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E.g., 27-02-2020
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    Gavekal Research

    The Velocity Of Money In The Time Of Covid-19

    Most serious investors know MV=PQ, where M is the money supply, V is the velocity of money, P is the general price level and Q is output. The typical approach is to wait for M, P and Q to be published and so derive V, which renders the equation a mere tautology. In contrast, Charles has long thought V to be an independent variable whose variations impact P and Q.

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    Gavekal Dragonomics

    The Covid-19 Cost To Corporate Cashflow

    The coronavirus has only worsened the situation for corporate coffers already under strain from the Lunar New Year. Thomas outlines the difficult road ahead for Chinese firms: with an estimated loss of RMB5trn in cashflows, many will have no choice but to default on cash obligations to staff, banks and suppliers, as well as curtail their capex plans for the year.

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    Gavekal Research

    Doing On Monday What We Wish We’d Done On Friday

    Monday was the epitome of Charles’s observation that in a down-market, the temptation to sell on Monday what you wish you’d sold on Friday can become overwhelming. As markets sold off on Monday following a weekend of bad news, the following developments seemed especially relevant.

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    Gavekal Research

    Far From Priced In

    Asian markets switched to risk-off mode Monday as investors reacted to further coronavirus news outside of China. Yet in onshore markets, investors are optimistic that the economy will quickly normalize as the spread of the virus comes under control, and that the central bank will provide policy easing. Neither belief looks well-founded at the moment.

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    Gavekal Dragonomics

    A Looming Private Liquidity Squeeze

    A March spike in maturing bonds is going to mean significant liquidity challenges for many companies, particularly as they continue to grapple with the coronavirus and its economic fallout. The government has announced some supportive policies, but as Xiaoxi explains these measures are likely to favor large and state-owned companies, leaving smaller firms at risk of going under.

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    Gavekal Dragonomics

    Multinationals Take The Long View

    The coronavirus outbreak has undoubtedly had a significant impact on multinational companies’ operations in China. Nonetheless, drawing from a dozen interviews with China-based executives, Lance argues there is little evidence the outbreak will cause firms to rethink their long-term China strategies.

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    Gavekal Research

    Time And Risk

    The financial world is organized around two axes: time and risk. If some authority manipulates the time axis, the effect will be to compromise the risk axis. This is not an abstract formulation. It has the potential to threaten portfolios and the solvency of major institutions.

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    Gavekal Dragonomics

    Kinks Appear In The Tech Supply Chain

    Chinese electronics manufacturers are struggling to get their operations back to normal amidst the coronavirus outbreak. Dan outlines how this might lead to larger disruptions in the tightly scheduled mobile phone production cycle, and why smaller companies are more likely to postpone launching new products than their larger counterparts.

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    Gavekal Research

    Q&A On The Coronavirus Situation

    Louis spent last week meeting with clients in the US and discussions centered on the coronavirus situation. His starting point is that the Chinese authorities now have every incentive to overstate, rather than understate, the severity of the viral outbreak. He explores the impact on growth in the rest of the world and asset price movements.

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    Gavekal Research

    The Risk Of Falling Behind The Epidemic Curve

    China’s government was slow off the mark in responding to the initial outbreak of the new coronavirus. Although the government is now fully mobilized to fight the outbreak, it risks falling behind the curve again—this time in responding to the economic damage wrought by its extended shutdown of normal life and business activity.

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    Gavekal Research

    The Long Term Risks That Matter, And Those That Don’t

    In the third paper of his series about the risks that threaten asset markets in both the short and long run, Anatole turns his attention to four longer term risks that are widely discussed—and even more widely misunderstood. Investors should worry about demographics and climate change, although not for the reasons many believe. In contrast, they can sleep relatively easily about debt and productivity growth.

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    Gavekal Dragonomics

    The Hit To Consumer Durables

    The government’s drastic measures to contain the coronavirus are certain to deliver major blows to the auto and smartphone markets. Fortunately, Thomas, Ernan and Dan report that a V-shaped recovery is the most likely scenario for both sectors. Neither will meet pre-virus growth expectations, but both will likely still see an improvement from 2019.

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    Gavekal Dragonomics

    The Lingering Impact On Property

    While the 2003 SARS outbreak had only a transitory impact on China’s housing market, the 2020 coronavirus episode is proving to be much more serious. In this piece, Rosealea argues that the big hit to housing sales will leave developers short of cash and limit their ability to keep projects going. This points to a lingering drag on construction.

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    Gavekal Research

    Back To Work, Not Back To Normal

    China’s businesses are starting to get back to work, but the economy is still very far from normal. On Monday, the extended holiday declared by the government to help contain the coronavirus outbreak came to an end (except in Hubei province). But most businesses still face great difficulty in resuming their normal activities.

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    Gavekal Research

    A Quant View Of The Virus, Updated

    Last week, Didier applied his quantitative risk management tools to model the spread of the coronavirus, setting a bound on catastrophic risk. Thankfully that bound appears to have been undershot. In this update, he models the probable trajectory of the epidemic from here and finds reasons to hope the spread of the virus has been contained.

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    Gavekal Research

    Audio & Transcript — Gavekal Research Call February 2020

    In yesterday’s research call, Vincent Tsui and Tom Holland joined Arthur Kroeber to discuss the coronavirus outbreak, what it means for Chinese and regional economic growth, and how investors should position themselves during this period of rapid news flow and high market volatility.

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    Gavekal Dragonomics

    Viral Monetary Policy

    China’s central bank has moved quickly to demonstrate its readiness to support an economy battered by the coronavirus outbreak. But Wei argues that it is too early to assume the PBOC is going to abandon its policy of selective easing and aggressively cut rates, as it still has reasons to hold to its its conservative policy stance.

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    Gavekal Research

    Video: When Oil Hits The Floor

    No financial market has been hit more heavily by the Wuhan coronavirus than oil, with the price of crude falling by more than -20% from its early-January high on fears the outbreak will crush China’s demand for fuels. In this short video, Tom examines the global implications of the oil price slide, and asks “where next?” for the price of the world’s key commodity.

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    Gavekal Research

    Don't Count On Oil To Fall Further

    Nowhere in markets has the impact of the Wuhan flu made itself felt as forcefully as in the oil price. The price of Brent crude has fallen -24% in just four weeks to US$54.58/bbl on Wednesday morning in Asia on fears of massive demand destruction in disease-hit China. WTI has fallen by a similar amount. This slide has great immediacy for investors in the energy sector.

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    Gavekal Research

    A Quant View Of The Wuhan Virus

    There is now enough data on the spread of the Wuhan coronavirus to permit a useful quantitative analysis of its likely evolution. In this paper, Didier notes that while the spread of the virus continues to accelerate, the “jolt” of that acceleration is now slowing. This suggests the outbreak is likely to peak by early March.

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    Gavekal Research

    After The Rout

    The Chinese authorities’ attempts over the weekend to shore up confidence among domestic investors came to naught on Monday as prices plummeted when the onshore stock markets reopened after their 10-day lunar new year shut-down. Yet, once signs emerge that the outbreak it is contained, the resulting relief rally should combine with underlying tailwinds to propel stocks higher again.

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    Gavekal Dragonomics

    The Long And Short Of The Wuhan Flu

    There is now enough information available to begin to make useful judgments about both the short term and long term impact of the Wuhan coronavirus outbreak. In this extensive analysis, Arthur examines the health risks posed by the virus, its economic impact, and likely political fallout.

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    Gavekal Research

    Strategy Monthly: The Wuhan Virus And Emerging Markets

    The rapid spread of the Wuhan coronavirus has spooked investors and triggered steep sell-offs in Chinese and Asian markets. But there are good reasons to hope the spread of the disease will be contained in the coming weeks, at which point Chinese and regional equities can recover.

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    Gavekal Dragonomics

    Huawei Comes Out Ahead, For Now

    American attempts to kneecap Huawei have run into several setbacks. Internationally, Europe is pushing back on demands to exclude Huawei from 5G networks; domestically, further sanctions have been stymied by bureaucratic infighting. Dan reports that the war is hardly over, and we are likely to see broader rules limiting Chinese access to US tech.

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    Gavekal Research

    It’s Not The Disease, It’s The Treatment

    The economic costs of the Wuhan virus are not simply a function of how deadly it is, but of the measures China’s government takes to contain it—which have rapidly escalated to an unprecedented severity. The shutdown of normal travel and business now in place across much of China is certain to deliver a hit to growth in the first quarter of 2020.

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    Gavekal Research

    The Fourth Horseman?

    It is unlikely Xi Jinping has spent much time studying Christian eschatology. But if he has, the Chinese president might be forgiven for thinking that after (trade) war, conquest (in Hong Kong) and famine (African swine fever), he now has to deal with the fourth horseman of the Apocalypse: Death (in the unwelcome shape of the Wuhan coronavirus).

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    Gavekal Dragonomics

    Video: On Target In China?

    In 2015 the Chinese government set out its 13th five-year plan, with economic and social targets that it aimed to hit by the end of 2020. The five-year plans are important because the government derives legitimacy from improving people’s livelihoods. The Dragonomics team has examined seven such targets and their impact on the economy.

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    Gavekal Dragonomics

    A-shares Beyond Wuhan Volatility

    Although the Wuhan coronavirus has the potential to whipsaw Chinese equities in the near term, it makes sense to assess the prospects for China’s A-share market this year should the current nervousness quickly abate. Thomas argues that market sentiment is likely to turn favorable provided the virus is contained given the trade war truce, easing deflationary pressure and a profit cycle upturn.

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    Gavekal Research

    How Sturdy Are The Zeitgeist's Five Pillars?

    The investment zeitgeist can be thought of as a set of assumptions that investors hold about structural growth drivers, key prices and policy approaches. An investment manager should understand what makes up the zeitgeist and how it is changing. Louis outlines five foundational pillars that he considers integral to the current situation.

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    Gavekal Research

    Lessons From Last Time Around

    Beijing shops have sold out of high-spec surgical masks, scared customers are stockpiling medicines, and financial markets are looking shaky. The parallels between the current coronavirus outbreak and the 2003 epidemic of Sars are obvious. But there are also important differences, especially in the backdrop against which today’s outbreak is occurring.

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    Gavekal Dragonomics

    The Year Of Many Targets

    2020 is a big year for China’s central planners. Beijing has set a wide range of targets to be achieved by the year’s end, and the policies enacted to meet these objectives have had far-reaching effects. In this report, the Dragonomics team examines seven such targets, the policies implemented to reach them, and the consequences for China’s economy.

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    Gavekal Dragonomics

    Better Lucky Than Good

    China’s government has done its part to steady the economy and markets: it has agreed to a rather one-sided trade deal with the US, and softened the tone of its financial de-risking campaign. But December’s data show that good luck has mattered more: turns in the autos and electronics cycles are what’s really behind the stabilization of growth.

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    Gavekal Research

    The Post-Election Upside For Taiwan

    Contrary to investor fears, the victory of Chinaskeptic Tsai Ing-wen in last weekend’s Taiwanese presidential election is unlikely to lead to a marked further deterioration of cross-straits relations between Taipei and Beijing. With that risk off the table, explains Vincent, the coast is clear for an improving electronics cycle to support the local stock market.

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    Gavekal Research

    A Tough Ask On Trade, Trouble Brewing On Tech

    The story we’ve been telling for the past few months is that the conclusion of the US-China trade deal will reduce global macro risk in 2020, but tech-specific risk will still be an issue because of continued efforts by the US to constrain the rise of China’s technology sector and in particular Huawei. This week’s news buttressed that story: the trade deal was signed; but at the same time several US agencies are on the verge of tightening...

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    Gavekal Research

    Causes And Consequences Of Hong Kong Dollar Strength

    Last summer, as Hong Kong’s police seemed set to run out of tear gas, betting against the Hong Kong dollar peg seemed like a safe bet. It hasn’t exactly worked out that way, and in recent weeks the Hong Kong dollar has strengthened to the strong side of its limited trading band. In this piece, Louis explains why.

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    Gavekal Dragonomics

    Defense Drives US Decoupling

    Although US President Donald Trump has called a truce in his trade war with China, the strategic tensions in the US-China relationship still remain. Therefore, as Lance explains in this piece, the US defense sector is already taking concrete steps to reduce its reliance on China for some products with direct military applications.

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    Gavekal Research

    Audio & Transcript — Gavekal Research Call January 2020

    The past few weeks have seen Chinese policymakers signaling clearly that the campaign of selective easing begun last year will be carried on into 2020 even as growth continues to slow. With trade war risk lowered, and the electronics and auto sector cycles bottoming out, the outlook for equity and bond markets is fairly benign.

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    Gavekal Research

    Ten Bears That Could See Off Goldilocks In 2020

    With interest rates low, and growth that is neither too hot nor too cold, Anatole remains firmly in the “Goldilocks lives on” camp. But while a continued bull run is the most probable outcome for 2020, bears still lurk in the shadows. In this paper Anatole identifies the 10 main macroeconomic, political and sector risks that could derail markets in 2020.

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    Gavekal Dragonomics

    The Mortgage Rate Reset

    China’s central bank is moving forward with its interest-rate reforms, ordering mortgages to be reset based on the new loan prime rate. Rosealea explains that this shift will make monetary policy more transparent and effective by re-linking mortgage rates to official policy rates, but it does not herald a cycle of major cuts in mortgage rates.

    0
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    Gavekal Research

    Strategy Monthly: China's Balancing Act Gets Easier

    In 2019, investors were cowed by the US-China trade war and Chinese policymakers’ efforts to balance growth and financial stability. This year, these factors will weigh less heavily: the US and China are set to ink a trade deal, while China is shifting more toward growth-supporting policies. Such a combination is mildly bullish for both Chinese bonds and equities.

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    Gavekal Research

    What The Trade Deal Won't Change

    President Trump has confirmed he will sign his trade deal with China on January 15, and the PBOC has reinforced its tilt to more dovish policies. This combination of events means the macro factors that drove December’s rally—a receding trade war and a global easing of monetary policy—are still in place for January, if increasingly priced in.

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    Gavekal Research

    The Surprises Of 2019

    As the year draws to a close, Louis has decided to review the key events of 2019 that he either didn’t see coming, or whose ramifications he under estimated. Such events could cast a long shadow in the coming quarters as their impact on markets may not yet be fully digested.

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    Gavekal Research

    Audio — Gavekal Research Call December 2019

    In the final Gavekal Research Conference Call of the year Louis-Vincent Gave, Anatole Kaletsky, Arthur Kroeber and Will Denyer reviewed the current investment environment and outlined their expectations for 2020.

    0
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    Gavekal Research

    Why Aren’t Markets Pricing In Global Reflation?

    Back in October, when the Fed said it would start expanding its balance sheet at the same time as the ECB and BoJ, Louis reasoned that powerful forces were aligning for a global reflation trade. A little over two months later, markets have ripped higher, but the reflation trade has not materialized quite as anticipated. In this paper, Louis examines why not, and asks what conditions will be needed for it to come good in 2020.

    0
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    Gavekal Dragonomics

    Stable Growth Without Undue Stimulus

    China's latest economic figures show continued growth into the end of this year. In this report, Thomas outlines how these data points, combined with the fragile US-China trade truce, might give Chinese policymakers the space they need to achieve their goal of maintaining stable growth without resorting to excessive stimulus.

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    Gavekal Research

    The Trade War’s Uneasy Truce

    The “phase one” US-China trade deal announced last week still has some hoops to pass through before it becomes real: completion of a bilingual legal text and formal signing in January. Still, both sides have incentives to avoid the economic damage from further tariff escalation, so the deal will almost surely come into force. The agreement falls far short of achieving the US goal of forcing China to change its state-led economic system; instead...

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    Gavekal Research

    Is Brexit The Midwife To A New Investment Environment?

    With the confirmation of a conservative victory in the UK election, and a long awaited trade deal between the US and China, the pieces are falling into place for a weakening of the US dollar and a continuation of the global reflation trade. Already, both sterling and the euro have strengthened in response to the reports of a Tory victory.

    1
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    Gavekal Research

    Our 2019 Holiday Reading List

    “So many books,” lamented the late Frank Zappa, “so little time.” For readers wondering which of the 130mn books published since the invention of the printing press they should curl up with over the coming break, hopefully Gavekal’s annual holiday reading picks may help.

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    Gavekal Dragonomics

    Scenarios For 2020

    Beijing has been largely successful in balancing a response to China’s economic slowdown with a need to continue its financial cleanup, but how sustainable is this delicate status quo? In this report, Andrew lays out different scenarios and the likelihood of policymakers being able to maintain their “selective easing” strategy through 2020.

    0
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    Gavekal Dragonomics

    Why The Private Liquidity Crisis Isn't Over

    The multi-year liquidity squeeze for Chinese private-sector firms continues, despite repeated promises from policymakers to resolve the issue. In this report, Thomas explains how Beijing’s tight grip on financial risk has stymied efforts to alleviate China’s beleaguered private sector—and why this lending crunch will persist through 2020.

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