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    Gavekal Research

    Why Not To Trust In Central Bankers

    More than ever investors are fixated with central bankers, whether it be the latest utterance of Janet Yellen or what Mario Draghi may announce later today. To my mind, there are bigger issues on the horizon.

    6
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    Gavekal Research

    Equities And The Euro

    It is likely that 2015 will be remembered as a strong year for eurozone equities. With only a few weeks of normal trading activity remaining, the MSCI EMU has delivered a solid 17% total return in local currency terms (the benchmark small and mid-cap index is up 24%). Still, we doubt that many investors will be celebrating a bumper year. The standard view was that the European Central Bank’s huge asset purchase program, which started in March,...

    0
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    Gavekal Research

    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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    Gavekal Research

    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?".

    0
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    Gavekal Research

    What Now For The Renminbi?

    It’s official: the IMF has confirmed that the renminbi will join the SDR currency basket. Now that China has achieved this goal, attention will turn to the renminbi’s exchange-rate outlook. The reality, however, is that SDR inclusion is largely irrelevant to the trajectory of the exchange rate; what happens to the US dollar will be the key.

    3
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    Gavekal Research

    When To Reduce The Volatility Of An Equity Portfolio

    Having worked as a money manager with mandates that allowed me the freedom to move at will between cash, bonds and equities, while still being measured against the world equity index, my key asset allocation decision was always when to reduce the portfolio’s volatility below that of the benchmark—and which tool to use in pursuit of this goal.

    0
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    Gavekal Dragonomics

    Bringing The World To China's Doorstep

    Chinese consumers love global brands, but hate their high prices. So well-off Chinese have often shopped for them abroad rather than pay inflated domestic prices. These days, though, Chinese consumers can import foreign goods over the internet at much lower prices. This trend will wreak havoc on middlemen, but will also create new opportunities.

    3
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    Gavekal Research

    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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    Gavekal Research

    Lament For A Vanished Middle East

    It is desperately saddening to see the terrified population of the Middle East fleeing for refuge towards a Europe that has utterly forgotten what the region looked like just a few decades ago. Yet nobody can hope to understand the disaster that is unfolding if he knows nothing of the events that shaped the modern Middle East.

    7
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    Gavekal Research

    Osborne’s Masterful Tack

    “Since 2010, no economy in the G7 has grown faster than Britain,” boasted George Osborne, the Chancellor of the Exchequer, presenting his autumn public spending review yesterday. Indeed it is true that, according to the latest estimates, GDP in both Britain and the US has increased by exactly the same number, 12.4%, since the first quarter of 2010.

    0
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    Gavekal Research

    Poverty Still Matters For Capitalists

    Since 2000 the median US household income has fallen by -7% in real terms as living standards have declined for the poorest members of American society. As Charles explains in this follow-up to his July 2014 paper, Poverty Matters For Capitalists, this worsening impoverishment has been inflicted largely by monetary policy mistakes, and threatens to drag the entire US economy into recession.

    7
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    Gavekal Research

    The Squeeze On US Profits

    Forget yesterday’s upward revision in US third quarter GDP growth from 1.5% to 2.1%. The real news was the release of top-down domestic corporate profit data—and it was much less encouraging. Here is what we learned:

    4
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    Gavekal Dragonomics

    A Less Distorted Mirror

    China’s stock markets reflect its economy as in a funhouse mirror: consumer and service sectors shrink to midget proportions, while finance and industry swell to giant size. The process of correcting these distortions speeded up in 2015 as industry slumped and services held steady. Progress will likely slow some in 2016, but the trend is clear.

    0
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    Gavekal Research

    Financing Europe’s Soaring Defense Costs

    François Hollande has rightly made it clear that France is at war (see France Under Attack). And wars cost a lot of money, as keeping an army in the field and airplanes in the air is expensive. There is a reason for the military adage “amateurs talk strategy; professionals talk logistics”. Moreover, fighting a terrorist organization involves both military costs and large domestic security costs. As such, the increase in security spending for the...

    0
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    Gavekal Research

    Stepping Away From The Abyss

    Clients sometimes complain that while we like to cloak ourselves in a “free-market” mantle, we are seldom fussed that China’s growth model is government-controlled by acommunist party that jealously guards its political powers (see A Happy Apologist). To be fair, Gavekal writers have recently bemoaned the slowing pace of reform in China (see A Plan for Less Planning?), but over the years we have tended to justify our constructive view by arguing...

    0
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    Gavekal Research

    Stick With The Dollar

    With the US set to raise interest rates and the eurozone more likely to ease policy, a long-dollar, short-euro position has been an obvious bet. Yet as the DXY inches closer to its March high, the question is whether a breakout is feasible. After all, the long US dollar trade looks crowded, with the world and its dog convinced that Janet Yellen and Mario Draghi will soon be travelling quite different monetary pathways. Such a comfortable...

    1
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    Gavekal Research

    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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    Gavekal Research

    A Britisher At Heart

    On Monday, Anatole argued that a British exit from the European Union would rank as a foreign policy disaster of historic proportions (see Brexit: A Blunder To Rank With The Boston Tea Party). This is not the first time I have disagreed with my partner on UK matters, and it will likely not be the last. In recent years Anatole worried about the impact of public spending cuts being pushed through by the Conservative-led coalition government; I...

    4
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    Gavekal Dragonomics

    Breaking Down The Services Cycle

    With China’s industrial sector in a deep slowdown, the services sector has been generating most of the good economic news in 2015. But there is no economic law that makes services immune to the business cycle. Services have their own ups and downs, and while that cycle has helped growth this year, it will provide less of a boost in 2016.

    1
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    Gavekal Research

    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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