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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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    Gavekal Research

    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...

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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...

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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.

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    Gavekal Research

    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.

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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.

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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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    Gavekal Research

    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...

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    Gavekal Research

    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%.

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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.

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    Gavekal Research

    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.

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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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:

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    Gavekal Research

    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...

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    Gavekal Research

    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...

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    Gavekal Research

    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...

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    Gavekal Research

    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...

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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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.

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    Gavekal Research

    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...

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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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.

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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.

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    Gavekal Research

    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.

    4
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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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.

    0
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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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.

    0
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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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...

    0
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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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