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Gavekal Research
Cedric Gemehl
May 23rd 2019
Don't Bet On A German Fiscal Boost
On Wednesday the OECD added its voice to the chorus calling on the German finance ministry to open its fiscal tap and juice up economic growth with additional public spending on investment. Yet although the outlook for external demand is darkening, investors should not hold their breath for a sizable fiscal boost.
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Gavekal Dragonomics
Ernan Cui
May 23rd 2019
The Household Debt Service Burden
The rapid rise in China’s household debt has become a major concern for markets and policymakers. While most analysis looks at the household debt-to-GDP ratio, in this report Ernan calculates the household debt service ratio for a better angle on the problem. She finds that the debt burden on household budgets will keep increasing in 2019.
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Gavekal Research
Anatole Kaletsky
May 22nd 2019
May's Last Stand
When something unexpected happens and the market moves against you, it is usually best to cut your losses. But sometimes it is worth indulging the contrarian instinct. This month most of the pound's gains in the first quarter have been given up and sterling’s position looks dicey. But sterling bulls should not cut their losses. In fact, they should consider doubling down.
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Gavekal Research
Charles Gave
May 21st 2019
The Trouble Unseen
The world and its dog are suddenly worried that the growing US-China trade war may be the event that sparks the next panic. Might I suggest that the looming iceberg that could yet sink the good ship Global Growth may not lie in the obvious spot where spy glasses are focused.The real menace may still lie in the European banking system.
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Gavekal Dragonomics
Dan Wang
May 21st 2019
The Fate Of Huawei
The US government has China’s most prominent technology firm in a stranglehold. The question now is whether the US government continues to strangle Huawei until it goes out of business, or chooses to eventually stop squeezing and allow a weakened Huawei to keep operating under some limitations. In this report, Dan explores the possible scenarios.
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Gavekal Research
Cedric Gemehl
May 21st 2019
Everything You Wanted To Know About EU Politics
This week EU voters will elect representatives to a legislature that has often been dubbed a snooze fest. That has changed as populist-nationalist parties challenge the established organs of government. Cedric gives a detailed explanation of how politics works at a supra-national level in Europe, and how current tensions are changing the key institutions.
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Gavekal Research
Arthur Kroeber
May 20th 2019
Trump's Trade War Calculus
Keeping track of all the pieces of the US-China confrontation has become a full-time job. But the chaos and uncertainty of the past couple of weeks has begun to resolve itself into fairly clear patterns, even if the outcomes remain in doubt. Three main conclusions emerge from last week’s activity, and none of them are particularly reassuring.
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Gavekal Research
Tom Holland
May 17th 2019
Oil Market 1, Commentariat 0
As if the macroeconomic impact of a full-blown US-China trade war weren’t enough to worry about, over the last couple of weeks investors have also had to contemplate the risk of a real shooting war between the US and Iran, the effect it would have on the price of oil and the threat that would pose to a fragile global economy and jittery world markets.
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Gavekal Dragonomics
Long Chen
May 17th 2019
Video: How Much Downside For The Renminbi?
Since the US slapped fresh tariffs on Chinese exports a week ago, the renminbi has fallen, but by less than when the first round of tariffs were imposed last year. In this video interview, Chen Long discusses why that is, and how far China’s currency is likely to fall if things get worse.
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Gavekal Dragonomics
Andrew Batson
May 16th 2019
Stabilization At Risk
China’s economic data for April came in rather worse than the too-good-to-be-true indicators for March. As Andrew explains in this report, the April figures do not actually show a serious deterioration, and property is still holding up. But the stabilization in growth is now under threat from a more protracted trade conflict with the US.
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Gavekal Research
Nick Andrews
May 16th 2019
One Reduction Of Risk At The Margin
By putting off for six months its decision whether or not to impose a 25% tariff on all imports of passenger cars and car parts on national security grounds, the US administration bowed to expedience on Wednesday. In theory, the threat of auto tariffs remains on the table. In practice, the six month delay has robbed the proposal of much of its credibility.
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Gavekal Research
Udith Sikand, Edward Hookey
May 16th 2019
A Less Than Bonza Outlook
Australian politics has been a psychodrama for more than a decade, but for investors it barely mattered. The country has grown rich on selling ever more rocks to China and following smart, evidenced-based policy at home. That, however, looks to be changing as this weekend voters go to the polls after an election campaign that may come to be seen as a watershed.
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Gavekal Research
Charles Gave
May 15th 2019
Monopsonies, Protectionism And ROIC
It is extremely unfashionable to say so, but Donald Trump’s campaign to bring manufacturing industries back to the US by slapping tariffs on goods imports may not be quite the act of economic illiteracy most professional practitioners of the dismal science would have you believe. On the contrary, it could well be positive for US growth, living standards, and market outperformance.
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Gavekal Research
Louis Gave
May 15th 2019
The Case Of The Missing Inflation: The Changing Demographic Picture
Demography, it is said, is destiny. If so, then the finger of destiny may be pointing at a more inflationary future for the world economy. Louis reviews the slow shifts in demographic profile which govern trends in consumption and savings, and so propel the forces of inflation and deflation over the very long term.
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Gavekal Research
Long Chen
May 14th 2019
Beijing's Most Effective Trade Tool
In response to the escalation of the US-China trade war, Chinese policymakers are likely to step up their easing measures. This should help support domestic demand. But as Chen Long argues in this piece, the effect of policy easing, coupled with the impact of increased tariffs on China’s exports, will add to downward pressure on the renminbi.
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Gavekal Research
Arthur Kroeber
May 13th 2019
The Trade War Story Lines Harden
The US-China trade war has three potential outcomes. First, we could see a step back from brinksmanship and a deal in the next few weeks. Second, the two sides could dig in for more protracted negotiations. Third, the talks could break down and the trade war become permanent. With the probability of each outcome less than 50%, the only certainty is continued uncertainty.
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Gavekal Research
Anatole Kaletsky
May 13th 2019
Goldilocks And The Ten Bears (2019)
Anatole returns to the framework he set out in November 2017, examining the 10 key risks that could threaten global markets over the next 18 months and which investors should monitor closely—and he comes to some surprising conclusions about the central locus of global dangers.
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Gavekal Research
Louis Gave
May 10th 2019
The Motivation Behind Trump's Tweets
Since becoming president, Donald Trump has made it clear that he sees the S&P 500 as the real-time judge of his White House performance. Why, then, did Trump on Sunday send a tweet alleging that China had backed off from agreed positions in the US-China trade talks, and in so doing rattle a market priced for Goldilocks?
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Gavekal Research
Nick Andrews
May 10th 2019
Video: Is The Worst Over For The Eurozone?
Eurozone economic growth was modest in the first quarter of 2019, but it was still stronger than most economists had expected, with Germany avoiding a recession and Italy returning to growth. Meanwhile eurozone equity markets are up a respectable 13% over the year to date. Does this mean Europe is emerging from its economic soft patch?
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Gavekal Research
Tan Kai Xian
May 09th 2019
A Better Time For A Trade War
For equity investors, there is a never a good time to have a trade war. Nevertheless, if there must be one, the US stock market is now better placed to ride out a US-China tariff conflict than it was a year ago. That’s just as well. Chinese negotiator Liu He is set to arrive in Washington on Thursday for the latest round of trade talks which are going down to the wire.
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Gavekal Dragonomics
Lance Noble
May 09th 2019
Where Can Industrial Policy Work?
The Trump administration’s trade war has targeted China’s ambitious industrial policy, which China clearly has no intention to abandon. But will that industrial policy work? In this report, Lance explains his eight-point system for evaluating industrial policy’s odds of success, and tests it on electric vehicles, airplanes and pharmaceuticals.
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Gavekal Research
Charles Gave, Louis Gave
May 09th 2019
Audio & Transcript — Gavekal Research Call May 2019
Investor concern this week is centered on the US-China trade negotiations, but Charles Gave and Louis Gave wonder if investors aren’t missing another risk, namely, that the world might be shifting from a deflationary to an inflationary environment. In our monthly Conference Call yesterday, they outlined arguments for why this may be the case, and what it would mean for portfolio construction.
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Gavekal Research
Udith Sikand
May 08th 2019
Gauging The EM Collateral Damage
After Donald Trump’s weekend tweets, trade war is once again the center of attention for investors. The perceived probability of an escalation has risen sharply, and risk assets have sold off. Asian emerging markets have not escaped the rout, but it would be a mistake for investors to treat all Asian emerging markets equally.
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Gavekal Research
Louis Gave
May 08th 2019
The Case Of The Missing Inflation: Chinese Foreign Exchange Policy
As the US-China trade talks enter a critical phase, all eyes are on a new meeting of officials and whether it can can break the log jam. Louis, however, wonders if investors may be missing a trick by purely focusing on issues of market access, enforcement and tariffs. Adjustments in the value of the renminbi may yet be the real story of any deal.
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Gavekal Research
Louis Gave
May 08th 2019
Series: The Case Of The Missing Inflation
As the Federal Reserve launched the second round of its quantitative easing, the fear was that the Fed’s unorthodox monetary policy would ignite a new round of inflation throughout the world, with dramatic effects on asset prices. After all, most asset prices are driven by the interaction of inflation and economic activity. But inflation failed to materialize, and even fell from more than 3% globally in 2010 to negative territory in 2015. These...
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Gavekal Research
Charles Gave
May 07th 2019
A Reverse-Engineered US Inflation Indicator
In the Strategy Monthly I presented a fairly simple rule to show whether an economy is in the top, or the bottom half of the Four Quadrants framework. To show that the rule worked, I laid out relationships between the "rule" and a range of other useful indications of a price environment shift. Here, I capture all of these relationships in a simple, revised decision rule.
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Gavekal Dragonomics
Andrew Batson
May 07th 2019
Xi's Pivot To The Private Sector
The improved economic outlook for China in 2019 owes a lot to an effective stimulus and progress toward a trade deal. But it has also been driven by top leader Xi Jinping’s surprising political pivot from champion of state enterprises to patron of the private sector. In this piece, Andrew examines how sincere Xi’s new stance will prove to be.
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Gavekal Research
Arthur Kroeber
May 06th 2019
Trade Deal Delayed, Not Yet Denied
Any trade negotiator will tell you that the last yard is always the hardest. That is obvious now in the US-China trade talks, which were thrown into doubt by Donald Trump’s weekend tweets threatening to hike tariffs on US$200bn of imports from China from 10% to 25% this Friday if a deal is not done.
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Gavekal Research
Tan Kai Xian, Will Denyer
May 06th 2019
How Long Can Productivity Contain US Inflation Pressure?
April’s US payrolls report showed job creation was stronger than expected and unemployment lower, yet wage pressures were softer. This suggests weaker unit labor costs will allow the Fed to remain dovish, at least for now. All else being equal this is positive for equity investors. The question is: How long can this benign combination persist?
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Gavekal Research
Charles Gave
May 03rd 2019
Inflation And The Gold Fix
When the market rate of interest for a long period has been held abnormally low relative to returns on invested capital, financial engineering takes off with huge debt issuance, making a chaotic denouement of the credit cycle unavoidable. To prepare for such an event, an equity portfolio hedged with gold can reduce volatility and raise returns.
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Gavekal Research
Udith Sikand
May 03rd 2019
Video: India’s Acceleration Phenomenon Explained
Multinationals and investors are looking to India to deliver the next great surge in sales of consumer goods and services. But demand will not expand in a linear fashion as GDP increases. The acceleration phenomenon dictates that sales of different products and services will grow in leaps and bounds as cohorts of new consumers surpass key income thresholds.
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Gavekal Research
Louis Gave
May 03rd 2019
Q&A On The Hong Kong Dollar Peg
The recent publication of a letter on the future of the Hong Kong dollar peg by Gavekal’s good friend Kyle Bass has triggered a flood of questions on the topic from clients. Now, Louis admits that there may be some home bias to this conviction that the Hong Kong dollar peg is not under threat. But in this paper, he sets out his answers.
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Gavekal Research
Nick Andrews
May 02nd 2019
The Message In Eurozone Money
The advanced estimate of first quarter eurozone GDP released on Tuesday came as a pleasant surprise. Growth came in stronger than generally expected, while Italy emerged from recession. With the MSCI EMU equity index up almost 17% YTD in local currency terms, the question is whether growth can be sustained over the coming quarters.
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Gavekal Research
Charles Gave
May 02nd 2019
Strategy Monthly: The Inflation Shift And Portfolio Construction
Despite inflation remaining muted, Wednesday saw the Federal Reserve stand pat on interest rates. Having switched to an overly dovish stance early this year, Fed Chairman Jay Powell remains wary of changing tack and easing policy as he worries about inflationary pressure bubbling up from an economy that looks to be fully occupied. For his part, Charles is less nuanced and believes the US will shortly flip over into an environment where inflation...
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Gavekal Research
Udith Sikand
May 01st 2019
Look Through The Trade Data
After rallying 10% in 1Q19, emerging market equities have hit an air pocket as investors worry about global growth. Given the link between EM profitability and global trade, data showing that activity shrank in both volume and value terms in the three months to February has raised concerns. It hasn’t helped that the Washington side of the US-China trade talks has amped up “no deal” rhetoric in what is slated to be the final run-in of the...
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Gavekal Dragonomics
Tom Miller
May 01st 2019
Struggling To Reform The Belt And Road
China’s much-criticized Belt and Road Initiative will become “open, green and clean,” Xi Jinping pledged last week. Do these new promises mean an end to the debt traps, kickbacks and white elephants that the infrastructure spree has been accused of fostering? In this piece, Tom argues Beijing will struggle to fundamentally reform the initiative.
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Gavekal Research
Thomas Gatley
Apr 30th 2019
The World's Biggest Bull Loses Steam
China’s equity bull market has lost steam in the last 10 days after the Politburo adopted a less supportive tone following stronger than expected economic data in March. Even before the announcement, market ebullience had moderated. This is positive for China's stock market development, since it reduces the risk of an over-muscular regulatory reaction.
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Gavekal Research
Will Denyer, Tan Kai Xian
Apr 29th 2019
Managing Today’s Biggest Risk
The US first quarter GDP data released on Friday proved consistent with the picture of slower—but still positive—growth through 2019, and a continuation of the Goldilocks tailwind for asset markets. But after a strong run-up in equities this year, it might be time to ask what the greatest risk is to the current environment, and how to position for it.
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Gavekal Research
Louis Gave
Apr 29th 2019
The Case Of The Missing Inflation: US Fiscal Policy
The US seems set to run huge fiscal deficits for as far as the eye can see, and it is not clear who is going to fund this indulgence. In the fourth instalment of his “missing inflation” investigation Louis considers the options available to the US Treasury and concludes that hard funding choices will likely be ducked by whoever wins the 2020 election.
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Gavekal Research
Long Chen
Apr 26th 2019
The Least Ugly Duckling
In a year marked by unexpected US dollar strength, the renminbi is one of the few major currencies to be up against the dollar. The reason is simple enough: the resumption of trade talks between the US and China. Yet although a trade pact is now substantially priced in, there are reasons to believe the renminbi has further upside potential.
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Gavekal Dragonomics
Long Chen
Apr 26th 2019
Video: Is The Worst Behind Us?
At our seminar in Shanghai, Chen Long presented the outlook for China’s economy and markets. Crucially, the credit cycle appears to have bottomed out, and credit growth should accelerate towards the end of the year. He expects the overall economy to follow suit. He also covered the outlook for capital markets, equities and the renminbi.
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Gavekal Research
Louis Gave
Apr 26th 2019
The Case Of The Missing Inflation: Chinese Monetary Policy
China’s response to the Fed’s QEII program in 2010 was to tighten monetary policy, as it feared a spill-over effect into inflation. Since that point China has seen credit growth progressively slow, making it an inhibitor to any global rebound in inflation. This orientation by China is changing as the focus of policy shifts away from crimping the shadow finance sector.
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Gavekal Research
Anatole Kaletsky
Apr 25th 2019
Why The Bulls Are Back In Charge
Now that the S&P 500 has hit a new all-time high and other stock markets have recovered most of the steep losses they suffered last summer, it seems a lifetime since the financial panics of 2018. Investors who bought the dip have enjoyed Wall Street’s strongest quarterly performance in this bull market. After being so well rewarded, how should bullish investors who kept the faith now respond?
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Gavekal Dragonomics
Rosealea Yao
Apr 25th 2019
The Property Cycle Perks Up
China’s property market data has been surprising on the upside. Thanks to easier credit and looser administrative restrictions, sales volumes picked up in March and prices rose. In this paper, Rosealea examines whether the upturn can last, and assesses what it means for land sales, construction activity, materials prices and the broader economy.
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Gavekal Research
Louis Gave
Apr 24th 2019
How Contagious Is The Health Care Downturn?
On paper, this should have been a good year for health care stocks: global growth has disappointed, long term interest rates have fallen, the US yield curve for a brief while was inverted and a looming US-China trade deal should see China buy lots of health care gear and drugs from the US. Yet, even though the stars aligned, health care has been the worst performing major US equity sector this year. Notwithstanding a bounce yesterday, the sector...
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Gavekal Research
Cedric Gemehl
Apr 24th 2019
A Fire-Tested Macron
Tomorrow will see Emmanuel Macron deliver the big national address that got upended by the Notre Dame inferno on April 15. His speech will outline a mix of tax breaks, constitutional modernizations and symbolic grand gestures. The broad story, however, is that the effort to reform France remains broadly on track.
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Gavekal Research
Louis Gave
Apr 24th 2019
Series: The Kitsune Market
The Kitsune, the mythical Japanese fox which portends a change of fortune, has nine tails. Inspired by the unnatural conditions in markets, Louis has identified nine tail risks which could upend the investment world over the short to medium term.
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Gavekal Research
Tom Holland
Apr 23rd 2019
Iran Waivers And The Oil Price Spike
US Secretary of State Mike Pompeo has announced that the US will not roll over waivers on its sanctions on Iranian oil exports when they expire in May. The question for investors is this: If Washington does make good on its threat, to what extent are other oil producers able and willing to increase output in order to make up any supply shortfall in global markets?
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Gavekal Research
Louis Gave
Apr 23rd 2019
The Case Of The Missing Inflation: Energy’s Impact
When the Fed launched QE2 in 2010, there was widespread fear that a great inflation beckoned. It has not exactly worked out that way. Louis considers the role energy played in a decade of becalmed US consumer prices. Yet, with oil prices again rising, he asks whether the market has grown complacent in its analysis of the relationship between oil and inflation.
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Gavekal Research
Louis Gave
Apr 18th 2019
The Case Of The Missing Inflation
As the Federal Reserve launched the second round of its quantitative easing, the fear was that the unorthodox monetary policy would ignite a new round of inflation—even hyper-inflation—throughout the world, with dramatic effects on asset prices. But inflation failed to materialize, and now nobody seems to be worried about it anymore.
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