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    Gavekal Research

    Asia And Tapering Fear: Get Over It

    0
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    Quarterly Strategy Chart Book - Look To Asia, Tapering Or Not

    In our previous Quarterly, we argued that investors should consider increasing their exposure to the emerging markets, and Asia in particular. The logic being that the taper tantrum sell-off in the summer was overly violent and that the valuation gap with the developed markets had grown too wide. Since then, our conviction on Asia has hardened. One reason for this is China, where a pretty decisive supply-side reform agenda has emerged in the...

    0
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    5C Asia: Will The Rupiah Get Its Groove Back?

    The Indonesian rupiah’s continued slide in recent weeks has earned it the dubious distinction of being one of the few emerging market currencies in a worse position than at the height of the tapering scare in late August. An aggressive rate tightening cycle in recent months has done little to stem the -18% fall in the rupiah so far this year—ironically, investors now worry that this conventional central banking tool may end up exacerbating an...

    0
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    5C Resources: A Dark Outlook On Coal

    After two years of carnage in the coal sector, Asian thermal coal prices clawed back a bit of ground this autumn—rising US$5 to settle around $85 a ton. Prices are now down a mere –40% from their 2011 peak.

    0
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    Now Is The Time For Japanese Equities

    Never mind that Tokyo and Beijing look to be moving on to a war footing or that Japan’s latest trade and industrial production data was weak—the Nikkei yesterday soared to a six-year high. At the same time, the yen has resumed its slide, giving succor to those betting on domestic reflation.

    2
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    Bangkok Versus Thailand

    Thailand’s constant political turmoil over the last 30 years has convinced many investors that instability is a sideshow to the country’s strong growth trajectory. As such, periodic political crises have come to be seen as a much prized buying opportunity. Alas, this simple logic may no longer hold as political dissent is unfolding against a backdrop of weaker structural growth and increasingly embedded subsidy programs which have corrupted the...

    0
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    Xi's China Flexes Its Muscles

    Having celebrated Chinese leader Xi Jinping’s bold economic reform agenda, we must now take stock of a less appealing element of the new regime: a more determined and muscular effort to throw China’s weight around Asia. Beijing’s declaration on Saturday of a new “air defense identification zone” (ADIZ) covering a huge swathe of the East China Sea and including the disputed Senkaku Islands, came as an unwelcome surprise to Japan and the United...

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    Japan: Time For The Trade That Never Works

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    Japan Breaks Out

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    Indian Stars Are Aligning

    Those investors who seek celestial alignment may have noticed that India’s maiden mission to Mars pretty much coincided with equities rocketing to an all-time high. The ‘Mangalyaan’ orbiter safely exited the launchpad on Tuesday, but the real test will come when the module exits the earth's orbit in a risky slingshot maneuver towards its ultimate destination. We would argue that Indian equities are at a similarly critical juncture, and that...

    0
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    Gavekal Research

    5C Asia: A Niche Exposure To Japanese Equities

    The great Japan macro-trade has stalled—what will it take to revive enthusiasm? Apparently the answer is not a strong earnings season. Of the two-thirds of Nikkei companies that have reported so far in 3Q, 62% have beaten earnings estimates by an average 16%. Excluding financials and utilities, aggregate profits have jumped 2.2x YoY for 3Q on sales growth of 13%.

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    Learning Japanese Patience

    2
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    Resource EMs Reopening The Doors

    Two years ago, with commodity prices high, emerging market resource producers scrambled to restrict or regulate foreign investment in their mines and oilfields, in the hopes of keeping most of their windfall profits on shore. Now they are scrambling the other way: in the past three months, Mexico, Brazil, Mongolia, Indonesia and Russia have all announced new policies to ease commodity-related FDI, or signed new export deals on favorable terms...

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    The Next Fastest-Growing EM?

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    5C Resources: To The least Dirty Go The Spoils

    The fallout from China’s slower industrial growth since 2012 has been pervasive, but perhaps nowhere more so than the global coal market. The price for Aussie thermal coal out of Newcastle port — the main Asian benchmark — is down 40% from its 2011 high and 20% this year alone. Coal producers everywhere are hurting badly.

    0
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    Changing The EM Pavlovian Response

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    A Fisherian Take On Velocity

    Defining the velocity of money is not an easy task. John Maynard Keynes summed it up as the ‘animal spirits,’ the Austrians called it ‘the preference for liquidity,’ Knut Wicksell labeled it the spread between the ‘market rate’ of interest and ‘the natural rate.’ Joseph Schumpeter tied changes in velocity to entrepreneurs’ willingness to take risk, which in turn is tied to factors including the legal systems in which they operate, property...

    10
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    Gavekal Research

    Asia's Debt, Subsidies And Deficits

    Much of the recent commentary on Asian economies’ external imbalances has confused cause and effect. Unlike the meltdown in the late 1990s which stemmed from debt-fuelled over-investment, today’s imbalances largely derive from fiscal profligacy. Hence, Asian policymakers face the headache of curbing recently adopted subsidies that are fast becoming embedded political entitlements. The likes of Malaysia seem to be rising to the challenge, while...

    2
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    5C Overview: East Asia's Reforms: Thank The US

    1
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    5C Asia: The Deflationary Specter

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    Is That A 'Third Arrow' We See?

    4
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    Mary Poppins In Japan: Abenomics Explained

    We recently dove into the mysteries of Abenomics, and concluded that the main motivation behind Japan’s suddenly aggressive macro policies is fear of fiscal collapse and eclipse by China (see Why Abenomics, Why Now?). Today we explore the details of the program and assess the likelihood that it will succeed in its aim of boosting Japan’s long-term trend growth rate to 2%, or a bit over double the rate during the two so-called “lost decades”...

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    Gavekal Research

    The New Asian Landscape

    By now, I hope we have telegraphed our message on emerging market Asia: this is not a balance sheet crisis but a case of crumbling growth drivers. After a decade of galloping growth—with EM Asia outpacing the OECD’s real economic expansion rate by as much as 7.5pp—the growth gap with the OECD is narrowing. An easy street paved by accelerated globalization and massive Chinese investment spending is giving way to a more complex macro landscape for...

    0
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    Why Abenomics, Why Now?

    Like many others, we have spent a lot of time over the past few months trying to figure out where Japan’s “Abenomics” experiment came from, what its purpose is, what it actually consists of, and how likely it is to achieve its aims. Today we try to answer the first two questions (origins and purpose); next week we will tackle the other two. We think that Prime Minister Shinzo Abe’s aggressive reflation campaign has two main sources. First, after...

    9
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    Gavekal Research

    The Next Phase Of EM Investing

    Emerging markets have had a pretty springy rebound in the past 10 days or so, and may now be in pause mode ahead of next Wednesday’s Federal Reserve announcement. A key question is whether this is the calm before the storm of another bout of contagion selling. We don’t think so. Rather, it is more likely investors will start focusing more precisely on the fundamental difference among the various EMs.

    0
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    The Widow-Maker Survives Abenomics

    3
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    Gold For Japan's Confidence Game

    The Tokyo Olympics 2020 celebrations were so extensive and jubilant, that some commentators said it all seemed rather “un-Japanese.” But this is exactly what Prime Minister Shinzo Abe is looking for—a new kind of Japan. Tokyo’s hosting of the 2020 games offers much more than the limited economic boost directly attached to the Olympics: more importantly it raises the odds that Abenomics will continue to enjoy a popular mandate. This is an...

    0
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    5C Asia: Time For The Yield Hunt To Recommence?

    With US 10 year government bond yields stabilizing at around 3%, QE tapering expectations appear broadly priced in. As such, bargain-hunters have already returned to emerging market bonds, nudging down yields. There is still plenty of opportunity left for those who think the worst of the tapering storm has passed.

    0
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    Australia's Next Era

    Australia’s doomsayers love to focus on high foreign liabilities and household debt ratios, calling up the ghosts of America’s housing bust and emerging market sudden stops. Such risks are heavily overstated. With the opposition conservative coalition expected to win tomorrow’s national election, the new government’s greatest challenge will be to reverse a 15 year trend of deteriorating productivity growth and position Australia as a prime high-...

    0
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    India’s Mess And How To Clean It Up

    How fast fashions change: in 2012 India had one of the world’s best performing stock markets, despite abundant evidence that the country’s growth momentum was slowing. But since June of this year, India has been the hottest flashpoint in the emerging-markets meltdown that began after Ben Bernanke started his QE taper-talk: the rupee dropped by 20%, capital outflows accelerated and GDP growth fell to 4.4% in the most recent quarter, the worst...

    0
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    Gavekal Dragonomics

    Korea And China: Rhyme Or Repeat?

    Stop me if you’ve heard this one before. An Asian country emerges from a period of internal strife to take global markets by storm. Sweeping domestic reforms and a hands-on industrial policy result in a surge in manufacturing capabilities and exports, which in turn drive years of sustained and rapid economic growth. But once exports start to slow, the government tries to keep growth going by pushing up investment. This works for a while, but...

    0
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    Gavekal Dragonomics

    CEQ Q3 2013 - Books

    Stop me if you’ve heard this one before. An Asian country emerges from a period of internal strife to take global markets by storm. Sweeping domestic reforms and a hands-on industrial policy result in a surge in manufacturing capabilities and exports, which in turn drive years of sustained and rapid economic growth. But once exports start to slow, the government tries to keep growth going by pushing up investment. This works fora while, but...

    0
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    Gavekal Research

    Can Rajan Rescue India From Disaster?

    0
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    Winners And Losers In China's Rebalancing

    Investors may have noticed that Asia is having a pretty rough run. Capital is leaving the region and, unlike after the 1997 crisis, it is uncertain whether nations can “export” themselves back to health (see It’s Not A Balance Sheet Problem). Indeed, China has been the region’s key export growth market in recent years, and as we all know, her era of investment-fuelled hyper-growth is giving way to a slower, more balanced growth model. This...

    0
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    Gavekal Research

    It’s Not A Balance Sheet Problem

    There is a growing fear that emerging markets could be on the cusp of a general crisis of the type seen in the early 1980s or late 1990s. The concern is that too much debt was racked up during an easy money phase and chickens are coming home to roost as the US moves toward a tightening cycle (see Resetting Expectations For Emerging Markets). Attention has understandably focused on those emerging economies with sizeable current account deficits,...

    13
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    Asia's Naked Swimmers

    4
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    Can Growth Save The Rupee?

    With the rupee skidding to a new low, India on Monday announced its latest round of measures aimed at stemming the currency's decline. By curbing “non-essential” imports and easing regulations for overseas borrowings to attract inflows, the government continues its patchwork approach to solving its balance of payments problem. But the measures unveiled over the past few weeks do little to address the structural issues plaguing the Indian...

    0
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    Gavekal Research

    Iron Ore Hits The Floor

    As China’s economy slows, the price of iron ore has been sliding. In early 2011, it peaked at US$187 per ton. Since then, bar a brief rally in the final months of 2012, it has been heading downward, and many investors are convinced that weak demand in China and the opening of new mines abroad mean it is only a matter of time before the US$100 threshold is breached. But we think expectations of an extended slump are wrong—and indeed, iron ore...

    0
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    Gavekal Research

    Buy The Lion, Sell The Baby Dragon

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    5C Asia: Japan's Third Arrow Dilemma

    Abenomics may go down in history as the one of the most mysterious economic stimulus plans of all time. So far Prime Minister Shinzo Abe’s platform has invigorated markets, delivered soaring corporate profits, boosted consumption and lowered deflation—all this, and yet Japan’s bonds are the only ones in the region to have gained this year.

    0
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    Gavekal Research

    An Emerging Market Reform Wave

    We know that rising bond yields have been tough on emerging market asset prices. What remains to be seen is the real economic impact that results from this changed market landscape. If Indonesia, which just reported 2Q13 GDP is an example, then we can perhaps expect an era of reform and newfound policy discipline. We have argued that a mini crisis may be just the thing a number of emerging markets need to nudge them into making painful reforms...

    0
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    Gavekal Research

    Look To EM For Real Yield

    Tomorrow is the big day. Market participants have their microscopes out to scrutinize the FOMC’s statement for any tonal change regarding the Bernanke put. Judging from the narrowing spreads over US treasuries in global bond markets, no major surprises are expected. However the yield-chasing game is not back in full swing: many emerging market bonds, which suffered a scorching sell-off earlier in the summer, have lagged the recent recovery....

    2
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    Japan: Keep Following The Yen

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    India: A Smart Muddle-Through Story

    4
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    Game Over For Austerians

    Margaret Thatcher used to say that “There Is No Alternative” to whatever policy she believed in. But there is always an alternative to banging your head against a brick wall—you can stop banging your head against a brick wall. The G20 meeting in Moscow last weekend may have marked such a moment of revelation.

    4
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    Gavekal Research

    Short-Term Japan, Long-Term China

    The weekend news from Asia featured two big items. On Friday night, China’s central bank announced the abolition of all controls on bank lending rates. On Sunday, Japanese PM Shinzo Abe’s coalition won a majority in the upper house of Parliament big enough for Abe to push through major economic reforms, (but too small for him to re-militarize the country). Both of East Asia’s biggest economies seem primed for major structural reforms under new...

    1
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    Japan’s Consumption Tax Imperative

    For Japan’s Prime Minister, Shinzo Abe, much is at stake in Sunday’s upper house elections. Victory would give the Liberal Democratic Party control of both parliamentary chambers and remove an inevitable veto to contentious policies that challenge vested interests. This is the hope of investors who have bid Japanese shares sharply higher in recent weeks on the bet that an LDP electoral victory will break the policy logjam and allow Abe to...

    0
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    Five Corners (17 July 2013)

    In the latest Five Corners biweekly review of global economics and investment:

    0
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    The Other Emerging Markets Story

    Investors have had a harsh reminder of the risks presented by high growth developing economies with rudimentary financial systems. And yet for every manager who tells us that they will never again take the call of a Singapore or Sao Paulo-based equity broker, we cannot but feel that the current gloom is overdone. Indeed, we are seeing encouraging signs of reforms that could serve as the basis for the next phase of EM growth.

    1
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    Good Omens

    Two months ago I gave ten reasons for believing that April’s break-out of the S&P 500 from its 13-year trading range “could mark the start of a secular bull market in global equities”. This piece, which came out on May 20, was singularly ill-timed, since equity markets peaked the very next day and then plunged on May 22, after Ben Bernanke’s tapering comments (see Goldilocks And The Ten Bears). Luckily for my credibility, I did end this...

    5
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    Australia And The China Syndrome

    So for the satellite supplier economies to the Chinese juggernaut, is it simply a matter of following the leader? This morning it was announced that China’s economic growth duly slowed to an annual rate of 7.5% in 2Q13 from 7.7% in the previous period. Moreover, the latest credit data shows that China’s credit cycle has decisively turned, implying that last month’s interbank rate spike was no aberration. Dragonomics will publish a detailed look...

    2
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    Asia Between A Rock And A Hard Place

    Asian central banks have had a painful reminder of their dependence on external (in particular US) monetary conditions. Despite their economies’ facing far tighter financial conditions than a few months back, central banks in Korea and Malaysia yesterday left key interest rates on hold, while Indonesia tightened by 50bps. As the Federal Reserve prepares to wind-down unconventional monetary policies (yes, we did see the chairman’s latest “...

    0
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    Bad Omens

    In late May we published a debate piece on the near-term outlook for equity markets. Since then, emerging markets have once again lived up to their name by proving themselves hard to emerge from during an emergency (in USD terms, Brazil is down –35% year to date while Chinese valuations are back to 2008-crisis levels); for their part, European and US equity markets have pulled back, while the only salvation has come from Japan (the one market...

    10
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    Counter-Balancing Market Trends?

    Over the past decade, investors needed to come up with one of two ideas to ensure outsized success: “front run the Chinese” or alternatively "front run the Fed".

    5
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    Nuclear Decision Nears

    We have argued that Japan was persuaded to join the currency devaluation race less by any innate desire to pursue structural reform than a fear of becoming dependent upon foreigners. Japan runs the biggest fiscal deficit among rich nations and when its current account fell decisively into deficit last year, alarm bells went off in Tokyo. Concern morphed into paranoia as it became clear that regional rival China was one of biggest incremental...

    2
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    Falling Rupee A Knife Worth Catching

    India’s release of quarterly balance of payments data tomorrow will be more than usually scrutinized. In the last month, emerging markets which depend on capital inflows to offset current account deficits have been given the cold shoulder. India has been especially shunned because its combined current and fiscal deficits exceed 10% of GDP, a level frequently cited as a critical threshold. And in the stampede out of “twin deficit” economies few...

    2
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    Five Corners (19 June 2013)

    In the latest Five Corners biweekly review of global economics and investment:

    0
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    Who Is Liquidating?

    Short-term pullbacks of 10% or more are nothing out of the ordinary for Asian equity investors. However, the sell-off that started on May 22nd is troubling. It is occurring on no major news (no Fukushima disaster, no SARS-type health scare, no Sino-Forest corporate scandal, etc); and it is rather indiscriminate, with the correlation among all stocks, and all asset classes, shooting up. Even the safest of the region's government bond markets...

    1
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    The Incredible Deflating Gas Market

    Emerging markets are taking a pounding with commodity-producing centers worst affected. Everywhere we look we see resource markets that are either over-supplied or have the potential to be so. The old market adage that the best cure for high prices is high prices would seem as relevant as ever. But it isn’t just iron ore and copper stocks which are bulging; LNG prices have plunged almost 25% in the last couple months.

    6
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    Not All Emerging Markets Are Equal

    Emerging markets suddenly face a perfect storm of fleeing capital and shrinking demand for their wares. The proximate cause is the global bond market sell-off, which has sucked hot money back home. And the hardest hit markets are those commodity-heavy exporters which hitherto benefitted from rapidly expanding Chinese demand. But while it may seem like a time to circle the wagons, this sell-off is most likely a healthy realignment of winners and...

    0
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    Asia And The Dollar

    Asian risk assets have been sucked into the volatility vortex since the latest panic started over the end-game for the Federal Reserve's quantitative easing program.

    0
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    Japan Misses The Target

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    Gavekal Dragonomics

    China Economic Quarterly June 2013 - Southeast Asia

    Deng Xiaoping used to say that the foreign policy breakthrough he was most proud of was the full normalization of China’s relations with the countries in Southeast Asia. In the 1980s, Deng’s policies helped China transform itself from a deadly enemy of its southern neighbors to a potential partner. Over the next two decades, China nurtured relationships in its backyard. Yet over the past few years many of these efforts have gone to waste: from...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Indonesia

    Gandaria City is the largest retail mall amid the growing high rises of south Jakarta,but for many years it stood as a half-finished skeleton. Its Indonesian-Chinese developer, Pakuwon Group, racked up huge debts during the Asian Financial Crisis of 1997 and was unable to complete the project. Yet soon after making forays into China during the mid-2000s, the firm suddenly found itself in aposition to finish the massive complex—supported, it is...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Vietnam

    “Follow America and save the country; follow China and save the Party.” This saying, ubiquitous in Vietnam, distills the geopolitical dilemma facing its ruling Communist Party. Forty years after the last American troops left Vietnam, the Party thatwon independence and unified the nation has lost much of its legitimacy. No amount of harking back to the virtues of Ho Chi Minh and his comrades canrestore its élan nor, it seems, root out systemic...

    0
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    Gavekal Dragonomics

    DragonWeek - A Respite For Japan

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    Gavekal Research

    Can Japan Stop The Rout?

    The sudden collapse of Japanese equity prices last month had many possible explanations (see An Odd Divergence) but one that deserves more attention is the simplest—there were more sellers than buyers. What makes this banal observation potentially useful in Japan’s case is the possibility that the imbalance between buyers and sellers may be about to shift. More precisely this imbalance may soon be affected by a change in government regulation...

    5
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    An Odd Divergence

    In recent weeks, the JGB market has broken down, with 10-year bond yields almost doubling. The Nikkei has fallen more than -15% from its peak and thus technically entered bear market territory (even if, in fairness, the past ten days' pullback only brings the Nikkei back to where the index was at the beginning of the month!). But, over the same period, in a surprising turn of events, the yen has barely budged, staying well anchored in the...

    9
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    It's The Volatility That Matters

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    Five Corners (22 May 2013)

    In the latest Five Corners biweekly review of global economics and investment:

    2
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    The Arithmetic Of Abenomics

    The 3.5% GDP growth announced this morning suggests that Japan may be the fastest growing economy in the G7. Since the Tokyo stock market hit bottom exactly six months ago, the Nikkei share index has soared 72%. Meanwhile, the yen has experienced its biggest ever six-month move against the dollar. All these events appear to be linked to Shinzo Abe and the new regime he has installed at the Bank of Japan.

    0
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    Gavekal Research

    Has The AUD Met Its Wooloomooloo?

    Much like your average marsupial, the Australia dollar is a strange creature. As a commodity exporter whose biggest customer is China, Australia’s currency has tended to appreciate during periods of brisk economic activity and muscular risk appetite. But in the aftermath of the 2008-09 crisis Australia also became a safe haven, which explains why the AUD remained strong in the past 18 months, even as China’s appetite for commodities started to...

    2
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    Japan Exports Ready To Rumble

    Could it be a case of ‘buy the rumor, sell the fact’? Japanese exporters have seen their share prices soar following the yen’s more than 20% depreciation against the dollar since late last year. The real world impact has been far more muted; Japan’s exports rose only slightly in March, while those of rival industrial powerhouse economies – South Korea and Germany – have remained relatively steady.

    4
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    A 'Perfect Score' For Abenomics

    Japan’s beggar-thy-neighbor monetary goals got a perfect score yesterday—of 100. Indeed, after breaching the resistance level of 100 against the US dollar, the yen kept falling, to finish the day at ¥101. This comes in the midst of an earnings season that has put on full display Abenomics’ potential for boosting company fortunes. More than half of Topix companies have reported, with 1Q13 earnings rising an average of 10% YoY, compared to 5% in...

    0
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    Gavekal Research

    Don't Miss Out On Asia

    The spectacle of daily new highs on US equity markets, combined with continued euphoria in Japan, makes it hard to notice anything else going on in global stock markets. But stocks in Asia ex-Japan are humming along at a pretty decent clip as well. Lost in the fanfare of the Dow Jones Industrial Average’s 15,000 milestone, hit yesterday, is that MSCI Asia ex-Japan has outperformed the DJIA so far this quarter, returning 5.5% in USD compared to...

    0
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    Malaysia’s Longer Term Debt Riddle

    The razor-thin victory of Malaysia’s ruling Barisan Nasional has prompted a relief rally in financial markets. But the result could prove a pyrrhic victory for the country’s long term growth prospects. Accusations of widespread voting irregularities can only exacerbate the country’s polarized social divide, and perpetuate an economic structure that ensures growth is bought with escalating debt levels.

    0
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    Gavekal Dragonomics

    The Myanmar Dilemma

    Follow the old Burma Road from Mandalay through the rolling hills to China’s southwest border, and you will catch glimpses of narrow strips of freshly dug farmland, scattered with white marking posts. Underneath the deep-red earth lie twin pipelines, each a meter in diameter, that will carry oil and natural gas 1,000 km from Myanmar’s western coast to the Yunnan border town of Ruili, and then on to the provincial capital of Kunming.

    1
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    Implied Assumptions

    Financial markets operate on a number of implied assumptions about growth, policy direction and other factors. Experience tells us that these assumptions often turn out to be erroneous. The goal of this paper is simply to test the rationality of the current set of assumptions.

    9
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    Will India Rise As Commodities Fall?

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    A Way Out For Japan?

    After two lost decades, Japan is trying something radical. There are three pillars to Abenomics: aggressive monetary policy, an expansionary fiscal policy and structural reforms to ensure a sustainable growth strategy.

    2
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    Indonesia's Version Of A Great Rotation

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    A First Non-Euro Currency Debate

    Last Thursday the Bank of Japan stunned investors with a muscular monetary response that aims to break a deflationary cycle that had seemed to condemn Japan to permanent economic decline. In this piece we debate what the new policy settings mean for investors and crucially, seek to answer the trillion-yen question of where the Japanese currency is headed.

    3
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    Nikkei: Far From A Crowded Trade

    The GaveKal view is for 2013 to be the year when the main driver of markets shifts from government policy to economic fundamentals. We never expected this to be a smooth ride and the global economy continues to throw up contradictory signals (see today’s Daily Riding A Bull Market With No Conviction). The big exception to this conceptual framework was always going to emanate from Tokyo. Unlike the US, China and (even) Europe, it has been clear...

    2
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    Riding A Bull Market With No Conviction

    The Irish poet WB Yeats wrote, “The best lack all conviction, while the worst are full of passionate intensity.” We see something similar in equity markets. With the S&P 500 on Tuesday hitting a new all-time high, we clearly remain in bull market territory. Central bank easing measures such as that just announced by the Bank of Japan mean we could push higher. And yet we see plenty of evidence that these new peaks have come on the back of...

    4
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    Australia Is Lucky, But China Might Be Luckier

    Australia apparently suffers from a “two-speed” economy, where a booming resource sector drives up both borrowing costs and the value of the currency, thus crowding-out other activities. But any day of reckoning resulting from such an unbalanced economy has been deferred in large part due to the blow-back effects of the post-2008 global financial crisis. It could just be argued that the crisis which hurt so many other big economies was, in fact...

    3
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    Asia's Underperformance

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    A Recantation

    Over the years a number of economists and political scientists have seen the error of their ways and come clean with a reasoned recantation. The mid-19th century British thinker John Stuart Mill famously changed his mind on the divisive question of industrial wages. My contribution to political economy hardly matches Mill’s, but I have spent my adult life pondering the linkages between economics and markets. However, in recent times I have come...

    11
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    A Brief Overview Of Global Equities

    As we never tire of pointing out, equity bull markets rest on three pillars: attractive valuations, decent economic growth, and excess liquidity (to push valuations higher). Looking at global markets on the basis of these three pillars, we find that:

    2
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    Gavekal Research

    Storm In A Masala Tea Cup

    India yesterday got the rate cut many were hoping for—but also a political squabble no-one wanted. The Sensex tumbled -1.5% for the day, bringing year-to-date losses to -2%, amid concerns that parliamentary infighting will derail a hard-won reform push that began late last year.

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    Gavekal Research

    Breaking Asia Into Digestible Pieces

    One of our long-held beliefs is that bull markets rest on three pillars: attractive valuations (so that multiples can expand), excess liquidity (to push up multiples) and decent economic growth (to ensure no disappointments in earnings). In our recent meetings with investors in Australia, we were asked where Asian equity markets stood along this grid and, to be honest, we were hard pressed to answer. Now, with the hair-raising news out of Cyprus...

    0
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    Look Forward, Not Back In ASEAN

    Southeast Asian economies have had a strong run on decent export performance and solid consumption spending. A key structural concern, however, is that this recovery has occurred on a thin capital stock that has barely grown since the late 1990s Asian crisis. For this reason, an increasingly vocal group of bears argue that payback for under-investment is coming due in the shape of overheating pressures—in particular they cite worsening current...

    0
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    Japan: Bowing To The Dow

    The Dow Jones Industrial Average is the best performing major index year-to-date, in US dollar terms. But Japan is not far behind, with the Topix up 9% in USD terms, trailing the DJIA by just about -80bp. This is not random. If the US continues to do well, so will its major trading partner and competitor across the Pacific. Those optimistic that the US recovery story will continue to fly, should also put Japan on their radar screen.

    0
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    Of Auto Sales And Smog Clouds

    To make up for weak external markets since 2008, Asian policymakers have sought to boost domestic demand. Judging by passenger car sales, they have done a pretty good job. Boosted by financing conditions and tax incentives, car sales have taken off in China and in Southeast Asia.

    6
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    Not Deja Vu Again In Asia

    For plenty of Asia watchers there is an uncomfortable familiarity with the boom conditions that have gripped Southeast Asia in recent years. Capital is pouring into the region, risk premiums have collapsed and domestic demand is galloping ahead. Manila suddenly has aspirations to be a financial “hub,” Thailand has just racked up a record trade deficit and even Anwar Ibrahim, the enfant terrible of Malaysian politics is back, suggesting he can...

    0
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    The Next BoJ Head's Tough Mandate

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    Betting On The Indian Budget

    After shooting out of the starting gate with a 5% bounce in January, Indian equities have given up all their gains and are flat year to date. The proximate cause is poor earnings reports and downgrades. But the broader story is the fading of the reform euphoria that helped push up Indian markets 25% last year. Negative economic news flow, from a record current-account deficit to major growth estimate downgrades, indicate that India is now...

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    Walking On Egg Shells In Japan

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    Quality vs Trash In Japan

    It has become the world’s favorite momentum trade as shown by today’s 3.8% rise in the Nikkei 225. Japan’s avowed yen depreciation policy has prompted a rush into exporter stocks with little regard for their underlying quality—the yen has depreciated 16% against the dollar since November, while a broad index of exporter stocks is up 38%. Global fund providers are seeing big flows into products offering exposure to Japanese exporter stocks while...

    8
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    India’s Easing: Baked In The Baseline

    Tomorrow, the Reserve Bank of India is set to decide on what may be the first in a series of interest rate cuts. Investors should stay tuned because, absent a strong economic growth story, we expect monetary policy to be the main news influencing Indian equities this year.

    0
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    ASEAN And Modern Political Risk

    Southeast Asian countries’ recent success in grabbing direct investment and portfolio inflows is rightly attributed to positive growth dynamics, good policy and moderate aggregate debt levels. Less often mentioned is the role of stable politics and stronger democratic institutions in securing this growth dividend. Viewed in these terms, governments in Indonesia the Philippines and even rambunctious Thailand are being financially rewarded for...

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