Gavekal Research

Research Team

Apr 22nd 2015

Overview: Charles Gave argues that an era of globalization and expanding world trade is coming to an end. On balance, he says this is no bad thing. United States: The negative impact of the strong dollar on US exporters will become clear once disruption from the early year port strikes on the US West Coast clear up according to Will Denyer and Tan Kai Xian. Europe: Europe’s huge trade surplus is purely a German issue. François-Xavier Chauchat...

Gavekal Research

Andrew Batson

Apr 20th 2015

What is China doing about the loss of a big driver of export growth? Back in the days when total exports were growing at a 20%-plus annual rate, up to half of that growth came from the outsourcing of manufacturing assembly to China (we use processing trade, a customs arrangement used by many outsourcing factories, as a proxy). But the outsourcing boom of the 1990s and 2000s has faded lately. Since 2012, processing trade has essentially stopped...

Gavekal Research

Charles Gave

Apr 20th 2015

Sustained economic growth has always gone hand-in-hand with a big rise in communications infrastructure. To explain why, assume that a country has two cities, named A and B. At the point that a modern communication infrastructure is built (road, trains, internet) then, in each case, a single line of communication is needed. Three cities implies the need for three lines; a fourth city means six lines. Ultimately, if all the cities are to...

Gavekal Research

Long Chen

Apr 15th 2015

The gap between China’s booming stock markets and slumping economic growth just got a lot wider. Figures for the first quarter published today showed a picture of nearly unrelieved gloom, with most growth readings at their weakest since the first quarter of 2009 when China was suffering from the global financial crisis. This poor performance is not surprising, given the structural slowdown in the housing market, falling corporate profits, anemic...

Gavekal Research

Louis Gave

Apr 13th 2015

My mother often said that the main reason she pushed Charles to return to work following the sale of his previous business in the mid-1990s was that having a retired husband was the worst of both worlds: “Less money and more husband”. On this measure, Hong Kong should be happy today. In its troubled marriage with mainland China, it looks very much as if Hong Kong is about to get “more money and less mainlanders” out of its conjugal partner. In...

Gavekal Research

Joyce Poon

Apr 08th 2015

Widespread skepticism about the power of monetary policy at the outset of easing cycles can provide great investment opportunities. Despite clear lessons about the effects of central bank activism in the US in 2009, Japan in 2012 and Europe in 2014, international investors still doubt the quality of the bull run in China’s onshore stock markets ignited by the People’s Bank of China. As a result, even though the Shanghai A-share market has...

Gavekal Dragonomics

Andrew Batson

Apr 06th 2015

Commodity prices boom when supply is slow to respond to surging demand, and collapse when supply finally catches up. The iron ore market is clearly in the second phase now, with global supply surging just as Chinese demand slows. In this piece we outline the fundamentals for iron ore, which mean that prices will remain lower for longer.

Gavekal Research

Long Chen

Apr 01st 2015

China’s banks are going through their toughest times since the central government bailed them out at the end of the late 1990s banking crisis. After 10 years of double digit growth, the earnings of China’s five largest banks grew by only 6.5% in 2014. Fourth quarter profit growth was actually negative. China’s smaller banks have performed better than their larger counterparts, but even so their profit growth has also slowed significantly. What’...

Gavekal Research

Louis Gave

Mar 30th 2015

Markets can be hit either by endogenous shocks (they collapse suddenly because of the build-up of internal excesses—think the 2000 tech bubble, the 2008 US mortgage crisis, or the 2011-12 eurozone crisis) or by exogenous shocks (9/11 in the US, or the price of oil shooting up from US$100/bbl to US$150/bbl in 2008 following the Sichuan earthquake and preceding the Beijing Olympics). This raises the question how investors should view...

Gavekal Research

Louis Gave

Mar 26th 2015

After yesterday’s trading action, the S&P 500 is now broadly flat for the year so far, and stands at the same level as on November 21. Interestingly, over the past 26 days since February 17, the US index has not managed to string together two consecutive days of gains. In other words, US equities are now adding more volatility and less returns to portfolios. That’s hardly the combination that most investors are looking for. In contrast, the...

Gavekal Research

Mar 25th 2015

Overview: Louis deconstructs the cycle across different regions to work out what investment strategies should work best, and where. North America: David Hay argues that the Canadian dollar may be nearing its trough, and if so, that Canadian REITs offer compelling value. Europe: Turkish assets have suffered recently. But with cheaper oil and a recovery in European demand emerging, Cedric makes the case for an impending rebound. China: With yields...

Gavekal Research

Louis Gave

Mar 23rd 2015

The rule of thumb in all of our fixed income models used to be that the nominal yield on ten-year government bonds for a given country should be equal to the country’s ten-year average inflation rate plus the structural real growth rate of its gross domestic product (i.e. demographic growth + productivity gains). So, for example, if the US were to see 2% GDP growth (1.2% productivity gains and 0.8% demographic growth) and 2% inflation, then the...

Gavekal Research

Louis Gave

Mar 23rd 2015

With trillions of US dollars’ worth of transactions every day, the G7 foreign exchange markets are supposed to be the most liquid, least prone to manipulation, markets out there. Even so, the five day rate of change of the EUR-US$ exchange rate has lately fluctuated in the +5% to -3% range usually only seen at times of deep market crisis. As a result, most investors, or companies looking at their budgets and sales projections for the second...

Gavekal Research

Joyce Poon

Mar 20th 2015

One reason we have received push-back on our call to overweight Asian equities has been the risks associated with a major US dollar spike. Asia has not racked up foreign currency debt at the rate seen in recent years since just before the region’s financial crisis in 1997. Still, we would argue that there are sufficient differences this time around to think that Asia can generate strong performance on lower volatility over the coming year.

Gavekal Research

Long Chen

Mar 18th 2015

A number of clients have asked recently when we think the renminbi will start to weaken against the US dollar, and how far we expect it to fall. With the euro and the yen having both recorded double digit percentage falls against the US currency over the last six months, and with the Taiwan dollar down -4% and the Korean won now down -7% after the Bank of Korea cut interest rates last week to a record low, the renminbi is a glaring exception....

Gavekal Research

Andrew Batson

Mar 12th 2015

The beginning of the year can be a sleepy time for China watchers, what with the short daylight hours, long holidays and a dearth of economic data releases. In this season, even the most earnest reader of tea leaves can be forgiven for dozing off for a bit. But if you fell asleep watching the China economy channel, you didn’t miss much: it was just playing reruns.

Gavekal Research

Michael Komesaroff

Mar 10th 2015

The commodity super cycle is finished. After massive and sustained increases during the early part of this decade, prices for most metals are now thoroughly depressed. The one exception to this trend is aluminum—not because its price is not low, but because it never went up strongly during the heights of the commodity boom. In fact this exception only proves the rule that China and supply-side discipline were the key factors behind the boom in...

Gavekal Research

Long Chen

Mar 08th 2015

As the renminbi’s once-steady appreciation against the US dollar has lost steam, so has the pace of currency internationalization. After doubling in size from early 2013 to early 2014, thanks to strong growth in Taiwan and South Korea, total offshore renminbi deposits have barely increased in recent months. In January, renminbi deposits actually declined by more than 2% in Hong Kong, the currency’s largest offshore center.

Gavekal Dragonomics

Arthur Kroeber, Michal Meidan

Mar 08th 2015

China was blamed for the failure of the last big climate-change talks, in Copenhagen in 2009. Will it be able to take credit for the success of the next round, in Paris this year?

Gavekal Dragonomics

Rosealea Yao, Michal Meidan

Mar 08th 2015

For years, China’s problem has been finding enough new supplies of natural gas to satisfy its voracious demand. Now, the critical issue is to get prices right.

Gavekal Dragonomics

Simon Cartledge

Mar 08th 2015

The Hundred-Year Marathon: China’s Secret Strategy to Replace America as the Global Superpower by Michael Pillsbury (Henry Holt, 2015)

Gavekal Research

Andrew Batson

Mar 05th 2015

How far have China’s famously growth-obsessed leaders really dialed back their growth expectations? We fear not quite enough. China has given up on pursuing 10% growth, but still wants to keep growth of at least 7%. We do not think this is possible, for at least three reasons: history, housing and leverage.

Gavekal Research

Tom Miller, Thomas Gatley

Mar 04th 2015

In China, political slogans matter. They help to set the agenda, acting as political weather vanes. In recent months, “One Belt, One Road” has become a signature slogan of Xi Jinping’s administration. A contraction of “Silk Road Economic Belt” and “21st Century Maritime Silk Road,” “One Belt, One Road” describes Beijing’s policy of financing and building transport infrastructure across Eurasia, the South China Sea and the Indian Ocean—aka the...

Gavekal Research

Andrew Batson, Long Chen

Mar 02nd 2015

China’s central bank has announced another interest-rate cut—but how many more is it prepared to deliver? The latest move reduced benchmark lending and deposit rates by 25bp, after last November’s 40bp cut, a response to the growing pressure to ease the financial strain on companies from falling prices and weak growth. Indeed, we think monetary policy decisions in China are increasingly driven not just by the classic issues of growth and...