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Gavekal Research
Feb 10th 2015
Five Corners (11 February): The Earnings Squeeze
Overview: Charles contrasts US companies' strong accounting profits with the less impressive numbers reported in the national accounts and asks some hard questions. United States: The latest earnings season revealed a tale of two markets with multinationals and energy firms lagging while domestics surge ahead. Will and KX ask whether this can last. Europe: François argues that if eurozone GDP growth picks up to the degree that the...
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Gavekal Dragonomics
Ernan Cui
Feb 09th 2015
Will The Middle-Class Consumer Please Stand Up?
The big beneficiaries of China’s tight job market have been lower-income rural migrant workers. This is no bad thing, but these households account for a very small share of total consumption. The real drivers of consumer spending in China, as elsewhere, are the middle classes—and their income growth has been slowing.
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Gavekal Dragonomics
Arthur Kroeber
Feb 06th 2015
China: More Pain Than Gain
China is in for a rough year. The economy is in its most fragile state since 1998, at the nadir of the Asian financial crisis. Gross domestic product grew at an annualized rate of just 6.1% in the last quarter of 2014, and most key indicators suggest that the first half of 2015 is unlikely to be much better. Industrial profits are weakening sharply, which is likely to dampen wage growth and consumption—the two bright spots over the last couple...
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Gavekal Research
Arthur Kroeber
Feb 06th 2015
More Pain Than Gain
China is in for a rough year. The economy is in its most fragile state since 1998, at the nadir of the Asian financial crisis. Gross domestic product grew at an annualized rate of just 6.1% in the last quarter of 2014, and most key indicators suggest that the first half of 2015 is unlikely to be much better. Industrial profits are weakening sharply, which is likely to dampen wage growth and consumption—the two bright spots over the last couple...
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Gavekal Research
Thomas Gatley
Feb 06th 2015
5C China: Big Dark Cloud, Small Silver Lining
With commodity prices collapsing, the profits of China’s industrial sector are in free-fall (see [China] Profits Under Pressure). Since heavy industrial corporations make up a sizable proportion of China’s publicly-traded sector, this is bad news for listed company earnings. State-owned banks, which make up another large portion of China’s stock market indexes, also face earnings pressure as expected interest rate cuts hurt their margins and bad...
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Gavekal Dragonomics
Rosealea Yao
Feb 04th 2015
Peak Coal Is Nigh
Here’s some good news for China’s smoggy skies: the nation’s consumption of coal fell outright in 2014, for the first time since 1998. This decline—the result of a severe downturn in the most energy-intensive industries—has upended some long-held assumptions about China’s future trajectory of energy use. Last year’s unexpected combination of 7.4% GDP growth and just 2.2% growth in energy consumption means it is now very likely that China is...
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Gavekal Research
Long Chen
Feb 03rd 2015
Why RMB Stability Vs The US$ Matters
In China’s onshore market the renminbi is trading within a whisker of the weak side of its permitted trading band against the US dollar. Meanwhile in the offshore market the renminbi hit a two year low last Friday. Against the backdrop of a strong US dollar—in trade-weighted terms the US currency rose 9% over the three months to the end of January—these moves have prompted a number of clients to ask whether Beijing is about to steer a...
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Gavekal Dragonomics
Thomas Gatley
Jan 30th 2015
Profits Under Pressure
China looks like it should be a winner from falling commodity prices, as it is a large importer of raw materials. Unfortunately, the truth is almost exactly the opposite: lower commodity prices mean that its own energy, mining and metals firms are suffering. Add in the construction slump, and 2015 is shaping up to be a horrible year for industry.
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Gavekal Research
Louis Gave
Jan 29th 2015
Asia’s Encouraging Currency Stability
Three months ago to the day, the US Federal Reserve ended its outright purchases of treasuries. Three months before that, the ECB instituted negative interest rates. And whether by coincidence or causation, most commodity prices chose the past six months to unravel. The combination of these events has led to some sharp exchange rate moves. Over the past three months, commodity currencies have been taken to the woodshed: the Russian ruble is down...
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Gavekal Research
Jan 28th 2015
Five Corners (28 January): In Central Banks We Trust
Overview: When central banks led a war on inflation in the late 1970s and 80s they kept on fighting long after the enemy was beaten into submission. They are likely to take the same approach of using overwhelming force in today’s fight against deflation, says Anatole. United States: The Swiss may have given forward guidance a bad name, but the Fed should be taken at its word, argues Will Denyer. Unlike Anatole, he thinks that interest rate...
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Gavekal Research
Joe Studwell
Jan 27th 2015
The Case For A Real Chinese Bull Market
This report makes the case for a secular improvement in returns from Chinese equities. It does so by a political economy analysis of long-run equity market performance in the three East Asian developmental success stories most akin to China: Japan, South Korea and Taiwan. The basic argument is that when a high-growth economy shifts from policies of “financial repression” to a more liberalized financial system, a sustained period of improved...
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Gavekal Research
Arthur Kroeber
Jan 27th 2015
Chinese Equities: A Guide For The Perplexed
The 60% rally in China’s main onshore stock market was clearly one of the big stories of 2014. Whether this bull market can continue is obviously one of the big questions for 2015. As attentive readers will have noticed, we at Gavekal have formed a wide range of views on this subject. This note is an effort to summarize and, we hope, clarify our various opinions.
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Gavekal Research
Long Chen
Jan 25th 2015
5C China: The PBOC Loves To Be Feared
With consumer inflation modest, producer prices falling, and many other central banks in easing mode, the People’s Bank of China looks set to cut interest rates further this year following last November’s reduction (see Five Macro Questions For 2015). At the same time the central bank also seems intent on maintaining the pace of financial reform after last year’s moves to widen the renminbi’s permitted trading band and liberalize deposit rates...
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Gavekal Dragonomics
Long Chen
Jan 21st 2015
The Inevitable Rise Of Fiscal Deficits
China is now pushing forward the biggest reforms to its fiscal system in 20 years.. These important changes will however have one major and rather counter-intuitive consequence: the official government budget deficit will have to get much larger. In China’s case, a wider budget deficit will be evidence of progress not regress.
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Gavekal Research
Long Chen
Jan 20th 2015
In China, Bad News Is Just Bad
It never rains but it pours. China’s official statisticians announced today that the economy’s annual growth slowed to 7.4% in 2014, the slowest rate in 24 years. Their news came hard on the heels of yesterday’s -7.7% slump in the domestic A-share market, triggered by a tightening in the regulations governing margin trading. That intervention came out of the blue, although the regulators are clearly concerned by the growth of illicit margin...
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Gavekal Research
Thomas Gatley
Jan 14th 2015
Where's The Arbitrage In China Shares?
The rally in China’s domestic equity market over the last two months has been spectacular; the run-up in Hong Kong’s offshore market less so. While the Shanghai composite index has shot up 33% since late November, the MSCI China index—composed of mainland businesses listed in Hong Kong—has climbed a relatively feeble 5%. As a result, onshore and offshore valuations have diverged markedly, defying expectations that November’s launch of a channel...
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Gavekal Research
Long Chen
Jan 14th 2015
5C China: A Mixed Bag Of Blessings
Most researchers have rightly argued that China will on balance benefit from US$50 a barrel oil since it is a large net-importer of the stuff. The standard story runs that the trade surplus should swell and consumers can use their effective tax cut to buy other items. We have addressed the regional impact of cheaper oil, but on the whole the negative consequences have gotten less attention (see The Losers From Lower Energy Prices). This is a...
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Gavekal Research
Tom Miller
Jan 12th 2015
Still Aiming For The Top
China has long criticized the dominant role of the US, arguing instead for a “multipolar” world. But a recent and surprisingly dovish speech by Vice Premier Wang Yang has stirred up a debate about whether Beijing’s foreign policy is becoming more accommodative. So is China really willing to accept a US-led international order? Don’t believe it for a moment.
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Gavekal Research
Joyce Poon
Jan 09th 2015
Discrimination Pays In The Emerging Markets
Viewed as a single asset class, the emerging markets had a tough time of it in 2014. A world characterized by weak global demand, soft commodity prices and a stronger US currency left US dollar-reliant emerging economies exposed and vulnerable. Today, as we roll into 2015, emerging markets are still facing the same headwinds. The US will struggle to support global growth single-handedly and the oil price is unlikely to stage a meaningful...
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Gavekal Research
Tom Miller
Jan 08th 2015
Stay Long The Renminbi
With the Federal Reserve expected to raise interest rates, Europe seemingly about to embrace quantitative easing, and Japan’s economy still in the doldrums, the US dollar’s rise looks unstoppable. But for investors seeking a longer term store of value, the Chinese renminbi is a surer bet.
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