Gavekal Research

Charles Gave

Apr 12th 2021

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.

Gavekal Research

Tan Kai Xian, Udith Sikand, Louis Gave

Apr 09th 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.

Gavekal Research

Yanmei Xie

Apr 09th 2021

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.

Gavekal Research

Tan Kai Xian, Cedric Gemehl, Udith Sikand

Apr 08th 2021

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...

Gavekal Dragonomics

Arthur Kroeber

Apr 07th 2021

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.

Gavekal Research

Anatole Kaletsky

Apr 06th 2021

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?

Gavekal Research

Anatole Kaletsky, Cedric Gemehl, Nick Andrews

Apr 02nd 2021

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.

Gavekal Research

Yanmei Xie, Tan Kai Xian

Apr 01st 2021

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....

Gavekal Dragonomics

Wei He

Mar 31st 2021

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.

Gavekal Research

Udith Sikand

Mar 31st 2021

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...

Gavekal Research

Tom Holland

Mar 29th 2021

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.

Gavekal Research

Tom Miller

Mar 26th 2021

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.

Gavekal Research

Will Denyer, Tan Kai Xian

Mar 26th 2021

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...

Gavekal Research

Cedric Gemehl

Mar 25th 2021

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...

Gavekal Research

Will Denyer, Tan Kai Xian

Mar 24th 2021

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...

Gavekal Research

Louis Gave

Mar 24th 2021

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...

Gavekal Research

Udith Sikand

Mar 22nd 2021

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.

Gavekal Research

Vincent Tsui

Mar 19th 2021

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...

Gavekal Research

Louis Gave

Mar 19th 2021

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.

Gavekal Research

Vincent Tsui

Mar 18th 2021

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.

Gavekal Dragonomics

Xiaoxi Zhang

Mar 17th 2021

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.

Gavekal Research

Tan Kai Xian

Mar 16th 2021

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?

Gavekal Dragonomics

Dragonomics Team

Mar 16th 2021

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.

Gavekal Dragonomics

Andrew Batson

Mar 12th 2021

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.

Gavekal Research

Cedric Gemehl, Nick Andrews

Mar 12th 2021

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.

Gavekal Research

Anatole Kaletsky

Mar 11th 2021

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.

Gavekal Research

Louis Gave, Charles Gave, Didier Darcet

Mar 10th 2021

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.

Gavekal Research

Charles Gave

Mar 10th 2021

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.

Gavekal Research

Will Denyer

Mar 09th 2021

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...

Gavekal Research

Udith Sikand, Tom Miller

Mar 08th 2021

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.

Gavekal Research

Will Denyer

Mar 05th 2021

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?

Gavekal Research

Tan Kai Xian

Mar 04th 2021

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.

Gavekal Research

Nick Andrews

Mar 03rd 2021

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.

Gavekal Research

Tom Miller

Mar 03rd 2021

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.

Gavekal Research

Dan Wang

Mar 02nd 2021

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.

Gavekal Research

Will Denyer

Mar 01st 2021

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...

Gavekal Research

Cedric Gemehl, Nick Andrews, Anatole Kaletsky

Feb 26th 2021

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...

Gavekal Research

Will Denyer

Feb 25th 2021

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.

Gavekal Dragonomics

Thomas Gatley

Feb 25th 2021

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.

Gavekal Research

Louis Gave

Feb 24th 2021

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.

Gavekal Dragonomics

Andrew Batson

Feb 23rd 2021

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.

Gavekal Research

Tan Kai Xian

Feb 22nd 2021

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...

Gavekal Research

Anatole Kaletsky, Louis Gave

Feb 19th 2021

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.

Gavekal Dragonomics

Ernan Cui

Feb 19th 2021

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.

Gavekal Research

Louis Gave

Feb 17th 2021

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...

Gavekal Dragonomics

Wei He

Feb 16th 2021

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.

Gavekal Research

Vincent Tsui

Feb 15th 2021

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.

Gavekal Research

Udith Sikand

Feb 12th 2021

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.

Gavekal Research

Arthur Kroeber

Feb 11th 2021

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.