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Gavekal Research
Louis Gave
Aug 09th 2017
The Most Important Change And Its Natural Hedge
I don’t usually quote mass murderers, but when I do, I usually fall back on Lenin’s quip that “there are decades when nothing happens, and weeks when decades happen”. Lenin was referring to the Russian Revolution which took place a hundred years ago and to this day still casts a long shadow. To some extent, the Russian Revolution, itself a bastard child of the first world war, crystallized the end of an era for Europe. Thereafter the world’s...
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Gavekal Dragonomics
Rosealea Yao
Aug 09th 2017
Oil Import Deregulation Put On Hold
China’s market for gasoline, diesel and other oil products has gotten increasingly competitive since the government started allowing private-sector refiners to import their own crude oil. But the government has now put additional liberalization on hold, which will halt gains for independent refiners and benefit big state enterprises.
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Gavekal Research
Tom Holland
Aug 08th 2017
Is The Whale Breaking Surface?
Charles has often said that the impact of a market shock shows up with the same sort of delay as the effects of dynamite fishing. First the small fry float to the top, then the mid-size fish. Only later does the dead whale break surface. With that analogy in mind, Louis has long maintained that investors will not be able to call the end of the oil price slump with any confidence until they have seen major bankruptcies and/or consolidation among...
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Gavekal Research
Charles Gave
Aug 08th 2017
Love The Economy, Hate Economists
Charles is proud of his data-driven approach to economic analysis and is not impressed with the methods applied by much of the modern economics profession. More to the point, he thinks that most modern economic remedies have negatively impacted the growth outlook and dulled investment performance.
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Gavekal Research
Long Chen
Aug 07th 2017
Beijing’s New Renminbi Strategy
Since 2016 China has pursued an opportunistic currency strategy, taking advantage of periods of US dollar weakness to steer a depreciation of the renminbi’s trade-weighted exchange rate. But over the last couple of months that policy has shifted, as it looks as if the authorities are satisfied with the renminbi’s current trade-weighted value.
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Gavekal Research
Cedric Gemehl
Aug 04th 2017
Leading Europe Into Reflation
The Czech National Bank has become the first central bank in Europe to raise interest rates in this cycle. Yesterday the CNB lifted its policy rate from 0.05% to 0.25%, its first rate hike since 2008. Where the Czechs are leading, others, including the European Central Bank, will follow—but in the case of the ECB, likely not for another two years or more.
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Gavekal Research
Charles Gave
Aug 04th 2017
The Brexit Talks Don’t Matter
The details of the Brexit talks between the British government and Brussels are far less important, argues Charles in this paper, than the blow Britain’s referendum vote has dealt to the technocratic principles which underpin the European Union’s power structure. The pillars of the temple are crumbling, and sooner or later the edifice must fall.
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Gavekal Research
Louis Gave
Aug 03rd 2017
Energy Stocks, If Only As A Hedge
A quick glance at our Gavekal TrackMacro application illustrates how the global equity environment remains benign: modest but accelerating growth, low inflation, solid corporate profits and low interest rates. In such an environment, why not load up on equities? Investors have clearly done just that in recent quarters. As one seasoned client put it in a recent meeting: “If central banks are not going to raise rates with German consumer...
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Gavekal Dragonomics
Ernan Cui
Aug 03rd 2017
The Lull In The Tourism Boom
Chinese outbound tourism is having a rough 2017: growth in international travelers is down to about 6%, from 20%-plus growth in earlier years. So has something fundamental in the Chinese tourism story changed, or is this just a blip? In this piece, Ernan argues this slowdown is largely temporary, caused by events in key destinations in Asia.
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Gavekal Research
Charles Gave
Aug 03rd 2017
Building A Bond Valuation Tool
The “golden rule” of French Nobel laureate Maurice Allais states that over the long run, long term government bond yields always converge with the nominal structural growth rate of the economy. In this paper Charles sets out to build a government bond market valuation tool based on the Allais postulate.
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Gavekal Research
Tan Kai Xian
Aug 02nd 2017
The Misleading Signal In US Auto Sales
Trying to tease economic trends out of recent US data releases is a frustrating business. Take yesterday’s figures. Although the ISM manufacturing PMI ticked down a shade in July to come in a fraction below expectations, at 56.3 the number remained firmly in expansionary territory. On the other hand, two classic cyclical indicators of US economic health—construction spending and automobile sales—both came in weak.
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Gavekal Research
Udith Sikand, Tom Miller
Aug 02nd 2017
Strategy Monthly: India — Poised For A Pickup
India clearly offers one of the best long-term growth stories in the world today. In 2016 for the first time it added more to global nominal GDP growth than China. Demographics are favorable, opportunities for infrastructure- and housing-driven growth are abundant, and despite some hiccups the Modi government has done a good job of taming inflation and setting the country on a structurally sounder path. For investors, the problem is that Indian...
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Gavekal Research
Rosealea Yao
Aug 01st 2017
Fade The Latest Commodity Rally
China’s property market is once again running hotter than expected, pushing prices of iron, steel and coal up by 15%-40% over recent weeks. But the gradual downward trend in property has not changed. And with high prices and government intervention both stimulating more commodity supply, the potential for further price gains is limited.
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Gavekal Research
Cedric Gemehl, Nick Andrews
Jul 31st 2017
Get Selective Over Eurozone Stocks
Emmanuel Macron’s political honeymoon proved short-lived, but the new French president’s honeymoon with eurozone equity investors was over before it began. In a classic case of buy the rumor sell the fact, the euro Stoxx index peaked on May 5, the last trading day before the second round of the French presidential election. That run-up had been driven by receding fears of deflation, as investors embraced the idea of eurozone reflation, coupled...
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Gavekal Research
Charles Gave
Jul 28th 2017
An Interesting Configuration
When the market is suffering from doubts, it pays to start with the facts. And clearly the market is having a few doubts right now. After setting the latest in a series of record highs in intraday trading yesterday, US equities succumbed to the jitters. In the space of an hour, the S&P500 fell -1% and the Nasdaq -2%, as investors questioned the underpinnings of the current run-up in stocks. So, let’s begin with some facts:
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Gavekal Research
Anatole Kaletsky
Jul 28th 2017
The Battle Of Brexit Is Over
Judging by statements made by two of the most fervent Europhobes in Theresa May’s cabinet, Soft Brexit has emerged the victor over Hard Brexit. While this means the UK's exit will be postponed during a transition period, and possibly beyond, Anatole argues this comes with its own drawbacks and risks. Things are likely to get worse before they get better.
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Gavekal Research
Tan Kai Xian
Jul 27th 2017
US Bear Flattening Ahead
The miniscule change of wording in yesterday’s Federal Reserve statement appears to confirm that the Fed will go ahead and begin to shrink its balance sheet from September. June’s statement said balance sheet normalization would begin “this year”, implying the process would start by December at the latest. Yesterday’s statement altered that to “relatively soon”—and relatively sooner than December suggests September, as the only other meeting...
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Gavekal Dragonomics
Thomas Gatley
Jul 27th 2017
Profits Heading Down But Not Out
The profits of China’s industrial sector handily beat expectations in the first half of 2017, rising 22% YoY. In this piece, Thomas surveys the profit cycle’s path over the next 12 months, which mirrors that for the overall economy: a slowdown in the rest of 2017 and into 2018, but quite a gradual one with little risk of a profit recession.
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Gavekal Research
Louis Gave
Jul 26th 2017
When Smoking Pays
Baseball cards, Beanie Babies, bitcoins... For the last eight years, governments have regarded them as much the same sort of thing, taking a broadly tolerant attitude to the proliferation of crypto-currencies. Not anymore. Yesterday the US SEC declared that blockchain-based digital tokens such as bitcoin are in fact securities and thus subject to the full panoply of SEC regulation.
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Gavekal Research
Dan Wang
Jul 25th 2017
Big Tech Is Not Standard Oil
Back in May, Louis warned that the regulatory knives were coming out for Big Tech. In the worst case scenario for the dominant technology giants that have done so much to drive the stock market to new highs, Louis argued that they could even face the same treatment that Standard Oil received at the hands of the US government in 1911. Investors were forcibly reminded of this tightening regulatory squeeze yesterday when Google parent Alphabet...
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Gavekal Research
Cedric Gemehl, Tan Kai Xian
Jul 25th 2017
The Eurozone Is Now So Far Behind The US, It’s In Front
Among the many tricky tasks facing investors is to determine the relative positions of the US and eurozone economies in their respective business cycles. Over the preceding two cycles—the ones that peaked in 2000/01 and 2005/06—the two economies moved broadly in phase, with the eurozone lagging the US by around one year. Estimates from the International Monetary Fund and OECD suggest that that relative position is largely unchanged, with the...
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Gavekal Research
Anatole Kaletsky
Jul 24th 2017
Draghi Can’t Lean Against The Euro’s Rise
After the euro broke out of its three-year trading range last week, it is reasonable to assume that the European Central Bank would much rather see a big correction than a further move to the upside. But central bankers can’t always get what they want—and their powers to control the currency markets are much more limited than generally assumed by day traders and media headline writers.
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Gavekal Dragonomics
Andrew Batson
Jul 24th 2017
Taking Stock Of The Investment Cycle
Investment drives China’s growth, but the state of the investment cycle is now being obscured rather than revealed by the most closely followed indicator of capital spending, fixed-asset investment. In this piece, Andrew updates his model of monthly real growth in gross fixed capital formation, and draws three conclusions from its signals.
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Gavekal Research
Louis Gave
Jul 21st 2017
Life’s Certainties And The Euro
There are very few certainties in life. Death, taxes, US consumers living beyond their means, and Italian central bankers talking down their currency are pretty much the only things I have learnt in my career to be inevitable. Sure enough, Mario Draghi came out yesterday doing his best to sound as dovish as he possibly could. That did not stop the euro from surging past its ceiling of US$1.15 to reach US$1.1620.
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Gavekal Research
Charles Gave
Jul 21st 2017
Value Creation In A Capitalist World
In a capitalist economy there are three different kinds of value creation: the Schumpeterian, the Ricardian, and the Malthusian. And the companies in each of these value creation segments swing through very different cycles. In this short paper, Charles outlines how each segment works, explains where they are in their cycles, and suggests how investors can build appropriately hedged portfolios.
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Gavekal Research
Arthur Kroeber
Jul 20th 2017
Reading Trump’s Trade Signals
Donald Trump came into office six months ago today promising to rip up the rules of global trade in order to put America’s narrow interests first and cut its trade deficit. So far, though, his administration’s trade policies have been more smoke than substance. Global trade volume has accelerated smartly since the US election. Threats of a trade war with the main target, China, fizzled in the face of US business interests, Beijing’s ability to...
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Gavekal Research
Tan Kai Xian, Will Denyer
Jul 20th 2017
Liquidity: More Bad News Than Good
Gavekal has long maintained that bull markets rest on three pillars: liquidity, valuations, and growth. Now with the Fed set to tighten further in an environment of weak bank credit growth, KX and Will warn that the liquidity pillar which has done so much to support the current bull market in US equities is looking increasingly shaky. That is especially ominous, given that valuations are no longer cheap and catch-up growth is played out for this...
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Gavekal Research
Tan Kai Xian, Cedric Gemehl
Jul 19th 2017
Watch US-Eurozone Rate Differentials
Interest rate differentials between the US and eurozone are wide by historical standards. This is no surprise. The US has enjoyed uninterrupted growth (at least in year-on-year terms) since 2010, and today the Federal Reserve stands as the most hawkish big central bank in town. In contrast, the eurozone slumped back into recession in 2012, and the European Central Bank remains in full-blown easing mode. As a result, interest rate differentials...
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Gavekal Dragonomics
Yanmei Xie
Jul 19th 2017
Reasserting Control Over Outbound Investment
The flow of cross-border M&A from China is reviving as the crackdown on capital flight eases. But as Yanmei argues, the flow of deals is unlikely to repeat the stunning growth surge in 2016, as the government has now reasserted its control over outward direct investment. This environment will likely be friendlier to state firms than private ones.
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Gavekal Research
Anatole Kaletsky
Jul 18th 2017
Who’s Afraid Of The ECB?
Mario Draghi’s hint last month that the European Central Bank’s bond buying may not continue forever unleashed a storm of panic among the perma-bears who still dominate the media and market commentariat. But its actual effect on markets themselves has so far been close to minimal. So should investors worry—or relax—about a repeat of the “taper tantrum” in May 2013, when Ben Bernanke first hinted that the Federal Reserve would eventually start to...
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Gavekal Research
Arthur Kroeber
Jul 18th 2017
Video: New Investment Opportunities In China
China’s onshore financial markets are opening up. Admittedly, neither last month’s inclusion of Chinese A-shares in MSCI’s benchmark indexes, nor this month’s opening of the Bond Connect scheme, will change the world immediately. But together they signal that Beijing is serious about opening its capital markets to foreign investors.
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Gavekal Research
Long Chen
Jul 17th 2017
Signs China’s Tightening Has Peaked
Official statements following the conclusion of Beijing’s National Financial Work Conference signal that the recent tightening cycle has now peaked and that market interest rates are likely to fall from current levels, argues Chen Long. The story remains that while Chinese reflation has peaked, the ensuing slowdown will be moderate and gradual.
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Gavekal Research
Anatole Kaletsky
Jul 17th 2017
The Lost Decade
Next month will mark the tenth anniversary of the Global Financial Crisis, and the developed world’s GDP per capita still lingers 20-25% below its pre-crisis long term trend. Were there no good economic policies to deal with the aftermath? Far from it, argues Anatole, but four features of post-crisis politics and ideology blocked constructive policy responses.
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Gavekal Research
Nick Andrews
Jul 14th 2017
Making Sense Of Mario Draghi
Mario Draghi got people scratching their heads last month. “As the economy continues to recover, a constant policy stance will become more accommodative,” declared the European Central Bank president. “The central bank can accompany the recovery by adjusting the parameters of its policy instruments—not in order to tighten the policy stance, but to keep it broadly unchanged.”
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Gavekal Dragonomics
Andrew Batson
Jul 14th 2017
The Regional Bottom Line For Growth
China’s 2016 stimulus likely provided enough momentum to ensure GDP growth in 2017 will meet the 6.5% target. But on closer examination the stimulus looks as much a rescue operation for troubled regions as a shift in national policy. This interpretation implies that the political drivers of Chinese policymaking are different from what most commentators believe.
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Gavekal Research
Udith Sikand
Jul 14th 2017
EM Asia’s Most Sensible Market
The “safety first” stance of Indonesian fiscal and monetary policies has contained the country’s budget deficit, restored its investment grade credit rating and capped inflation. Granted, these policies have come at the cost of lackluster growth. However, with the rupiah undervalued and plentiful carry available, Udith still sees opportunities in local currency bonds.
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Gavekal Research
Udith Sikand
Jul 13th 2017
End Of The Line For EM Dollar Debt?
As if alarmed by the realignment in global financial markets over the last few weeks, Janet Yellen struck a slightly more dovish note in her Congressional testimony yesterday. Yet the Federal Reserve chair’s more nuanced words are unlikely to temper by much the developing skepticism among investors towards the US dollar bonds of emerging markets.
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Gavekal Research
Tan Kai Xian
Jul 13th 2017
The State Of US Inflation
In her testimony to Congress yesterday, Federal Reserve chair Janet Yellen attributed the weakness of US inflation to temporary factors. As a result, the Fed remains focused on tightening policy. However, given that US inflation has consistently undershot the Fed’s target, any further decline will raise concerns that the US business cycle is rolling over.
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Gavekal Research
Thomas Gatley, Long Chen
Jul 13th 2017
Audio & Transcript — Gavekal Research July Call
Recent efforts to open up China's stock and bond markets have granted deeper access for foreign investors. In Tuesday's conference call Thomas Gatley outlined what MSCI's decision to include A-shares in its indexes means for investors, while Chen Long argued that the next great bond bull market may happen in China.
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Gavekal Research
Tom Holland
Jul 12th 2017
The Wile E. Coyote Moment
Sometimes financial markets can look a lot like Wile E. Coyote. So intent was the old Looney Tunes character on chasing the Road Runner, that he somehow never realized when he had shot over the cliff’s edge. For a few moments he would continue in thin air, legs a blur, supported by momentum and incomprehension. Only when he looked down... In much the same way, financial markets often continue their trend after the underlying conditions change,...
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Gavekal Research
Charles Gave, Louis Gave
Jul 12th 2017
On The Demise Of Populism
Anyone who bought European equities in the wake of Emmanuel Macron’s impressive win in the French presidential election is down a few percent in euro terms and underperforming global equities by about 1%. Charles are Louis are not convinced that this can be explained away by the markets taking a “breather” after a big run up. They smell darker forces at work.
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Gavekal Research
Tom Miller
Jul 11th 2017
Into My Indian Arms
Last week Louis argued that the most likely growth area for richly valued defense contractors was Western-aligned powers in East Asia. The problem was that despite rising regional tensions, India and Japan were playing hard to get (see Should Investors Chase Defense Stocks?). Last week’s events on the Korean peninsula should give the merchants of death a fresh calling card in Tokyo, Seoul and Taipei. Yet while garnering fewer headlines, the...
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Gavekal Research
Will Denyer, Tan Kai Xian
Jul 11th 2017
The Payrolls Paradox: Tight Labor But Weak Wage Growth
As usual the market focused closely on the headline number in last Friday’s employment report, which saw non-farm payrolls come in at a stronger than expected 220,000 in June. As usual, we caution against reading too much into any one month’s figures, for the reasons Anatole has explained so elegantly (see Beyond The March Payrolls Soft Patch). Instead we prefer to take a step back and to attempt to answer the two big questions currently hanging...
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Gavekal Dragonomics
Ernan Cui
Jul 11th 2017
The Peak In Home Appliances
When you buy a house, you also buy things to go in it—yet the rebound in housing sales over the past 18 months has not done much for sales of major home appliances. As Ernan explains in this piece, Chinese demand for washing machines, refrigerators and televisions has now more or less peaked. The main exception is the humble air conditioner.
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Gavekal Research
Nick Andrews, Cedric Gemehl
Jul 10th 2017
Don’t Give Up On Eurozone Equities
When a market fails to rally further on successive rounds of good news, investors can be forgiven for feeling a tad nervous about the outlook. It is little surprise, therefore, that many portfolio managers are expressing skepticism about the near-term sustainability of the bull market in eurozone equities. Since the election of Emmanuel Macron as French president two months ago, the macro headlines from the single currency area have been...
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Gavekal Research
Nick Andrews
Jul 07th 2017
Video: A Cure For The Italian Malaise
Italy’s economy is enjoying a cyclical upswing, and a long-delayed banking clean-up is finally under way. But while both these developments are welcome, they are not sufficient to change the underlying picture. Nick argues there is little chance that the general election due to be held by May 2018 will produce a government strong enough to press ahead with reform.
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Gavekal Research
Tan Kai Xian, Will Denyer
Jul 07th 2017
What Could Turn Around The US Business Cycle? Hint: Not Much
As often happens, US data is sending mixed messages. Yesterday’s ADP report showed weak job growth in June, despite the latest ISM service sector PMI being decidedly perky. Investing according to the latest high-frequency growth data is a good way to get whiplash. Instead, let’s take a step back and review the US economy’s overall positioning.
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Gavekal Research
Nick Andrews
Jul 07th 2017
Italy: Stuck At The Back Of The Peloton
In the Tour de France, the cyclists at the back of the peloton benefit enormously by riding in the slipstream of stronger competitors at the front of the pack. That’s fine for most of the time, but when the leaders stage a breakaway, the weaker riders can struggle to maintain the pace.
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Gavekal Research
Yanmei Xie
Jul 06th 2017
Video: The North Korea Conundrum
In this brief video interview Yanmei Xie outlines the ever-shrinking list of options the US has for solving the problem of a nuclear-armed North Korea. The risk of military action remains slim, but with North Korea's recent test of an intercontinental ballistic missile it is no longer unthinkable.
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Gavekal Research
Charles Gave
Jul 06th 2017
Sweden’s Secret Sauce
Sweden is a high-growth economy with competitive firms in everything from retailing to metal bashing to software. Yet, there is a time to be in Sweden—or at least overweight—and there are times to be out. Sweden and the US had two of the 20th century’s best performing equity markets and I will simplify this decision by measuring their relative attractiveness. Spoiler alert: this report has a positive recommendation.
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Gavekal Research
Cedric Gemehl
Jul 06th 2017
The Real Macron
On Monday Emmanuel Macron launched what is being dubbed an imperial presidency. He offered a neo-Gaullist vision of a strong leader nurturing a troubled nation’s recovery. Yet he also unfurled an electoral reform program aiming to break the old political duopoly. The worry is that Macron uses up his political capital and economic reform stalls.
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Gavekal Research
Yanmei Xie
Jul 05th 2017
The North Korean Tail Risk Just Got A Whole Lot Fatter
Despite the protestations of some of the less temperate US news media, North Korea did not cross a US “red line” yesterday. However, with the successful test launch of an intercontinental ballistic missile that could, in theory, drop a nuclear warhead on the US state of Alaska, Kim Jong Un’s rogue state has brought North Asia a big step closer to the critical point at which investors can no longer rule out military action. A shooting war on the...
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Gavekal Dragonomics
Rosealea Yao
Jul 05th 2017
Government Becomes A Home Buyer
It’s no secret that managing the housing market is a core part of China’s economic policy. But as Rosealea explains in this piece, government’s role in supporting housing sales is now even greater than most realize. The government is buying millions of unsold housing units directly from developers, and the scale of the program is only increasing.
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Gavekal Research
Louis Gave
Jul 04th 2017
Should Investors Chase Defense Stocks?
Aside from health care, the other “Trump trade” that has worked wonders since November 9 has been defense stocks. After all, with the Dow Jones sector index up some 22% in the period, what’s not to like? On taking office, Donald Trump cranked up military spending, and during his state visit to Saudi Arabia in May secured weapon sales worth US$110bn. On Friday—just hours before Xi Jinping took the stage in Hong Kong to celebrate the 20th...
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Gavekal Research
Arthur Kroeber
Jul 03rd 2017
Trump And Xi: The End Of The Bromance?
Last week Washington soured its relationship with China by imposing sanctions on some Chinese companies and individuals that do business with North Korea and announcing a big arms sale package for Taiwan. Rumors also continue to percolate that Trump is preparing for more aggressive trade action. Arthur discusses whether it is time to worry.
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Gavekal Research
Thomas Gatley, Long Chen
Jul 03rd 2017
Strategy Monthly: The China Markets Opportunity
The doors to China’s capital markets are opening wider, with MSCI adding A-shares to its indexes, and the Bond Connect program launching in Hong Kong. In this Strategy Monthly, Thomas Gatley and Chen Long explain how foreign investors should position themselves in Chinese bonds and equities in light of these new market-opening measures.
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Gavekal Research
Tom Miller
Jun 30th 2017
The Indian Summer
Tomorrow India will roll out its most important economic reform since the early 1990s. The Goods and Services Tax will transform the country’s 29 states, which run semi-autonomous fiscal systems, into a single market. Backed by strong fundamentals, Modi’s reform agenda is playing well with investors: MSCI India is up 19% this year, foreigners are piling into Indian bonds, and FDI is at record levels. Yet, look closer and a weaker economy emerges...
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Gavekal Dragonomics
Long Chen
Jun 30th 2017
Macro Update: Surviving The Financial Crackdown
In our latest quarterly chartbook, Chen Long assesses the effects of Chinese regulators’ surprising crackdown on the financial sector. Interbank rates and bond yields have jumped, but credit growth has slowed only modestly. While growth has clearly peaked and will slow further in the rest of 2017, a gradual slowdown still looks quite achievable.
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Gavekal Research
Tan Kai Xian
Jun 30th 2017
A Late-Cycle Signal From US Factories
Determining the exact extent of the US output gap at any point in time is immensely difficult, if not impossible. Earlier this month, KX suggested monitoring four indicators: the gap between actual unemployment and the “natural” rate; real corporate profits; profit margins, and the change of US CPI inflation. Today he adds another indicator to that list: the ratio of factory order backlogs to new orders. By this measure too, the US is running...
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Gavekal Research
Cedric Gemehl, Anatole Kaletsky
Jun 29th 2017
Draghi’s Two Ps And The Euro
When choosing three adjectives to describe the ECB’s evolving monetary policy stance, Mario Draghi this week alighted on confidence, persistence and prudence. Yet judging by the big reaction in currency and bond markets, traders ignored the two Ps and heard only about Draghi’s confidence in Europe’s strengthening recovery. Markets treated the speech as a unambiguous signal that the ECB is turning more hawkish.
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Gavekal Research
Charles Gave
Jun 29th 2017
When Central Bankers Attempt To Change Direction
In recent days , central bankers in the US and Europe have been signaling how much they want to end unconventional monetary policies and revert to a more normal monetary model that does not put asset prices at the heart of the system. It is a laudable aim. But, warns Charles in this piece, central bankers have seldom managed to transition from one monetary regime to another without causing convulsions in the financial markets. This time, the...
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Gavekal Research
Louis Gave
Jun 28th 2017
A Change In The Investment Environment?
A couple of weeks ago, Louis asked if the downside breakout in bond yields (touching 2.10%) could foster a stable investment environment. At the time he foresaw three possible scenarios. After yesterday's hawkish pronouncements by multiple central banks, he is not so sure and is focusing on a narrower range of possibilities which may herald a new investment environment.
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Gavekal Research
Will Denyer
Jun 27th 2017
Not Getting Paid To Take Credit Risk
When things cannot get any better, they rarely do. Credit spreads for both high-yield and investment-grade corporate bonds are back near lows last seen just before the onset of previous financial busts. Will the calm soon give way to another perfect storm? Worryingly, corporate fundamentals are already deteriorating.
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Gavekal Dragonomics
Yanmei Xie
Jun 27th 2017
Empty Promises Of SOE Reform
At the close of 2016, Xi Jinping’s government vowed to speed up economic reform, and declared “breakthroughs” would be made in overhauling state-owned enterprises. Half a year on, these bold claims have not been matched by actions. The numerous reform trials can give the impression of activity, but real change remains a distant prospect.
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Gavekal Research
Nick Andrews
Jun 26th 2017
Common Sense Prevails In Italy
The European Union authorities bowed to the inevitable yesterday. They agreed to let Rome spend as much as €17bn in Italian taxpayers’ cash to prevent losses among the senior bondholders and depositors in two Italian regional banks that the European Central Bank declared on Friday to be failing.
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Gavekal Research
Tan Kai Xian
Jun 26th 2017
Calm Sailing For A Reason
Those with a constructive view of quiescent asset markets say low volatility is justified by the stable economic situation. Others mutter of a looming “Minsky moment”. KX does not rule out a sharp rise in near-term volatility, but says the secular trend is down.
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Gavekal Research
Louis Gave
Jun 23rd 2017
Should Investors Chase Health Care Stocks?
Years ago, when Charles attempted to retire, my mother promptly decided that retirement was the “worst of both worlds”: more husband and less money. She quickly put the kibosh on the idea. The US government is a little more complicated to run than the Gave household, yet health care policy also offers a “worst of both worlds” outcome—profligate spending and rising bureaucracy (from government interference) and eye-watering prices (from the...
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Gavekal Research
Tom Holland
Jun 22nd 2017
Saudi, The Oil Price & Capital Markets
It says a lot about the dynamics currently at work in the oil market that the king of Saudi Arabia yesterday promoted his firebrand young son to crown prince, yet the price of oil still fell -2.7%. The question now is whether Saudi will double down on its current policies in a fresh attempt to goose up the oil price, whether Riyadh will be forced by its rapidly eroding finances to change direction entirely and devalue the riyal, much as Russia...
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Gavekal Research
Nick Andrews
Jun 22nd 2017
A Hard Road Ahead For Italy’s Banks
The eurozone’s rising tide is floating Italy’s boat. Earlier this month, the national statistics agency revised the country’s first quarter growth up from 0.2% on the previous quarter to 0.4%, marking nine consecutive quarters of economic expansion. This equals the longest stretch of continuous growth since the mid-1990s. What’s more, with unemployment down steeply to a five-year low of 11.1% in April and the composite PMI at a buoyant 55.2, the...
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Gavekal Research
Thomas Gatley
Jun 21st 2017
A Slow Motion Game Changer
After three years of teasing, MSCI has agreed to include Chinese domestically-listed stocks, or A-shares, in its main equity indexes. Yet, hopes that MSCI inclusion will quickly spur huge capital inflows and a sustained domestic bull market, are almost certainly wide of the mark.
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Gavekal Research
Nick Andrews
Jun 20th 2017
A British Rebalancing?
Last week the Bank of England left interest rates unchanged, but three out of eight policymakers voted for a hike. In the past any weakness in UK consumption has been met with a soothing monetary response. The fact that the consumer looks increasingly forlorn, yet the BoE is hanging tough suggests the game has changed.
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Gavekal Dragonomics
Rosealea Yao
Jun 20th 2017
The Central Pillar For Housing Sales
China’s housing market is proving quite resilient this year, with sales growth perking up in May. In this piece, Rosealea argues the current sales recovery is broad-based: growth is strong in both central and coastal provinces. While restrictions on speculative purchases are spreading to some smaller cities, this should have only a moderate impact.
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Gavekal Research
Cedric Gemehl
Jun 19th 2017
The French Reset
French voters have handed President Emmanuel Macron a clear parliamentary majority after his La République en Marche party yesterday secured an estimated 360 out of 577 seats. He will also get support from many of the 170 or so Republican and Socialist party deputies who were just elected. After a record low turnout, critics may question his moral authority, but there is no doubting that Macron is now the master of French politics. Hence, he is...
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Gavekal Research
Charles Gave
Jun 19th 2017
So We Are In Secular Stagnation...
Hand-wringing has reached new levels among economists over the somewhat nebulous concept of “secular stagnation”. Charles is not convinced by explanations which range from policymakers hitting practical limits of control, through to a technological dark age being encountered. He thinks there is a simpler answer for why some developed economies such as Germany and Canada have maintained a steady expansion, and others like France and the US have...
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Gavekal Research
Louis Gave
Jun 16th 2017
Keeping It Simple
Three prices have a disproportionate impact on global financial prices: the oil price, the price of the US dollar, and US interest rates. Often the rest is just noise. In the long term, it is shifts in these three prices that drive economic cycles and determine the performance of almost any investment strategy. Take this year as an example. The investment environment has been dominated by:
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Gavekal Dragonomics
Ernan Cui
Jun 15th 2017
The Retreat From Steady Employment
China’s troubled industrial sector shed 2.3mn jobs in 2016—but these losses were swamped by millions more new jobs created in services. The real issue in the labor market today is not how many jobs are being destroyed, but the quality of the jobs being created. Most new jobs are in small businesses that offer lower wages and less security.
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Gavekal Research
Will Denyer
Jun 15th 2017
The Fed's Balance Sheet Contraction
As universally expected, the Federal Reserve raised interest rates by another 25bp yesterday. It also published details about its plan to start shrinking its balance sheet before the end of this year. While this too was widely expected, there remain plenty of questions about how the markets will respond. With no precedents for the Fed’s impending move to contract its bloated balance sheet, no one can be entirely confident how the market will...
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Gavekal Research
Charles Gave
Jun 14th 2017
Small Caps, Big Caps And US Corporate Spreads
The performance of large-capitalization US stocks relative to small caps is sending an important signal about US corporate yield spreads. In this short piece, Charles decodes the message, and advises corporate bond investors to begin seeking safety in treasuries.
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Gavekal Research
Tan Kai Xian
Jun 13th 2017
Mind The (Output) Gap
The US economy is offering up conflicting signals. Recent manufacturing survey data has been soft, auto sales have slowed and the rate of job creation has markedly reduced. At the same time, inflation expectations have dipped after their bolt upwards earlier this year. Yet, redirect the gaze and the same US economy shows distinct signs of waddling towards a late cycle denouement with the labor market, in particular, looking tight. Put another...
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Gavekal Research
Anatole Kaletsky
Jun 12th 2017
May Day For Hard Brexit
After the Conservative government of UK prime minister Theresa May lost its parliamentary majority in last week's general election, Anatole argues that the "hard Brexit" strategy formerly pursued by May no longer looks politically viable. That means a Norwegian-style soft Brexit is more likely, which makes sterling assets look relatively attractive.
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Gavekal Research
Anatole Kaletsky, Louis Gave
Jun 12th 2017
Audio & Transcript — Gavekal Research June Call
Anatole Kaletsky responded to the British Conservative Party’s shock loss of their electoral majority by arguing that the UK is now likely to end up with a soft Brexit and may even end up rejoining the European Union. Louis Gave looked across recent market moves and argued that the case for emerging markets remains exceptionally strong.
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Gavekal Research
Neil Newman
Jun 09th 2017
Video: Breaking The Yen-Equity Link
Japanese equities recently touched a 17-year high in US dollar terms and perhaps more significantly, they appear to have decoupled from their usually tight inverse relationship with the yen. In this video interview Neil considers both cyclical and structural reasons for the apparent breakout and concludes that investors should not underweight a market that has plenty of tailwinds.
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Gavekal Research
Charles Gave
Jun 09th 2017
Back To Sanity In Japan
I know, or I believe I know, that over thelong term equity returns follow one thing only: corporate earnings. As an example, look at Japan. If I rebase both the Topix price index and corporate earnings to 100 in 1978, I find that today the market is at at 385, and earnings are at... 385. Spot on!
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Gavekal Research
Nick Andrews
Jun 09th 2017
Goldilocks Beds Down
Headline attention today is clearly focused on the car-crash general election result for UK prime minister Theresa May. At the time of writing, it was still unclear whether May would be able to form a viable government after the vote. Unsurprisingly, the uncertainty triggered a steep 1.6% sell-off in sterling (see Trading The UK Election).
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Gavekal Dragonomics
Hugh White, Agatha Kratz, Jude Blanchette, Simon Cartledge
Jun 08th 2017
CEQ: China In The Asia-Pacific
China is attempting to become Asia’s new leader. The high costs of confronting it mean that the US’s regional influence is likely to dwindle. But widespread distrust of China means that many countries will continue to prefer investment from the EU, US and Japan. This issue of China Economic Quarterly investigates China’s role in the Asia-Pacific.
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Gavekal Dragonomics
Arthur Kroeber
Jun 08th 2017
US-China Power Shift: Not So Fast
Do Donald Trump’s miscues ensure the eclipse of Pax Americana by a rising China? Not yet.
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Gavekal Dragonomics
Tom Miller
Jun 08th 2017
The Belt And Road To Leadership
China’s Belt and Road Initiative elicits widespread skepticism and concern, while the Regional Comprehensive Economic Partnership is often seen as a poor cousin of the aborted Trans-Pacific Partnership. But they are currently the only credible plans for greater Asian integration.
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Gavekal Dragonomics
Hugh White
Jun 08th 2017
After The Pivot, It’s Bye-Bye Asia
With the costs and risks of confronting China growing by the day, the most likely scenario for the Asia-Pacific is one of steadily dwindling US influence. This is good news for Beijing and its claim to regional leadership.
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Gavekal Dragonomics
Agatha Kratz
Jun 08th 2017
High-Speed Rail Blues
While China’s trade with Southeast Asia flourishes, a lack of experience has left its investment in the region lagging far behind. For now, Southeast Asian countries will continue to work with Japanese, EU and US institutions—regardless of how attractive China’s initial bids are.
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Gavekal Dragonomics
Long Chen
Jun 08th 2017
The Regulatory Storm
The past few months saw a flurry of regulatory measures to tackle risks in the financial system. Beijing is trying to avoid a credit crunch, but the effect on the economy will depend on how far these measures are implemented.
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Gavekal Dragonomics
Arthur Kroeber, Dan Wang
Jun 08th 2017
The Export Upgrade Challenge
Shifting China’s industrial production from low-margin assembly to high-value, technology-intensive goods has long been the Holy Grail for planners. Export data show a lot of progress, but also an enduringly high reliance on foreign components, technology and management.
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Gavekal Dragonomics
Jude Blanchette
Jun 08th 2017
Still Holding High Mao’s Banner
Within China’s increasingly restrictive political landscape, neo-Maoists continue to thrive. Tolerated for now as Xi’s ideological allies, they could turn into his fiercest opposition should he surprisingly uphold his Third Plenum pledge to give a “decisive role” to the market.
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Gavekal Dragonomics
Simon Cartledge
Jun 08th 2017
Whatever Happened To Hong Kong?
Its return to China was greeted with cautious optimism, but Hong Kong’s past 20 years have disappointed. Tepid growth amplified inequality and bred political dissatisfaction. What happened since 1997? And what can we expect for the future?
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Gavekal Dragonomics
Tom Miller
Jun 08th 2017
The East Is Rising … Isn’t It?
Will the Asia-Pacific region will shape global politics and economics in the 21st Century, as the West’s centuries-long domination of world affairs draws to a close, or will unseen threats in Asia, from economic stagnation to political unrest and growing military tensions, throw a spanner in the works? Tom Miller reviews two books that each present their case.
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Gavekal Research
Udith Sikand
Jun 08th 2017
EMs And A Chill Trade Wind
The Asian trade cycle, having perked up notably since mid-2016, shows worrying signs of rolling over. Korean export growth in May halved from a month earlier, while Taiwan has seen the same measure steadily slow since February. Today, China reported a reduction in export growth to single digit levels, while import demand growth for May fell to 15% YoY, compared to 38% in February. To an extent, this can all be explained by flattering base...
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Gavekal Research
Anatole Kaletsky
Jun 07th 2017
Trading The British Election
Anyone who claims to be confident about the outcome of tomorrow’s UK election is really just guessing, which is why we have advised against taking big positions in sterling assets—either long or short—before the exit polls are released. But from 10.01pm onwards, the currency markets could start to see major moves that are very tradeable in one direction or another. So for clients who got hooked on overnight currency trading after profitable (or...
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Gavekal Dragonomics
Rosealea Yao
Jun 07th 2017
The Iron Ore Slump Nears Its End
China’s iron ore price is now down by about a third from its peak in February. In this piece, Rosealea reassesses the market in light of this correction, and argues that the price is unlikely to stay substantially below US$60 per ton for long. That’s because domestic miners responding to low prices by cutting output, helping rebalance the market.
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Gavekal Research
Will Denyer
Jun 07th 2017
Policy & Productivity: How To Make America Great Again
A critical and much-debated question about the US economy is whether it is permanently stuck in a “new normal” of 2-2.5% annual growth—about a point below the 3.2% average growth rate in 1970-2000—or if it can regain its previous luster. Will assesses arguments from both the upbeat techno-optimists and the grizzled growth skeptics and updates his own view based on US policymaking in the age of Trump.
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Gavekal Research
Louis Gave
Jun 06th 2017
Figuring Out Where The Ball Will Be
Rugby players fall into one of two categories: the forwards, who typically go where the ball is (and in the process put their heads in places most sane people wouldn’t put their feet), and the backs, who try to go where the ball will be, which enables them to look good and keep their kit clean, but earns them the scorn of the forwards. Peter FitzSimons, the first Aussie to play for a French club (Brive), once remarked: “Come the revolution, the...
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Gavekal Research
Andrew Batson
Jun 05th 2017
What Is The Signal In The Renminbi’s Surprising Strength?
Over the past week and a half, the renminbi has appreciated 1.1% against the US dollar in the onshore market, and 1.5% offshore, where the PBOC has also engineered a spike in short-term interest rates. It seems China wants to send a signal about the renminbi, but markets are having trouble decoding what it is. Andrew outlines three possible strategies the central bank may be following.
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