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E.g., 04-12-2020
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    Gavekal Research

    Why Big Caps Are Still Blighted

    Big cap stocks globally have had a horrible 2015 with the Volkswagen emissions scandal being just the latest “uncorrelated shock” to hit the sector. In Europe, German utilities RWE and E.ON have lost more than half of their market value, while oil and commodity producers everywhere have been hurt by a collapse in the price of their wares. Still, “blue chips” got that reassuring moniker because they tend to be the highest value counters on the...

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    Gavekal Research

    A Worrying Set Of Signals

    Regular readers will know that we keep a battery of indicators to gauge, among other things, economic activity, inflationary pressure, risk appetite and asset valuations. Most of the time this dashboard offers mixed messages, which is not hugely helpful to the investment process. Yet from time to time, the data pack points unambiguously in a single direction and experience tells us that such confluences are worth watching. We are today at such a...

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    Gavekal Research

    Libor Not Lehman

    With shares in Volkswagen down -28% since the diesel emissions rigging story broke last Friday, VW bond yields up sharply, and the securities of other European automakers hit hard by the news, investors face some uncomfortable questions. Is the risk posed by the scandal idiosyncratic, with the fallout likely to be confined largely to VW itself? Or could the risk prove systemic, with potentially catastrophic implications for the broader European...

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    Gavekal Research

    Gastarbeiter Redux

    The influx of hundreds of thousands of asylum seekers from war torn Syria, Afghanistan, Iraq and parts of Africa has laid bare familiar divisions within the European Union. This week’s deal to relocate 120,000 more refugees from Greece and Italy on top of the 40,000 agreed in May starts to address the problem. Many multiples more are making the trip to Europe, but only one country—Germany—is promising to take large numbers. Commentators often...

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    Gavekal Research

    What The VW Scandal Could Mean

    Last year as Europe tightened economic sanctions on Russia for its role in fomenting the Ukrainian conflict, German business confidence readings took a bath. This was not surprising as German exports to Russia—a one time key growth market for Teutonic metal bashers—have shrunk by about €9bn in two years. However, once the dust settled on 2014 it became clear that far from being decimated, Germany’s highly diversified exports had actually risen...

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    Gavekal Research

    How Much Does China Really Matter?

    How much does China’s slowdown really matter to the rest of the world? At first this might sound like a silly question. After all, China is home to a fifth of humanity, it is the world’s second largest national economy and its second largest importer, and in recent years has contributed between a quarter and a third of global growth. What’s more, the recent volatility in China’s stock markets and exchange rate caused shockwaves around the world...

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    Gavekal Research

    Europe And Chinese Risk

    Yesterday Joyce argued that the slowdown in China was not a major problem for most developed economies (see How Much Does China Really Matter?). Arguably an exception to that general observation are Europe’s multinationals, which over the last decade or so have thrived by selling goods that Chinese firms and households love to buy.

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    Gavekal Research

    Is The China Panic Abating?

    For the past six weeks, global markets have been in a China-centric panic, sparked partly by bad economic data, but mostly by policy bungling from China’s policymakers. Having spurred a huge expansion in equity margin debt, regulators turned tail in June and cracked down on the practice. As an equity market crash unfolded, policymakers took to swinging a big stick: price-keeping operations were tried, stock trading was halted and speculators...

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    Gavekal Research

    How Corbynomics Could Work

    Whatever you may think of Jeremy Corbyn, he has a point about economic policy. Actually he has two good points and one bad one. Corbyn has been right about what he called People’s Quantitative Easing, a potentially transformative idea for restoring economic prosperity that was proposed years ago by several radical economists but had never been taken seriously in Britain until it became the centerpiece of Corbynomics. Corbyn has also been right...

    6
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    Gavekal Research

    Is The Bull Market Over? (II)

    Yesterday we examined the three big fears that—in the absence of any markedly negative news from the OECD economies—lie behind the recent equity market sell-off, and which have prompted many investors to ask “Is The Bull Market Over?”

    2
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    Gavekal Research

    Fixing Germany’s Current Account

    Germany’s trade surplus for July rose to a record €25bn, lifting the country’s accumulated current account surplus over the last 12 months to a hefty 8.2% of GDP. The fall of the euro has clearly made German exports more competitive outside the single currency area. As a result, Germany’s expanding trade surplus is by far the dominant influence on the eurozone’s external accounts. Over the last 12 months, Germany’s trade surplus with the rest of...

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    Gavekal Research

    The US Current Account Deficit And World Markets

    Spotting turning points in the US current account is central to Gavekal’s research method, as such shifts impact all other economic relationships. When the US dollar is strong the US tends to run a big current account deficit, providing the world with lots of “earned dollars.” Conversely, a weak dollar eventually leads to a shrunken US current account deficit and more incentive to borrow in dollars. Big moves in the dollar exchange rate create...

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    Gavekal Research

    German Exports Are Not Kaputt

    Predictions of the German export machine’s demise followed southern Europe’s 2011 slide into deflation, the yen’s 2012/2013 devaluation, and now the emerging world’s slowdown. And yet German exports hit a new high in 2Q15 and the latest IFO survey points to more strength in 3Q. Far from going kaputt, German exporters can likely handle an emerging world crunch due to their geographical diversification, the benefit of a weak euro and improving...

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    Gavekal Research

    Can Europe Be Part Of The Solution?

    The eurozone is no longer the center of the global market panic, but an interesting question is whether it can be part of the solution. Investors ostensibly sold equities yesterday on more evidence of economic weakness in China. However the deeper fear is of a faltering global growth outlook at a time when the Federal Reserve is looking to hike rates. Eurozone equities topped out back in April as the initial flush of the European Central Bank’s...

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    Gavekal Research

    The Four Horsemen Of The Apocalypse

    Markets are entering bear market territory and what vexes Charles and Louis is whether the root cause is a liquidity crunch, a solvency crisis or a deflationary bust. In this wide ranging chart book they explore the problem through the revelatory prophecy of four riders whose presence marked the coming of judgement day. We don’t mean to pile on the misery in what is shaping up as a tough week and the moderately good news is that the-end-of-times...

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    Gavekal Research

    As The Crisis Ebbs, Will Europe Turn Japanese?

    The China-induced crisis of recent weeks was noteworthy for being a major global risk-off event that, for once, was not made in Europe. Indeed as markets crumbled on Monday the euro soared. Europe’s graduation from weak link to quasi safe haven is not so surprising given the patch-up job done on Greece and a gathering cyclical recovery—private sector credit growth in the eurozone for July was a fairly perky 0.7% YoY. The question is whether the...

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    Gavekal Research

    The Real Message From Oil

    Violent swings in oil prices are destabilizing economies and financial markets worldwide. When the oil price halved last year, from US$110 to US$55 a barrel, the cause was obvious: Saudi Arabia’s decision to increase its share of the global oil market by expanding production. But what accounts for the further plunge in oil prices in the last few weeks—to lows last seen in the immediate aftermath of the 2008 global financial crisis—and how will...

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    Gavekal Research

    Who Benefits From The Fall Of Europe’s Export Champions?

    Panic in the emerging world has reverberated back to the European equity markets through the de-rating of high quality exporters. What we call “export champions” get more than half of their sales from outside Europe and account for about half of Europe’s market value within broad indices. Yet the travails currently faced by this group have not resulted in Europe’s domestically-focused “national victims” outperforming. Instead, it is the “...

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    Gavekal Research

    How To Build A Reserve Currency

    A store of value, a unit of account and a medium of exchange—these are the three essential characteristics of any proper currency. Needless to say a reserve currency must possess all three. But they are far from enough. A reserve currency must have at least six other attributes too, as Jacques Rueff and Robert Triffin did so much to establish.

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    Gavekal Research

    Modest Eurozone Growth May Be Enough To Lift Markets

    Eurozone economic growth disappointed in the second quarter, coming in at 0.3% quarter-on-quarter, compared with the expected 0.4%. At 1.2%, the year-on-year growth rate was the highest since 2011, but it remains too weak for comfort. For equity investors, it is crucial that gross domestic product grows strongly enough for corporate profits to rise significantly (see What A Few Decimals Of GDP Growth Could Change). Happily, corporate earnings...

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