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    Gavekal Research

    The Perils Of Leadership

    Around 50 countries have signed up to join China’s Asian Infrastructure Investment Bank. A year ago, when Beijing began to draw up plans for a new multilateral lender, no one could have guessed that it would cause such a global stir. We first wrote about China’s attempt to provide an alternative to the US-dominated system of global development finance last June (see [China] A Chinese Bretton Woods?). But it is too early to conclude that the...

    0
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    Gavekal Research

    Five Corners (8 April): The Outlook For Bank Earnings

    Overview: With banks’ earnings squeezed on one side by flat yield curves, and on the other by tech companies encroaching on their traditional consumer-facing business lines, Louis wonders where the banking sector will generate future earnings growth United States: Doing More With A Flatter Yield Curve: Now consumers have deleveraged, and with strengthening demand set to drive a pick-up in corporate investment, Will argues that earnings growth...

    0
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    Gavekal Research

    Thai Decision Rule Signals Time To Buy - Joyce Poon & Udith Sikand

    It would take a courageous investor to buy wholeheartedly into Thailand’s equity market just now. The country’s ruling generals may have lifted martial law last week, almost a year after seizing power, but local analysts dismiss the move as a cosmetic attempt to persuade Thailand’s Western allies that things are returning to normal. In reality, they report, the government is actually seeking to tighten its control in the face of undiminished...

    2
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    Gavekal Research

    One Belt, One Road, One Grand Strategy

    In what can only be described as a triumph for Chinese financial diplomacy, some 48 countries had defied US disapproval to sign up for Beijing’s new Asian Infrastructure Investment Bank by yesterday’s deadline. The applicants included not only Europe’s big four economies, but staunch US allies such as Saudi Arabia, geopolitical rivals like India, and even Taiwan, which China does not recognize as a separate country.

    2
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    Gavekal Research

    5C Asia: Capturing Beta From India’s Laggard Banks

    The stars could hardly be aligned more propitiously for India’s economy. The falls in oil and other commodity prices have helped to correct the external deficit and have paved the way for the Reserve Bank of India to continue its monetary easing cycle. On the fiscal side, in February Narendra Modi’s government underscored its pledge to prioritize investment when it proposed a 25% YoY increase in capital expenditure in its first full year budget...

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    Gavekal Research

    Where Has The Modi Magic Gone?

    India has fallen out of favor with investors lately. Over the last four weeks, the Nifty stock index has dropped 4.6%, a fall that included eight consecutive sessions of declines, the market’s longest losing streak in more than 18 months. Investors blamed the collapse of lofty valuations following poor earnings results, with the fall exacerbated by rising tensions in the Middle East. But critics of India’s government say the problems go deeper....

    5
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    Gavekal Research

    Exogenous vs Endogenous Shocks

    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...

    4
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    Gavekal Research

    The Divergence In Market Action

    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...

    3
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    Gavekal Research

    Five Corners (25 March): Where To Find Value

    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...

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    Gavekal Research

    5C Asia: Japan Finally Gets Religion

    Japan has been tough on value investors. With no catalysts to unleash shareholder value, investors have typically found themselves sitting on their portfolios waiting for the Grim Reaper. Time and again activist funds have tried to release locked-up value, only to be blocked at every turn by intransigent management and unsympathetic regulators. Now the market is watching with considerable interest to see how Daniel Loeb’s Third Point Management...

    0
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    Gavekal Research

    All 21st Century Roads Lead To...

    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...

    0
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    Gavekal Research

    5C Overview: Three Regions, Three Strategies

    Fundamentally, there are three ways to make money in financial markets: Momentum trades: ideally buying high and selling higher. Return to the mean trades: ideally buying low and selling higher. Carry trades: borrowing short to lend long.

    0
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    Gavekal Research

    London Seminar March 2015 - Anatole, François, Andrew & Charles

    We held our main spring seminar in London on March 17 with Anatole, François, Andrew and Charles offering their views of the global economic pulse and recent market and central bank developments.

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    Gavekal Research

    Asia Is Not So Scary

    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.

    1
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    Gavekal Research

    Who Gains When The Fed Hikes?

    The Fed has lost patience in words only, not in deeds. In its statement yesterday the Federal Open Market Committee dropped its linguistic backstop—the word “patient”—indicating that the first rate rise since 2006 could come as early as June (remember, Fed chair Janet Yellen defined “patience” as meaning there would be no rate hike for at least two meetings after the word’s use). But the underlying message the market took away yesterday is that...

    0
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    Gavekal Research

    Don’t Bet On A Renminbi Depreciation

    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....

    1
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    Gavekal Research

    Five Corners (11 March): Currency Wars

    Overview: Charles Gave wonders whether Japan might surprise by affecting an appreciation of the yen. United States: With the US dollar rampant, Will Denyer runs the numbers against the euro and yen and finds decisively in favor of the yen. Europe: Francois Chauchat argues that as a major trading currency, the euro was never going to be driven just by trade flows. However in the final analysis the strong external position of euroland will make...

    0
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    Gavekal Research

    The EM Challenge

    With the US dollar on a tear and expectations hardening that the Federal Reserve will raise interest rates this summer, emerging market currencies are again in the firing line. In recent days, the Turkish lira and Mexican peso have hit all-time lows against the dollar, while the Brazilian real, Indonesian rupiah, Malaysian ringgit and South African rand are also in the toilet. And yet while developing world crises have often followed US...

    0
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    Gavekal Research

    5C Overview: Going Long The Yen

    If I held a decision making role within the Japanese policy apparatus, I would do everything in my power to spur a yen appreciation. Here is why:

    1
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    Gavekal Research

    5C United States: A Crowded Trade, With Good Reason

    The dollar has had quite a run—with the DXY up 22% since July. This crowded trade is obviously vulnerable to pullbacks. But volatility aside, is there potential for the dollar to rally further in the medium term? The short answer is yes, especially against the euro. But if you want to be contrarian, we suggest going long yen. These calls are based on three factors: (i) relative monetary policy trajectories, (ii) the likely direction of fund...

    0
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    Gavekal Research

    5C China: A Slowdown In Currency Internationalization

    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.

    0
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    Gavekal Research

    5C Asia: Asian Currencies Should Be Resilient

    A few years back we developed an Asian currencies indicator to help identify times when it pays to dial back exposure (see this report). The tool monitors six global and regional factors to which Asian currencies are sensitive; included are two volatility tracking indicators, two foreign exchange trend rates (renminbi and yen), the Gavekal global velocity indicator and the OECD Asian leading indicator.

    1
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    Gavekal Research

    The New Normal Will Not Be 7% Growth

    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.

    0
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    Gavekal Research

    Investing Along The New Silk Road

    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...

    0
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    Gavekal Research

    A Japanese Goldilocks?

    Ever since the Japanese bull market kicked off in late 2012, global asset allocators have been able to put the market on the back burner as equity gains have been eroded by yen weakness. Despite two years of aggressive monetary easing and a 70% rally in stocks, Japanese stocks still only matched global benchmarks (MSCI Japan versus MSCI AC World in US dollar terms). However, there are good reasons to think that this negative correlation between...

    0
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    Gavekal Research

    Growth & Markets Monthly (March 2015)

    Our latest monthly report shows that the modest recovery in growth indicators, which started last month, has continued. Since central banks are engaged in aggressive easing action on a number of fronts, it would be surprising if this improvement does not continue. In addition, our velocity indicator has rallied and hovers at a six month high, which mirrors the low level of the VIX index. Such readings point to a “risk-on” environment, but we...

    0
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    Gavekal Research

    India’s Budget Is Not The Real Story

    Following India’s dramatic national accounts revision, images of a turbo elephant overtaking an exhausted dragon are becoming tiresome. We are upbeat on India’s secular growth outlook, but struggle to reconcile last year’s purported 6.9% expansion with other indicators. Our concern is that for all Narendra Modi’s reforming zeal, capital spending remains near its post-2009 crisis low. Looking forward to Saturday’s annual budget, the key factor...

    2
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    Gavekal Research

    5C Overview: The Importance Of Property

    Property, both residential and commercial, is the world’s oldest investment and, in the long run, the most reliable and profitable store of economic value. Like the world’s oldest profession, however, it operates in the financial shadows. Property lacks the transparency of mainstream asset classes such as equities, bonds and currencies, with no completely objective price benchmarks to measure returns reliably even in sophisticated markets such...

    3
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    Gavekal Dragonomics

    Can The New Silk Road Revive China’s Exports?

    The various New Silk Road initiatives add up to one of the biggest and most elaborate export-promotion plans in history. Yet even this new brand of checkbook diplomacy may struggle to reverse the global economic forces that have been weighing on Chinese exports.

    0
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    Gavekal Research

    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...

    0
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    Gavekal Research

    5C Asia: Look For Real Growth To Boost Earnings In Asia

    A strong US dollar has rarely been a tailwind for emerging market equities. Set against the backdrop of anemic global demand and the concomitant fall in commodity prices—a severe weight on export revenues for many EMs—the outlook for EM corporate earnings is not exactly benign. However, Discrimination Pays In The Emerging Markets. The rapidly changing global environment is likely to throw up a new set of winners and losers in the EM universe.

    0
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    Gavekal Research

    Turning Cautious on US Equities

    Given their remarkable performance over the last four years, can US equities really continue to outperform global peers? Recent developments give cause for concern as market technicals look weak and earnings announcements for bellwether stocks have come in lackluster. Earlier this week Louis asked some basic questions about US equity market leadership (see Does It Still Make Sense To Overweight US Equities?). We share his concern not because we...

    4
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    Gavekal Research

    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...

    0
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    Gavekal Research

    Does It Still Make Sense To Overweight US Equities?

    Investment decisions are typically driven by the costs of five factors: land, labor, capital, energy and government. One of the key theses of Too Different for Comfort, the book I wrote a couple of years ago (available for free download here), was that in the years following the Asian Crisis of the late 1990s, Asia boasted one massive comparative advantage: a much cheaper cost of labor than anyone else. So for ten years, any new factory,...

    2
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    Gavekal Research

    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...

    3
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    Gavekal Research

    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...

    1
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    Gavekal Research

    5C Asia: Will The BoJ Follow Suit?

    Governor Haruhiko Kuroda’s comments at the World Economic Forum in Davos last week set off speculation that the Bank of Japan may soon expand its program of quantitative easing. Our base case is that the BoJ is unlikely to oblige QE enthusiasts in the next 6-12 months as Japan is currently in a ‘honeymoon’ period where lower inflation is likely tolerable.

    0
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    Gavekal Research

    Australia, The Next Shoe To Drop

    Central bankers are ditching managerial gradualism in their monetary policy communication and are getting serious. Switzerland, Denmark, India and now Canada have all made surprise interest rate moves in recent days—okay, the European Central Bank continues to drip-feed its every thought to friendly journalists, but the sheer scale of the adjustment taking place in relative global prices means that policymakers must respond swiftly to events....

    0
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    Gavekal Research

    The Essential Emerging Market

    These are challenging times for emerging markets and investors could be forgiven for writing them off as being more trouble than they are worth in terms of risk-adjusted returns. The macro environment is harsh given the continued cratering of commodity prices and a potential reversal of US dollar flows on the back of a likely Federal Reserve tightening. Still, we think this would be a terribly short sighted formulation as the coming year is...

    4
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    Gavekal Research

    5C Asia: Oil's Bane Is Asia's Boon

    The oil price plunge is likely to create dislocations in the global economy for years to come, especially if consensus predictions of ‘lower for longer’ play out. Asia, as a net oil importer, almost certainly stands to gain, although the path to prosperity will vary depending on where a particular economy is in the economic cycle. Japan and India offer prime examples of this divergence.

    0
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    Gavekal Research

    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...

    0
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    Gavekal Research

    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.

    4
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    Gavekal Dragonomics

    Beijing Will Call The Shots In Resource Sector Battle Royal

    In October the world’s fourth largest mining company, Glencore, launched an audacious merger bid for the world’s second biggest miner, Rio Tinto. The approach was rebuffed, and United Kingdom takeover rules—both companies have London listings—forbid Glencore from making any further overtures for the following six months. Yet few in the mining business believe that is the end of the story. Glencore’s chief executive officer Ivan Glasenberg has...

    0
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    Gavekal Research

    Europe Not EMs At The Vortex

    In the summer of 1998, Russia’s financial crisis stemmed from the oil price plunge that followed the Asian financial crisis. Today the worry is that Russia’s fall is causing a cycle of contagion which could pull down even decently managed emerging economies. Unusually, this collapse is happening just as the world’s biggest asset allocators prepare to effectively shut up shop. It is rare to get a full blown crisis over year-end simply because...

    3
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    Gavekal Research

    The Scene Is Set For Abenomics Act II

    On Sunday, Prime Minister Shinzo Abe got what he wanted: a resounding victory in Japan’s snap general election; a general election he had painted as a referendum on his ‘Abenomics’ economic policy program. Abe’s Liberal Democratic Party and Komeito, its junior partner in the ruling coalition, won 325 of the 475 seats up for grabs in the House of Representatives, maintaining their two-thirds majority in the lower house of Japan’s parliament,...

    0
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    Gavekal Research

    China And North Asia’s Deflation Syndrome

    Northeast Asian economies are “fated” to experience a structural deflation as they mature due to the nature of their industrialization model. Such economic determinism means that China faces an imminent risk of structural deflation similar to that experienced by Taiwan 20 years ago. In this piece Joyce argues that the way Northeast Asian economies protect their financial systems helps them avoid acute financial crises, but ensures a date with...

    0
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    Gavekal Research

    Five Corners (10 December): Contrarian Ideas For 2015

    Overview: Anatole Kaletsky looks at the struggle between the Middle-East sheiks and US oil producers and concludes that oil is about to finally conform to standard economic theory. One unintended consequence may be the effective liquidation of western oil majors. United States: Will Denyer considers the dramatic scaling back of the US shale oil sector but argues that US capital spending should do just fine next year. Europe: Francois Chauchat...

    0
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    Gavekal Research

    5C Asia: When To Bet On A Reversal Of The Yen?

    “Abenomics” has become a confidence game in that the government must do whatever it takes to stop the public losing faith in the Bank of Japan’s ability to spur reflation—even if this means printing ever larger sums of money (see Gold For Japan’s Confidence Game). A breakdown in confidence is unthinkable as it will kill both risk appetite and consumer demand. So unless Shinzo Abe can pull a rabbit from the hat, Japan appears to be heading for...

    0
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    Gavekal Research

    A Dream Of Asian Empire

    After years of passive diplomacy, China is now making it clear that it wants to play a substantive role on the global stage. In foreign policy, Xi Jinping’s “Chinese dream” means restoring China’s historical dominance in Asia. China is serious about winning friends and helping its neighbors to benefit from its rise, but its own interests come first: it wants to generate new trade networks, open up transit routes for its exports, and develop its...

    1
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    Gavekal Research

    The Burning Questions For 2015

    With two reports a day, and often more, readers sometimes complain that keeping tabs on the thoughts of the various Gavekal analysts can be a challenge. So as the year draws to a close, it may be helpful if we recap the main questions confronting investors and the themes we strongly believe in, region by region.

    0
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    Gavekal Research

    Growth & Markets Monthly (December 2014)

    This month saw our main growth indicator drop into negative territory for the first time in more than a year. The key drags were the commodity-related components and the underperformance of growth-sensitive stock markets such as South Korea and Sweden. The chief concern for markets is whether lower oil prices and the new monetary activism of the Bank of Japan and promises of action from the European Central bank can help reignite market momentum...

    0
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    Gavekal Research

    The Commodity Bust: Not The Obvious Winners & Losers

    The huge moves in oil over the last four trading sessions together with the ongoing cratering of prices across the commodity complex have added to deflationary pressures weighing on developed and developing economies alike. But the greatest pressures are inevitably being seen in emerging markets as they tend to be (i) the biggest commodity exporters, and (ii) are more likely to subsidize fuels (developed economies prefer to tax most fuels like...

    0
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    Gavekal Research

    A Better Class Of Bubble

    We never tire of pointing out that, when it comes to bubbles, no two bubbles are ever the same. Firstly, bubbles can bid up asset values because of their perceived ‘scarcity’ (typically land and real estate, but also tulips, or gold…) or because of their productivity (canals, railroads, telecom lines, energy…). This distinction matters because, in the first case, an economy is left with no more land (or gold, or tulips…) than at the outset. In...

    13
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    Gavekal Research

    Quarterly Strategy Chartbook - Avoiding The Pitfalls Ahead

    Forces of creative destruction are building up in the world economy as never before. Several of Gavekal’s key indicators are signalling that we are moving into a mild deflationary boom, in which cheaper resources, lower technology costs—especially for robotics—and accelerating disintermediation—notably in the financial sector—all promise to act as game-changers over the coming years. Reliably picking winners in such disruptive times is difficult...

    0
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    Gavekal Research

    The Great Policy Convergence

    Yesterday’s announcement that the European Central Bank is preparing to buy government bonds from the first quarter of next year is an event of historic importance. As the logical follow-up to Mario Draghi’s commitment to expand the ECB’s balance sheet by €1trn, yesterday’s statement by ECB vice-president Vitor Constâncio confirms beyond reasonable doubt that Europe is ready, at last, to implement full-blown quantitative easing, over-riding the...

    1
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    Gavekal Research

    Five Corners (26 November): Capital Spending In 2015

    0
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    Gavekal Research

    5C Asia: India’s Investment Boom Is Almost Here

    Against a backdrop of weakening global growth, India stands out as a rare bright spot. Much of the optimism is predicated on hopes of a recovery in the capital spending cycle, especially in infrastructure.

    0
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    Gavekal Research

    Global Central Banks Are Driving Appetite For US Cyclicals

    The rebound in US equities since their mid-October trough has been impressive. After giving up almost all its year to date gains in just four weeks, the S&P 500 snapped back even more quickly, ending October at a new record high. Since then, it has extended its advance to notch up a YTD gain of 12%. Yet, until just a few days ago, the relative performance of sectors within the index indicated a degree of caution on the part of investors....

    0
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    Gavekal Research

    Japan's Election And The Yen

    With Japan in the middle of a triple-dip recession, and Japanese households suffering a significant contraction in real disposable income, it might seem at first that Prime Minister Shinzo Abe has chosen an odd time to call a snap election. But that conclusion would ignore the two iron-clad rules of investing in Japan that we never tire of repeating:

    0
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    Gavekal Research

    What If The Yen Falls Another 20%?

    Japan’s woeful third quarter performance—the economy contracted at an annualized 1.6% rate, pushing the economy into a technical recession—has killed any remaining expectations that the government of Shinzo Abe will proceed with its original plan to raise the country’s sales tax for a second time next year to 10%. In the absence of further fiscal consolidation, this will leave the prime minister’s ‘Abenomics’ policy to revitalize Japan’s economy...

    7
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    Gavekal Research

    Here Comes The Melt-Up

    Back in mid-October as stock markets around the world plunged faster than at any time since 2011, many investors and economists feared a meltdown. But with the US economy steadily expanding, monetary and fiscal policy becoming more stimulative in other parts of the world and the autumn season for financial crises now over, a melt-up seems more likely than a melt-down.

    0
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    Gavekal Japanese

    Japan's Genki Grandparents!

    Aged 94, Susumu Yamamoto thought about a career change, but he didn’t want to rush the decision. Two years later, he is still mulling it over. Meanwhile, his daughters are on his case for doing too much. Recently an argument broke out with his youngest daughter (aged 72). She took the duvet to the cleaners. He said he could have washed it himself. On top of all that, his eldest daughter (76) is nagging him to eat more vegetables. But Yamamoto-...

    0
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    Gavekal Research

    Bank Shares And Deflation Risks

    Over the years, I have learnt the hard way to pay a good deal of attention to the behavior of bank shares. Simply put, when interest rates and bank shares fall in tandem the market is offering a clear signal that very bad news is on the way.

    3
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    Gavekal Research

    Five Corners (12 November): The Commodity Fallout

    Overview: Louis Gave Considers the poor performance of gold mining stocks and wonders if energy companies are set to go the same way.

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    China's Geostrategic Ambition

    Xi Jinping is making good on his promise to restore China’s position on the world stage. On Monday, China agreed to slash tariffs on high-tech imports, breaking almost 18 months of deadlock with the US over how to update the WTO’s Information Technology Agreement. In coming to terms, China showed it is willing to work with the US in support of multilateral trade frameworks. But China’s President Xi also used his chairmanship of this year’s Asia-...

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    Gavekal Japanese

    Japan’s Hydrogen game Changer

    Japan is often described as lacking domestic energy sources, but this is not quite fair. In addition to geothermic energy galore (108 volcanoes) it has untapped natural gas encased in sheets of ‘fire ice’ buried beneath the sea bed. Japan has spent years working on test production sites with the aim of moving to mass production. Such a commercial operation looks increasingly tenable in what could be an energy game-changer for Japan, just as...

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    5C Asia: Soft Commodity Prices Provide A Profit Cushion

    Are weak commodity prices good or bad news for Asia? Most Asian countries are net commodity importers, so common sense dictates that they will benefit from lower input costs. What’s more, just as rising prices represented a transfer of wealth towards commodity producers, so weaker prices will support consumer demand by lifting real incomes.

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    Gavekal Japanese

    When Beta Fades

    A week ago Haruhiko Kuroda surprised the market with a new and aggressive quantitative easing plan. In response most brokers surprised absolutely no-one with calls to ‘buy exporters, buy banks and buy real estate plays’. Of course, such trades might work for the macro tourists looking to give their capital a two-week sightseeing trip in Tokyo. Which brings to mind Charlie Munger’s words of wisdom of: ‘show me the incentives and I will show you...

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    The Two Things That Matter In India

    Indian equities yesterday registered a new peak even as emerging markets remain almost 10% off their early September high. Resurgent optimism toward India’s prospects has been ramped up by a belief that Prime Minister Narendra Modi can return the economy to its high growth path of the mid-2000s. Udith is not convinced of this simple story line, but his contention is that global investors do not need to fret over each twist and turn in India’s...

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    Growth & Markets Monthly (November 2014)

    In this edition of our monthly report we note that economic activity continues to register weaker momentum while deflationary pressures remain stubbornly present. On the primary liquidity side, the Fed has ended its quantitative easing program, while the Bank of Japan has committed to a more aggressive policy, which may yet inspire the European Central Bank into similar action. Private sector credit multiplication, or the velocity of money, has...

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    Gavekal Research

    Japan Is More Than Just A Macro Trade

    The market’s reaction shows that most investors were taken by surprise by Friday’s announcement from the Bank of Japan. They should not have been. BoJ governor Haruhiko Kuroda has declared time and again that he watches growth numbers closely, and would act on any signs of a deterioration. Those signs were officially acknowledged on Friday when the central bank published its three-year growth forecasts, halving the outlook for this year.

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    Gavekal Research

    The True Meaning Of The September October Sell-Off

    The World MSCI stands marginally higher than its position on August 1st. So someone who went on holiday for three months might conclude that not much has happened. Yet, in doing so, our Frenchman (for who else takes three month holidays?) would have overlooked an important question that is highly relevant to the here and now. Specifically, why did markets unravel so aggressively in a six week period from early September to mid-October? To this...

    2
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    London Seminar October 2014 - Anatole, Francois, Tom, Will & Charles

    We held our autumn seminar in London on October 28 with Anatole, Francois, Tom, Will and Charles offering their take on the state of the world economy and the outlook for financial markets.

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    Gavekal Research

    In Japan The Era Of QE Continues

    Just two days after the US Federal Reserve ended its program of quantitative easing, and with the world still waiting to see if the European Central Bank will ever launch effective action, the Bank of Japan stepped up to the plate, stunning markets by announcing a major expansion of its own balance sheet. The acceleration of the BoJ’s “quantitative and qualitative easing” will markedly widen the divergence of monetary policy between Japan and...

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    Five Corners (October 29): The Fiscal Imperative

    Overview: Anatole Kaletsky explains why monetary policy has become an effective irrelevance and fiscal policy is really the only game in town.

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    Gavekal Research

    5C Asia: Japan's Fiscal Debate

    Japan’s fiscal policy has been the exception among developed economies this year. While others sought to avoid austerity, Japan hiked its sales tax rate from 5% to 8% in April, sending the economy into contraction. The weaker-than-expected recovery from this slump has prompted a series of growth downgrades, with the International Monetary Fund cutting Japan’s forecast growth rate for 2014 in half to just 0.9% and predicting a 25% chance of...

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    Gavekal Research

    Travels Along The New Silk Road: The Economics Of Power

    China’s economic expansion overseas is one of the defining geopolitical shifts of our time. Chinese firms have already invested in excess of US$500bn abroad, and the annual flow of overseas investment is set to overtake the flow of foreign direct investment this year (see More Deals, More Players). The push into Africa has captured most attention, but China’s economic tentacles are spreading across developing Asia, too—not least in Central Asia...

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    Gavekal Research

    Buying The Dip? Choose Asia

    Markets remain jittery, but the last week has at least seen a break in the downward momentum. Hence it may be worth taking stock of relative performance by the big regions. Looking across the MSCI benchmarks, the All Country World index is down –4.7% since its peak in early September, while the US, Eurozone, Emerging Markets (ex-Asia) and Emerging Asia declined respectively by –3.9%, -5.2%, -8.4% and –5.4%.

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    Gavekal Research

    Waiting For The Japanese Pay-Off

    Back in December 2012, as it became clear Japan was moving towards an all-out attack on deflation, I argued that if Tokyo’s shock and awe campaign drove the yen into undervalued territory, it would have a powerful deflationary impact on the rest of the world. My view at the time was that the devaluation of the Japanese currency would reintroduce a formidable competitor into the world’s economic system, and that it would take roughly 18 months...

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    Gavekal Research

    Blood And Bazaars On The New Silk Road

    After more than three decades of passive foreign policy, China has a strong leader unafraid of articulating a vision of expansionism. Like Vladimir Putin, Xi Jinping wants to re-establish his country’s historical sphere of influence—but Xi’s vision is based on economic logic rather than political machismo. Across Asia, China is using its enormous domestic market, financial power and prowess in building infrastructure to suck its neighbors into...

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    Give Last Week Back To The Indians

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    Torschlusspanik!

    The Germans, it is said, have a word for everything—and their word for what we saw in European and US markets on Wednesday and in Asia on Thursday morning is Torschlusspanik. Literally ‘gate-shut-panic’, this describes the nasty crush that develops when everyone rushes at once for an exit that is fast closing; inevitably someone gets injured.

    1
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    Five Corners (October 15): The Equity Rout

    Overview: François Chauchat asks whether a US recovery is enough to drive global equity markets or has the world changed.

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    An Exemplary Emerging Market

    The combination of a strong US dollar and weak commodity prices would usually spell misery for emerging markets. Yet the benchmark for this group has lost only 4.5% since the dollar started rising in July, compared to a 15% fall in the month that followed Ben Bernanke saying “taper” last May. To be sure, the EM benchmark is down as much as 6% in the last month, but it's worth noting that the main eurozone equity index has shed 10% in the...

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    Gavekal Research

    Behind The Equity Market Meltdown

    Why are stock markets around the world falling? The surest explanation is one that works whenever the markets move in a big way: there are more sellers than buyers after a long period without a meaningful correction (it is three years since the 20% decline that ended in October 2011). A more sophisticated account of the correction might point to the collapse of oil prices and its impact on natural resource shares. While falling oil prices are...

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    Normal Or Systemic Markets?

    In The Crucible Arthur Miller wrote “until an hour before the Devil fell, God thought him beautiful in Heaven”. Granted, equity markets have not exactly suffered Lucifer-like de-ratings lately. Nonetheless, the price action in stock markets around the world is looking less and less healthy by the day. Let me explain: when examining the performance of a given index over a very long period of time, one typically finds that, like most things in...

    3
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    Gavekal Research

    If You Keep On Doing What You’ve Always Done...

    ...you'll keep on getting what you’ve always got. At least, that's what any sports coach worth his salt would tell a losing team in the half-time huddle. And perhaps this is the problem facing the big developed economies. Not enough of today's bien-pensants (Hollande, Merkel, Yellen, Bernanke...) or their advisers (Summers, Piketty, Krugman...) have spent time chasing a ball around a field. Let me explain.

    2
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    Seek refuge In The US

    Markets have suffered a significant risk-off move in the last month. US equities have fallen as much as –3.8%; European stocks are down -6% in euro terms and –8% in US dollar terms, and government bonds have been bid up while credit spreads have widened. Readers are surely wondering what to do now: Buy the dip, or sell everything before this turns into a full-on bear market? Hold steady, or adjust portfolios? To answer these questions, we have...

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    5C Overview: Waiting For The Regional Rotation

    After years of doubt about the efficacy of US economic policies, the revival of confidence in America stands out as one of the key developments of 2014. This turnaround has been attested by the recovery of capital investment, by the resilience of the US economy to the Federal Reserve’s tapering process, and more recently by the strength of the US dollar.

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    5C Asia: Finding Real Growth In Emerging Markets

    US dollar strength and weakening commodity prices have knocked the wind out of global equities in recent weeks, and EMs have not been immune. Intuitively, the emerging market experiencing relatively larger losses could be broadly classified into three somewhat inter-related buckets: (i) markets where idiosyncratic factors add to geopolitical risk premiums (e.g., Russia, Argentina, etc.); (ii) markets facing a loss of growth momentum as the China...

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    Growth & Markets Monthly (October 2014)

    This month produced another visible deterioration in our growth indicators. A large part of this downshift stems from Europe which remains the major economic region of particular concern. On the risk side, most of our indicators weakened slightly; interestingly our own proprietary velocity indicator was the lone positive outlier. On the asset allocation side, equities generally hover around fairly valued, while bonds look expensive. However,...

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    Five Corners (1 October): The Energy Selloff

    Overview: Louis looks at the decline in oil prices and wonders whether the genesis can be found back in May when the leaders of China and Russia met for an historic summit.

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    Japan: Where Bad News Is Good

    At first glance recent data flows from Japan appear deeply at odds with the market action. Factory output, consumer spending and real wages all fell in August, while Japan’s economic surprise index has spent most of the last month deep in negative territory, an exceptional occurrence, even when viewed through the lens of Japan’s recent lost decade. Yet in a dismal third quarter for global equity markets, Japanese stocks stood out for their...

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    India’s Muddled Mission Statement

    The public relations machine of Narendra Modi, a one-time pariah in respectable political circles, is currently in overdrive. India’s charismatic prime minister grabbed the plaudits for India’s low cost Mars orbiter pipping China to the Red Planet last week, and in recent days he’s been getting the full blown celebrity treatment during an official visit to the US, something which is rare for a foreign leader. In between these triumphs of...

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    An Irish Outlier?

    The Irish economy looks to be making a faster than expected recovery from its grim 2010 nadir. Growth is running at an annualized 6.5% which is more reminiscent of the “Celtic tiger” era than the grinding recession conditions still typical in Southern Europe. Ireland seems sure to emerge as a paradigmatic case study between the rival policymaking camps of so called Austerians and those advocating more conventional Keynesian responses. But for...

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    5C Asia: It Pays To Restart

    Japan has a clear economic interest in restarting its nuclear power program since the high cost of replacing its cheapest source of power has had a direct negative impact on the government’s hoped for reflation—most of the price rises generated in the last two years have come not from improving domestic demand, but higher power bills. And now that Japan has learned to live without nuclear power (and accept the costs) policymakers must be...

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    Asia Can Handle A Strong Dollar

    Can emerging markets handle a strong US dollar? This is a crucial question for investors in emerging Asia since an appreciating dollar has often spelt trouble for the region’s markets. The worry is that the dollar now looks to be on a secular strengthening trend with the DXY up 6% since July 1. For its part, the MSCI Asia ex-Japan index has lost 3% in less than two weeks.

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    Can Working Women Revitalize Japan?

    In his reshuffle earlier this month, prime minister Shinzo Abe appointed five women to Japan’s cabinet. By more than doubling the number of senior ministerial posts held by women, Abe was hoping to lend some extra impetus to the ‘third arrow’ of his ‘Abenomics’ program to revitalize Japan’s economy. The first two arrows—fiscal and monetary stimuli—have succeeded in weakening the yen to a six year low against the US dollar, returning Japan to...

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    Five Corners (17 September): World Bond Markets

    In our latest bi-weekly review of global economics, we take a searching look at the state of global bond markets. As the US Federal Reserve inches closer to a tightening bias, bond investors must climb a wall of fear. Recent weeks have seen yields rise globally. The issue is whether this represents a nervous short-term move or a bigger shift in the cycle. Gavekal Dragonomics analysts consider the picture from the major economic regions.

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    Japanese Equities' Surprise Potential

    After spending most of this year range-trading against the US dollar, the Japanese yen has moved decisively lower since July. Yet—unlike the last time the yen broke out in 1H13—equity investors have mostly yawned. Despite a mild pick-up in economic growth and inflation since it took office in late 2012, Shinzo Abe’s government has failed to deliver meaningful structural reform. As a result, equity investors have been left trying to game the...

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