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    Gavekal Research

    India’s Race To The Top

    What do Apache helicopters and one-fifth of the world’s vaccines have in common? They are manufactured in India’s Telangana state. How about Apple, Google and Uber? They are all opening their largest development bases outside the US in Hyderabad, the state capital, following in the footsteps of Facebook and Microsoft, which have their head India offices there. Amazon, too, is setting up its second-largest global delivery base in the city. And...

    0
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    Staring Into The Abyss

    Since Rodrigo Duterte became president of the Philippines in May, he has sanctioned the extra-judicial killing of some 3,600 petty criminals and drug users, graphically insulted the US president, favorably compared himself to Hitler, and threatened to switch his country’s allegiance to China and Russia. As he has ripped up behavioral norms for democratic heads of state, investors have yanked out at least US$500mn of capital over the last two...

    1
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    The Gavekal Monthly: What Price On A Trump Victory?

    Markets seem sanguine about the prospect of a Donald Trump victory in next month's US presidential election—too sanguine. Expert opinion gives Hillary Clinton a 75% chance of winning. But remember that four months ago in the UK, expert opinion discounted polls showing a strong chance of Brexit, and the experts were proved wrong. And the consequences of a Trump win are so huge and potentially destabilizing that even a 25% chance means...

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    Gavekal Research

    That Sinking Feeling

    You almost have to feel sorry for poor Haruhiko Kuroda. Just over a week after the Bank of Japan governor announced his intention to overshoot the central bank’s 2% inflation target, it is painfully obvious that investors believe he will fall short. That much is clear from the Japanese government bond market. At last week’s meeting the BoJ announced that from now on it will tailor its JGB purchases to target a 10-year yield of zero. In the days...

    0
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    Gavekal Research

    Modi Finds His Mojo

    India, according to its many skeptics, will never change. It is too messy, too unwieldy—perhaps too democratic—to emulate China as an engine of global growth. For all the hoopla that greeted Narendra’s Modi election in 2014, very little changed for the better in Modi’s first two years in charge: his new government failed to pass its “big bang” reforms, banks stopped lending, and investment slumped. Critics accused Modi of being all talk and no...

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    Gavekal Research

    Singapore Seminar—September 2016

    Audio and video from the latest Gavekal seminar in Singapore is available here. Louis Gave explains why financial markets have recently behaved predictably, and why that is about to change. Andrew Batson explains why Chinese policy making is in a holding pattern until next year's party congress is settled. Udith Sikand explains why this year's emerging market outperformance is likely to continue, as bonds and especially equities have...

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    Gavekal Research

    Neil Newman: BoJ Policy Meeting In A Nutshell

    After the Bank of Japan’s announcement earlier today of quantitative easing “with yield curve control”, Neil delivers a quick-fire video assessment of the new policy slant, and what it will mean for markets and the broader Japanese economy.

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    Gavekal Research

    Don’t Misread The BoJ’s Signals

    The monetary policy committees of both the Federal Reserve and the Bank of Japan meet tomorrow. But whereas the Fed faces a simple binary call—either raise rates or don’t—the decision confronting the Bank of Japan is more complex.

    0
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    Gavekal Research

    The End Of A Bubble?

    Ask three economists for the definition of a financial bubble, and you will be lucky to get fewer than four different answers. Even in our little shop, we like to make distinctions between bubbles in productive assets (US railroads, the internet, fiber optic cables, shale gas wells...) and bubbles in unproductive assets (gold, tulips, Japanese land, Florida condos…). We also like to make distinctions on how bubbles are financed: equity (good) or...

    2
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    The ECB And BoJ: Brothers Disarmed

    The combination of negative interest rates and quantitative easing is not working as central banks had hoped. Yesterday European Central Bank president Mario Draghi conceded that more than two years after introducing negative rates and 18 months after commencing asset purchases, the ECB is no closer to hitting its 2% inflation target than when it first adopted its unconventional policies. Although headline inflation is set to tick up over the...

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    Gavekal Research

    Gavekal Research Monthly Conference Call — September 2016

    In the inaugural Gavekal Research monthly conference call, Louis, Anatole and Arthur addressed the global growth environment and offered asset allocation suggestions.

    0
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    Gavekal Research

    Yes, Those Indian Growth Numbers Are For Real

    China has long been the whipping boy of skeptics who claim its growth numbers can’t be trusted. Data denialists got a fat new target in 2015 when India adopted a new set of national accounts that magically bumped up its GDP growth by 1.5 percentage points to over 7%, vaulting it past China as the world’s fastest growing big economy. This seemed just a bit too good to be true. Is India’s growth for real, or just a mirage conjured up by...

    1
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    Gavekal Research

    A Better G-20 Communiqué

    Another year, another G-20, another yawn. Though the group of the world’s 20 biggest economies was useful in the aftermath of the 2008 financial crisis, it has since degenerated into another global drawing room where leaders explain to one other how the world would be a better place if only it were a better place. This was a missed opportunity.

    1
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    Gavekal Research

    India’s Quiet Revolution

    Last week India announced a partial liberalization of its debt and currency markets, which should open up the economy to more long term foreign capital. Such money is sorely needed to finance an estimated US$1trn of infrastructure spending over the next five years. While India has a fairly open equity market, debt issuance has been tightly controlled and banks account for some 80% of total financing across the economy. The issue is whether banks...

    0
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    Gavekal Research

    Real Yields Still Favor A Strong Yen

    Haruhiko Kuroda didn’t quite say he will do “whatever it takes” to push up inflation expectations, but he did the next best thing. Speaking at Jackson Hole on Saturday, the Bank of Japan governor promised “to take additional easing measures without hesitation”. Declaring there is “ample space” to expand the size and the scope of the BoJ’s asset purchases, as well as to push short term interest rates further into negative territory, Kuroda...

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    Gavekal Research

    The Falling Natural Rate Is No Mystery

    As the high priests of global central banking congregate in Jackson Hole, much of the chatter ahead of the meeting has concentrated on the “mystifying” fall over recent years in the natural rate of interest, and possible reasons why it should have declined to such an extent. Having spent the last ten years attempting to apply the economic theories of the great 19th century Swedish economist Knut Wicksell, I have to say I am delighted with the...

    6
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    Gavekal Research

    Indonesia: Bet On Stability Not Growth

    Late last summer, Indonesia looked like a disaster in the making as the worsening commodity bust caused its currency and equity markets to plunge. A sharp fall in exports had caused economic growth to crater, while high inflation limited the scope for monetary easing. It was a time for strong leadership and decisive action, yet President Joko “Jokowi” Widodo seemed weak and ineffectual. A year on and much has changed with economic growth up,...

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    Gavekal Research

    Demographic Dividend Or Demographic Nightmare?

    Among the Herculean challenges facing the government of India, job creation ranks first. Simply put, the number of new jobs is not keeping up with economic growth—a huge problem in a country where half the population is aged below 25. India needs to create roughly 8mn new jobs every year to absorb new entrants into the labor force. In addition, it needs to create more opportunities both for farmers seeking better-paying non-agricultural work and...

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    Video: Indian Growth And Demographics

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    Gavekal Research

    India’s Enhanced Central Bank

    Louis is fond of quoting Lenin that there are “decades when nothing happens and weeks when decades happen”. Given India’s generally sclerotic pace of institutional change, these seem to be revolutionary times that will dictate the policymaking framework for years to come. Last week saw parliamentary approval granted for a national goods and services tax that should spur a genuinely common market, while lawmakers this weekend signed-off on an...

    0
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    Gavekal Research

    India’s Great Leap Forward

    India, finally, is on course to become a genuine economic power. Calling it a “Treaty of Rome” moment goes too far, but India’s Goods and Services Tax could prove nearly as significant as the agreement that created the European common market. India has been a strong political state for nearly 70 years, but its fragmented economy prevents goods and many services from moving freely within its borders. The GST promises to create a genuinely common...

    2
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    Gavekal Research

    The Death Throes Of The JGB Market

    While the Japanese government was rolling out its latest stimulus package yesterday—with a headline value of ¥28trn, but only ¥4.6trn of additional fiscal spending this year—investor attention was fixated on the spasms in the JGB market. Having touched a record low of -0.3% last Wednesday, the yield on 10-year JGBs leapt 28bp in just five trading days to hit a four and a half month high of -0.02% yesterday morning. On one level the spike in...

    4
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    Gavekal Research

    The Gavekal Monthly: Shall We Dance?

    In a world in which the Fed shows no inclination to get ahead of the curve on inflation and in which both the ECB and the BoJ are in full quantitative easing mode, investors everywhere are on the hunt for yield. But the chase is a nervous one. Investors are all too aware that equities and bonds are sending conflicting signals, and that the favorable trends that have lifted most assets over the last six months could be disrupted by a sudden spike...

    0
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    Gavekal Research

    The EM Equity Question

    Despite this year’s strong run-up, there remain good reasons to stick with emerging market assets. The twin impact of collapsed borrowing costs amid a renewed global hunt for yield, and greatly reduced exchange rate volatility has been the ideal environment for EM yield curve flattening trades.

    2
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    Gavekal Research

    The Flow Through To EM Equities

    These are strange times for investors with bond yields in big developed markets plumbing new depths on dark concerns about never ending deflation and stagnation. Yet in a clearly related development, US equities are making new highs while corporate- and emerging market-bonds continue to rally.

    2
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    Gavekal Research

    The JGB Endgame Approaches

    Over the last couple of weeks, the world’s attention has been focused by turns on British politics, Italy’s banking crisis, the US presidential race and most recently, last night’s ghastly events in Nice. It is little surprise then, that a series of three stories from Japan (or perhaps just two and a half) has passed largely under the radar. Taken together, however, these developments bear heavily on the future of the Japanese government bond...

    2
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    Gavekal Research

    Can ‘Make In India’ Work?

    In September 2014, Prime Minister Narendra Modi launched an initiative to transform India from an industrial laggard into a global manufacturing hub. The “Make in India” plan is sorely needed: in 2014, India’s merchandise exports accounted for a paltry 1.7% share of the global total. That was on a par with Taiwan, whose population is smaller than Delhi’s. India relies heavily on imports of consumer goods, especially from China, and runs a large...

    2
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    Gavekal Research

    A Fundamental Assault On Freedom

    Of all basic freedoms, one of the most fundamental of all is the freedom of the individual to organize his or her relationship with time. The way we order our affairs with respect to the all too brief time allocated to us on this earth is a profound right that we all should be allowed to exercise unhindered. In short, everyone should be free to choose whether to be an ant or a grasshopper.

    10
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    Gavekal Research

    The Next Monetary Move

    Shinzo Abe was today scheduled to meet with Ben Bernanke, the chief architect of unconventional monetary policy responses following the 2008 crisis, with the issue of Japan’s adoption of so called helicopter money expected to top the agenda. In this piece Joyce asks would Japan do it and more importantly could money drops make any difference in the land of the stagnant price index.

    3
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    Gavekal Research

    Ignore Japan’s Banks At Your Peril

    Any investors contemplating adding to their Japanese equity exposure following Shinzo Abe’s weekend election victory and the subsequent market rally should look closely at the performance of Japanese bank shares. Their signal, argues Joyce, is anything but encouraging.

    3
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    Gavekal Research

    Positioning For Uncertain Times

    Regular readers will know that Gavekal is a broad church. And while the church choir only occasionally sings in perfect unison, the different singers can often hit harmonies that are all the more powerful for being unexpected. This may be one of those occasions. Yesterday, Anatole, Charles and Louis took part in a conference call in which they laid out their different views of Brexit and what it will mean for the economy and markets of the UK,...

    1
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    Gavekal Research

    The Gavekal Monthly: Life After The Brexit Vote

    The world is now a considerably more uncertain place than a month ago. Following the UK’s referendum vote in favor of Brexit, a near-term recession in the UK is more likely than not, the European Union faces the possibility of a renewed economic slowdown, and investors find themselves forced to reassess the probability that Donald Trump will win November’s US presidential election. In this edition of the Gavekal Monthly, our analysts set out to...

    0
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    Gavekal Research

    The Enemy Of My Enemy Is My Friend

    The British prime minister was not the only one thwarted by a vote last week. Despite Narendra Modi’s personal efforts and heavyweight backing from Washington, India failed in its attempt to join the 48-country Nuclear Suppliers Group. It was a bruising setback for Modi, who has spent two years energetically trying to boost India’s global clout. Yet the result itself was less significant than the US support for India in the face of Chinese...

    0
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    Gavekal Research

    India’s Reform Agenda After Rajan

    Over the weekend, Reserve Bank of India governor Raghuram Rajan announced he will not seek an extension of his three-year term, which ends in September. His unexpected decision will dampen sentiment in the near term, as it follows—and was perhaps even precipitated by—a high decibel campaign seeking his ouster by members of India’s ruling BJP. However, fears that the hard-won credibility of the RBI under Rajan will be undermined by the...

    2
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    Gavekal Research

    Japan As Safe Haven

    Global markets are in a risk-off mood as investors scramble to find a sure thing in an uncertain world. The populist surge in Europe and the US is ending long held “certainties” about the developed democracies, while next week’s Brexit vote could set in train the European Union’s break-up. Ironically, as investors scramble for stable ground, Japan is proving an island of calm, at least for those with an eye to capital preservation. The yen has...

    0
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    Gavekal Research

    Never Do On Monday What You Wish You’d Done On Friday

    The first rule of bear markets is never to do on Monday what you wish you had done on Friday. During bear markets, the constant stream of negative stories from the media leads to a build-up of anxiety among investors, anxiety that pours out first thing on Monday morning on trading floors everywhere.

    1
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    Gavekal Research

    South China Sea Risks

    In the next few weeks the Permanent Court of Arbitration in The Hague will likely rule in favor of the Philippines in its dispute with China over territorial claims in the South China Sea. Beijing’s reaction will show to what extent China is prepared to defy international law to defend what it claims are “core interests”.

    5
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    Gavekal Research

    The New Material

    The US$1.8trn global aviation sector shows no sign of slowing—last year passenger numbers rose by 6.5%. The race is on to deliver cheaper, more efficient aircraft. The big winners from this trend may be makers of composite carbon fiber. The market for carbon fiber used in aircraft is set to grow from US$17.3bn in 2014 to US$34.2bn by 2020.

    1
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    Gavekal Research

    Japan: Twice Bitten, Thrice Shy

    It was a case of twice bitten, thrice shy. This week Shinzo Abe announced he will postpone next April’s planned 2pp increase in Japan’s sales tax until October 2019—a step the prime minister had previously sworn he would only take in a Lehman-scale crisis. Despite Abe’s protestations to the contrary at last weekend’s G-7 meeting, the world economy is facing no such meltdown. Nevertheless, deferring the tax hike makes sense. Previous increases in...

    0
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    Gavekal Research

    How Much Geopolitical Risk In Asia?

    With the global economy in the doldrums and most asset markets stuck in neutral, the last thing that is needed is a trade war or an armed confrontation in the world’s most vibrant region, East Asia. The risk of either is low, but inching up.

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  • Gavekal Research

    The Challenge For Equity Markets

    Given high valuations and a rock bottom risk-free rate, it is hard to see US equities moving higher without a pick-up in corporate earnings. Yet with the strong US dollar hurting exporters and domestic economic data coming in weak, US-based firms may struggle to deliver.

    6
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    Gavekal Research

    A New Marginal Buyer Of Japanese Equities

    Thanks in part to erratic monetary policy moves, Japan has slid back to being an irrelevance for global investors. Perhaps that does not matter, as foreigners only account for about 30% of the market while Japan has a vibrant domestic equity scene. Yet, the fact remains that it generally takes fickle gaijin to get excited about Japanese equities for the market to break out—that was the story in 2012-15 as a 50% yen devaluation supercharged...

    5
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    Gavekal Research

    India’s Significant Step Forward

    When Narendra Modi took over as Indian leader nearly two years ago, he promised to deliver higher growth by making the world’s most bureaucratic large economy more business friendly. It has been a hard slog, with a slew of failures along the way: the BJP-led government’s attempts to push through tax, land and labor reforms have all been hobbled by opposition in parliament. But with the passing of a new bankruptcy code last week the fog of...

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  • Gavekal Research

    Asia’s Best Market Reaches A Precipice

    The Philippines has since 2011 morphed into a balanced development story with growth averaging about 6% Growth has been underpinned by robust domestic demand, and it has also benefited from a long period of fairly trouble-free governance so when Filipinos go to the polls on Monday to elect a replacement for the President, much is at stake.

    1
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    Gavekal Research

    Making Sense Of The Rally In Cyclicals

    By all accounts, 2016 has so far proved to be a challenging year for “market neutral” funds, and “smart beta” strategies, along with various quant funds. Before we have even reached the seasonally-challenging part of the year—sell in May and go away, and all that—a quick glance at year-to-date returns for “low volatility” hedge funds illustrates that the pain is pretty widespread. In a sense, this is surprising; after all, spreads are tighter...

    2
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    Gavekal Research

    The Gavekal Monthly: Glass Half Full Or Glass Half Empty?

    The past month has seen the US dollar seemingly top out, the oil price settle into a trading range and China’s economic outlook stabilize. Emerging markets in particular have bolted higher despite weak global trade, an oversupplied commodity complex and worries about high levels of leverage. In this edition of The Gavekal Monthly we ask a pressing question for EM investors: is the glass now half full, or half empty?

    0
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    Gavekal Research

    Can The BoJ Ever Do The Right Thing?

    Another Bank of Japan meeting, another market slump. Yesterday saw investors mortified by a BoJ tease which came to nothing, while in January the same market response followed an activist move to charge a negative interest rate on a small part of banks’ reserves. In response to the disappointment the yen soared against the US dollar with its biggest daily move in seven years, while the ensuing six hours saw a 7% peak-to-trough move in Nikkei...

    0
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    Gavekal Research

    Asian Plowshares Into Swords

    Japanese Prime Minister Shinzo Abe invested time and prestige in a failed bid to supply Australia with 12 new attack submarines and service them for the next 50 years. It was announced yesterday that the approximate US$38bn contract was scooped by a rival French bidder due to its technical competence, but also after a strong lobbying effort by China which does not want to see a resurgent Japanese defense sector. Canberra’s decision represents a...

    0
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    Gavekal Research

    The End Of Asian Equity Market Underperformance?

    With Asian equities having underperformed their global equivalents by almost 40% since 2011, the past five years have not been much fun for regional investors. Encouragingly, however, just as the panic over a possible China currency crisis and economic implosion reached its apex last summer, Asia’s underperformance seems to have abated. Over the following eight month period or so, Asian equities have held their own with a number posting decent...

    1
  • Gavekal Research

    NIRP: Machiavellian Design Or A Policy Mistake?

    In order to make money, Starbucks has little choice but to sell coffee. Ford must sell cars if it hopes to stay open. And Lockheed Martin better get orders for bombs, missiles and planes if it is to remain relevant. But banks do not need to make loans (their stated purpose) in order to make payrolls and pay shareholders a dividend, at least at certain points in the cycle. When the yield curve is steep, banks can borrow money cheaply at the...

    3
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    Gavekal Research

    Emerging Markets Reality Check

    Emerging market assets have enjoyed a powerful momentum-driven rally over the last two months. A more dovish stance from the US Federal Reserve, falling yields, acceptance that the US dollar is no longer strengthening, and a pick-up in commodity prices combined to quell the market’s worst fears and persuade investors that emerging markets were not in fact facing Armageddon. More recently last week’s release of relatively upbeat economic data...

    0
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    Gavekal Research

    The Sum Of All Fears

    As “China implosion” and renminbi devaluation fears have faded, risk assets around the world have enjoyed a sustained a rally led by “China sensitive” assets such as commodities, Asian equities and emerging market high-yield debt. In short, all the assets that were priced for a scenario just short of Armageddon. But following this rebound, what next? The most obvious point is that, with the pick-up in fiscal stimulus, the rebound in construction...

    0
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    Worth Buying This Japanese Dip

    Those with an active interest in Asian markets had much to process in early trading with shorts cheered by the hardly surprising news that Iran and Saudi Arabia could not agree on an oil production freeze, while longs could point to China whose 1Q15 GDP report on Friday seemed to confirm that the authorities will do whatever it takes to defend their near-term growth targets. But perhaps the bigger factor unnerving investors has been the fallout...

    0
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    The Bright Spot Amid Japan’s Gloom

    The new narrative about Japan is straightforward: Japanese government bond yields will fall even further, the yen will strengthen, corporate earnings will collapse, stock prices will sink, and Mrs Watanabe will withdraw all her savings from the bank and stash them under her tatami. Over the last couple of months, international investors have positioned themselves accordingly. Yet anything more than a cursory visit to Japan quickly emphasizes...

    0
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    Why India Can Move Faster

    India’s lack of efficient roads and railways lowers productivity, depresses aggregate demand, raises costs and stymies trade—all impediments to economic growth. The good news is that India’s latest infrastructure push, financed initially by public investment, is showing signs of traction. The latest government budget committed a hefty US$32bn to roads, rail and other infrastructure, a big increase within a broader environment of fiscal...

    2
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    Gavekal Research

    The Yen And Japanese Equities

    It is hard not to feel a smidgen of sympathy for Haruhiko Kuroda. In the last 18 months, the Bank of Japan governor has deployed a whole battery of heavy artillery, stepping up his asset purchases to ¥80trn a year, extending them to cover exchange-traded funds and real estate investment trusts, and pushing short term interest rates into negative territory. As well as supporting asset markets, much of this effort was aimed at driving the yen...

    0
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    Gavekal Dragonomics

    CEQ Q1 2016 - Powerhouse, Menace, Or The Next Japan?

    Two popular narratives about China are that it will either reform its economy and become the next superpower, or fall victim to a dramatic financial crisis. There is a third and perhaps more likely scenario: gradual stagnation, along the lines of 1990s Japan.

    0
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    Gavekal Research

    Fade The Emerging Market Rally

    In defiance of conventional wisdom the oil price has tumbled -10% in the last two weeks despite a weak US dollar. For emerging markets investors, the breakdown of this correlation raises tricky questions.

    0
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    Gavekal Dragonomics

    CEQ: Avoiding The Japan Trap

    Growth is slowing, debt is rising, and the government is openly talking about "zombie companies" in key industries. This is China today, but there are also echoes of 1990s Japan. This issue of the CEQ examines the similarities and differences, and handicaps China’s chances of dodging a Japanese scenario of low-growth, high-debt stagnation.

    0
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    Gavekal Research

    The Gavekal Monthly: The Dollar Weakens; Time To Buy Jewels?

    The big change over the last month is that the US dollar is now falling on a year-on-year basis. This weakness reflects a more abundant international supply of dollars as the US trade balance, ex-China and ex-oil, has swung back into the red after six years in surplus. In this edition of The Gavekal Monthly, Louis outlines why, in such a plentiful-dollar environment, investors should consider prioritizing “jewels” over “tools”.

    0
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    Gavekal Research

    The Beef In Japan’s Budget Bowl

    At ¥97trn, the 2016/17 budget passed by the Japanese parliament on Tuesday was the country’s biggest ever, with accelerating spending increases for welfare, pensions, healthcare, and defense. Yet no one expects Tuesday’s budget to be the end of this year’s fiscal story. Greater than expected increases in tax revenues both from corporations and individuals mean the budget’s reliance on funding from Japanese government bond issuance fell to 35.6...

    6
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    Gavekal Research

    Bridging India’s Financing Gap

    India’s shoddy infrastructure is the stuff of legend. Ranked 87th in the World Economic Forum’s infrastructure quality index, much of it would not look out of place in sub-Saharan Africa. Mumbai’s rickety old airport, famous for its frequent delays and scuttling rats, once told visitors everything they needed to know. Yet the city’s sleek and airy new terminal presents a fresh image: five times bigger than the old airport, it is clean, efficient...

    2
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    Gavekal Dragonomics

    No Worries From China's Rebalancing?

    For a country that gained so much from China’s commodity boom, Australia seems quite sanguine about the bust. Mining investment may be falling, but optimism on tourism is rising. So has Australia already switched from the old commodity-driven to the new consumer-driven China? And will this rebalancing also be painless for the rest of the world?

    0
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    Gavekal Research

    Dollar Liquidity And Its Dependents

    One of our long-standing rules of thumb has been that a deteriorating US trade balance is good news for the rest of the world, and especially for emerging markets. It is thus a positive sign that the ex-energy, ex-China trade balance shifted from surplus to a deficit in 2015, sending US$150bn to the world outside of China and the oil exporters. The overall trade balance is likely to continue worsening through late 2017, thanks to the lagged...

    5
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    Gavekal Research

    The Upside In India

    The biggest immediate problem is that corporate India is not investing. Private businesses are over-leveraged and economic demand is weak. Hamstrung by US$130bn of bad loans, India’s state banks aren’t lending. The government has made little headway on the long-running debate over how to clean up their overstretched balance sheets.

    0
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    The Yen And Hard Truths

    The renewed “risk-on” moves of recent weeks has seen a vicious rebound in commodity prices, renewed stability in credit markets and, notably, a decline in the euro, which has fallen back to its early year level against the US dollar. The big outlier in these moves is the Japanese yen, which has become the new strong man of the currency world.

    0
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    Not Yet The Buy Of A Lifetime

    With emerging market equities up 13% over the last three weeks, and outstripping developed markets over the year to date, the notion is gaining traction that after four years of underperformance emerging markets are now “the buy of a lifetime”. Investors should be cautious. While it is indeed possible that emerging markets could continue to rally over the next few months as the US dollar tops out and commodity prices stabilize, the longer term...

    2
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    The Avoidance Of Debt Traps

    Yesterday saw Asia’s two big emerging economies adjust economic settings to deal with their respective debt problems. China cut the required reserve ratio that banks must hold by 50bp and India’s government rolled out a cautious budget. Both countries' actions, while different in nature, reflect sensible responses to testing circumstances.

    0
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    The Gavekal Monthly: Nothing To Fear But Fear Itself

    February saw some stability return to markets as investors got more comfortable with China’s currency policy and became less convinced that the Federal Reserve made a fatal mistake in December by raising interest rates. In this edition of the Gavekal Monthly Anatole assesses the big worries for global investors, while other writers focus on the burning currency questions in the major economic regions.

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    Video: On India's Growth

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    No More Curve To Roll Down

    Since the Bank of Japan introduced a negative deposit rate on January 30, Japanese bank shares have collapsed, falling -21% in yen terms and -15% in US dollars. The first question to ask is this: why were Japanese bank shares derated so dramatically after the policy change? Here are a few explanations, which are not mutually exclusive:

    4
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    More Power To India

    India’s economic expansion is being retarded by an impaired banking system whose non-performing loan ratio, depending on your methodology, is as high as 12%. The biggest contributor to this bad debt mound is the country’s power sector which accounts for about 10% of bank credit (INR6trn) and 20% of “stressed” loans. The irony is that fast growing India—which currently uses about 1010kWh of power per head versus a global average of about 3000kWh—...

    0
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    Japan’s Point Of No Return

    On January 29 the BoJ destabilized Japan's market equilibrium with a poorly communicated shift to negative interest rates. The message received by the market was that Governor Haruhiko Kuroda was making a desperate gamble with the suggestion that the BoJ’s quantitative-easing strategy had run up against key limits.

    0
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    Two Cheers For India

    The end of China’s investment boom means the global economy is seeking a new driver of growth. India’s economy outpaced China’s last year, making it the world’s fastest-growing large economy. Tom and Udith analyze what India must do to fulfill its potential

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    Having Your Cake, And Eating It

    Is the world really facing a 2008-style economic and market meltdown all over again? If it is, then the prescription for investors is clear: load up on long-dated US treasuries in expectation of a continued slide in yields, leaven your portfolio with exposure to gold, and prepare for the apocalypse. But what if the end of days is not imminent? In that case, investors face a trickier call.

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    Crisis? What Crisis?

    Two weeks ago I published an article dissenting from the near-universal view among my Gavekal colleagues, and also probably among our clients, that the global equity markets had entered a severe bear market (see Is Wall Street In A “Bear Market”?). Since I expressed this relatively optimistic view on January 27, the S&P 500 has fallen another -2.7%, the world MSCI-ex US by -3% and the Nikkei by a whopping -8.5% in yen terms. It may therefore...

    4
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    India’s Cleanup

    The last year has been both the best of times and the worst of times for the world’s fastest growing emerging market. India has gotten inflation under control and reaped a nice dividend from the oil price collapse, resulting in a much improved external position. The pro-growth majority government of Narendra Modi has not delivered “big bang” reforms, but has been generally competent and cut red tape. All of this marks India out as a “survivor”...

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    QSCB: How To Adapt To A Slow-Growth Future

    Growth in the world’s two biggest economies is settling at much lower rates than investors are used to. We predictably struggle to find a neat consensus on what the current macro environment means for asset allocators, but Charles, Louis and Anatole all offer specific portfolio advice.

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    No More Shock Absorbers?

    Things have come to a pretty pass when the heads of two of the world’s three leading central banks come out with all guns blazing in an attempt to persuade markets that they will do whatever it takes and more to ease policy—and their currencies promptly strengthen by two big figures. Yet that is exactly what has happened this week. On Monday Mario Draghi dropped a heavy hint that the European Central Bank is preparing to push interest rates even...

    2
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    Why Is Yen Weakness ‘Good’ But Renminbi Weakness ‘Bad’?

    When the yen falls, global markets think it is A Good Thing, and risk appetite increases. But market moves early in January demonstrated that the opposite applies to China: when the renminbi falls, markets think that is A Bad Thing, and risk appetite vanishes. So why do investors like a weak yen but fear a weak renminbi?

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    Red Herrings, Margin Calls And Heart Attacks

    Most recent commentary we have read suggests that January’s turmoil can be blamed on either the slowdown in China or the fear of an impending US recession. But let us suggest an alternative: these are red herrings which only distract from the real analytical challenges faced by investors.

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    The Gavekal Monthly: Enter Ursus Magnus?

    January was a hair raising month for investors with a deeply worrying combination of falling oil prices, plunging equities and soaring yields for sub investment grade debt. In this edition of the Gavekal Monthly we seek some answers to the “what next” question, kicking off with Charles and Anatole who take very different views on whether a bear market is upon us.

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    The Bank Of Japan Surprises

    The Bank of Japan just got all European in its battle against deflationary forces by adopting a negative interest rate policy. By changing its main interest rate for the first time in five years the BoJ genuinely surprised the market; some form of easing was expected given the recent strength in the yen and growth worries, but only a week ago Governor Haruhiko Kuroda ruled out the negative rate option.

    18
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    Anatomy Of The Bear

    I wish I shared Anatole’s degree of conviction. In yesterday’s Daily he set out his belief that the current sell-off in financial markets is not the start of “a structural ‘bear market’, still less a structural Ursus Magnus likely to last for many years” (see Is Wall Street In A ‘Bear Market’). I am not so sure. I suspect that what we are witnessing may indeed be the emergence of an Ursus Magnus, the sort of bear market so deep and prolonged...

    2
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    Don’t Buy The BoJ Bluster

    Haruhiko Kuroda, the Bank of Japan Governor, has presided over a pick-up in domestic demand and seems loath to have it extinguished by a global growth scare. Last week he hinted that he was ready to do more, and subsequent press leaks point to a further expansion of his quantitative easing program. One reason to think a big bazooka may be rolled out at Thursday’s policy-setting meeting is that a month ago the BoJ mildly expanded its QE operation...

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    Looking For The Bright Side

    By most measures, the first two weeks of 2016 have been the worst-ever start of the year for risk assets. With the MSCI All-Countries index down nearly -20% from last May’s high, we are now in a global bear market.

    1
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    Is Japan’s Building Boom For Real?

    As followers of our specialist Gavekal Japan Alpha service will know, something of a construction boom is emerging in Japan. At first glance this seems surprising, especially given that Japan is pedaling into some severe demographic headwinds. According to the 2010 national census, Japan’s population did grow between 2005 and 2010—but only by 0.2% over the five-year period, to reach 128mn. Over the coming decades, that anemic demographic growth...

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    Going Down With The Renminbi

    Emerging markets have faced significant headwinds ever since the “taper tantrum” of mid-2013 when investors began to factor in tightening moves by the Federal Reserve. Their headache got much worse last summer when China allowed a mini-devaluation of the renminbi, and 2016 is hardly starting well. The root problem is that most emerging markets are over-geared and need to ease policy if growth is to be kick-started. Unfortunately, easing is...

    4
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    The Gavekal Monthly: The Balance Of Risks

    The new year has been a wild ride so far, with sharp drops in the renminbi, Chinese stock markets, and oil prices leading global markets down. In our first Gavekal Monthly of 2016 we try to make sense of the risks facing investors today. As usual there are some strong differences of opinion: Anatole argues that developed economies are in decent shape, the dollar's rise will soon be over, and equities should post a better performance than...

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    ASEAN Could Yet Matter

    Until the Asian Financial Crisis of the late 1990s, Southeast Asia’s export-led development was driven by ethnically-Chinese entrepreneurs who ran dispersed production that mostly supplied the garment, electronics and consumer goods sectors. By the mid-2000s these relationships had greatly simplified, with the economies of the Association of South East Asian Nations either slotting into the Chinese manufacturing supply chain, or alternatively...

    0
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    Forget About Oil And China, Look To The US In 2016

    On the whole, 2015 was a year for investors to forget. US bond and equity prices were both flat, equity gains in Europe were mostly wiped out (for US dollar investors) by the fall of the euro, and commodity plays and high-yield issues crumbled. China sparked a brief panic after a clumsy intervention to cushion a stock-market collapse and an unexpected currency devaluation, but by the end of the year the Shanghai index was still up nearly 5% in...

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    The Clash Over Fossil Fuels

    Over the weekend in Paris, the leaders of 195 nations announced a landmark deal to address climate change that its more optimistic supporters say heralds “the end of the fossil fuel era.” But both market action and many government policies point in the opposite direction. Crude oil prices continue to tumble towards the US$30 mark, and coal prices have also collapsed—both moves that reflect abundant global supplies of fossil fuels. The Paris...

    4
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    The Cure For Low Prices Is Low Prices

    What is the latest rout in commodity prices telling us? Certainly, China’s demand for many commodities is weak—but everyone knows this. The most important signal is rather on the supply side: low prices are finally pushing commodity producers to cut output. It is this restructuring that will eventually bring stability to commodity prices.

    0
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    A Year-Defining Week

    Four hugely important events occurred last week which between them have largely determined the course of the world economy in the year ahead: the strong US payrolls, the Organization of the Petroleum Exporting Countries’ decision not to reduce production, the European Central Bank’s escalation of monetary stimulus and the inclusion of the renmimbi in the International Monetary Fund’s Special Drawing Rights basket. While all these events were...

    1
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    Are Emerging Markets Cheap?

    On the face of it, the valuation of emerging markets looks compelling. After declining -30% from its 2011 high, the MSCI Emerging Markets index is now at a forward P/E ratio of 12, a third cheaper than the S&P 500. As a result, the valuation premium of developed over emerging equity markets is close to its highest in more than ten years. What’s more on average, emerging-market currencies are now below fair value against the US dollar,...

    1
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    The Gavekal Monthly: A Cloudy Currency Outlook

    The Gavekal Monthly outlines our highest conviction ideas and summarizes the key economic, market and thematic views held by the firm’s partners and analysts. This report is an attempt to answer a question that we are often asked, but find it hard to answer: "What does Gavekal think?".

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    No Savior On The New Silk Road

    Over the last year China has stepped up its efforts to build an informal empire in Asia. This “One Belt, One Road” initiative has the potential to boost regional development and strengthen China’s geopolitical heft. But in the shorter term, can Beijing’s grand plan absorb China’s industrial overcapacity and revive commodity demand? Sadly, no.

    1
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    Indonesia: After The Pain Trade

    Indonesian assets did well out of the late summer pain trade, with equities and rupiah bonds both rallying by around 20% in US dollar terms. Even more encouragingly, they have since held on to most of those gains as commodities have tested new lows. This is a signal that the rupiah has fallen enough over recent years to allow Indonesia’s economy to adjust to the end of the commodity boom. That makes the high yields on rupiah-denominated bonds...

    0
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    Not So Bad In Japan

    Japan, as of Monday, was back in recession after GDP in 3Q15 shrank by -0.8% YoY, a second successive quarterly contraction. Such weakness supports a growing consensus that the economic renewal program of Prime Minister Shinzo Abe—based on the idea that monetary easing would spur domestic reflation—is a busted flush. For the bears, the question is when, not if, Japan tilts back into full-blown deflation. We are not so sure about this view, and...

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    A Happy Apologist

    At Gavekal the conversation with clients never stops and from time to time we like to offer up a taste of debates that strike us as interesting. Louis got into just such a discussion earlier this week with one of our smarter, free-market embracing US clients. The topic of discussion was China and why Louis is such an apologist for the Chinese Communist Party when he clearly has little time for governments meddling with markets elsewhere?

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