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Gavekal Research
Tan Kai Xian
Feb 25th 2019
The Mystery Of The Missing Stimulus
Since late 2016, the US trade deficit has been widening. Usually, when the US trade deficit expands, the effect is stimulative for the rest of the world. However, this time around there have been no signs that non-US economies are enjoying a resulting pick-up. In this report, KX examines possible explanations for the failure of this longstanding relationship.
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Gavekal Research
Will Denyer, Tan Kai Xian
Nov 21st 2018
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.
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Gavekal Research
Tan Kai Xian
Nov 14th 2018
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...
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Gavekal Research
Tan Kai Xian
Sep 20th 2018
The Message From US Housing Construction
Wednesday saw a soft US housing data release for August, pointing to a coming weakening in residential construction. With the Fed raising rates and 10-year treasury yields well above 3%, equity investors may sniff late-cycle decay. KX shares such concerns, but advises investors to hold their noses for a while longer.
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Gavekal Research
Will Denyer, Tan Kai Xian
Jul 04th 2018
A Better Fed Model
The “Fed model” which values US equities relative to bonds is now more than 20 years old. In that time, it has become widely used and has attracted equally widespread criticism. In this paper Will and KX revise the original to iron out some of its flaws, and come up with an improved model which offers greatly superior risk-adjusted returns.
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Gavekal Research
Tan Kai Xian
Jun 28th 2018
The New Model Duration Rule
Choosing the right level of duration for a bond portfolio is devilishly tough. It is doubly so when the global interest rate environment is shifting. For this reason KX is introducing a new top-down based duration management tool which encouragingly offers superior signaling and can be used across multiple developed economy bond markets.
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Gavekal Research
Tan Kai Xian
Apr 04th 2018
US Auto Sales: No Longer A Growth Driver
Strong US auto sales in March mask a stagnating longer term trend and rising auto loan delinquencies. Happily, as KX explains, neither has broader implications for overall US consumer demand. Although auto sales may no longer be contributing to US growth, rising bad loans in the sector do not prefigure a wider consumer credit crisis.
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Gavekal Research
Will Denyer, Tan Kai Xian
Mar 28th 2018
Don’t Fret About Libor
A disproportionate increase in Libor relative to other benchmark short term rates over recent months has got many observers flustered. In this concise paper, Will and KX dig down to the cause of the increase, and explain what it does and doesn’t mean for portfolio investors.
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Gavekal Research
Tan Kai Xian
Mar 05th 2018
The US Current Account, Trump’s Trade War And Equities
US president Donald Trump’s announcement last week of tariffs on imports of steel and aluminum are just the first salvo of a trade war aimed at reducing the US$566bn annual US trade deficit. Yet even far more extensive tariffs than those announced on Thursday will do nothing to narrow the US trade gap. As KX argues in this report, more powerful economic forces are working to widen the US trade and current account deficits over the coming...
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Gavekal Research
Will Denyer, Tan Kai Xian
Feb 02nd 2018
Take Profits On US Homebuilders
Our view that real growth in the US will remain supported this year at a similar level to 2017’s 2.5% rate is based on three main elements: rising business investment following December’s tax cuts; a moderation in consumption growth as labor market tightness slows job ceation, and a neutral to mildly positive view on residential investment (see The Outlook For US Growth And Prices). The third element—our neutral view on homebuilding—merits...
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Gavekal Research
Tan Kai Xian
Jan 16th 2018
The Yield Curve As A Duration Guide
With US stock markets scaling new heights, there are multiple reasons why nervous equity investors might want to reduce portfolio risk. The usual way to do this would be by increasing allocations to long-duration treasury debt. But with long-dated yields now rising, what duration of treasuries should investors hold? And when and how should they adjust duration?
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Gavekal Research
Will Denyer, Tan Kai Xian
Dec 05th 2017
Positioning For US Tax Reform
What’s not to like about tax cuts? Quite a lot as it turns out. Although the final shape of US tax reform has yet to be settled, there are enough common points between the House and Senate bills to allow Will and KX to conclude that the likely tax cuts will prove inflationary, and could prompt a more aggressive stance from the Fed. Despite some undoubtedly positive macro outcomes, the implications for investors are not exactly bullish.
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Gavekal Research
Tan Kai Xian
Nov 07th 2017
Equities When The Dollar Declines
The US dollar has strengthened over the last couple of months. But the relative maturity of the US cycle, the US dollar’s overvaluation, and the prospect for changes in monetary policy stances outside the US all argue for US dollar depreciation over the medium term. Against this bearish backdrop, KX examines the characteristics of equities that tend to outperform when the US currency is depreciating.
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Gavekal Research
Tan Kai Xian
Oct 26th 2017
US Equity Exposure For The Late Cycle
The US equity bull run continues even as the US economy issues an increasing number of late cycle indicators. For investors who want to maintain exposure to the stock market but are getting nervous that the economy may soon turn down, KX examines the characteristics that allow stocks to outperform in the late stages of the cycle.
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Gavekal Research
Tan Kai Xian
Oct 13th 2017
Don’t Count On A Miracle
Do animal spirits in the US live after all? As profits have picked up, firms’ capital spending has rebounded from contraction territory in 2015-16 to a perky 6.7% QoQ rise in 2Q17. A range of business surveys suggest the trend was sustained through the third quarter. Much is at stake, for if capital spending can break out of its post-2008 range, it is just possible that a productivity surge can follow, lifting underlying economic growth. KX...
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Gavekal Research
Tan Kai Xian
Oct 10th 2017
A Portfolio For The Monetary Cycle
Every US recession since the 1960s has been preceded by the combination of a fall in true money supply growth relative to real GDP growth, and a fall in the unemployment rate below NAIRU. In this paper, KX constructs a model portfolio which reduces exposure to risky assets in response to these signals, and finds that it offers investors superior risk-adjusted returns.
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Gavekal Research
Tan Kai Xian
Aug 29th 2017
Not That Canadian
The US and Canadian economies share many similarities due to their geographical proximity, similar level of development and Anglo-Saxon traditions of common law and open political dialogue. So it is curious that each economy’s labor market dynamics are strikingly different. This observation has more than hypothetical significance as workers become hard to find at the right price in late-cycle America.
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Gavekal Research
Tan Kai Xian, Will Denyer
Aug 11th 2017
Can The US Property Engine Fire Up?
Two years ago banks started to make it harder for US construction firms to borrow and soon after activity began to fizzle. While blame has been pinned on skilled worker shortages and rising costs of both land and materials, KX and Will think financing was the key issue. The good news is that banks seem to be again loosening their purse strings.
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Gavekal Research
Cedric Gemehl, Tan Kai Xian
Jul 25th 2017
The Eurozone Is Now So Far Behind The US, It’s In Front
Among the many tricky tasks facing investors is to determine the relative positions of the US and eurozone economies in their respective business cycles. Over the preceding two cycles—the ones that peaked in 2000/01 and 2005/06—the two economies moved broadly in phase, with the eurozone lagging the US by around one year. Estimates from the International Monetary Fund and OECD suggest that that relative position is largely unchanged, with the...
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Gavekal Research
Tan Kai Xian, Will Denyer
Jul 20th 2017
Liquidity: More Bad News Than Good
Gavekal has long maintained that bull markets rest on three pillars: liquidity, valuations, and growth. Now with the Fed set to tighten further in an environment of weak bank credit growth, KX and Will warn that the liquidity pillar which has done so much to support the current bull market in US equities is looking increasingly shaky. That is especially ominous, given that valuations are no longer cheap and catch-up growth is played out for this...
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