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E.g., 21-02-2020
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    Gavekal Research

    Embrace The EM Rally, Selectively

    Washington and Tehran are dialing down the geopolitical tensions, at least for now. The US and China are about to sign a trade deal. Big central banks are spraying around liquidity. And the mighty US dollar is looking mortal. The fact that emerging markets have underperformed US equities the last five years surely points to a burst of catch-up growth? Yes and no.

    0
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    Gavekal Research

    Japan's Fiscal Engagement

    Japan's upward revision to GDP growth yesterday was taken as a bad omen. It suggests that shoppers went on a spree before the October 1 tax rise, and tougher times may follow. This explains why the government unfurled a big emergency fiscal stimulus last week. On the face of it, this should be negative for the yen, yet other forces are likely to keep the currency range-bound.

    0
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    Gavekal Research

    A Japanese Price Taker

    The yen has long been a fairly reliable indicator of global risk appetite. Over the summer, trade war fears pushed the yen up to ¥105 to the US dollar, before recent cheerier developments saw it weaken again. If the BoJ can deliver on its promise to match other central banks’ easing moves, that weakening trend could be worth following. Alas, the BoJ probably can’t.

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    Gavekal Research

    India’s Laffer Curve Gamble

    India’s decision to cut its corporate tax rate from 30% to 22% has spurred a 7% surge in equities as investors bet on new capital spending reigniting a stalled growth cycle. The problem is that even if this fiscal easing spurs more business investment, the consumer side of India’s economy remains stuck in a low gear due to knottier problems.

    0
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    Gavekal Research

    The EM Oil Shock That Won't Be

    Three “master” prices tend to dictate price levels in most asset markets—US interest rates, the US dollar and energy prices. A synchronized fall in these three prices usually bodes well for emerging market assets, while a rise bodes ill. Since it is rare for all three master prices to move together, the challenge for investors is to figure out which way the cross currents are flowing. If one master price is making a big move, its effect can...

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    India's Frenetic Inertia

    They say the first step to solving a problem is recognizing that you have one. With its recent moves to shore up sagging growth, Narendra Modi’s new government has finally acknowledged that India’s economy is in trouble. But unless it quickly finds a coherent reform strategy, Modi’s second term could fizzle out into economic failure.

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    Gavekal Research

    The Yen Dilemma

    Since the beginning of the month, the yen has been one of the few major currencies to strengthen against the US dollar. At the same time, Japanese government bonds have not escaped the global bond rally. This presents the BoJ’s chiefs, who for the last three years have been pursuing a policy of “quantitative easing with yield curve control”, with a problem.

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    Gavekal Research

    No Time To Be Chicago Trained

    Technocrats globally are under the cosh from populist politicians who have tired of doing the sensible thing. In the developed world, checks and balances have insulated most big agencies, but the story is different in developing economies. The worry is that they are lurching off onto a development track that ends with fiscal blowouts and currency debasement.

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    Gavekal Research

    Emerging Markets After The Trade War

    Emerging markets did nicely out of the rumor, less well from the fact. As hopes grew through June for some form of trade détente between the US and China, EM assets staged a broad rally. Similarly, EM currencies pushed broadly higher, on the back of a wider US dollar softness. Over the last week, however, EM equities and currencies have pulled back.

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    Gavekal Research

    Japan's Fiscal Dilemmas

    As investors worry about global economic weakening, attention is turning to the cavalry, which in recent years has been central banks. In Japan poor survey and sentiment readings have sparked surprisingly dovish public comments by the BoJ governor. In fact, investors may be better off listening to the prime minister, as the real game may now be fiscal.

    0
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    Gavekal Research

    EMs Hit The Trade Wall

    It is not clear if the latest trade actions launched by the US against Mexico and India form part of coherent plan. Such moves do signal that the US-centered multilateral trading system is hanging by a thread. This upending of the post-WWII order is especially bad news for trade-dependent emerging economies.

    0
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    Gavekal Research

    Gauging The EM Collateral Damage

    After Donald Trump’s weekend tweets, trade war is once again the center of attention for investors. The perceived probability of an escalation has risen sharply, and risk assets have sold off. Asian emerging markets have not escaped the rout, but it would be a mistake for investors to treat all Asian emerging markets equally.

    3
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    Gavekal Research

    Look Through The Trade Data

    After rallying 10% in 1Q19, emerging market equities have hit an air pocket as investors worry about global growth. Given the link between EM profitability and global trade, data showing that activity shrank in both volume and value terms in the three months to February has raised concerns. It hasn’t helped that the Washington side of the US-China trade talks has amped up “no deal” rhetoric in what is slated to be the final run-in of the...

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    Gavekal Research

    Modi And The Markets

    Indian markets are pricing in a victory by the ruling BJP in this year’s general election, a six-week process of mindboggling complexity that started on April 11. But while this will be the most likely single outcome when results are announced on May 23, nothing is a foregone conclusion under India’s unpredictable first-past-the-post system.

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    Gavekal Research

    The Populist Challenge In Indonesia

    These are populist times. After the elections of Duterte in the Philippines, Trump in the US, Bolsonaro in Brazil, and the return to power last year of Mahathir Mohamad in Malaysia, investors would do well to take note of the last minute opinion poll gains made by another rabble-rousing populist seeking election to high office in Indonesia.

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    Gavekal Research

    A Tactical Opportunity In Turkey

    Turkey has long been a market to steer well clear of, with investment opportunities poisoned by toxic politics and an ever-depreciating local currency. However, with the US Federal Reserve adopting a more dovish stance and following the weekend’s municipal elections, Turkish lira assets may now offer an attractive tactical opportunity.

    1
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    Gavekal Research

    Among EMs, Favor North Asia

    With their high beta to global growth, emerging markets seldom outperform when investors begin to get nervous about the health of the global economy. So it is no surprise that the risk-off move of the last week has seen the Brazilian real and Argentinian peso each sold off by more than -5% against the US dollar, while the Turkish lira has been propped up only by a regulatory squeeze on liquidity. But the jitters have not affected all emerging...

    0
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    Gavekal Research

    The Central Banker Who Cried Wolf

    In January, the BoJ governor promised more monetary easing if that was what it took for inflation to reach 2%. Investors increasingly doubt the fortitude of Japan’s financial sector as it endures the pain inflicted by the world’s easiest central bank. If that suspicion grows, the variable of adjustment may be a rising yen, which would be a big headache for the BoJ.

    0
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    Gavekal Research

    Towards A New Triple Merit Scenario

    Emerging market equities have benefited handsomely from the global risk-on move so far this year. With the prospect of a US-China tariff truce and the likelihood that China’s growth rate will stabilize in the coming months, EM may be on the cusp of a new “triple merit scenario” that could extend the equity rally through the rest of 2019.

    0
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    Gavekal Research

    Time To Underweight Thailand

    In the two weeks since the announcement that a movie star princess would stand for prime minister in Thailand's March election—though her candidacy was swiftly shot down by the palace—investors have largely shrugged off fears of renewed upheavals. However, this is not just Thai politics as usual. It reopens old wounds and throws current alignments into doubt.

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