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E.g., 06-12-2019
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    Gavekal Research

    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.

    3
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    Gavekal Research

    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

    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

    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

    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

    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

    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

    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

    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

    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

    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

    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

    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

    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

    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

    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

    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

    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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    Gavekal Research

    Video: India's Hard-To-Call Election

    India’s cacophonous exercise in democracy is well underway and polling suggests there is only a 50% chance of a Narendra Modi-led BJP holding onto power. Tom dives into the details of why the “bear-hugging” reformer has electoral problems this time around. Tom also considers the likely outcome of the election for Indian asset markets.

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    Gavekal Research

    Modi And The Markets

    Indian markets are pricing in a victory by the ruling BJP in this year’s general election, a six-week process of mindboggling complexity that started on April 11. But while this will be the most likely single outcome when results are announced on May 23, nothing is a foregone conclusion under India’s unpredictable first-past-the-post system.

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    Gavekal Research

    US Financial Asset Valuations Stretched Every Which Way

    Charles dusts off his equity and bond valuation models for the US and is disturbed to see that for only the fourth time since the mid-1980s both asset classes are simultaneously overvalued. In this piece, he asks: what gives?

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    Gavekal Dragonomics

    Stabilization Confirmed

    The raft of economic data released by China on Wednesday morning suggests the world’s second largest economy is proving more responsive than expected to the authorities’ supportive policy measures. The question is no longer whether the government will hit its 2019 growth target, but whether the apparent success will make Beijing halt its easing.

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    Gavekal Research

    The Populist Challenge In Indonesia

    These are populist times. After the elections of Duterte in the Philippines, Trump in the US, Bolsonaro in Brazil, and the return to power last year of Mahathir Mohamad in Malaysia, investors would do well to take note of the last minute opinion poll gains made by another rabble-rousing populist seeking election to high office in Indonesia.

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    Gavekal Dragonomics

    An Epidemic That Can No Longer Be Denied

    The world’s deadliest pig disease is now established in the world’s largest pork market. The spread of African swine fever in China has been more severe than the government has admitted, and as a result pork prices are spiking and imports are surging. But as Ernan argues in this report, the impact of this epidemic is still only in its early stages.

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    Gavekal Research

    Inflation Is The Real Risk

    Happy days seem to be here again as risk assets soar on a dovish Federal Reserve and better growth outlook. Yet, investors should take note. The Fed has three official mandates; namely, to keep inflation low and stable, keep unemployment down, and keep interest rates low and stable. Yet among those “equals”, the first is thought to be bearing down on inflation.

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    Gavekal Research

    Europe's Cruel Summer

    The eurozone is rapidly becoming the Errol Flynn of global economies: it just never fails to disappoint. From weak German PMIs, through falling French industrial production, to Italy slipping back into recession, it is hard to think of a single European data point over the past 12 months that gave any reason for cheer. Will things get better over the coming months?

    0
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    Gavekal Research

    Video: Where Now For EU-China Relations?

    The annual EU-China summit concluded this week with usual diplomatic platitudes about deepening partnerships and strengthening cooperation. But the meeting took place against a backdrop of heightened tensions, after the EU declared China a “systemic rival” and with many European politicians highly critical of China’s economic nationalism.

    0
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    Gavekal Research

    The End Of The Smartphone S-Curve

    Smartphones are a maturing industry. Sales in China, the US, Europe and Japan are declining, and demand growth in India and Africa is not fast enough to drive a new surge in global sales. The industry is hoping that 5G and foldable phones will trigger a fresh upgrade cycle. But neither will drive a significant increase of sales in the near term.

    0
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    Gavekal Research

    Brextension And The Gilt-Edged Opportunity

    The latest act of the Brexit tragicomedy has played as expected—and market reactions should follow, as the risk premium on sterling and UK assets is substantially reduced. The six and a half months remaining between now and the new Brexit deadline is plenty of time for Britain to decide between the three possible outcomes I have repeatedly discussed.

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    Gavekal Dragonomics

    Market Access Widens, On China's Terms

    Over the last two years, China has announced a series of steps intended to open market access for foreign businesses and ease its inward investment restrictions. In this paper, Lance examines these reforms and assess just how far they go towards leveling the playing field for foreign companies operating and investing in China.

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    Gavekal Research

    A New Look At The Housing Market

    When the US slides into recession, it generally does so because of a contraction in investment, either in the corporate sector or in the housing market. Today, returns on capital invested in housing exceed the cost of capital, signalling a positive outlook for US residential investment, construction, house prices, and the shares of homebuilders.

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    Gavekal Research

    Hong Kong Seminar — April 2019

    Louis Gave examined the reasons for equity markets' good performance amid a global trade slowdown; Thomas Gatley assessed the state of the Chinese economy and whether the current Chinese equity bull market still has legs; Udith Sikand reckoned it is time to be positive on emerging markets, especially EM Asia.

    0
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    Gavekal Research

    Europe's China Syndrome

    Chinese premier Li Keqiang is in Brussels on Tuesday for the 21st EU-China summit, and the talks are likely to be testy. After much dithering and in response to much pressure from Washington, the EU has begun to take a more hardline posture towards China. The core EU countries share many of the concerns that motivate the US trade war with China.

    0
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    Gavekal Dragonomics

    Don't Believe The 5G Hype

    5G mobile is the technology of the future, and the US and China are now in a life-or-death struggle to dominate it. That anyway is the story used to justify the US government’s campaign against Huawei—but as Dan argues in this piece, this is mostly alarmism disconnected from reality. It’s best not to get caught up in the politicized hype about 5G.

    1
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    Gavekal Research

    And The Brexit Winner Is...

    With the Brexit deadline in the rear view mirror, Britain's leave voters have are left with the impression that they have been taken for a ride by the UK’s political class, and in particular by their representatives in parliament. So who is the real sovereign power in the UK? The people or parliament? Charles sees three possible outcomes.

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    Gavekal Research

    Europe's Export Problem

    Europe is the world’s most export-dependent big economic region. In such a precious position, the effect of external weakness can be debilitating, as shown by the eurozone manufacturing PMI having just fallen to its lowest in nearly six years at 47.5. The question is whether any respite can be found in overseas markets.

    0
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    Gavekal Dragonomics

    Video: Chinese Property Is Slowing, Not Collapsing

    Home sales in China fell by 3.6% in the first two months of 2019. This, however, was better than expected considering that this upcycle is now four years old. Lower mortgage rates and supportive policies by local governments should prop up demand, and Rosealea expects overall housing sales to decline a modest 2% for the year.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call April 2019

    In yesterday’s Gavekal Research Conference Call, Will Denyer and Udith Sikand addressed the changing US dollar liquidity environment, and its impact on markets.

    0
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    Gavekal Research

    Last Lap For China's Bond Rally

    Starting from April, Chinese government and policy bank bonds are included in the Bloomberg Barclays Global Aggregate bond index. But index inclusion, while an important landmark, may not be the best guide to market timing. After a bull run that has lasted since the beginning of 2018, China’s bond market rally looks to be nearing an end.

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    Gavekal Research

    Auf Wiedersehen, German Competitiveness

    Behind the factors that have caused Germany’s factory slowdown, deeper structural trends are eroding the competitiveness of German industry. The gains Germany made by deploying labor more effectively since the late 1990s have now run out, and that there are few signs Germany is well positioned to deploy capital more efficiently in the future.

    4
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    Gavekal Research

    Play A Longer US Cycle With Small Caps

    After a wobble late last year, the US economy looks to be stabilizing. The Atlanta Fed has revised up its estimate for 1Q19 GDP growth to 2.1%, while more timely indicators such as mortgage applications, PMI readings and durable goods orders indicate a steadying of the ship.The question is how to play this development.

    0
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    Gavekal Research

    London Seminar — March 2019

    Cedric Gemehl examined the possibility of a European rebound; Charles Gave argued the world is splitting into three distinct monetary zones; Tom Miller presented on the state of the US-China trade talks and the health of the Chinese economy; Anatole Kaletsky examined the risks to the bull market, and arrived at a bullish conclusion.

    0
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    Gavekal Research

    Good News For Goldilocks

    Last Thursday, with the price of oil approaching a four-and-a-half month high, Donald Trump took to Twitter. “Price of Oil getting too high.” Trump’s tweet had little effect, with Brent crude hitting US$69/bbl on Monday. Prices are likely to continue to push higher over the coming months towards 2018's highs—a troubling prospect.

    0
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    Gavekal Dragonomics

    A User's Guide To The Chinese Stock Market

    China’s onshore equity markets are now large and accessible enough that they can no longer be ignored by foreign investors—but idiosyncratic enough that they are hard to understand. This in-depth DeepChina report explains the fundamentals: What is there to invest in? Who owns the market? How can foreigners invest? How is the market regulated?

    0
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    Gavekal Research

    A Tactical Opportunity In Turkey

    Turkey has long been a market to steer well clear of, with investment opportunities poisoned by toxic politics and an ever-depreciating local currency. However, with the US Federal Reserve adopting a more dovish stance and following the weekend’s municipal elections, Turkish lira assets may now offer an attractive tactical opportunity.

    1
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    Gavekal Research

    Strategy Monthly: A New Liquidity Environment

    The prospect of easier liquidity conditions helped make 1Q19 one of the best ever quarters for US equities. Confirmation of the Federal Reserve’s newly dovish policy stance means that US equities should continue to do well through 2019. Other big winners in this environment may be equities in northeast Asian emerging markets that do not rely on Chinese commodity demand.

    0
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    Gavekal Research

    A Week Is A Long Time

    Harold Wilson, the former British prime minister’s, quip that “a week is a long time in politics” has become an over-used cliche. Still, in the last week, there has been good reason to dust it off.

    1
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    Gavekal Research

    Beyond The Yield Curve Inversion

    The current yield curve inversion and softness in growth data are curious developments, given that the four prices that matter most for the global economy—long bond yields, corporate credit spreads, the oil price, and the value of the US dollar—are all relatively favorable. Louis and Charles weigh five different explanations for what may be going on—from bullish to highly bearish—and examine the investment implications.

    2
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    Gavekal Research

    Among EMs, Favor North Asia

    With their high beta to global growth, emerging markets seldom outperform when investors begin to get nervous about the health of the global economy. So it is no surprise that the risk-off move of the last week has seen the Brazilian real and Argentinian peso each sold off by more than -5% against the US dollar, while the Turkish lira has been propped up only by a regulatory squeeze on liquidity. But the jitters have not affected all emerging...

    0
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    Gavekal Dragonomics

    Macro Update: Is The Worst Over?

    China has gotten off to a good start in 2019, with a stock market rally and some encouraging datapoints. In this chartbook, Chen Long surveys the economic and market outlook to determine if the worst is really over. Credit growth and infrastructure are picking up, but property, consumption and industrial profits have not bottomed just yet.

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