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    Gavekal Research

    Indonesia Ups The Ante On Resource Nationalism

    The China-driven resource boom over the past decade has created great wealth in developing countries with big mining industries. It has also created a move toward “resource nationalism,” as countries seek to capture more of the value of their natural resources by clamping down on exports of raw ores and forcing investment in domestic smelting and processing plants. The poster child for this movement is Indonesia, which banned exports of many...

    0
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    Japan's Momentum Trade

    The combination of a broadly stable macro-economic backdrop, plentiful central bank liquidity and low market volatility has been kind to investors this year. The year-to-date performance of most major equity markets has converged, regardless of any divergence in fundamentals or profit trends. If nothing rocks the boat, there is no reason to believe that the current momentum cannot continue. In that case, will Japan, which lagged other major...

    0
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    New York Seminar June 2014 - Louis, Anatole & Andrew

    We held our summer seminar in New York on June 10, with Anatole, Louis and Andrew offering their take on the state of the world economy and financial markets. We were also joined by Henrik Christensen who is director of Robotics at Georgia Tech. Audio recordings of their discussions are available below:

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    A Chinese Bretton Woods?

    Even as it plants offshore oil rigs and rams foreign vessels in disputed waters, China is wooing its neighbors with infrastructure investment. Its next step is to create new multilateral banks whose twin goals are to allay fears about Chinese expansionism and to provide an alternative to the US-dominated system of development finance.

    2
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    5C Overview: Volatility RIP

    Having weathered fears of depression, a systemic euroland failure and most recently the specter of deflation, investors can be excused for their insouciant attitude to risk. We may not be in sunlit uplands, but for the first time since 2008 the global growth trajectory looks fairly secure and the big central banks have their monetary policy settings in sync. Hence, it is not surprising that volatility across most asset classes is making new lows...

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    5C Asia: Hop Aboard The Momentum Train

    Far from worrying about policy risks or soft patches in growth, investors suddenly seem to see nothing ahead but clear blue skies—the perfect environment for momentum investing.

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    Overcoming The Macro Breakdown

    The financial crisis of 2008-2009 heralded a golden age for macro investors. As the wholesale market crash rendered the relative value judgments of stock pickers irrelevant, macro investors enjoyed a boom time—especially ones who had had the foresight to short US housing, global financials, or eurozone peripheral debt. Now, as the crisis recedes further into the rear view mirror, macro investors are struggling to adapt to a world in which...

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    Growth & Markets Monthly (June 2014)

    Having watched our growth indicators soften over recent months, we are now witnessing a momentum shift since our economic activity indicators have perked up markedly. Moreover, the velocity of money has risen rapidly, while our price indicators continue to show lessening deflationary pressure. Hence, it was not surprising to see that bonds are getting more expensive. Unfortunately, equities are not cheap, and this makes it a challenging...

    0
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    Gavekal Dragonomics

    CEQ: Investment Abroad — The Dragon Steps Out

    China is now the world's third biggest source of outward direct investment, and the things it is buying are rapidly changing. Gone are the days when Chinese outward investment was all about state-owned enterprises buying oil wells and iron ore mines. There are still plenty of state-driven resource deals, but 40% of Chinese direct investment is now conducted by private firms, who are mainly interested in consumer, technology and service...

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    India’s Interregnum

    Narendra Modi stands as India’s most powerful prime minister in 30 years with a mandate to pursue a pro-economic growth agenda. The reason to stay with the most compelling trade in emerging markets is that a clear reform impulse has been articulated while the capital spending cycle is showing signs of life. The problem for investors is that key choices on fiscal consolidation and specific reform initiatives may not be announced until a budget...

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    Five Corners (28 May 2014)

    In the latest bi-weekly review of global economics and investment:

    0
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    Mean Reversion In Japan

    You did not have to be an investment genius to make a positive call on Japanese equities last year. That was because corporates stood to win from Prime Minister Shinzo Abe’s chosen program, regardless of whether it was successful or not. Enriching Japan’s corporate sector, which has high operating leverage and so is sensitive to any yen depreciation, was effectively a transition phase of Abe’s big plan. The hope was that richer companies would...

    4
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    The Earnings Expectations Paradox

    When it comes to global equity investment, all markets are not equal. Over the last couple of years, investors have evolved distinctly different attitudes about how to discount trends in profit growth in each of the four major equity market regions.

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    Why Thailand Is The Odd Man Out

    In the mid-1990s Thailand’s over-built and excessively geared economy provided a clear early warning signal for the troubles about to engulf the rest of emerging Asia. But having now suffered two military coups in eight years Thailand is less a bellwether than a regional outlier that seems to have given up serious development in favor of a struggle to subdivide existing wealth and power. The good news from Asia is that ascendant political...

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    5C Overview: Keeping China In Check

    How much should we worry about China’s increasing assertiveness beyond its borders? Provocations continue to pile up in maritime Asia, most recently a spat over a Chinese oil rig in what Vietnam considers to be its waters. And last week’s Xi Jinping-Vladimir Putin summit in Shanghai, capped by the signing of a long-delayed US$400 bn gas pipeline deal, conjured the specter of a Sino-Russian concert enabling both countries to defy the United...

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    5C Asia: Less Confidence In A More Confident Bank of Japan

    The message from Haruhiko Kuroda is clear: the Bank of Japan has done enough to reach its 2% inflation target. By extension, we should expect weak yen policies to take a back seat in driving future reflation.

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    How To Lose The Eastern Front

    Russia, it appears, has emerged victorious in Ukraine. After the unofficial referendums organized by pro-Russian groups in Ukraine’s eastern regions, Kiev knows it must negotiate with the separatists to avoid national disintegration. A deal on autonomy for parts of Donetsk and Luhansk will have to be made on terms acceptable to Vladimir Putin.

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    The Case For (Some) Emerging Markets

    Investors in emerging markets need to focus on three main things: nominal GDP growth in US dollar terms, valuations and leverage. The problem is that over the last decade, most EMs enjoyed very strong nominal growth in US dollar terms, in which valuation and currency played a bigger role than real growth. That game has run its course and the key to success in the coming period is identifying those markets with strong real growth prospects that...

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    India: Stay Or Go?

    The world’s largest democratic election is all over, bar the shouting, and results will be announced tomorrow. Polls point to a decisive win for the Narendra Modi-led Bharatiya Janata Party which is pro-business and promises a clean sweep of policy. Equity investors have duly jumped on the bandwagon since India is one of the few emerging markets with a decent growth story. But with the market having consistently made new highs over the last...

    1
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    Five Corners (14 May 2014)

    In the latest bi-weekly review of global economics and investment:

    0
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    Gavekal Research

    EM Carry Trade Looks Vulnerable

    Over the last two months, emerging markets have delivered a handsome rally, with the MSCI emerging markets index recording a 7% return in US dollar terms, compared with just 1% for the developed markets. The trouble is that this rally has been driven primarily by investors’ growing enthusiasm for carry trades in an environment of declining global volatility. Experience teaches this is an engine which can all too suddenly be thrown into reverse

    5
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    Gavekal Research

    After The Repositioning

    After publishing each Quarterly Strategy Chart Book Gavekal partners and analysts book as many client visits as possible, to present the materials and also get fresh ideas for the coming months. And so having just gone around the world to meet investors, we were reminded of Groucho Marx’s words that “I’ve had a perfectly wonderful evening. But this wasn’t it”. Indeed, most of the clients we met with (but especially those who had had a perfectly...

    2
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    5C Asia: Hong Kong’s Diminished Prospects

    Even as Chinese growth has ebbed, Hong Kong has defied the downturn. The territory effectively has full employment and real wages have risen nicely. Over the last year, hot money flows continued to enter Hong Kong and tourists from across the border kept arriving. This, at least, was the case until recently when cracks started to appear in the prosperity of China’s preferred haven for tax-avoidance and luxury shopping.

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    A Supply-Sider’s View Of Japan

    Two years ago respectable opinion had it that the United Kingdom’s economic outlook was pretty bleak. After all, the Conservative-led government had adopted a policy of public spending cuts, which every right minded person knows must lead to insufficient aggregate demand and a descent to oblivion. My somewhat unfashionable take was that these spending cuts had laid the ground for a sustainable pick-up in private sector activity (See An...

    4
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    Gavekal Research

    Why Are Bond Yields So Low?

    As long as men continue to age, they will probably complain that “things were better in their day” and that “the world is going to hell in a hand-basket”. Ignore for a moment that the proportion of undernourished people fell from 23% of the developing world in 1990-92 to under 15% in 2010-2012, that more than two billion people gained access to improved sources of drinking water in the past decade, and that never in history have so many people...

    9
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    Growth & Markets Monthly (May 2014)

    For a second straight month, our growth indicators have weakened, suggesting the possibility of another summer lull. The outlier is US employment, as evidenced by last week’s very decent non-farm payroll report. We were also intrigued by the recent pick-up in US 5-year inflation expectations, which does not seem to fit with the narrative of constant deflationary pressures. Combined with recent US wage growth, could this imply that there is a...

    0
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    Five Corners (30 April 2014)

    In the latest bi-weekly review of global economics and investment, Arthur Kroeber considers the implications of Asian deflation. Will Denyer & Tan Kai Xian consider the strong rental market for US homes and wonder what this means for the broader housing sector. Nick Andrews looks up close at reduced liquidity in the eurozone’s financial system. Chen Long looks at a favorable convergence between national GDP numbers and the growth claims made...

    0
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    Gavekal Research

    What Ails The Dollar

    A curious brew of cheap money, a grinding cyclical recovery and “new economy” verisimilitude has helped drive Wall Street to new highs. And yet even as equity investors have scaled the wall of worry, the dollar has remained uninspired. The unit arguably started a structural upswing in 2008 but the recent performance has been lackluster with the DXY index at the bottom of its trading range.

    4
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    Indian Reform: Facts On The Ground

    When Raghuram Rajan took over the reins of India’s central bank last September he faced a weakening economy and persistent capital outflow. His contrarian solution was to jack up interest rates and propose an accelerated internationalization of the long cosseted rupee. This program was not exactly popular, but it seems to have worked. Eight months on India’s foreign exchange reserve buffer is back above US300bn and the currency has strengthened...

    1
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    Gavekal Research

    The Japanese Value Trap

    Equities around the world have enjoyed a modest rebound over the last week, with encouraging signs of buy-on-dips behavior and the leadership rotation that we believe was the main driving force behind early April’s sharp setback (see The New Rotation Into Value). But there is one major market that is a glaring exception to the generalized shift from growth to value: Japan.

    0
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    Gavekal Research

    5C Asia: A Low Beta Korean Won

    The Korean won has defied expectations over recent months by retaining its strength despite last year’s upward spike in emerging market volatility. This resilience confounds traditional perceptions of Korea as a high beta market. Some observers have even argued that the won is now behaving like a classic safe haven currency.

    0
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    Gavekal Research

    5C Overview: How Much More Asian Deflation?

    The latest news from Asia’s biggest economies is uninspiring. China’s growth grinds lower, and the renminbi has declined by 3% against the US dollar since January. Japan is suffering the anticipated effects of this month’s consumption tax hike, and Anatole has predicted that the BoJ will respond later this year with a fresh round of money-printing which could push USD/JPY well above its established level of 102 to the dollar.

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    Five Corners (16 April 2014)

    In the latest bi-weekly review of global economics and investment, Charles Gave explains why it still pays to run a balanced portfolio, despite the market’s rotation. Will Denyer argues that outlook for US consumption remains favorable, even though consumer cyclicals have taken a beating. François-Xavier Chauchat examines the reasons behind the euro’s persistent strength. Andrew Batson looks at Beijing’s new focus on jobs and finds the...

    0
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    5C Overview: Why A Balanced Portfolio

    Last August I suggested moving from a fully invested position in equities to a “balanced portfolio” with equities hedged by high quality government bonds. What underlay this recommendation was a simple reality: the global consumer price index had by that point dipped to about 3.3% and the G7 core CPI measure was down to 1.1%.

    0
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    Gavekal Research

    Stay With The JGB Short

    The short JGB trade has a reputation among investors as a widow maker; its devotees live brief unhappy lives and expire early. The prevailing view is that Japan is on the edge of an deflationary abyss. Bank of Japan governor Haruhiko Kuroda appears sanguine for now, but should the economy falter, the market is looking for fresh BoJ support.

    0
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    The Case For Shorting JGBs

    The short JGB trade has a reputation among investors as a widow maker; its devotees live brief unhappy lives and expire early. The prevailing view is that Japan is on the edge of an inflationary abyss. Bank of Japan governor Haruhiko Kuroda appears sanguine for now, but should the economy falter, the market is looking for fresh BoJ support.

    0
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    In Laos, All Roads Lead To China

    Two thousand years ago, in the days of the Roman Empire, it was said that “All roads lead to Rome.” Rome’s might was built on the back of metaled roads constructed by an army of 180,000 legionnaires, who pushed the expansion of the empire to its geographic limits. China’s expansion over its modern-day borders is primarily economic, not military. But as China’s massive domestic road-building program extends over its borders into Southeast and...

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    No Bridgehead Too Far In China’s Expanding Empire

    For centuries, China’s borders expanded and contracted as dynasties rose and fell. With its star in the ascendant, the Chinese empire is expanding once more. This expansion is based on economic power—trade and investment—not military conquest. But it will nevertheless reshape the geopolitics of Asia.

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    London Seminar April 2014 - Anatole, Arthur, Louis & Francois

    We held our spring seminar in London on April 2, with Anatole, Arthur, Louis and Francois offering their take on the state of the world economy and financial markets. Audio recordings of their discussions are available below:

    0
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    Growth & Markets Monthly (April 2014)

    Please find the latest monthly review of our models and indicators. In this edition we note two important changes. First, our growth indicators have taken a turn for the worse, and second our indicators on risk appetite have deteriorated. Since we have seen no significant rises in market spreads, this is probably more a sign of a slightly overextended rally, then a real erosion of financial conditions. Could the rally in risk assets be about to...

    0
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    Bet On Europe Vs The US-EM Axis

    Following decades of European economic integration, euro coins and notes were introduced with great fanfare in January 2002. Equity investors barely noticed as their attention was focused on the emerging trans-Pacific economic relationship between the US and China. Initially, this axis relied on the buying power of the US consumer and the production capabilities of the Chinese factory lands. But as the decade wore on this simplified “ChinAmerica...

    4
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    How To Treat The Fall In Velocity

    Debate continues to rage in our office as to the sustainability of the US economic recovery. On the plus side of the ledger, we can book factors such as decent bank loan growth (both for households and corporates), rising wage growth, falling unemployment and solid business surveys. On the negative side, we find a weakening housing sector (which has been the lynchpin of the US recovery), intensifying disinflationary pressure, and long bond...

    0
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    Will Thailand Ever Smile Again?

    Despite having suffered more than a dozen coups since adopting a constitutional monarchy in 1932, Thailand has largely been a model development story. Annual growth averaged more than 7.5% between 1970 and 1996, and then around 5.5% in the 1998-08 post Asian crisis period. So although the latest political standoff in Bangkok suggests that a deeply divided country is becoming ungovernable, the feeling is also that we’ve been here before—some kind...

    0
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    5C Asia: Cyclical Prospects Favor India Over Indonesia - Udith Sikand & Joyce Poon

    Differences in the way macroeconomic adjustment has affected Brazil, India, Indonesia, South Africa and Turkey have shown that lumping disparate economies together with tags like the “Fragile Five”, “BRICS” or “MINT” does little to illuminate the risk-reward trade-off for EM investors.

    0
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    What Happened To The Asia Beta-Bounce?

    Identifying an Asian upturn or downturn used to be straight forward. One just had to look at cyclical indicators in the developed economies, because Asia would be sure to follow. Yet the bounce in Asian exports promised by recent business surveys in the West has failed to materialize. China, Korea, Indonesia, Thailand—these and other Asian countries have released disappointing trade data so far this year. This is worrisome on a number of levels...

    0
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    One Last Flicker Before The Japan Trade Goes Out

    Most of us at Gavekal have been enthusiastic devotees of Abenomics since late 2012. But Anatole suddenly showed his true Keynesian colors by turning negative on Japan in September, when Prime Minister Shinzo Abe announced his decision to implement a controversial fiscal tightening planned by the Ministry of Finance (MoF) from April 2014. And indeed, the Nikkei has underperformed the S&P 500 by 15% since the consumption tax was announced on...

    2
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    Indonesia's Political Lottery

    If global investors were looking for a reason to go back into Indonesia’s hard-hit market, Joko Widodo has supplied it. The immensely popular governor of Jakarta, who is widely perceived to be a reformer and an efficient administrator, has been confirmed as his party’s nominee in the presidential elections to be held in July this year.

    0
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    The Sword Is The Axis Of History

    As Anatole recently argued, we can all breathe a sigh of relief that the tussle over the Crimea has likely been resolved without serious bloodshed and at minimal cost (see All Over Bar The Annexation). But in the longer term it is clear that these events may cast a long shadow over international relations for years to come. Indeed, as British politician Ernest Bevin famously said, “don't open this Pandora’s box, it is full of Trojan horses...

    2
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    5C Asia: Japan - Politics vs Economic Reality

    There is, theoretically, a virtuous cycle of growth embedded in Abenomics. Japanese companies are making more money and are expected to share the wealth through wage increases. This in turn would boost inflation expectations, consumption and aggregate demand. As growth veers away from a dependency on external demand, Japan’s revitalization will become sustainable.

    2
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    Japan’s Self-Defeating Mercantilism

    In the 16 months since Japanese Prime Minister Shinzo Abe launched his bold plan to reflate Japan’s shrinking economy the yen has depreciated by 22% against the dollar, 28% against the euro and 24% against the renminbi. The hope was to stimulate trade and push the current account decisively into the black. Yet the reverse has occurred. Japan’s external position has worsened due to anemic export growth and a spiraling energy import bill: in...

    2
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    Gavekal Dragonomics

    CEQ: China And Japan

    In this issue, we focus on the increasingly tense relationship between China and Japan. Frictions over disputed islands in the East China Sea have stalled bilateral trade and driven the confidence of Japanese businesses in China to the lowest level ever. China's increasing assertiveness, and Japan's election of strongly nationalist leader Shinzo Abe, have sparked worries over a damaging Sino-Japanese conflict. Yet the news is not all...

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    5C Asia: Confession Time For Emerging Markets

    These days we often hear that emerging markets are suffering through no fault of their own. To test this theory we thought we would put on our priest collars and take the confessions of Asian EMs. Charles Gave has long identified five “cardinal sins” that, when committed, inevitably lead to a purgatory on returns for investors. These are protectionism, tax increases, burdensome regulation, monetary policy mistakes and war. Are Asian EMs guilty...

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    Gavekal Dragonomics

    CEQ Q1 2014 - Japanese Business in China-Alive In The Bitter Sea

    Growing belligerence by China’s government and populace has driven Japanese companies’ confidence in the China market to its lowest level ever. An increasing number are hedging their bets by investing more in Southeast Asia. But some still find ways to win in hostile territory.

    0
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    Gavekal Dragonomics

    CEQ Q1 2014 - Shinzo Abe's Master Plan To Re-arm Japan

    International media celebrate Shinzo Abe for his economic stimulus and reform package. But ‘Abenomics’ is just a fig leaf for Abe’s true aim: an aggressive nationalist plan to re-militarize Japan in response to the rise of China. Can anything stop him? Most likely, Abenomics will.

    0
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    After Ukraine, Russia Risks Losing The New Great Game

    Russian president Vladimir Putin sat stony-faced through yesterday’s closing ceremony in Sochi. The Winter Olympics were supposed to convince the world that a confident and modern Russia is once again rising as a great power. But after a stunning reversal of fortune in the burning streets of Kiev, Ukraine appears to be slipping from Putin’s grasp.

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    An Indian Counter Revolution?

    An Indian economy mired in stagflation and failing political responses bears some resemblance to the US of the late 1970s. But just as American decline was arrested by the tough medicine dispensed by Federal Reserve chief Paul Volcker and the supply-side reforming Ronald Reagan, so India plausibly may soon have its own team of consensus busters. Since taking over India’s central bank in September Raghuram Rajan has made the eradication of...

    0
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    Asia Ducks The EM Crisis

    Janet Yellen’s first proper outing on the international stage is set for this weekend when she attends the G20 finance ministers shindig in Australia. She will encounter grumpy emerging market counterparts who blame fickle US monetary policy for capital outflow that has sent growth tumbling. This is likely all the EMs will agree upon since it is increasingly clear that this is not a generalized crisis of big developing economies, but a shake-out...

    1
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    5C Asia: When Bad Is Good In Japan

    The “bad is good” phenomenon may have waned elsewhere, but it is alive and well in Japan, home to the only major central bank that is still aggressively expanding its balance sheet. And since Japan has had plenty of bad news to choose from lately, it came as no surprise that the Bank of Japan took dovish action at yesterday’s policy meeting.

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    The Great Pacific Gas Arbitrage

    Severe winter weather in the US has driven gas prices higher, forcing power firms to impose sizeable fuel bill hikes on consumers. But those who think that the low-cost US energy revolution is about to be dashed on the rocks of rising production costs are wrong. US shale gas still trades at a near 60% price discount to Asian liquefied natural gas (LNG) benchmarks, and the gap is unlikely to close quickly. As the US faces no meaningful constraint...

    0
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    Japan: A Shelter From Deflation

    One key cloud over the global economic landscape is very weak corporate pricing power. After last week’s European Central Bank meeting, we saw Mario Draghi peppered with more questions about deflation than about the traditional euro-crisis bugbears. The US recovery faces a similar challenge. The all-around fear is that deflation will prevent the OECD’s struggling economies from reaching escape velocity. Is there an exception? Yes, in Japan—the...

    4
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    The US Current Account And Vanishing Global Liquidity

    The US dollar is the world’s reserve currency which in simple terms means that the United States is the only country which can settle a foreign deficit by issuing its own money. As such, any “improvement” in the US current account balance means that fewer dollars show up outside of the US, while the reverse holds true in the event of a deterioration.

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    Central Bankers Can Still Be Trusted

    The rout in risk assets last week has generally been attributed to emerging markets—and looking at Argentina, Turkey and Ukraine, there has been plenty for investors to panic about. On the other hand, why should the dollar/yen exchange rate or the value of US equities be so sensitive to just another devaluation in Argentina or the shakiness of or incompetent regimes in places such as Ukraine?

    0
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    Who Will Gain From Thailand's Loss?

    With growth flailing across much of the developing world, even as the developed world gets stronger, 2014 is likely to see a trend of investors prioritizing the political cycle over the economic cycle in emerging markets. A number of key EMs including India, Indonesia, Brazil, Turkey and South Africa will hold elections this year; it is no coincidence that the “fragile five” have witnessed headline grabbing mass protests in recent years, as...

    0
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    Indonesia: Life After Commodities

    Indonesia is one of the developing world’s surprise success stories. After a severe crash in 1997 and a subsequent period of economic and political turmoil, it emerged during President Susilo Bambang Yudhoyono’s nine years in office as a model of stable prosperity. Annual real GDP growth has averaged a solid 5.9% since 2004, and democracy has been strengthened, with political power regularly changing hands in provinces and cities. Devolution has...

    0
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    5C Asia: Is Japan Facing Constraints On Yen Devaluation?

    Usually a 20% currency devaluation would have a country feeling about that much poorer. But Japan, as we all know, is feeling richer after last year’s 20% devaluation, and this is not just because of exporter gains. Japan is a creditor nation with large overseas assets which get revalued upwards as its currency moves downwards.

    0
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    Asian Markets: A Ranking

    Investors in Asian markets have been frustrated by the poor returns over the past couple of years. To that frustration we can now add anxiety about the potential for a broad sell-off in emerging markets, including emerging Asia, if the China slowdown proves more severe than expected or if Turkey provokes panic by blowing up, as seems ever more likely.

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    The Easy Japan Trade Gets A Little Harder

    We stuck to our guns on Japan throughout last year, even at times when investors were clearly blinking. This was not because we thought Abenomics would solve all of the country’s problems, but simply because Japan exposure offered defined downside risks, against huge upside potential. This “asymmetry” still exists—which is why we still like Japan. But admittedly, the risk-reward profile has worsened somewhat.

    2
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    5C Asia: Anyone For Recoupling?

    Last year saw Asia engage in a “re-coupling” but it was the wrong type: rather than an economic recoupling that captured something of the sunnier outlook for developed markets, Asia revealed its continued dependence on financial conditions in the big centers. Asian markets (excluding China and Japan) were hammered due to their reliance on foreign capital to lubricate trade and their financial systems.

    0
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    The Sun Hasn't Set On Asia

    People in markets, nervous folks, always need something to worry about. In 2012 the big anxiety was whether Europe would fall apart; in 2013 it was whether the Federal Reserve would start cutting back on its asset purchases. Now that Europe has crept from despair to stagnation and the Fed has anchored expectations that it will steadily reduce its asset buying while holding rates near zero, the anxiety-vane is likely to spin towards Asia.

    2
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    Energy Buyers Are In Charge

    After months of wrangling, Mexico has dramatically passed its long-awaited energy reform bill, amid fistfights and shouts of “treason” in Congress. Mexico’s oil sector opening—significantly more liberal than the initial proposal circulated in August—will be a boon to the country’s sagging growth rate and an opportunity for the oil majors who have been locked out of the country for decades. But it is also another sign of the times—with fuel...

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    Why India Is Worth The Risk

    Ahead of a potential tapering of Federal Reserve bond buying it seems to be a case of “once bitten, twice shy” for investors in Asian emerging market equities—Indonesia, Philippines and Thailand are back near their summer lows. An exception is India which has surged in the last three months on clearer policy settings, an improving current account deficit and a political situation that has moved in a pro-growth direction. On balance, we would...

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    Asia And Tapering Fear: Get Over It

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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...

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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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    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

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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.

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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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    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...

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

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    5C Asia: The Deflationary Specter

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    Is That A 'Third Arrow' We See?

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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”...

    16
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    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...

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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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    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.

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    The Widow-Maker Survives Abenomics

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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...

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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.

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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-...

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