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    Gavekal Research

    The Age Of Range Trading

    It is a Gavekal adage that 10-year treasury yields, crude oil prices and the US dollar exchange rate are “master prices” that have an outsized impact on economic activity and financial markets. Yet as Louis notes, in recent years, these three prices have shown little by way of a structural trend. In this piece, he seeks to understand the meaning from this range-trading phenomenon.

    6
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    Gavekal Research

    Modi Shifts From Tub-thumping To Stimulus

    After spending the first few months of his second term on nationalist politics, Indian Prime Minister Narendra Modi is shifting his government’s attention to the economy. The substantial corporate tax cut announced last month was welcome news. However, Modi will have an uphill battle to get the economy moving before ballooning twin deficits begin to bite.

    8
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call October 2019

    Vincent outlined EM Asia's "great moderation", as inflation is diverging from other emerging markets, creating opportunities in bonds. Udith argued that Indian growth may be bottoming out but a bad banking picture means that equities may have more downside. Tom addressed the remaking of Asian supply chains in light of the US-China trade war.

    0
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    Gavekal Research

    At Home In The Range

    Almost a month after missile attacks on key Saudi Arabian oil production and processing facilities pushed benchmark global oil prices up by 20% overnight, the market has moved on. Saudi Arabia has defied industry expectations by continuing to supply oil to the market in abundant quantities. The current market pricing reflects that.

    0
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    Gavekal Research

    Strategy Monthly: An Asian Repricing

    Asian inflation has decoupled from other emerging market regions and may be settling at a new permanently lower level. At the same time, lower Asian inflation also reflects weak capital spending and slower economic growth due to the global trade downturn. The best way to play this new low-inflation, low-growth era is with regional bonds.

    0
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    Gavekal Research

    Reasons To Truly Love Malaysia

    In a bid to lessen currency depreciation pressure, three years ago Malaysia effectively closed down offshore trading in the ringgit. It won the battle but has been losing the war. Its asset markets remain unloved and Malaysia has a higher cost of capital than most regional rivals. Yet the time may be right to look again at Malaysia, at least from a fixed income stance.

    0
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    Gavekal Research

    India’s Laffer Curve Gamble

    India’s decision to cut its corporate tax rate from 30% to 22% has spurred a 7% surge in equities as investors bet on new capital spending reigniting a stalled growth cycle. The problem is that even if this fiscal easing spurs more business investment, the consumer side of India’s economy remains stuck in a low gear due to knottier problems.

    0
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    Gavekal Research

    The Industrial Disease (II)

    Last week, Charles examined the decline of the US industrial sector, introducing his “industrial Wicksellian spread” as an indicator of environmental conditions for industry. Now he looks at the probable causes of industrial deterioration, explains why neither monetary nor fiscal policy can help, and uses his toolkit to draw some important conclusions for portfolio investors.

    0
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    Gavekal Research

    The EM Oil Shock That Won't Be

    Three “master” prices tend to dictate price levels in most asset markets—US interest rates, the US dollar and energy prices. A synchronized fall in these three prices usually bodes well for emerging market assets, while a rise bodes ill. Since it is rare for all three master prices to move together, the challenge for investors is to figure out which way the cross currents are flowing. If one master price is making a big move, its effect can...

    0
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    Gavekal Research

    The Cost Of Cleaner Shipping

    Right now, investors concerned about energy prices are focused on the attacks on Saudi Arabia’s processing facilities. But a possible conflict in the Gulf will not be the only emergent factor likely to affect oil prices over the coming months. New rules for cleaner shipping fuels, known as “IMO 2020,” also have the potential to roil global petroleum markets.

    0
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    Gavekal Research

    Q&A On The Saudi Oil Attacks

    One thing that stands out about the reaction to the weekend’s strikes on Saudi Arabian oil facilities is how muted much of the market response has been. Nevertheless, investors are concerned about what lies ahead. In this report, Louis attempts to answer some of the most prominent questions asked over the last 48 hours.

    2
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    Gavekal Research

    A Saudi Tipping Point?

    Following this weekend's attacks on Saudi Arabian oil installations, the important question has to be whether this proves to be the moment at which investors realize that market expectations have become too far removed from reality. In short, will the attacks shatter the consensus that neither energy prices nor inflation can ever rise meaningfully again?

    7
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    Gavekal Research

    The Three Waves Of Capitalism

    Three great forces drive capitalism and markets: the Schumpeterian, the Ricardian, and the Malthusian. Usually only one dominates at any one time. The flood of capital into tech indicates investors believe that Schumpeterian creative destruction will continue to drive returns over the coming years. But Louis argues that a new wave may be about to take over.

    15
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    Gavekal Research

    Asia's Great Moderation

    Emerging market government bonds yield more than rich-world equivalents because investors worry about getting their money back. This higher return on capital can cause a feedback loop of rising foreign debt and diminished financial sovereignty. Yet, with Asia having seemingly crushed inflation, a “great moderation” may reverse that dynamic and usher in a potential re-rating of risk assets.

    0
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    Gavekal Research

    The Meaning Of The Iran-China Deal

    Reports that China has signed a long term agreement to buy large quantities of Iranian oil in defiance of US sanctions will weigh on global crude prices and further complicate US-China talks, reducing the chances of a deal before the 2020 US election. In effect, the world is now facing a four-way tug of war over the oil price.

    0
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    Gavekal Research

    India's Frenetic Inertia

    They say the first step to solving a problem is recognizing that you have one. With its recent moves to shore up sagging growth, Narendra Modi’s new government has finally acknowledged that India’s economy is in trouble. But unless it quickly finds a coherent reform strategy, Modi’s second term could fizzle out into economic failure.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call September 2019

    In yesterday’s conference call, Anatole Kaletsky, Will Denyer and Louis-Vincent Gave outlined reasons for recent dramatic moves in bond markets and made arguments for what comes next. Anatole also addressed Brexit developments and Louis discussed the situation in Hong Kong.

    0
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    Gavekal Research

    Strategy Monthly: The Message From Bonds

    Record low bond yields point to a deflationary catastrophe in the making. Yet growth data in the world’s two biggest economies remain decent. Could investors be reacting to a rupture in the international order? Gavekal analysts are not persuaded by such arguments and offer four alternative explanations for the “bond bubble”.

    0
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    Gavekal Research

    The Importance Of Oil

    The world’s fixed income markets are priced for a severe bout of demand destruction and deflation. Yet, outside Europe at least, growth in the world’s major economies continues to tick over. However, could a sudden oil price rise spark an uptick in inflation pressure that triggers an abrupt repricing in which bond yields spike sharply higher?

    0
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    Gavekal Research

    Asia Ditches Fiscal Conservatism, Conservatively

    As the external environment darkens, Asian governments are turning on the fiscal spigots—cautiously. Moves announced in recent weeks do not radically move the dial, but they should support growth. For now, monetary policy will remain the main counter-cyclical tool for arresting a downturn in Asia, but recent moves reflect an end to an era of fiscal consolidation.

    0
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    Gavekal Research

    Buffeted By Deglobalization, Shipping Lines Tack To Asia

    After a sluggish 2018, global shipping lines are again facing choppy seas thanks to Donald Trump's tariffs and slumping trans-Pacific trade. There is, however, a silver lining for carriers with a strong Asian presence; the US-China trade war is spurring a fragmentation of regional supply chains, and that seems set to boost intra-Asian trade.

    0
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    Gavekal Research

    The Yen Dilemma

    Since the beginning of the month, the yen has been one of the few major currencies to strengthen against the US dollar. At the same time, Japanese government bonds have not escaped the global bond rally. This presents the BoJ’s chiefs, who for the last three years have been pursuing a policy of “quantitative easing with yield curve control”, with a problem.

    0
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    Gavekal Research

    Video: The Anatomy Of The August Panic

    As more and more government bonds around the world slide into negative yield, investors can draw one of two conclusions: either the world faces an economic meltdown, or there is a buying panic in safe assets. But although there is indeed a synchronous global slowdown in growth, Louis favors the latter explanation.

    0
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    Gavekal Research

    India Macro Update: Hardly A Growth Agenda

    India’s economy is weak across the board, weighed down by lackluster investment, anemic consumption and soft external demand. Deep reforms are needed to unlock the country’s economic potential. In this quarterly report, Udith and Tom offer a check-in on India’s growth outlook, explain why equities may be de-rated further and worry about the bond rally fizzling out.

    0
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    Gavekal Research

    The Diminishing Market Impact Of Tariffs

    After the US imposed its first major round of tariffs on Chinese goods last September, the S&P 500 sold off by -20%. After the second round went into force, it fell -6.8%. And since President Trump announced a third round, it has sold off by -6.1%. It seems each successive escalation in the trade war is having a smaller impact on the US stock market.

    2
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    Gavekal Research

    When The World Goes To Hell

    Anatole has previously argued that the correlation between inverted yield curves and recessions has very little predictive significance. In this piece he updates that view to argue that inverted yield curves have no predictive significance whatsoever. For this reason, he thinks that equity investors have gotten their reaction to recent developments about right, while bond investors are all in a muddle.

    5
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    Gavekal Research

    Asian Currencies Remain A Shock Absorber

    It has often been said that when the US sneezes the rest of the world catches a cold. In Asia, a similar link exists between the behemoth China and other regional economies. Hence when Beijing unexpectedly let the renminbi weaken through CNY7.00 to the US dollar last Monday regional currencies fell by 1.6% in the following five days. They could fall more, however there is unlikely to be a broader contagion to regional asset markets. Asia’s solid...

    0
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    Gavekal Research

    Strategy Monthly: Focus On The Fed, Not On US Tariff Threats

    Trade war fears are once again front and center of investors' minds. But the reduced magnitude of pledged US tariffs indicates that Trump is anxious to avoid damaging the US economy and financial markets. This leaves the focus on the Fed, and how much it is likely to cut interest rates.

    0
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    Gavekal Research

    The Effectiveness Of EM Rate Cuts

    An easier Fed stance suggests that the US dollar is unlikely to trend significantly higher from its present levels. The prospect of limited US dollar upside frees Asian central banks from the necessity of defending their exchange rates, and gives them leeway to support growth by cutting interest rates. However, the impact of rate cuts on both growth and asset prices will vary among Asian EMs.

    2
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    Gavekal Research

    Video: Korea's Coping Strategy

    No other G20 economy is as exposed to global trade tensions as Korea. With its heavy dependence on semiconductor manufacturing, Korea has proved vulnerable both to the US-China economic cold war, and to long-running disputes between Seoul and Tokyo. As a result, exports have cratered and economists have slashed their Korean growth forecasts.

    0
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    Gavekal Research

    No Time To Be Chicago Trained

    Technocrats globally are under the cosh from populist politicians who have tired of doing the sensible thing. In the developed world, checks and balances have insulated most big agencies, but the story is different in developing economies. The worry is that they are lurching off onto a development track that ends with fiscal blowouts and currency debasement.

    0
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    Gavekal Research

    Normalizing Tech Disruption

    Investors have been cheered by the US and China deescalating a trade dispute that has focused on China’s use of US technology. So what to make of a stand-off between two US allies in North Asia that could disrupt highly integrated technology supply chains? Could this action reflect the normalization of trade sanctions being used in bilateral disputes?

    0
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    Gavekal Research

    Video: Modi's Second Term Challenges

    Indian prime minister Narendra Modi faces some daunting economic challenges in his second term. As Udith explains in this interview, the biggest is to create new jobs India needs. In the coming decades, India must generate some 10mn new jobs every year simply to provide employment for the cohort of young Indians set to enter the workforce.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call July 2019

    In yesterday’s Gavekal Research conference call, Louis-Vincent Gave, Anatole Kaletsky and Arthur Kroeber conducted a mid-year review of the investment environment and outlined their expectations for the rest of the year onward.

    0
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    Gavekal Research

    Foreigners And The Deepening Of Indian Finance

    India’s new government delivered a careful budget last Friday, preferring to keep a veneer of fiscal rectitude than to prioritize growth and jobs with heavy spending. Yet there was one exception amid the caution: for the first time, India is set to issue sovereign debt in foreign currency. This is an intriguing development for foreign investors wanting exposure to India while avoiding currency risk.

    0
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    Gavekal Research

    Emerging Markets After The Trade War

    Emerging markets did nicely out of the rumor, less well from the fact. As hopes grew through June for some form of trade détente between the US and China, EM assets staged a broad rally. Similarly, EM currencies pushed broadly higher, on the back of a wider US dollar softness. Over the last week, however, EM equities and currencies have pulled back.

    0
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    Gavekal Research

    An Investment Thesis For The 2020s

    A look back at the last 50 years shows that the dominant conviction among investors at the end of each decade about what would drive markets over the following decade was invariably wrong. With this in mind, and on the basis that avoiding losers is easier work than picking winners, Louis asks what beliefs dominate investors’ minds today, and how they are likely to be proved wrong in the 2020s.

    12
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    Gavekal Research

    Can Vietnam Eat China's Lunch?

    Vietnam has the potential to be a big winner from the US-China trade war as companies move manufacturing out of an increasingly high-cost China. This trend can be seen in sharply rising foreign investment and fully occupied export-focused industrial parks. Yet the issue is how to deal with bottlenecks that impede the path to high value-added activities.

    0
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    Gavekal Research

    Strategy Monthly: Should We Believe Equities, Or Bonds?

    Record-high US equity prices seem hard to reconcile with the message sent by the lowest bond yields since 2016. Should investors hunker down due to the inverted yield curve, or jump aboard the equity bandwagon? In fact, both markets may be right in their own way.

    0
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    Gavekal Research

    Trade War II, The Dollar And Gold

    After the opening Twitter salvo in "Trade War II" by Donald Trump in May, markets have reacted quite differently from "Trade War I" in the spring of 2018. This time, the Federal Reserve is sounding more dovish, US bond yields have fallen back to 2%, the dollar seems to be rolling over, and gold and EMs are doing well. This raises the question whether the investment environment is changing before our eyes.

    9
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    Gavekal Research

    Can Vietnam Win The Trade War?

    Vietnam is being touted as the big winner of the US-China trade war as companies shift their supply chains toward the low-cost export powerhouse. In the long term that is likely. In the short term, however, an improved export performance may be partly down to Chinese exports being routed through Vietnam to escape US detection.

    5
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    Gavekal Research

    The Iran Wildcard

    Of the many risks besetting investors right now, the hardest to assess is the confrontation between the US and Iran. Should tensions escalate into a shooting war, the consequences would be far-reaching and severe. However, looking beyond the bellicose rhetoric there are reasons to believe that the balance of probability still weighs against a marked escalation.

    1
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    Gavekal Research

    Investing For A New Cold War

    Earlier this year, Louis and Charles published a book whose main thesis was that an era of globalization is ending and the world is breaking into three separate economic zones.The question Louis addresses in this piece is how investors should play this macro shift. Those strategies that did best over the last decade are unlikely to outperform in the next period.

    10
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    Gavekal Research

    Japan's Fiscal Dilemmas

    As investors worry about global economic weakening, attention is turning to the cavalry, which in recent years has been central banks. In Japan poor survey and sentiment readings have sparked surprisingly dovish public comments by the BoJ governor. In fact, investors may be better off listening to the prime minister, as the real game may now be fiscal.

    0
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    Gavekal Research

    India Macro Update: Post-Landslide Lethargy

    After the victory party, Narendra Modi’s reelected government's focus is shifting to structural reform, but Udith and Tom have fairly low expectations that this will materialize anytime soon and hold a cautious view on Indian risk assets. Such an environment should offer a reasonable outlook for government bonds.

    0
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    Gavekal Research

    Video: Bull Markets Don't Die Of Old Age

    The US economic expansion is entering its 11th year, which makes some wonder whether the end of the business cycle is nigh. Anatole thinks that’s asking the wrong question, because bull markets don’t die of old age. They are, however, more susceptible to diseases of old age. He identifies three events that would cause an economy to keel over. Also on the docket is the seemingly contradictory signals sent by bullish US equity markets and bearish...

    0
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    Gavekal Research

    EMs Hit The Trade Wall

    It is not clear if the latest trade actions launched by the US against Mexico and India form part of coherent plan. Such moves do signal that the US-centered multilateral trading system is hanging by a thread. This upending of the post-WWII order is especially bad news for trade-dependent emerging economies.

    0
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    Gavekal Research

    Strategy Monthly: Who Suffers Most In A Long Trade War?

    Markets have started to price in a long US-China trade and tech war, and we agree. The odds now favor an indefinite conflict. Damage from the trade war will vary based on a country’s trade-dependency and policy space. Big problems could emerge in Europe and in EMs exposed to China’s supply chain.

    0
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    Gavekal Research

    India After The Victory Party

    After Narendra Modi’s landslide victory in India’s general election, the economic issues that must be tackled quickly are stacking up. Tom runs through the Indian leader’s inbox and concludes that the scale of the short term problems he faces rules out a 2014-style euphoric run-up in Indian equity.

    0
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    Gavekal Research

    A Change In The Market Mood

    Thursday was an ugly day for global equity markets, with losses that brought total returns on US equities almost back to their January 2018 level, and non-US equities to the brink of bear market territory. It is hard to shake the feeling that the investment environment has changed. What lessons should we draw from the tumultuous trading session?

    7
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