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    Gavekal Dragonomics

    Video: China In 2019

    Washington and Beijing will likely find some kind of accommodation on trade and China’s economy will suffer a tough first quarter that sees the authorities adopt a range of counter-cyclical measures. In this video interview, Arthur outlines our key China views for 2019 and offers investment recommendations for the renminbi, bonds and the Chinese equity market.

    0
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    Gavekal Research

    A Silly Recommendation

    The euro just celebrated its 20th anniversary to scant fanfare. Hardly surprising, given that it caused a Greek depression, decline in Italy’s private sector GDP and a German current account surplus that has exported deflationary pressure to Europe and beyond. Against this grim backdrop, today’s note will consider whether now is the time to buy eurozone financials.

    0
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    Gavekal Research

    Awaiting India's Electoral Boost

    Two recent events have changed the calculus for investors in India. First, the ruling BJP took an electoral battering in three heartland states, imperiling its bid for general re-election. Second, in December the government appointed a new RBI governor. Investors can expect looser fiscal and monetary policies as the BJP pulls out the stops to ensure victory.

    5
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    Gavekal Research

    The Big Questions For 2019

    The last quarter of 2018 proved to be something of a horror show for most investors and despite this year starting with a firmer tone, the investment landscape looks to have changed in a fairly profound way. In this report, Louis considers the major shifts in the investment environment and asks whether these conditions will persist through 2019.

    3
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    Gavekal Research

    Beyond The US Dollar-Yen Flash Crash

    The consensus is that last Wednesday’s “flash crash” in the US dollar-yen exchange rate was sparked by a flight to safety in extremely thin trading while Japanese markets were closed for a holiday. Fair enough—but it does not explain why the yen has still strengthened 5% against the US dollar since early October.

    0
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    Gavekal Dragonomics

    A Cold Winter In China's Job Market

    China’s job market was an early casualty of the US-China trade conflict, with industrial layoffs accelerating to a pace last seen in 2015-6. But Ernan argues that the situation is worse this time, as service-sector employers are being squeezed by tighter regulations. The weaker job market means a worsening outlook for household spending in 2019.

    0
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    Gavekal Research

    Strategy Monthly: The Hope-Vs-Despair Smackdown Of 2019

    The massive sell-off in December left global equities on the precipice of a real bear market. Hope and despair are finely poised, but we find a bit more reason for hope. The US and China will both slow, but the US should avoid recession and Chinese growth should stay above 6%. Political and trade-war risk is lower, and liquidity pressures will ease. US equities and EM assets, especially local-currency bonds, both promise positive returns.

    0
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    Gavekal Research

    What To Watch In Chinese A-Shares

    Chinese A-shares were the world’s worst-performing major equity market in 2018. For the market to rally in 2019, three factors will need to show signs of clarity and improvement: China’s macro policy direction, liquidity squeezes in the bond and equity markets, and the trade war with the US.

    0
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    Gavekal Dragonomics

    More Than RRR Cuts Needed To Stabilize Growth

    After the central bank's latest cut in bank reserve requirements, the key question is not whether Beijing will continue to loosen policy, but when its measures will begin to have a visible impact. In this piece, Chen Long argues that it will take several more months of easing before the economy and stock market begin to feel the benefit.

    0
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    Gavekal Research

    Searching For A European Catalyst

    With 2019 not yet a week old, the eurozone is already looking uncomfortably like the odd man out. With the world’s big three economies heading more deeply into a synchronous slowdown, policymakers in the US and China are showing their readiness to alter course. European policymakers have displayed no comparable flexibility.

    0
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    Gavekal Research

    This Century's Suez Crisis

    China’s “Belt and Road” initiative is a clear bid by Beijing to challenge the incumbent imperial power: the US. And in an age when the highest-value commodities are not physical goods, but the binary digits zipping around the world at the speed of light, the battleground of this struggle for dominance will be telecommunication networks.

    7
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    Gavekal Research

    Rollover In The US, Not Recession

    This week’s revenue forecast downgrades from Apple and Delta Air Lines and Thursday’s steep dive in the ISM manufacturing PMI only appeared to confirm what market participants already knew: US growth is rolling over. Yet despite the recent sell-off in equities and the further flattening of the US yield curve, we see no recession on the horizon.

    0
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    Gavekal Dragonomics

    China And The US Still Hold The Keys To Markets' Fate

    In 2018 liquidity tightening in the US and China combined with trade war fears to make a miserable year for markets. In 2019 the same forces will be at work but the outcomes may differ. The key questions are: can the US and China work out a trade deal? How bad is the Chinese slowdown and how will Beijing respond? And how much will the Fed tighten?

    4
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    Gavekal Research

    The Market Weighing-Machine

    If there is one useful conclusion for investors from the crazy year that has just ended, maybe it is this: as they say in Hollywood, “Nobody knows anything.” The equity market predicted a boom while the bond market predicted recession, and then reversed positions. The consolation for investors should be that the market is a voting machine in the short term, but a weighing machine in the long term.

    2
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    Gavekal Research

    A Future For Value Investing

    Financial theory teaches that, in order to determine the price of an asset, we should take its foreseeable future cash-flows, discount them by a risk-free rate to which we can add a risk premium, and then beyond these cash-flows ascribe a “residual value” to the business. So it’s an easy game—we only need to determine four things: the future cash-flows, the direction of the risk-free rate, the level of the risk premium, and the residual value....

    1
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    Gavekal Research

    A Sober End To The Year

    For investors around the world, 2018 proved to be “challenging”. Yet to Gavekal’s clients, hopefully the year’s difficulties did not come as a surprise. Just over 12 months ago, early in December 2017, I published a paper entitled From A Ferrari To A Jeep advising investors to reduce the volatility of their portfolios.

    2
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    Gavekal Research

    More Half Full Than Half Empty

    Despite dovish comments from the Federal Reserve about the future trajectory of interest rates, US equities fell further on Wednesday. The S&P 500 has now fallen -14% since early October. Meanwhile, 10-year treasury prices have risen almost 5%. Momentum traders will therefore find good reason to shun equities and add exposure to long-dated treasuries. We suggest doing the opposite.

    0
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    Gavekal Dragonomics

    Why China Can Succeed In Tech

    Technology is at the heart of the US-China trade conflict. The US fears that China will challenge its technological leadership, and those fears are not without foundation. In this piece, Dan argues that China is in fact likely to succeed in many of its technological goals—but because of successful companies rather than big government plans.

    0
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    Gavekal Research

    A New Engine Needed

    As the European Central Bank halts net new asset purchases and ends its balance sheet expansion, European equities are back at almost exactly the same level as in December 2014, on the eve of the ECB’s announcement of quantitative easing. Clearly, with extraordinary monetary stimulus no longer in the mix, European stocks will need a different driver if they are to make gains in 2019.

    2
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    Gavekal Research

    Getting Out Of The Liquidity Squeeze

    With the Trump-Xi summit, compromise between Rome and Brussels, and the oil price down, all the ingredients should have been in the mix for a Santa Claus rally. Instead it's been an ugly few weeks in the markets, which strongly suggests no let up yet in this year's liquidity squeeze. In this detailed report, Louis looks back at recent history to determine what forces might bring the squeeze to an end next year, and therefore what asset...

    0
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    Gavekal Research

    A New Risk-Reward Equation In EMs

    US markets have come back to earth with a bump on a reassessment of risk and growth prospects. As a result, investors are betting on a less hawkish Federal Reserve and a weaker US dollar, both of which are a boon to hard-pressed emerging markets. The question is: do investors gain more from a more favorable US dollar liquidity environment than they lose from a growth picture clouded by a slowing China and unresolved trade tensions?

    4
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    Gavekal Research

    Perhaps The Most Important Chart I have Ever Published

    In my Wicksellian world, when the “market rate of interest” (cost of capital) moves above the “natural rate of interest” (return on capital) a recession usually follows. Italy offers an interesting case in point as it has spent so much time since the euro’s launch operating below this critical threshold.

    5
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    Gavekal Dragonomics

    2019 Will Get Off To A Rocky Start

    China’s growth data continue to disappoint, as Beijing’s easing policies have not still gotten traction. In this piece, Chen Long explains his outlook for 2019: more easing is coming, but it will take a while for those policy changes to deliver a stabilization in growth. That means there will likely be more bad economic news through early 2019.

    8
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    Gavekal Research

    Our 2018 Holiday Reading List

    “Books,” wrote Anthony Powell, “do furnish a room.” As author of the million-word, 12-volume A Dance To The Music of Time, Powell was something of an authority on the subject. But it is unlikely even his library was as eclectically furnished as Gavekal’s. If anything, our 2018 holiday reading list is even more varied than those of recent years. Sure, we’ve read and reviewed the economic and financial heavyweights: Barry Eichengreen on currencies...

    1
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    Gavekal Research

    Europe's Changed Policy Mix

    Until last week it was possible to make the case that the EU could still push ahead with major structural reform under the current political configuration. After a continuity candidate took over as head of Germany’s governing party and Macron turned on the fiscal spigots in France to buy off political dissent, that is no longer the case.

    4
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call December 2018

    In the final Gavekal Research Conference Call of the year, Louis-Vincent Gave, Anatole Kaletsky and Charles Gave shared their perspectives on a year which has been challenging for all asset classes, and offered their thoughts on what could be in store for investors in 2019.

    0
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    Gavekal Research

    Understanding The Next Bear Market

    My career in financial markets began in January 1971, which means I’ve seen a few bull and bear markets. A common trait of bear markets is that as the big decline starts, most investors have no idea why asset prices are falling. At some point, perhaps much later, the root cause of the marauding bear becomes clear and this revelation triggers the final phase of the sell-off. Hence, in light of the recent pull-backs, readers may like to consider...

    6
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    Gavekal Dragonomics

    The Supply-Chain Migration Begins

    The US-China trade conflict has changed the equation for multinational companies’ supply chains in China. Higher tariffs and increased uncertainty are pushing some firms to invest more in other locations. But Dan argues that most firms have strong reasons to stay in China, so the shift in supply chains will be more of a trickle than a flood.

    0
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    Gavekal Research

    Drinking Red Wine And Buying Italy

    A Gavekal rule of thumb has it that investors can safely invest in economies where the “working class” mostly drink beer but should be careful in places where theymostly drink red wine. I make this observation as investors face a quandary among the wine drinkers: France versus Italy. The assumption in the spring was that holding Italian bonds was crazy, while French paper offered safety. But is that the case?

    1
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    Gavekal Research

    The Brexit Game Of Chicken

    The Brexit roller coaster seemed to come off the rails on Monday with Theresa May’s effort to prevent parliament voting on what looked like her doomed plan to leave the European Union. May’s decision, which had been denied by her most trusted senior ministers right up to the moment it was leaked to the BBC, initially looked like a typical case of the can being kicked down the road. Yet by the time she had finished her parliamentary statement,...

    4
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    Gavekal Research

    A Careless Loss Of Indian Central Bankers

    To lose one central bank governor may be regarded as a misfortune. To lose a second one, as India did yesterday, looks like carelessness bordering on recklessness. Urjit Patel’s resignation, after resisting months of pressure from the ruling BJP to ease credit conditions and hand over some of its cash reserves, is another black mark against the government.

    2
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    Gavekal Research

    Opportunities Beyond The Death Cross

    November’s payroll report gave investors in US equities reason to cheer on Friday as it suggested reduced inflationary pressure, yet they chose to focus on an escalating row over the fate of a top Chinese telecom executive that is intensifying trade tensions with China. A -2.3% fall in the S&P 500 had the technically-inclined scrambling to glean meaning from a “death cross” as the 50-day moving average fell below the 200-day level. We remain...

    2
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    Gavekal Dragonomics

    Steel Prices Have Overshot

    Chinese steel prices suffered their biggest decline in two years in November, falling about 20% over the course of the month. That correction was driven by a combination of a big increase in supply along with worries about future demand. In this piece, Rosealea argues that both problems will be short-lived, and that steel prices can rebound.

    0
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    Gavekal Research

    What Huawei To Go

    The arrest last Saturday in Vancouver airport of the CFO of Chinese telecoms giant Huawei at the request of US prosecutors will have major consequences for investors beyond the short term market volatility it contributed to this week. Reaching a permanent US-China agreement is now much more complicated, and the arrest shows the US can use more than tariffs against China.

    0
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    Gavekal Research

    Strategy Monthly: Three Questions For The Year Ahead

    This has been a miserable year across most asset classes, with markets roiled by tighter US dollar liquidity. Looking into 2019, Louis sees the investment environment being dictated by whether the US dollar liquidity situation really is easing, the overall US policy and the possibility for the “Chimerica” relationship to rupture.

    0
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    Gavekal Research

    The Evolving Trade War

    There is little doubt that the US president is surrounded by advisers who see China as a genuine threat to the long term economic health and geopolitical strength of the United States. But, it is likely that Donald Trump’s most immediate concerns are more down to earth. Specifically, in order to be re-elected in 2020, Trump needs once again to carry states such as Ohio, Michigan and Wisconsin. And it is unlikely that he will be able to win the...

    5
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    Gavekal Research

    The Real Gilets Jaunes

    France’s yellow vest protest movement may have been the first since 1789 not to stem from left-wing origins, argues Charles. Instead, it reflected a great uprising by the forgotten people of middle France who have had enough of being the piggy bank that funds the lives of an urban elite which has rigged the system to its favor.

    4
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    Gavekal Research

    Macron’s Reform Program Lives On

    At first sight, the French government’s decision to postpone its proposed fuel tax increases in the face of popular gilet jaune street protests looks a lot like the climb-downs of 1996, 2006 and 2016, all of which saw attempts at economic reform derailed by mass opposition. Cedric argues such a conclusion would be overly hasty.

    1
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    Gavekal Research

    Trade, Earnings And The Chinese Equity Market

    Yesterday’s plunge in US equities was partly attributed to fears that the trade war with China is far from settled. A similar mood is taking hold in China: news of the trade truce spurred a rally in Chinese equities on Monday, but gains softened on Tuesday. However, other factors are also weighing on investors in the Shanghai and Shenzhen markets.

    1
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    Gavekal Dragonomics

    Paying For Industrial Policy

    China’s ambitious goals to lead in the technologies of the future are backed by huge resources. Since late 2014, there has been an explosion in state-backed funds targeting high technology. Our latest in-depth DeepChina report digs into these government guidance funds to find out how they work, and how successful they will be.

    0
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    Gavekal Research

    Don’t Sweat About The Yield Curve

    At least as interesting as the 1.1% rise in US equities on Monday, following the weekend’s news of a three-month US-China tariff truce, was the day’s decline in long-dated US treasury yields and the concomitant flattening of the US yield curve. But was this bond market action good news or bad for investors?

    5
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    Gavekal Research

    The Next Target Of Trump’s Firepower

    In today’s Daily, Arthur Kroeber offered his analysis of the weekend’s Trump-Xi summit in Buenos Aires. In this short report, Louis takes a slightly different tack, reviewing the series of tumultuous events in recent weeks. His conclusion is that few investors’ portfolios are well positioned for the probable outcome.

    0
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    Gavekal Research

    The Durability Of The Trump-Xi Rally

    The Trump-Xi showdown at the G-20 has produced a truce, and Asian equity markets rallied in response. But Arthur is skeptical of the durability of the rally, as the structural nature of the US-China rivalry was not addressed by the deal, and hardliners in Washington are likely to keep ratcheting up the pressure on Beijing.

    0
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    Gavekal Research

    Winter For Eurozone Credit Growth

    A depressing autumn is turning into a dismal winter in the eurozone, as November’s deteriorating PMIs follow weak third quarter growth—and even a quarter-on-quarter contraction in Germany. Much of the softness can be attributed to poor external demand, especially from China and the emerging markets, and to the ongoing disruption to car sales caused by the introduction of new emissions tests. Together these have hammered European manufacturing,...

    0
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    Gavekal Research

    Christmas Comes Early

    The most cherished gifts often come in small packets, and investors duly cheered just two small words yesterday by the Federal Reserve chairman. In a speech, Jerome Powell said policy rates were “just below” the neutral level. That was a big change from a month earlier when he said they were “a long way from” the not-too-hot-not-too-cold level. This suggests that the pace of interest rate hikes may lessen, while on the same day data was released...

    0
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    Gavekal Dragonomics

    Germany Is Rethinking But Not Rejecting China

    As the US-China trade conflict drags on, both sides are looking to Europe, particularly Germany, for support. Germany does share US concerns about China’s protectionism and expansionism. But it still sees China as an economic boon and is committed to engagement. Berlin is therefore unlikely to fully take the side of either Beijing or Washington.

    0
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    Gavekal Research

    India Macro Update: Post-Rout Uncertainty

    India is beset with economic problems that range from a deepening credit crunch, a worrying stand-off between the government and central bank and a capital spending cycle that has never really gotten going. Yet despite these challenges, the economy keeps chugging along and should hit 7.5% growth in the current fiscal year. In this quarterly macro update, Udith and Tom consider the outlook in light of political uncertainty ahead of next year’s...

    0
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    Gavekal Research

    What If Oil Stays At US$50?

    Since early October, oil prices have plunged more than -30%, while the US equity benchmark is down -8%. You don’t have to be Inspector Clouseau to wonder if these moves are related. Since this oil sell-off has unfolded at a time when US economic growth is slowing, my bet is for a negative short-term effect, but a medium term outlook that is fairly cheery.

    0
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    Gavekal Research

    EMs Need More Than A Bear Hug

    Having fallen -25% since late January, emerging market equities have been this year’s train crash of an investment. The good news is that EM equity valuations are at multi-year lows in both absolute and relative terms, begging the question: what could catalyze a rebound in oversold EM assets?

    3
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    Gavekal Dragonomics

    The Chinese Consumer In 2018

    In our annual review of the economic performance of the Chinese consumer, Ernan examines the key issues affecting households. This chartbook covers the reasons for the decline in car sales, the rising burden of household debt, the effects of the income-tax cut, the prospects for consumption upgrading—and where all these trends are headed in 2019.

    0
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    Gavekal Research

    Positioning Ahead Of The G20

    Over the summer, the US administration’s aggressive trade stance towards China helped trigger sell-offs in most non-US equity markets, even as the US market continued to make new highs. But, in the past six weeks, the massive outperformance of US equities has stalled. Louis asks where it makes sense for investors to hide until the outcome of the G20 meeting is clear.

    1
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    Gavekal Research

    The Failure Of The Bond Cushion

    If you had been told on September 20, when the US stock market made its high, that two months later the MSCI US would be entering correction territory, down almost -10%, and that oil would be in a full-blown bear market, with Brent down almost -30%, you would probably have concluded that long-dated US bonds would be the place to be. The US dollar delivered; the DXY is up 2.7%. But long bonds did not; over the two-month period, the TLT ETF has...

    4
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    Gavekal Research

    Salvini, Part Deux?

    This weekend saw protests in France that united demonstrators from all parts of the political spectrum against President Emmanuel Macron. Louis wonders if this represents the beginning of a populist wave that rejects the president’s mushy centrism and joins political bed fellows who have never laid down before. After all, it happened in Italy.

    3
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    Gavekal Research

    The Conflict Between Liquidity And Growth

    In recent days my colleagues Anatole Kaletsky and Arthur Kroeber have debated the strained relationship between China and the US, and what it may mean for emerging markets. I agree that this standoff matters greatly for the world, but I’m not convinced it’s the main issue driving markets and therefore a resolution—or not—at the G20 next weekend may end up as a damp squib for investors. A range of issues have me concerned, from widening credit...

    6
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    Gavekal Dragonomics

    The Chinese Internet Ventures Abroad

    Chinese internet companies are now the only credible challengers to the global hegemony of US internet companies. In this piece, Dan explains that, although they may not directly challenge Google or Facebook, the Chinese firms are pushing abroad and are well on their way to becoming a formidable presence in developing countries.

    0
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    Gavekal Research

    Don't Bet On Détente

    Yesterday my colleague Anatole Kaletsky explained his optimism ahead of the meeting between presidents Donald Trump and Xi Jinping in Buenos Aires later this month. He thinks the chances of at least a tariff cease-fire are pretty good, and investors should buy Chinese and emerging-market assets. I remain skeptical.

    2
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    Gavekal Research

    The Drag Of US Housing

    Despite the overall US growth outlook remaining decent, markets have taken on an ugly tone, with US equities having given back their 2018 gains and credit spreads gapping wider. Adding to grim tidings, yesterday saw weak housing data released, which is a worry as the sector often leads the broader US economy.

    16
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    Gavekal Research

    Reasons To Believe In Détente

    Should we take seriously President Donald Trump’s prediction of “a deal” at his summit with President Xi Jinping on November 30? Nobody can be sure—not even Trump himself—since the outcome may depend on whether Peter Navarro or Steven Mnuchin manages to catch his attention before Air Force One lands in Buenos Aires next week. There are, however, four reasons which I have discussed here before to justify continuing to increase long positions in...

    0
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    Gavekal Research

    Countering The Belt And Road

    In its escalating rivalry with China, the US has a new target: the Belt and Road Initiative. But both the US and Europe are struggling to redefine the way they win friends and influence people with development finance. Tom argues that the somewhat quieter middle way being pursued by Japan is delivering it both influence and profits.

    3
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    Gavekal Research

    The Uphill Struggle For Equities

    Last week saw the MSCI World turn in its sixth negative week in eight, while the only sector to record gains over the last two months has been utilities; cyclical sectors like materials, industrials, IT, energy and consumer discretionary have mostly entered correction territory. That begs the question: Is this a dip to buy, or will the environment remain harsh?

    5
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    Gavekal Dragonomics

    Housing & Construction Review 2018

    China’s property market has had a record-breaking run, but where is it headed next? In this concise chartbook, Rosealea delivers her annual overview of the key drivers of housing sales and construction activity and explains the outlook for 2019. An overdue correction in sales is coming, but construction should hold up relatively well.

    0
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    Gavekal Research

    GE Is More Fish Than Fowl

    There is suddenly a flood of commentary speculating that General Electric is a canary in the proverbial coal mine for the US corporate credit market. With investors focused on the troubled conglomerate’s underfunded pension scheme and ailing power business, GE has seen its credit rating downgraded and become a focal point for broader fears that US corporates have taken on too much debt and bought back too much equity. Without taking a view on GE...

    5
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    Gavekal Dragonomics

    Solving The Private Sector's Liquidity Crisis

    China’s leaders are now falling over themselves to show love for the private sector. This political rhetoric has a practical purpose: easing the financial stress on private firms that is freezing up the corporate bond market and driving down stock prices. In this piece, Thomas examines the tools for solving the private sector’s liquidity crisis.

    0
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    Gavekal Research

    The Winding Road To Vassalage

    No one much likes Theresa May’s compromise deal that would leave Britain as a rule-taking, semi-detached appendage to the European Union. That, however, is the most likely outcome after the UK cabinet yesterday approved an exit deal that sets up a November 25 summit, where EU leaders will be asked for their assent. Shortly afterwards, the UK parliament will have its say, and despite challenging math in the House of Commons a “national interest”...

    0
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    Gavekal Research

    Credit Availability As An Asset Allocation Tool

    US analyst KX bases his equity calls largely on a Wicksellian model that compares the cost of capital with the returns earned by the corporate sector. We remain comfortable that this “spread” remains favorable for US firms, and so recommend a roughly 70% allocation to equities. Yet even if credit is reasonably priced, there is the question of its availability. For this reason, we watch lending standard measures closely, and just got a benign...

    2
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    Gavekal Research

    Video: The Battle For Chinese Tech

    China imports more semiconductors than it does crude oil, highlighting its dependence on foreign technology and know-how. The US recognizes this weakness and is intent on squeezing China’s tech sector before it is able to produce the most advanced chips at home and in scale. For this reason, tech sits at the heart of the US-China tensions.

    0
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    Gavekal Research

    China's Data Will Get Worse Before It Gets Better

    The latest round of data releases painted a mixed picture of Chinese economic activity in October. Most notably, credit growth was weak. Given that without an acceleration in credit growth there will be no broad pick-up in overall economic growth, this indicates that Beijing will loosen policy further over the coming months. But how far and how fast?

    2
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    Gavekal Dragonomics

    The Next Wave Of SOE Consolidation

    Chinese officials are making another call to renew reform of state-owned enterprises. But a return to privatization is far away: the most concrete aspect of SOE reform is the guided restructuring of central-government-controlled firms. In this piece, Yanmei explains how big SOEs are using M&A in different ways to achieve consolidation.

    0
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    The Doom Loop Tightens

    The stand-off between Rome and Brussels over Italy’s 2019 budget claimed its first casualty on Monday. Italy’s major banks were forced to club together to support an emergency bond issue by Banca Carige, after the rise in Italian government bond yields triggered by the budget battle eroded the mid-sized lender’s capital base, pushing it to the brink of collapse.

    0
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    This Really May Be The Start Of A Year-End Rally

    Although this week started with a violent sell-off, Anatole argues that the stars are aligned for a year-end equity rally, especially in emerging markets. This is because EMs have sold off not on US interest rate worries but a combination of rising oil prices and heightened political risk. Those headwinds now seem to be abating and beaten up markets could surprise before year-end.

    6
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    The True Story Of Eurozone Equities

    Since the financial crisis, European equities have proven serial duds compared to their transatlantic cousins. Cedric argues this divergence is simple reflection of the higher earnings-per-share achieved by US firms. Looking forward, however, he says it will be almost impossible for US firms to maintain this profits gap.

    1
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    Germany, And Europe, After Merkel

    All political careers end in failure. Doubtless Angela Merkel is already feeling the sting. Even as the long-serving German chancellor stands up on Tuesday to address the European parliament in Strasbourg, political observers and investors are looking beyond Merkel’s term in office to the identity of her successor. That is likely to be decided on December 7, when Merkel’s Christian Democratic Union is set to elect a new party chairman, so...

    0
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    London Seminar — October 2018

    At Gavekal’s seminar in London last month Charles Gave and Anatole Kaletsky presented on whether the world is breaking up into three different monetary zones, and whether this is a correction to, or an end to, the long-running global bull market. Micahel Clendenin of Gavekal RedTech explained how they conduct research on the Chinese technology and internet sector.

    0
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    Hong Kong Seminar — November 2018

    At Gavekal’s seminar in Hong Kong this week, Yanmei Xie, Arthur Kroeber and Will Denyer presented their latest views on China's economy, trade war, and how to approach asset allocation in the US.

    0
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    A More Timely Wicksellian Tool

    According to my Wicksellian analysis of the US, when the market rate of interest moves above the natural rate (essentially the structural growth rate of corporate profits), then a recession is coming, and investors should exit US equities and load up on treasuries. I now propose an updated and more timely proxy for the "Wicksellian market rate".

    3
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    Gavekal Dragonomics

    The Many Misjudgments Of Supply-Side Reform

    Supply-side reform, Xi Jinping’s signature policy of cutting excess capacity in steel, coal and other industries, is widely considered a success. Yet Rosealea’s extensive review finds that this campaign was marred by repeated misjudgments that caused undesired spikes in prices. The justifications for continuing the policy are now wearing thin.

    0
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    What's Changed In The Oil Market

    “Sanctions are coming,” proclaimed Donald Trump in a tweet last week, three days before the imposition of the latest US embargo on Iranian oil exports. The oil market was not impressed. Since late September, when crude hit four-year highs, the Brent price has slumped -16.7% from US$86.29 to US$71.91, with WTI falling -19.1%.

    0
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    Gridlock is Good

    The Democrats have wrested back control of the US House of Representatives, while Republicans have expanded their Senate majority. Hence, the US’s bicameral legislature is set for two years of gridlock. This was the most benign result possible from this midterm election. While largely expected, confirmation is probably positive for risk assets.

    0
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    Handicapping The Trump-Xi Summit

    As the US prepares to wrap up its Congressional election season, Donald Trump’s administration is sending mixed signals on its China policy. The outcome of the upcoming G-20 meeting between Donald Trump and Xi Jinping is now basically a coin-flip. Either way, argues Arthur, US pressure on China’s technology sector is likely to intensify.

    1
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    Gavekal Dragonomics

    Pledged Shares Put Private Firms In Peril

    China’s bear market has created a crisis for hundreds of listed companies whose shareholders had pledged shares as collateral for bank loans, and now face the threat of margin calls. In this piece, Thomas explains the share-pledging crisis and how it is reshuffling corporate ownership, as state entities and others move to rescue distressed firms.

    0
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    Hot, But Not Too Hot

    It remains unclear if the US is moderating its approach to trade war, but there are other factors to keep equity investors on edge. Friday’s US payroll report showed average hourly earnings rising to a cycle-high of 3.1%, confirming the picture of a tight labor market. Hence, with 10-year treasury yields just below their recent peak of 3.23%, the question is whether the US economy can weather a higher cost of capital. For now, I think the answer...

    0
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    It's Finally Safe To Buy Sterling

    The pound rose 2% yesterday after a statement from the British government that a Brexit deal could be expected by late this month. That has since been rowed back. Nevertheless, the UK is moving into an endgame where the most plausible outcomes are either a "soft Brexit", or a new referendum which results in the UK remaining in the EU. Both would be good news for sterling.

    5
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    No Renminbi Line In The Sand

    The renminbi has jumped over the last two days after the central bank signaled it would squeeze offshore liquidity. However, argue Long and Tom, it would be wrong to interpret this as a sign the PBOC will defend a line in the sand at 7. Embracing flexibility makes more sense as an exchange rate policy. The PBOC is just aiming to smooth volatility.

    0
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    Strategy Monthly: Yes, We're Still In A Bull Market

    Anatole and Will believe that continued exposure to US equities makes sense, since underlying corporate profitability remains strong. So long as one avoids the most rate-sensitive sectors, US portfolios should be 70-75% in stocks, with the rest mainly in cash. Moreover, they argue that the period of EM underperformance is now done, and emerging markets are poised for a significant rally.

    0
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    India's Soft Approach To Hard Money

    A key reason to hold Indian risk assets in recent years has been the presence of a strong government willing to incur short-term political pain in return for longer-term economic gain. Yet, with the Reserve Bank of India fighting the finance ministry over bank regulation policies that may crimp growth ahead of a national election, this premise looks shaky. The partially independent central bank has faced political attack before, but this is...

    2
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    Has Oil Set Its High For This Cycle?

    With the price of WTI crude oil now back below its 200-day moving average, Louis puts himself in the shoes of Turkish president Recep Tayyip Erdogan and imagines what sort of leverage he could exert over Donald Trump, what this means for the enforcement of sanctions against Iran, and what that implies for the oil price going forward.

    4
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    First Blood In The Long Tech War

    Washington has opened a new front in the US-China economic cold war by slapping controls on exports of all “commodities, software and technology” to Chinese chipmaker Fujian Jinhua Integrated Circuit. The breath of the national security justification cited for this action escalates the US-China confrontation over technology to a new level.

    5
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    Another Weight On The Euro

    The bear flattening of the US yield curve while European short rates remain anchored in negative territory means that it no longer makes sense for euro-based investors to hedge the currency risk of US bond purchases. Their hedging costs have risen to a level that wipes out the yield they would get on a 10-year US treasury. For US dollar investors, the opposite is true.

    0
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    Beijing Seminar — October 2018

    At Gavekal’s seminar in Beijing last week, Louis-Vincent Gave, Udith Sikand and Chen Long presented their latest views on the turn in global markets, the prospects for emerging markets in the quarters ahead, and on China's policy priorities as it faces down the US in a prolonged rivalry.

    0
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    Gavekal Dragonomics

    The Policy Constraint From Property

    The hot property market is one of the major constraints on Chinese policymakers’ freedom to stimulate: surging prices and construction do not need more juice. In this piece, Rosealea explains why more decisive stimulus is very unlikely before the property market weakens significantly, and even then will not be as large as in previous cycles.

    1
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    US Macro And The Market

    Coming after another bruising week in the market, which saw the S&P 500 flirting with correction territory, down -9% from its late-September high, Friday’s third quarter US GDP report is heartening. Although 3Q’s quarter-on-quarter annualized growth rate of 3.5% was slower than the 4.2% rate recorded in 2Q, it was still strong relative to the expected 3.3% and compared with the US economy’s structural growth rate. While US growth will...

    0
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    Listen To What Italians Say

    Among the factors rattling global markets this week has been the brewing dispute between Brussels and Italy’s populist government over its blowout budget proposal.The fear is that Italy gets into a vicious circle of tightening credit markets and faltering growth that could end with a resumption of the euro crisis and ultimately its exit from the single currency.

    0
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    Buy The Dip

    “Things are fine now, but they are going to get worse.” This is what I hear from commentators on US growth, from corporate managers talking about profit margins, and from Chinese exporters discussing the impact of the trade war. The same could be said of US financial conditions—they are fine now, but as interest rates rise they will deteriorate.

    3
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    Gavekal Dragonomics

    On The Front Lines Of The Trade War

    There now seems to be little chance that the trade frictions between the US and China will be resolved anytime soon. So how are Chinese exporters dealing with the prospect of a steep rise in tariffs come January? Our analysts report from the Canton Fair on how exporters are coping now, and their strategies for the future.

    1
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    Bolsonaro’s Brazil

    Barring an extraordinary twist, Brazilians will on Sunday elect as president a right-wing tough guy who hints at being a closet economic liberal. He will inherit an economy that is enjoying a cyclical upturn and a reform initiative to social security that is far enough advanced that it can’t reasonably be reversed. For this reason, expect a near term upside for asset values.

    0
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    World Trade And A Troubling Signal

    As Donald Trump has ramped up tariffs on US imports from China, investors have understandably grown anxious about the impact on world trade. Few significant effects have shown up in the data so far. Nevertheless the outlook is alarming—although not necessarily in the way many might think.

    5
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    The Odd Behavior Of Gold

    Barbarous relic it may be, but I have long looked on gold as a proxy for emerging markets. The logic is that when the emerging market consumer—whether in India, China, Indonesia, Africa or the Middle East—finds himself at the end of the month with extra money in his pocket, he often tends to put that money into gold coins or jewelry. This makes sense if you live in a country with capital controls, or an untrustworthy financial system, under-...

    0
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    JAM Today For Indian Fintech

    There is a Dickensian quality to Indian finance just now as banks struggle under bad debt piles and finance companies face a wholesale funding crunch after a recent high profile default. Yet if these are the worst of times for credit intermediaries in India, there is a clear silver lining as fintech firms capitalize on a national biometric database.

    0
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    How The Brexit Stalemate Breaks

    As the Brexit negotiations enter their endgame, a stalemate has become the most likely outcome. Theresa May’s Conservative Party is now in open rebellion against her leadership, with Britain’s weekend press reporting that her government is just 72 hours from collapse. And a “No Deal” Brexit “car crash” is now described as a 50-50 probability by many politicians and commentators in both Britain and Europe. Yet the pound has maintained its value...

    6
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    Gavekal Dragonomics

    Still Waiting For Stimulus

    At the moment it seems there is only one question about China that people care about: when will the government move more aggressively to stimulate growth? With most economic indicators slowing in September, the time when the government will need to change course is getting closer. But, as Andrew explains in this piece, it is not here yet.

    2
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