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    Gavekal Research

    A Timely Downgrade For The UK

    Moody’s downgrade of the UK on Friday was just what the doctor ordered in at least three different respects. Firstly, the action was fully deserved, insofar as rating agencies’ criteria are to be taken seriously, which is not very far. Secondly, the downgrade accelerated the fall in sterling, which was exactly what the Bank of England and the Treasury had been trying for months to achieve, in the hope of stimulating some export growth, at least...

    0
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    Gavekal Research

    The Scope For A Pull-Back

    In our discussions with clients on the state of global equity markets, as well as in our own internal debate, the overwhelming belief is that the “risk-on/risk-off” period whereby equity markets suddenly shed -15% or more, only to bounce back strongly a few weeks later, should now be behind us. After all, global growth seems to be on a healthier footing (see Why the World Will be Better in 2013), animal spirits are on the mend with every week...

    3
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    Gavekal Research

    Merkel's Coming Election Loss: In Italy

    We do not yet know the winner of Sunday’s Italian election, but the losers are already clear. And in this particular election, who loses may be much more important than who wins.

    6
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    Gavekal Research

    EMU Growth: Beef Or Horse?

    A French food wholesaler has been accused of knowingly selling Romanian horsemeat to consumers and calling it beef, the latest charge in what is proving to be one of the biggest food scandals Europe has seen in a very long time. Conversely, one look at the latest European GDP numbers and one has to wonder if the story we have been served by policymakers on growth is in fact a pile of horse manure (see The Last Great Potemkin Village).

    3
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    Gavekal Research

    What To Buy The Grandchildren

    0
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    Gavekal Research

    Here Come The Helicopters

    Wednesday night may have marked the “emperor’s new clothes” moment of the Great Recession, in which the world suddenly realizes its rulers are suffering from a delusion that does not have to be humored. That delusion is economic fatalism: the idea that nothing can be done to break the paralysis in the global economy and therefore that a “new normal” of mass unemployment and declining living standards is inevitable for years or decades to come.

    6
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    Gavekal Research

    The Euro, Growth And Currency Wars

    Last year Europe managed to slap down systematic risk fears, making it safe for investors to return to the markets. But then another problem arose: the strengthening euro. A number of European officials have been venting concern—Bundesbankers publicly derided Japan for “currency war” behavior and this week Francois Hollande called for a euro target. Yesterday the Big Guy joined the conversation: ECB governor Mario Draghi said that if the...

    9
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    Gavekal Research

    The Last Great Potemkin Village

    On the surface, it would seem that the euro crisis has calmed. Markets have rallied since the summer and, to borrow a phrase from Herbert Hoover, “prosperity is just around the corner.” But outward appearances in Europe are like a Potemkin village. Behind the well-scrubbed facades, Southern Europe is collapsing. Anyone convinced that the European monetary union has come through the crisis stronger is a victim of the slickest PR campaign in...

    21
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    Gavekal Research

    A Perfect Storm In Europe?

    Last week we argued that the most likely scenario for Europe was a messy and rather boring muddle-through, where the biggest risk was not a reprise of the euro crisis but prolonged stagnation. No sooner did that missive go out than Spanish premier Mariano Rajoy was engulfed by allegations of getting payouts from a party slush fund. Spanish bond yields have risen by 50 basis points over the last two weeks, with nearly half that move coming...

    3
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    Gavekal Research

    Not A Sterling Year For The UK

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    Gavekal Research

    The Case For A European Recovery

    Attractive valuations and bountiful liquidity have driven stunning performance in most eurozone financial markets since last summer. Yet for the recent “europhoria” to turn into a sustainable bull market, we must see both a cyclical economic recovery and further enhancements in governance arrangements. Among the GaveKal team, my more optimistic view stems from the fact that most of the negative dynamics that drove Europe’s economic crisis have...

    7
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    Gavekal Research

    Muddle-Through Europe: For How Long?

    A year ago, the choice in Europe seemed clear: either set a clear course for fiscal union, or let the common currency blow up. Yet somehow Europe avoided making a tough choice, settled for a murky muddle-through path – and markets applauded. European equities had a fine year, the euro has perked up to $1.35, and ten-year sovereign bond yields for two of the riskiest major economies, Italy and Spain, have settled around 4% and 5% respectively....

    0
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    Gavekal Research

    Europe's Goldilocks LTRO Scenario?

    3
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    Gavekal Research

    The French Time-Bomb: Defused

    On the 50th anniversary of the Elysees Treaty signed by Charles de Gaulle and Konrad Adenauer to seal the Franco-German partnership, one has to be struck by the considerable differences in recent economic performance between the two countries. The Economist’s November cover story of “the time-bomb at the heart of Europe,” illustrated with loaves of baguettes ready to blow, underlined these divergent paths, amid fears stirred by the election of...

    0
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    Gavekal Research

    Russia: Trust But Verify

    As Gerard Depardieu gets Russian citizenship, wine exports to Russia are almost certain to get a boost. But Europe probably hoped for more after the country’s entry into WTO last summer. And indeed, tensions were thick at an EU-Russia summit held in Brussels just before Christmas, where the EU trade commissioner threatened legal action against Russia and sniped that, “far from using its new membership of the WTO as a tool for broader reform,...

    5
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    Gavekal Research

    The Cracks Are Widening

    Over the past four days, the Swiss Franc has lost –2.5% against the euro. This precipitous move follows a one year period when the CHF constantly tested the upper bounds of the EUR peg. It is another decisive piece of evidence that highlights the eurozone’s improved financial conditions.

    2
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    Gavekal Research

    Is Japan Gunning For Europe?

    It almost looks like Japan has Europe’s export champions in its cross hairs. Yesterday saw another significant bout of yen weakness and this time it was particularly pronounced against the euro. Indeed, the yen lost 1.8% against the single currency, the biggest one-day drop since mid-September last year and is now trading at ¥117.8/€, the lowest level since May 2011. Given that Germany is a major trade competitor, and that Japan recently...

    0
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    Gavekal Research

    And Now For The Telecom Union

    0
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    Gavekal Research

    Euro Strength - A Winter Phenomenon?

    Currencies are notoriously tricky for they can have multiple drivers: interest rate differentials, growth differentials, divergences from their historical purchasing parities, trade flows, cross-border M&A deals, etc. Worse yet, market drivers can turn on a dime. For example, investors love the Australian dollar for its interest rate pick-up—until the global environment turns wobbly, and then they hate the AUD for the deteriorating trade...

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    Gavekal Research

    Goodbye Break-up

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    Fathom China

    Profile: Geely: The Swedish Gamble

    China’s love affair with the automobile over the past decade has led to two types of car companies: joint ventures between foreign brands and state enterprises, and upstart private-sector firms making cheap cars. In the second category, Geely ranks among the best. The company is run by a self-described peasant who maintains absolute control over a large number of auto makers and suppliers, some listed and some not. This report focuses on the...

    0
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    Gavekal Research

    A Clown Comeback Unlikely In Italy

    1
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    Gavekal Research

    Budgets And Monkeys

    1
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    Gavekal Research

    Value In Bombed-Out EMU Stocks?

    In recent months a reduced focus on austerity and promises of monetary support from the European Central Bank has led to The Decline Of European Risk. The markets have rewarded these developments, with the MSCI EMU outperforming the MSCI World by eight percentage points since the European Union summit in late June. But the rallies in European assets have not been uniform.

    0
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    Gavekal Research

    Britain's Two Cheers For Carney

    5
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    Gavekal Research

    The Changing Face Of The Euro Crisis

    When Angela Merkel imposed the IMF on Europe in 2010, her move was initially interpreted as insulting for the EU commission and for the ECB, as well as a slippery maneuver to escape the debate over eurobonds. Now this plan has backfired, as the IMF has become an ally with the other troika actors against “German management” of the recovery process, with important implications for European financial markets.

    0
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    Gavekal Research

    And Meanwhile In Iceland

    The negotiations over the latest “extend and pretend” deal in Greece is, as usual, focusing on to what degree the economy should be strangled as retribution for past financial sins. According to the logic of the geniuses who created the euro, the population of Greece — as well as Spain, Ireland, France, Italy, Portugal, etc — has to suffer because there is "no other solution.”

    9
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    Gavekal Research

    Aa1 Mes Amis! - Francois Chauchat

    There is a distinctly Gallic reason for Donizetti’s “La fille du regiment” receiving a warm reception at the Paris Opera this autumn: each act ends with a resounding “Cocorico” at the same time as a giant picture of a proudly posturing rooster falls on the stage. Success guaranteed. Unfortunately, a perusal of the economic press the following morning will remind audiences that the Paris Opera is one of the few places where unabashed national...

    14
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    Gavekal Research

    European Seminar Presentations - With Anatole, Charles, Francois And Andrew

    0
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    Gavekal Research

    Goodbye Default Risk, Hello Volatility

    The global scramble for yield has caused investors to pour billions into emerging market bond funds. In a remarkable twist on recent history, markets such as Mexico and Indonesia have started to look like havens in the storm. Yet investors would be wrong to conclude that risk has been removed from emerging market fixed income investing. While solid fundamentals and lower total indebtedness has undoubtedly cut the chances of default, we would...

    1
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    Gavekal Research

    The Well-Kept Secret Of European Growth

    In the very early years of the last decade, I remember Warren Buffett saying that he would not consider investing in Europe “because there is no growth out there.” At that time, his widely shared belief was built on the extreme weakness of the German economy, the then sick giant of Europe. Like others, he missed a five-year long equity rally with outstanding performance by many European growth clusters that he was not even looking at: Spain, the...

    2
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    Gavekal Research

    UK Economy Is Still A Sick Man

    The British economy rebounded strongly in the third quarter, shedding the memory of a double-dip recession as it soared to the stratosphere with 4% annualised GDP growth. That, at least, might be the view of a Martian economist who knew nothing about earthling life. Such creatures seemed to be operating in the financial markets yesterday, to judge by gains in sterling and losses in the gilt market in what was otherwise a mildly “risk-off” day....

    2
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    Gavekal Research

    Welcome Back To The Euro Crisis

    There are plenty of plausible explanations for yesterday’s slide in equity prices and “risk-on” currencies, but one you are unlikely to have read in financial media relates to recent events in Dublin and Berlin. As we warned last Friday, the purported EU banking union agreement was anything but a done deal—and sure enough, this plan has already begun to unravel, creating a dangerously complicated new dynamic between the German, Irish and Spanish...

    2
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    Gavekal Research

    Mystical Rapture And The Euro

    Of all the miracles, or conjuring tricks, behind the euro’s unlikely survival, perhaps the most intriguing is that investors buy-in to the hypnotic power of magic words. Angela Merkel or Mario Draghi have only to say “Abracadabra” and all the Masters of the Universe fall into an obedient trance. What else but magic or hypnosis explains the narrowing of bond spreads, the rally in the euro and the powerful gains in Spanish equities in response to...

    1
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    Gavekal Research

    Eastern Europe’s Competitiveness Boom

    It may not have been enough to fully distract Dominique Strauss Kahn from extra curricular pursuits, but in 2008 it was Eastern Europe that put the IMF back to work. Ukraine, Hungary and then Latvia all needed to tap the fund in the aftermath of Lehman Brothers’ bankruptcy. After a substantial credit bubble leading up to 2008, most Eastern European economies (Poland excepted) have experienced a sharp and painful deleveraging. Although less...

    4
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    Gavekal Research

    The Failure Of Fiscal Sado-Masochism

    The controlled experiment continues and the results are getting clearer by the day. Since 2009, Britain and the US have applied diametrically opposite fiscal policies to two broadly similar economies, while keeping monetary policies almost exactly the same. Britain has raised taxes and cut public spending with more determination than any other G7 country, while the US government has made relatively little effort to tighten fiscal policy. The...

    9
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    Gavekal Research

    If I Were A German

    6
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    Gavekal Research

    The French Bond Market Puzzle Explained

    The superb performance of the French bond market has come as a big surprise for an overwhelming majority of investors and observers. Moody’s pulled France’s AAA sovereign credit rating in January, and in May the country elected the socialist Francois Hollande, who promptly implemented an economic policy that the business community roundly disapproved. Yet the 10-year OAT-bund spread declined to a range of 50-70bp recently, from almost 200bp in...

    8
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    Gavekal Research

    GaveKal Five Corners

    One of the main themes of our research since last summer has been the possibility of a sharp improvement in the US economy—and the likelihood that US economic conditions, whether good or bad, would set the tone for financial markets in 2012, even while investors and policymakers remained obsessed with the chaos in Europe. In other words, the US economy would produce the “signal” for markets, while Europe would create a lot of random noise. This...

    0
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    Gavekal Research

    Europe And The Chinese Consumer

    It would be easy to conclude that the good times are over for European consumer-good retailers in Asia. Investors recently felt a chill autumnal breeze after Burberry, the British retailer of spiffy trench coats and scarves, issued a profit warning based on lower Chinese “gift giving”. Concerns are centred on a slowdown after a brief period when Chinese shoppers seemed to rule the world. These fears are overdone since European retailers are...

    4
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    Gavekal Research

    A Reprieve From Repression?

    Although new asset purchase programs by the world’s major central banks promise to escalate the manipulation of market prices (see The Fed’s Money Tree), we detect a flicker of sanity among prudential regulators. Interestingly, the fight back against financial repression has come from some unlikely quarters, notably Paris.

    0
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    Gavekal Research

    Do Not Fear The German Recession

    Germany has been the main bright spot of the eurozone economy since the Global Financial Crisis, with +3% growth in 2011 after a +4.2% bounce in 2010. But this year’s economic slowdown now threatens to head into recession territory. Not only is the export industry under pressure from a global and European slump, but many are questioning whether the renewed prosperity in the domestic economy can last. In my view, these concerns are overplayed....

    0
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    Gavekal Research

    Why Europe Just Got Worse

    20
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    Gavekal Research

    A Money-Making Proposal To Save The Euro

    10
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    Gavekal Research

    Draghi's Plan

    So it is done now. The European Central Bank has announced a plan: it is called the OMT, for Outright Monetary Transactions, and to make a long story short, this plan is essentially a way to bypass the German opposition to providing a banking license to the size-limited ESM bailout vehicle. It does this through conditional but potentially unlimited ECB purchases of short-dated government bonds. By focusing on the short end of the curve (one to...

    4
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    Gavekal Research

    Frugal Italy And The French Carry Trade

    From time to time financial markets throw up pricing anomalies which are not backed by underlying economic reality. At the height of the global financial crisis in 2009, for example, yields on investment grade US corporate bonds were as much as triple the level for comparable local government bonds. At such a point, the rational investor has to admit that something has fundamentally changed, or, instead, recognize that markets have a bad dose of...

    9
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    Gavekal Research

    False Optimism

    There are days when I feel very discouraged. A supposed upside to the economic misery in Europe is that, thanks to deflation and a weaker euro, the EMU’s real effective exchange rate has fallen considerably since 2008. But it is preposterous to tout the external trade benefits of a collectively weaker REER—when the trend in real intra-EMU exchange rates is what put us in this boat in the first place.

    3
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    Gavekal Research

    Look To Asia For Value

    The outperformance of US equity markets has certainly been impressive. Since the start of 2010 the S&P 500 is up +26%, beating the MSCI AC World by 16 percentage points. This outperformance has been driven by both US corporate strength and the weakening EMU and Asian economies. While we remain convinced of the long term structural re-rating of US equities (see Once More Into The Breach or Weeks When Decades Happen) after such a period of...

    20
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    Gavekal Research

    The Decline Of European Risk

    After a two month rally in Eurozone risk assets, including one month of outperformance against the US, disciplined investors are naturally tempted to sell. Surely, the next couple of months will provide us with additional episodes to the euro crisis. The German constitutional court is expected to take a decision on whether the ESM bailout fund breaks German law on September 12, the same day as the Netherlands concludes general elections...

    10
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    Gavekal Research

    The True Test For the Euro?

    We have argued since 2005 (see Divorce – Italian Style) that the true test of the euro’s survival would take place in Italy rather than Spain, Greece Ireland or Portugal. Not because of Italy’s high debt-to-GDP ratio (unlike in France, Italy’s debt is mostly domestically financed) but instead because of Italy’s unique political structure. In almost all euroland member states, a given country’s “elite” typically belongs either to the political,...

    10
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