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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
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
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
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 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 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
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 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 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 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 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
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, 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
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 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
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
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 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
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
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 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
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
Nick Andrews
Feb 10th 2021
A Canary Chirps
In late January, just as the GameStop squeeze was beginning to attract attention, Louis advised investors “to keep European banks on their screens.” As the canary in the coal mine of global financial markets, eurozone banks would signal broader trouble ahead if they continued to fall. But if they rebounded, it would be a sign the global inflation trade was back on (see Third Time The Charm?).
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Gavekal Research
Charles Gave, Didier Darcet, Louis Gave
Feb 05th 2021
Webinar: Uncharted Territory And Portfolio Construction
Charles has sought to codify his many investment rules into a rigorous portfolio construction framework, which includes identifying periods when returns stop being normally distributed and move into the "tails". Right now markets could be going through a phase change, and in this webinar, he explained why. He was joined by Didier, who who heads the quant team in Paris, and Louis.
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Gavekal Research
Anatole Kaletsky
Feb 04th 2021
Six Reasons To Stay Bullish
Is the recent speculative mania the beginning of the end of the post-2009 bull market in stocks? Or is it only the end of the beginning? Anatole argues that today’s speculation is reminiscent of the later stages of dot-com bubble, but he remains a confirmed bull on global equities. In this paper he offers six reasons why this is no contradiction.
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Gavekal Research
Anatole Kaletsky
Feb 02nd 2021
The Real Effect Of The Vaccine Row
The fiasco of Europe’s vaccination plan and Brussels’ retreat from its standoff with the UK and AstraZeneca have has caused the euro to weaken. While this reaction makes sense, the euro is, in fact, unlikely to fall much more against sterling, while the euro-dollar exchange rate will depend on how politicians behave in Washington, more than bureaucrats in Brussels.
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Gavekal Research
Nick Andrews, Cedric Gemehl
Feb 01st 2021
Strategy Monthly: Europe’s Troubled Trajectory
For the eurozone, it seems everything went wrong at the end of 2020—and things have only got worse at the beginning of 2021. Unfortunately, hopes for recovery are pinned on a vaccination program which has been late to start, slow to gather speed, and beset by problems. Nevertheless, despite this gloomy prognosis, there will still be opportunities for investors.
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Gavekal Research
Arthur Kroeber
Feb 01st 2021
Vaccine Slippage
It is looking likely that most countries will miss their Covid-19 vaccination targets for 2021. This creates a risk of slower than expected economic growth, especially in Europe which take half a year to emerge from its double-dip recession. Moreover, any activity dependent on international travel or large-scale gatherings will remain severely depressed until well into 2022.
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Gavekal Research
Charles Gave
Jan 28th 2021
What The VIX Spike May Mean
On Tuesday, Louis noted that among ill tidings for global equity markets was a rollover in European bank stocks. I want to build on this idea using portfolio construction work done by our Paris team and specifically the insight that when the VIX exceeds a critical threshold, markets globally tend to seize up.
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Gavekal Research
Nick Andrews
Jan 28th 2021
Video: The UK — At The Center Of The Maelstrom
It’s been an especially stormy start to the year for the United Kingdom, which finds itself at ground zero for the spread of a new and highly infectious strain of the coronavirus, even as it struggles to cope with withdrawal from the European Union’s single market and customs zone. Yet the UK’s financial markets are performing relatively respectably year-to-date as investors focus on the UK’s strong vaccination performance and look ahead to the...
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Gavekal Research
Dan Wang
Jan 26th 2021
Supply-Chain Risks For The Covid Vaccine
The race to vaccinate the world in the wake of the Covid-19 pandemic will be one of the most complex projects ever attempted. Most developed economies aim to fully vaccinate their adult population by year’s end. Dan outlines the manufacturing and logistical challenges involved the vaccine rollout
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Gavekal Research
Louis Gave
Jan 26th 2021
Third Time The Charm?
Wherever you look, it seems there are signs of market froth, and evidence abounds that we are in an environment of “more money than fools”. Yet amid all these signs, one is especially troubling: last year US investor margin debt rose by a record US$200bn. This is sobering because the two previous record-setting peaks in margin debt growth did not end well.
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Gavekal Research
Cedric Gemehl
Jan 22nd 2021
Where Europe Went Wrong
Mass vaccination programs were always going to suffer teething troubles. But the rollout of Covid vaccination campaigns in European Union countries has been especially slow and troubled compared with the UK and US. This has left investors wondering about the reasons for the vaccine underperformance, whether it will persist and what the economic impact might be.
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Gavekal Research
Anatole Kaletsky
Jan 22nd 2021
Risks In The Biden Era
In December, Anatole outlined 10 disparate risks that could derail the bull market in 2021. That was before the Democrats won full control of the US government, paving the way for approval of Joe Biden’s new super-size stimulus package. In light of the developments over the last month, Anatole reassesses his 10 risks.
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Gavekal Research
Charles Gave
Jan 20th 2021
The Logos, Idiotes And Demagogues
Charles revisits the idea of the Greek "logos", "idiotes", demagogues and citizens, and how the Greeks believed that those who controlled the logos—the language used to describe the world—ipso facto controlled the political system. Problems arise when a new, competing logos started to emerge.
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Gavekal Research
Cedric Gemehl
Jan 20th 2021
Towards Stealth Debt Cancellation
The grand panjandrums of the European Central Bank meet Thursday amid growing calls for them to cancel the vast sums of eurozone member governments’ debt they have bought over the last year. There is zero chance they will formally agree to any debt cancellation, but the ECB may do so by stealth.
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Gavekal Research
Tom Miller
Jan 18th 2021
Biden’s United Front Against China
As the outgoing Trump administration exits with a flurry of executive actions directed against China, Beijing is not sitting around hoping for Joe Biden to spark a new era of détente with the US. The recent tightening of control in Hong Kong shows that President Xi Jinping has no intention of giving an easy early ride to a leader who has pledged to build a “united front of US allies and partners” to constrain a resurgent China. The European...
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Gavekal Research
Cedric Gemehl
Jan 18th 2021
Europe’s New Political Cycle
After a six-month respite, European political risk is back on the radar screen. Last Wednesday, ministers from the Italia Viva of former prime minister Matteo Renzi walked out of Italy’s cabinet in a dispute over how EU Covid recovery funds should be spent, leaving the coalition government of prime minister Giuseppe Conte scrabbling to survive. On Friday, the cabinet of Dutch prime minister Mark Rutte resigned over a scandal involving the over-...
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Gavekal Research
Charles Gave
Jan 12th 2021
The UK After Brexit
Four and a half years after the vote, Britain is properly out of the European Union and moving into a new era. It will surely be a freer nation, says Charles, but in this piece he asks: will it be a richer one? Spoiler alert, he thinks the upshot will be the City of London emerging as the world’s über financial capital.
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Gavekal Research
Arthur Kroeber
Jan 08th 2021
Strategy Monthly: Darkness Before Dawn? The Covid Vaccine Outlook
As a new wave of Covid infections grips major economies, and social restrictions return, the hopes for a return to pre-pandemic normal rest on the rollout of vaccines. With vaccine production ramping up, most developed economies could reach herd immunity by late in 2021. But many emerging economies will take longer, and several risk factors could still derail the rollout.
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Gavekal Research
Charles Gave
Jan 08th 2021
Portfolio Construction Over The Next Two Years
On Thursday, Anatole set out his view that undivided Democratic Party control of both the executive and legislative branches of the US government opens the door for unconstrained Keynesian stimulus, which will be highly positive for the US economy and equities. It will probably come as little surprise to Gavekal clients that I should dispute whether such unconstrained Keynesianism will be good news either for the economy or for US equities
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Gavekal Research
Nick Andrews, Cedric Gemehl
Jan 06th 2021
Europe’s New Lockdowns
On Tuesday, Germany followed the United Kingdom by imposing fresh restrictions on activity and movement that in effect amount to a new lockdown comparable—and in some areas even stricter—than the anti-coronavirus shutdown imposed over the second quarter of last year. With infection rates across Europe stubbornly high despite the controls already in place, and with fears mounting about the spread of new viral strains, the risk is high that other...
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Gavekal Research
Louis Gave
Jan 04th 2021
Gravity Or Liquidity? Which Will Win In 2021?
In hindsight, 2020 showed that if three conditions are met, a stock can break free from the earth’s gravity, and lift off for destinations only sci-fi writers could have imagined. Consequently, one of the most important questions for investors in 2021 is whether such inter-galactic travel can continue. Or will the coming year instead see a shift in investor behavior, with gravity once again exerting its downward pull?
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Gavekal Research
Louis Gave
Dec 22nd 2020
A Very Merry Christmas From Everyone At Gavekal
Unless something out of the ordinary happens (and given the year we’ve had, the bar is set quite high) this will be our last Daily of 2020. It is thus a chance for me to wish our readers a very Merry Christmas and to thank you for your support, friendship and interactions over the past year. As we never tire of saying at Gavekal, ideas presented in our research usually originate with our clients; or at least, the better ones do (we come up with...
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Gavekal Research
Anatole Kaletsky
Dec 22nd 2020
Goldilocks And The 10 Bears Of 2021
In recent years Anatole has written a series of articles describing 10 key risks for investors. He readily accepts that this year’s exercise was rendered redundant by the emergence of Covid-19 in January. Next year, however, he believes that a greater range of factors could weigh on markets and in this piece assesses them one by one.
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