration to electric vehicles. Yet this shakeup is also happening against the backdrop of a fast-changing investment environment due to a strengthening US growth outlook, rising inflationary pressure and an unnerved bond market which is driving yields higher. In this video interview, Will seeks to unpack these dynamics in order to navigate a...
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Gavekal Research
Andrew Batson
Mar 08th 2021
The Missing Target
For four decades, every five-year plan has included a target for average GDP growth. The latest plan, presented last Friday, did not. This points to China's leadership having a more complex view of development goals argues Andrew. These now include a range of metrics including technological capability, national security, financial stability and living standards.
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Gavekal Research
Udith Sikand, Tom Miller
Mar 08th 2021
India Macro Update: Reading The Recovery
India is enjoying a V-shaped recovery and there are hopes that high fiscal spending and favorable base effects can push GDP growth above 10% in the coming fiscal year. The problem is that the private sector remains weak after a savage Covid-19 experience. Udith and Tom digest the macro currents and on balance conclude they would rather be in Indian equities than bonds.
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Gavekal Dragonomics
Wei He
Mar 05th 2021
The New Normal For Infrastructure
Officially, the normalization of China’s fiscal policy will be moderate in 2021: the government budget will narrow to 3.2% of GDP from 3.7%. But public-works spending is China’s true fiscal policy, and tighter financing does not bode well. Infrastructure investment is likely headed for a fourth year of negligible growth, and could even decline.
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Gavekal Research
Will Denyer
Mar 05th 2021
Bond Vigilantes Keep Fighting The Fed
Jerome Powell tried to calm the bond market yesterday by repeating that it’s likely to be a while before policy normalization begins. Growth and inflation indicators are up, but the Fed expects much of this to be “transitory”. In short, Powell remains a steadfast dove. So why are bond yields, real and nominal, still ticking higher?
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Gavekal Research
Louis Gave, Anatole Kaletsky, Charles Gave
Mar 05th 2021
Webinar: Global Investment Roundtable, March 2021
As Covid-19 vaccinations are cranked up and Congress gets ready to dole out stimulus measures, US growth expectations have risen along with inflation concerns. In response, bonds have sold off and equity markets have shuddered. In our monthly global investment roundtable, Gavekal partners discussed this confluence of events and addressed what it means for risk assets.
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Gavekal Research
Tan Kai Xian
Mar 04th 2021
Enduring Cognitive Dissonance
As yields continue to test new highs, Jay Powell is set to deliver a speech today reasserting the Federal Reserve’s view that inflation can push above its 2% target due to base effects and pent-up demand without monetary tightening being needed. This could offer temporary relief to equity investors, but resulting uncertainty in the bond market is likely to ensure an unstable trading environment.
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Gavekal Research
Vincent Tsui
Mar 04th 2021
Video: Will Bond Yields Topple Asia's EMs?
Rising treasury yields are rarely a good thing for emerging markets, as this implies tighter financing conditions. The good news of sorts is that Asia's external position is strong due to buoyant exports, yet domestic demand has been constrained by the pandemic and a slow vaccine rollout.
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Gavekal Research
Nick Andrews
Mar 03rd 2021
The Problem With Europe’s Inflation
Later this year, eurozone consumer price inflation should hit its highest level in more than a decade. We found out on Tuesday that February’s consumer prices rose by 0.9% year-on-year, and more price hikes are in the works. Alas, this is not the type of inflation that the European Central Bank has been seeking to engineer for the best part of a decade.
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Gavekal Dragonomics
Ernan Cui
Mar 03rd 2021
An Unrealistic Vaccine Target
China’s government is aiming for 40% of its population to have received at least one dose of a Covid-19 vaccine by mid-2021, according to a senior health adviser. In this Quick Take, Ernan explains why such a target is unrealistic given China’s current vaccine production capacity and its obligations to other countries.
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Gavekal Research
Tom Miller
Mar 03rd 2021
India’s New Industrial Policy
Industrial policy is back in vogue, especially in India. Prime Minister Narendra Modi’s government will spend US$27bn on subsidizing manufacturing, as it seeks to forge a “Self-Reliant India.” Given India’s unhappy history of chasing self-sufficiency, this raises concerns. Yet “self-reliance” does not necessarily mean protectionism, argues Tom.
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Gavekal Research
Louis Gave
Mar 02nd 2021
The Oil-US Dollar Interaction
The past year has seen two important developments in the oil industry. Firstly, US oil production has rolled over by between -2mn and -2.5mn bpd and there are reasons to think this situation lasts until next year. Secondly, oil prices, which were in a clear bear market between late 2018 and early 2020 are now in a bull market. Hence, as US oil production falls and oil prices rise, energy may again become a major contributor to the US trade...
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Gavekal Research
Dan Wang
Mar 02nd 2021
Chips And Cross-Straits Tensions
Taiwan’s position at the core of the global semiconductor industry has never looked more secure: it is now the undisputed leader in advanced chip manufacturing. But does that success increase the risk of military aggression from China? While Beijing’s true intentions are difficult to read, semiconductors are not a plausible trigger for a hot conflict.
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Gavekal Research
Louis Gave
Mar 01st 2021
Productive Bubbles And Unproductive Bubbles
There are two kinds of bubbles: bubbles in productive assets like railways, and broadband lines, and bubbles in scarcity assets like tulips and gold. In turn, these bubbles can be funded through equity, or by debt. The best kind of bubble is in productive assets, funded by equity and the worst kind is in unproductive assets, funded by debt, especially if the leverage is hidden.
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Gavekal Research
Will Denyer
Mar 01st 2021
Strategy Monthly: The Threat Of Rising Inflation And Yields
The roll-out of vaccines in the US is upending the investment environment, as the focus shifts beyond the pandemic to full-throttled economic recovery. With both monetary and fiscal policy set to remain loose, nominal growth could soon rip. Hopes for “normalization” have driven up inflation expectations and freaked out bond investors. Those getting fixed interest are right to be unnerved, as production capacity is fairly tight, inventories are...
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Gavekal Research
Louis Gave
Feb 26th 2021
What I’ve Given Up For Lent
For Lent this year I decided to give up investing in gold miners. My priest said this was like giving up broccoli; for Lent you are meant to forgo something that feels good. I replied that the Church banned self-flagellation in the 14th century; by giving up gold, I would free my mind for higher purposes. I still ended up with three “Hail Marys” and three “Our Fathers” for penance.
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Gavekal Research
Cedric Gemehl, Nick Andrews, Anatole Kaletsky
Feb 26th 2021
Webinar: Europe And The Politics Of Exiting The Pandemic
Europe is at a strange juncture, as governments remain committed to massive fiscal and monetary support and refuse to rush into any economic reopening before Covid vaccinations are deployed. Yet despite this collective risk aversion, Italy has appointed a new technocratic government run by Mario Draghi that looks to have broad political support and a fairly radical plan for change. Our team explored Europe's exit from the pandemic and asked...
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Gavekal Research
Charles Gave, Didier Darcet
Feb 26th 2021
Inflation And The Stock Market
Despite a roiling US bond market sell-off, equity investors had until Thursday taken comfort from the Federal Reserve saying it would stay easy for longer. They were also fairly relaxed about a gentle rise in inflation, which seemed to be part of a "normalization" process as Covid-19 vaccines do their job and activity picks up. Charles and Didier are not so sure, and in this paper test the notion that limited inflation can, in fact,...
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Gavekal Research
Will Denyer
Feb 25th 2021
Video: Bitcoin—Money Or Snakeoil?
Will Denyer examines the forces behind the eye-watering run-up and eye-popping volatility of bitcoin, and delves behind the near-term moves in crypto-currency markets to ask whether bitcoin and its ilk will ever gain traction as a unit of account, means of exchange or store of value.
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Gavekal Research
Vincent Tsui, Udith Sikand
Feb 25th 2021
Emerging Markets And Rising Yields
As 10-year US treasury yields have pushed higher, investors have begun to reassess their enthusiasm for emerging market assets. Historically, rising US yields has seldom been accompanied by emerging market outperformance. Yet rising US yields are not necessarily negative for EMs, and there are reasons to think this time may well be different, at least for some EMs.
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Gavekal Dragonomics
Thomas Gatley
Feb 25th 2021
The Fate Of A Liquidity-Driven Rally
The writing is on the wall for China’s post-Covid bull market as the underlying credit and profit cycles that typically drive prices over the medium term are turning down in 2021. In this report, Thomas explains why liquidity flows can trump these fundamentals for a while, but not indefinitely.
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Gavekal Research
Will Denyer
Feb 24th 2021
It’s A Policy-Driven Market
US bond yields are rising as the growth outlook is boosted by the vaccine roll-out and sustained monetary and fiscal stimulus. US value stocks and the sectors hit by Covid restrictions are ripping. Growth investors, in contrast, are spooked about this situation, as much of their worth comes from earnings discounted far into the future. The investors' reactions to Federal Reserve Chair Jay Powell’s Congressional testimony on Tuesday reminded...
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Gavekal Research
Louis Gave
Feb 24th 2021
Beautiful In Heaven
Like the players on a rugby team, assets in a portfolio should both be all-rounders and excel at a specific job. For four decades, US treasuries both offered a stream of positive real yields and provided an anti-fragile portfolio hedge in times of market turbulence. Now however, Louis argues that US treasuries are at risk of falling from the position of anti-fragile favor.
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Gavekal Research
Cedric Gemehl
Feb 23rd 2021
No Exit
“We are not here to close spreads,” proclaimed European Central Bank president Christine Lagarde last March. “This is not the function or the mission of the ECB.” After the market took her at her word, Lagarde hastily back-tracked, and the ECB duly spent the following months doing exactly what Lagarde had said it would not.
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Gavekal Dragonomics
Andrew Batson
Feb 23rd 2021
To Hold Back The Tide Of De-Industrialization
China’s government is focusing on a new economic metric: the manufacturing share of GDP, which looks to feature in the next five-year plan. Rather than accept de-industrialization, it wants “stability” in manufacturing. In this piece, Andrew explains why China is worried about the fall in the manufacturing share, and whether it can be stopped.
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Gavekal Research
Anatole Kaletsky
Feb 22nd 2021
Can Covid Vaccines Cure The Pound?
The British pound has been the strongest major currency so far this year, contrary to Anatole’s expectations at the end of 2020. In this piece he outlines three reasons for sterling’s outperformance, but maintains that in the long term the pound will be forced lower.
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Gavekal Research
Tan Kai Xian
Feb 22nd 2021
The Changing Composition Of US Inflation
Investors are all in a tizz about US inflation as the economy begins to normalize and the effect of a huge fiscal stimulus is factored into calculations. Inflation expectations are above the Federal Reserve’s target at 2.2% and energy base effects mean the personal consumption expenditure reading is sure to rise from December’s 1.3%. So far, market action has been focused in the bond market (see A Discussion On Treasury Yields) but equity...
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Gavekal Research
Cedric Gemehl, Nick Andrews
Feb 19th 2021
Draghi’s Reform Plan And Asset Prices
Newly installed as Italy’s prime minister at the head of a broad coalition, on Wednesday Mario Draghi outlined an ambitious agenda of structural reforms. Notably, the former European Central Bank chief wants to oversee a root-and-branch overhaul of Italy’s tax system, while investing in the education system and streamlining public administration. His first task will be to steer Italy through the pandemic. But beyond that, Draghi’s plans could...
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Gavekal Research
Anatole Kaletsky, Louis Gave
Feb 19th 2021
A Discussion On Treasury Yields
In recent days, long-dated US treasury yields have made a clear move higher. Unless there’s a violent turnaround in the coming days, February will mark the seventh consecutive month of flat-to-negative returns for treasuries This is an important development, with potentially far-reaching investment implications. Anatole and Louis discuss the outlook for yields, and the consequences for asset prices.
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Gavekal Research
Udith Sikand, Vincent Tsui, Tom Miller
Feb 19th 2021
Webinar: Emerging Markets In The Next Phase Of The Pandemic
Emerging markets have had a strong run, fueled by floods of stimulus in developed markets. Much of that money has flowed to Asia, where export sectors have thrived on rich-world consumers’ demand for electronics and other goods. The question is whether Asian EMs will be able to keep up this outperformance as they lag far behind in the vaccination race. Our team addressed these issues, and considered whether commodity-based EMs can again have...
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Gavekal Dragonomics
Ernan Cui
Feb 19th 2021
Stuck At Home For The Holidays
China spent the Lunar New Year indoors and online. Travel over the seven days of the holiday declined 77% from 2019 levels, but sales of major retailers increased by 4.9%. In this Quick Take, Ernan explains how holiday restrictions and the January Covid outbreak in north-eastern China has depressed services and boosted retail sales.
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Gavekal Research
Udith Sikand
Feb 18th 2021
Geared To Global Recovery
Since the global recovery trade got going at the beginning of November, Japanese equities have performed respectably, returning some 24% in US dollar terms. But they have not outperformed. This is disappointing. With high operating leverage—the ratio of fixed to variable costs—and more than half their revenues generated overseas, Japanese corporates should be a clear play on global recovery. Indeed, the consensus-beating 3% QoQ rise in Japan’s...
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Gavekal Research
Louis Gave
Feb 17th 2021
Optimization And Fragility
I have played rugby for most of my life, but in recent years I have seldom been injured. This is because I have grown heavier and slower. It is the guys who are fast and agile that tear knee ligaments and strain hamstrings. Why do I bring this up? Because investors need to ask whether the global economy is a slow but resistant lumbering beast of burden. Or is it a finely-tuned machine in danger of spinning off its axis? Gavekal has touched on...
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Gavekal Research
Tom Miller
Feb 17th 2021
China Versus The Anglosphere
Beijing’s ability to weaponize its global trade power is concentrating minds from Washington to Canberra. On Tuesday it was reported that China has proposed controls on the production and export of rare earths. This threat is the latest example of why reducing critical dependence on Chinese trade is now a strategic priority for many countries, in particular those in the Anglosphere.
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Gavekal Dragonomics
Wei He
Feb 16th 2021
The Next Steps On Hidden Local Debt
In 2021, China’s central government is gearing up to once again tackle the hidden debts of local authorities, toughening its stance after a couple of lax years. As Wei explains in this piece, the solution is likely to be a mixed one, combining limits on new borrowing, partial bailouts of some debt, and a lot of kicking the can down the road.
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Gavekal Research
Nick Andrews
Feb 16th 2021
The Long Bond Bait And Switch
Ultra-long bond issuance is back in vogue in Europe. This month Spain has sold €5bn of 50-year bonds at a yield of 1.45%, while Belgium snapped out a 50-year issue at 0.69%. In January it was France, which sold a 50-year at 0.59%. Next up is likely to be Italy, which is expected to take advantage of the tightening in spreads following the appointment of Mario Draghi as prime minister (see Draghi’s Return) to come to market with a 50-year of its...
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Gavekal Research
Vincent Tsui
Feb 15th 2021
The Importance Of Taiwan
Across Europe and the US, car plants are getting shuttered because of a shortage of microchips from Asia. This storm is centered on Taiwan, which for decades has been an unsung contract supplier of electronics and chemicals. For those who had not noticed, its firms now dominate high-end global chip production and current industry dynamics mean this grip is only likely to intensify.
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Gavekal Research
Tom Holland
Feb 15th 2021
Game Theory, With Complications
Devotees of game theory are set to enjoy a rare drama playing out in front of their eyes in the oil market over the coming months. Since April last year the price of Brent crude has more than tripled. Now, with production constrained, inventories being drawn down, and vaccines promoting hopes of a return towards normal economic activity, expectations are high of further near-term price gains.
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Gavekal Research
Udith Sikand
Feb 12th 2021
A New Super-Cycle?
A surge in commodity prices has led to hopes for a new “super-cycle”. Bulls say that commodities have been in the doghouse for a decade, ensuring limited new capacity additions, yet demand is now getting supercharged globally by easy monetary and fiscal policies. Bears retort that commodity investors have a case of the vapors, as the next phase of global growth, especially in China, will be less resource-intensive.
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Gavekal Research
Yanmei Xie
Feb 11th 2021
The Trouble With Biden's Climate Plan
In a frothy market, few sectors are as pumped up as green plays. Since US markets bottomed last March, the Nasdaq composite has generated total returns of 105%. Over the same period the Nasdaq Clean Edge green energy index has returned 403%. Moreover, the outperformance has accelerated since early November, which suggests the green sector’s gains are being driven in part by hopes of a favorable policy environment under Joe Biden’s administration...
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Gavekal Research
Arthur Kroeber
Feb 11th 2021
Vaccines, Efficacy And Variants
Despite volumes of new information and the lightning creation of vaccines promising a path out of the pandemic, uncertainty remains. Almost daily we are bombarded with a mix of good news (the vaccines work really well!) and bad (new mutations resist vaccines!) that make it hard to know whether we should rejoice or despair. This note provides a framework for assessing these persistent uncertainties.
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Gavekal Research
Yanmei Xie, Will Denyer, Tan Kai Xian
Feb 10th 2021
Webinar: The Economic Impact Of A New Era
Vaccines, fiscal stimulus and cheap money are working together to bolster the outlook for growth and inflation in the United States. The US is also under new leadership with new priorities. Our US team of analysts explained what this all means for the economy and asset markets.