E.g., 21-10-2021
E.g., 21-10-2021
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    Gavekal Dragonomics

    What Strategic Competition Looks Like

    Last week’s diplomatic meeting between China and the US was marked by harsh rhetoric as both sides used the event to signal toughness to their home audiences. In this report, Arthur and Dan outline what policy tools Beijing and Washington have at their disposal and why the Biden administration is struggling to articulate a clear China strategy.

    1
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    Gavekal Research

    Weak Links No Longer

    Once upon a time, a steep rise in US yields coupled with capital outflows—like those we’ve seen in recent weeks—would have led to intense financial stresses in Asian emerging markets. Weak-link economies with fragile fiscal positions and precarious external balances would have been vulnerable to abrupt sell-offs and destabilizing currency depreciation. As sentiment swung risk-off, investors would have gotten badly trampled in the rush for the...

    0
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    Gavekal Dragonomics

    Webinar: Making Sense Of China’s Grand Plans

    The annual session of China's National People's Congress has wrapped up with the approval of a new five-year plan, a sweeping document that promises not only technological self-sufficiency but a different style of economic management in coming years. In this webinar, our China experts unpacked what these grand promises really mean, and also discussed the substantial recent correction in Chinese equities and where markets are headed...

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    Gavekal Research

    Financial Manias: The Electric Car Craze

    Almost wherever you look today, there are bubbles: in SPACs, in crypto, and in electric vehicles. In this report, the first of a series on today’s financial manias, Louis reviews Gavekal’s tried and tested framework for analyzing bubbles, and applies it to today’s mania for electric vehicles. He concludes that the electric car bubble is unique in history, and that the prognosis for many investors in the sector is less than encouraging.

    17
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    Gavekal Research

    Markets After The Fed

    The Federal Reserve saw no need to ease monetary policy any further at its March meeting which concluded Wednesday. That’s no surprise. Policy is already extremely easy, and growth and inflation are already looking up. Indeed, the Fed has pumped so much money into the system that the one policy change it felt compelled to make was to increase counterparty limits on its reverse repo facility from US$30bn to US$80bn in response to concerns that...

    0
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    Gavekal Research

    Video: Conflicting Forces In The Hong Kong Market

    The Hong Kong stock market started 2021 as one of the world’s best performing, gaining 14% in the first six weeks of the year. In the weeks since, however, Hong Kong-listed equities have given back half those gains as sentiment has soured. In this short video interview, Vincent weighs the opposing forces at work in the local market to assess how they are likely to play out in the future.

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    Gavekal Dragonomics

    The New Plan For Urbanization

    The 14th five-year plan outlines significant changes to China’s household registration (hukou) system. In this report, Ernan writes that this new policy direction is to reduce the significance of the system over time by reducing urban/rural inequality. Rural areas will benefit, but at a cost to China’s overall economic growth.

    0
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    Gavekal Dragonomics

    Time To Fix Credit Ratings

    2021 could be a pivotal year for the overhaul of credit ratings, which have long been an impediment to the functioning of China’s corporate bond market. The defaults of a few AAA-rated state firms have now pushed regulators into tackling long-standing problems, at a moment when cyclical and structural conditions are favorable for reform.

    0
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    Gavekal Research

    Attack Of The Drones

    Military technology is a lynchpin of the geopolitical balance. And the superiority of US weaponry has been one of the principal factors underpinning the US dollar’s status as the world’s reserve currency. However, recent events raise important questions about whether the US can retain this superiority.

    19
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    Gavekal Research

    Let's Twist Again

    When they sit down on Wednesday, the members of the Federal Open Market Committee will face a couple of knotty questions. Should they attempt to do anything about rising bond yields? And if so, what?

    4
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    Gavekal Research

    How Bad Is Europe’s Vaccine Problem?

    The Covid news from Europe only seems to lurch from bad to worse. The suspension by several European Union countries of distribution of AstraZeneca's Covid vaccine over possible side-effects threatens to disrupt the EU’s vaccination programs and damage public confidence in vaccines in general. So how bad are things likely to get?

    3
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    Gavekal Dragonomics

    Looking Past The Base Effect

    The collapse in activity during the Covid-19 lockdowns in early 2020 has ensured some eye-popping economic data for January-February 2021. In this report, the Dragonomics team looks past base effects to find consumption and services still on track to normalize this year, while industry and property will likely cool as policy tightens at the margin.

    0
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    Gavekal Research

    When Currencies Misbehave

    In recent days, investors have had to absorb a series of troubling headlines from Europe, yet news that should be either bearish for the euro or bullish for the dollar failed to keep the euro from gaining last week. Meanwhile, the yen continues to grind lower. Why is that, and what does the inability of the dollar to rally tell us about the future?

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    Gavekal Research

    The New High-Pressure US Economy

    Having just signed off on US$1.9trn of Covid relief, the US government has now spent US$5trn on support measures since the pandemic began. Unfazed by warnings that it could overheat the economy and spur runaway inflation, the White House plans another big package of public investment that aims to tackle climate change, upgrade US infrastructure and revamp education. Joe Biden seems intent on spurring a “high-pressure” economy.

    0
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    Gavekal Research

    The Yield Curve Control That Dare Not Speak Its Name

    A year ago today, European Central Bank president Christine Lagarde said “we are not here to close spreads”. With a fair amount of water having flowed under the bridge since then, the spread between 10-year Italian BTP’s and bunds has fallen from 261bp to just 94bp. So when on the anniversary of that proclamation, she said the “ECB is not doing yield curve control”, one could be forgiven for demurring.

    1
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    Gavekal Research

    Webinar: The Shape Of India's Recovery

    With the release of pent-up demand and more fiscal spending, India's economy is rebounding sharply. Its growth potential is also being raised by a new push towards privatization and an industrial policy that supports manufacturers. The question is whether India can overcome institutional lethargy and make these policies work. Tom and Udith addressed such issues and the latest market developments impacting sub-continent assets.

    0
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    Gavekal Dragonomics

    There Is No Plan To Boost Consumption

    Consumption and domestic demand are everywhere in the Chinese government’s latest policy rhetoric, with high-level promises to “boost consumer spending across the board” and “create a robust domestic market.” In this piece, Andrew explains why the new five-year plan is not actually a plan to boost consumption.

    2
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    Gavekal Research

    Is The Belt And Road Turning Green?

    China is trying to clean up its domestic energy sector, but critics accuse it of exporting an outmoded and dirty energy model around the world under the guise of the Belt and Road Initiative. In 2019, Xi Jinping pledged to turn the BRI “green and clean.” Tom argues that there may have been a moderate shift towards green energy, but not a decisive one.

    0
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    Gavekal Research

    Stop Worrying About Bond Yields And Buy Equities

    Is it time to buy or sell global equities? I think investors should be adding exposure for four broad reasons. As argued in February, during the last mini-correction the global bull market that began on March 20, 2020, is still in its early stages and the cyclical economic problems that usually provoke bear markets are not yet on the horizon.

    7
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    Gavekal Dragonomics

    The Capex Renaissance Is Coming

    2021 is set to be a strong year for capital spending by Chinese companies. In this report, Thomas explains why solid returns on assets across the industrial sector and low borrowing costs are creating incentives for firms to invest in new capacity. This should allow policymakers to cut back on spending without tanking overall investment.

    3
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    Gavekal Research

    Updating The Malthusian Constraint

    In June 2019, I argued that big shifts in the US economy and financial markets largely result from changes in the relative price of energy. If oil prices are rising faster than nominal GDP, this points to energy shortages and more of the economy’s value-added going as the “miners’ rent”. This situation points to rising inflation and contracting price/earnings ratios.

    3
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    Gavekal Research

    Gold, Renminbi Bonds And The Clash Of Empires

    As the US expands its deficits to pay for pandemic relief, emerging economies that use the US dollar for reserve backing have reason to fret. China is being incentivized to accelerate development of the renminbi as both an international standard and store of value. Louis, Charles and Didier offer a potential roadmap for how renminbi internationalization may unfold.

    16
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    Gavekal Research

    The Bursting Of The Electric Car Bubble, And Consequences

    A friend recently sent me the following quote from the Barrow Hanley small-cap manager, Jim McClure: “Should an investment narrative become particularly disputed, the best course of action is to identify the camp that is more emotional, and bet heavily against them”. This was good advice a few years back when anti-Tesla/anti-Elon Musk sentiment was rampant. And it would have been good advice again in early January, when the pendulum had swung...

    2
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    Gavekal Research

    Video: US Equities In A Changed Macro Environment

    US tech stocks have been hit hard, as attention focuses on the underlying quality of themes like the migration to electric vehicles. Yet this shakeup is also happening against the backdrop of a fast-changing investment environment due to a strengthening US growth outlook, rising inflationary pressure and an unnerved bond market which is driving yields higher. In this video interview, Will seeks to unpack these dynamics in order to navigate a...

    0
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    Gavekal Research

    The Missing Target

    For four decades, every five-year plan has included a target for average GDP growth. The latest plan, presented last Friday, did not. This points to China's leadership having a more complex view of development goals argues Andrew. These now include a range of metrics including technological capability, national security, financial stability and living standards.

    0
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    Gavekal Research

    India Macro Update: Reading The Recovery

    India is enjoying a V-shaped recovery and there are hopes that high fiscal spending and favorable base effects can push GDP growth above 10% in the coming fiscal year. The problem is that the private sector remains weak after a savage Covid-19 experience. Udith and Tom digest the macro currents and on balance conclude they would rather be in Indian equities than bonds.

    0
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    Gavekal Research

    Bond Vigilantes Keep Fighting The Fed

    Jerome Powell tried to calm the bond market yesterday by repeating that it’s likely to be a while before policy normalization begins. Growth and inflation indicators are up, but the Fed expects much of this to be “transitory”. In short, Powell remains a steadfast dove. So why are bond yields, real and nominal, still ticking higher?

    6
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    Gavekal Research

    Webinar: Global Investment Roundtable, March 2021

    As Covid-19 vaccinations are cranked up and Congress gets ready to dole out stimulus measures, US growth expectations have risen along with inflation concerns. In response, bonds have sold off and equity markets have shuddered. In our monthly global investment roundtable, Gavekal partners discussed this confluence of events and addressed what it means for risk assets.

    0
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    Gavekal Dragonomics

    The New Normal For Infrastructure

    Officially, the normalization of China’s fiscal policy will be moderate in 2021: the government budget will narrow to 3.2% of GDP from 3.7%. But public-works spending is China’s true fiscal policy, and tighter financing does not bode well. Infrastructure investment is likely headed for a fourth year of negligible growth, and could even decline.

    4
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    Gavekal Research

    Enduring Cognitive Dissonance

    As yields continue to test new highs, Jay Powell is set to deliver a speech today reasserting the Federal Reserve’s view that inflation can push above its 2% target due to base effects and pent-up demand without monetary tightening being needed. This could offer temporary relief to equity investors, but resulting uncertainty in the bond market is likely to ensure an unstable trading environment.

    0
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    Gavekal Research

    Video: Will Bond Yields Topple Asia's EMs?

    Rising treasury yields are rarely a good thing for emerging markets, as this implies tighter financing conditions. The good news of sorts is that Asia's external position is strong due to buoyant exports, yet domestic demand has been constrained by the pandemic and a slow vaccine rollout.

    0
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    Gavekal Research

    The Problem With Europe’s Inflation

    Later this year, eurozone consumer price inflation should hit its highest level in more than a decade. We found out on Tuesday that February’s consumer prices rose by 0.9% year-on-year, and more price hikes are in the works. Alas, this is not the type of inflation that the European Central Bank has been seeking to engineer for the best part of a decade.

    0
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    Gavekal Dragonomics

    An Unrealistic Vaccine Target

    China’s government is aiming for 40% of its population to have received at least one dose of a Covid-19 vaccine by mid-2021, according to a senior health adviser. In this Quick Take, Ernan explains why such a target is unrealistic given China’s current vaccine production capacity and its obligations to other countries.

    0
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    Gavekal Research

    India’s New Industrial Policy

    Industrial policy is back in vogue, especially in India. Prime Minister Narendra Modi’s government will spend US$27bn on subsidizing manufacturing, as it seeks to forge a “Self-Reliant India.” Given India’s unhappy history of chasing self-sufficiency, this raises concerns. Yet “self-reliance” does not necessarily mean protectionism, argues Tom.

    0
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    Gavekal Research

    The Oil-US Dollar Interaction

    The past year has seen two important developments in the oil industry. Firstly, US oil production has rolled over by between -2mn and -2.5mn bpd and there are reasons to think this situation lasts until next year. Secondly, oil prices, which were in a clear bear market between late 2018 and early 2020 are now in a bull market. Hence, as US oil production falls and oil prices rise, energy may again become a major contributor to the US trade...

    4
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    Gavekal Research

    Chips And Cross-Straits Tensions

    Taiwan’s position at the core of the global semiconductor industry has never looked more secure: it is now the undisputed leader in advanced chip manufacturing. But does that success increase the risk of military aggression from China? In fact not. As Dan argues in this piece, semiconductors are not a plausible trigger for a hot conflict.

    5
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    Gavekal Research

    Productive Bubbles And Unproductive Bubbles

    There are two kinds of bubbles: bubbles in productive assets like railways, and broadband lines, and bubbles in scarcity assets like tulips and gold. In turn, these bubbles can be funded through equity, or by debt. The best kind of bubble is in productive assets, funded by equity and the worst kind is in unproductive assets, funded by debt, especially if the leverage is hidden.

    1
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    Gavekal Research

    Strategy Monthly: The Threat Of Rising Inflation And Yields

    The roll-out of vaccines in the US is upending the investment environment, as the focus shifts beyond the pandemic to full-throttled economic recovery. With both monetary and fiscal policy set to remain loose, nominal growth could soon rip. Hopes for “normalization” have driven up inflation expectations and freaked out bond investors. Those getting fixed interest are right to be unnerved, as production capacity is fairly tight, inventories are...

    0
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    Gavekal Research

    What I’ve Given Up For Lent

    For Lent this year I decided to give up investing in gold miners. My priest said this was like giving up broccoli; for Lent you are meant to forgo something that feels good. I replied that the Church banned self-flagellation in the 14th century; by giving up gold, I would free my mind for higher purposes. I still ended up with three “Hail Marys” and three “Our Fathers” for penance.

    10
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    Gavekal Research

    Inflation And The Stock Market

    Despite a roiling US bond market sell-off, equity investors had until Thursday taken comfort from the Federal Reserve saying it would stay easy for longer. They were also fairly relaxed about a gentle rise in inflation, which seemed to be part of a "normalization" process as Covid-19 vaccines do their job and activity picks up. Charles and Didier are not so sure, and in this paper test the notion that limited inflation can, in fact,...

    2
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    Gavekal Research

    Webinar: Europe And The Politics Of Exiting The Pandemic

    Europe is at a strange juncture, as governments remain committed to massive fiscal and monetary support and refuse to rush into any economic reopening before Covid vaccinations are deployed. Yet despite this collective risk aversion, Italy has appointed a new technocratic government run by Mario Draghi that looks to have broad political support and a fairly radical plan for change. Our team explored Europe's exit from the pandemic and asked...

    0
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    Gavekal Research

    Video: Bitcoin—Money Or Snakeoil?

    Will Denyer examines the forces behind the eye-watering run-up and eye-popping volatility of bitcoin, and delves behind the near-term moves in crypto-currency markets to ask whether bitcoin and its ilk will ever gain traction as a unit of account, means of exchange or store of value.

    0
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    Gavekal Research

    Emerging Markets And Rising Yields

    As 10-year US treasury yields have pushed higher, investors have begun to reassess their enthusiasm for emerging market assets. Historically, rising US yields has seldom been accompanied by emerging market outperformance. Yet rising US yields are not necessarily negative for EMs, and there are reasons to think this time may well be different, at least for some EMs.

    0
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    Gavekal Dragonomics

    The Fate Of A Liquidity-Driven Rally

    The writing is on the wall for China’s post-Covid bull market as the underlying credit and profit cycles that typically drive prices over the medium term are turning down in 2021. In this report, Thomas explains why liquidity flows can trump these fundamentals for a while, but not indefinitely.

    0
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    Gavekal Research

    It’s A Policy-Driven Market

    US bond yields are rising as the growth outlook is boosted by the vaccine roll-out and sustained monetary and fiscal stimulus. US value stocks and the sectors hit by Covid restrictions are ripping. Growth investors, in contrast, are spooked about this situation, as much of their worth comes from earnings discounted far into the future. The investors' reactions to Federal Reserve Chair Jay Powell’s Congressional testimony on Tuesday reminded...

    0
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    Gavekal Research

    Beautiful In Heaven

    Like the players on a rugby team, assets in a portfolio should both be all-rounders and excel at a specific job. For four decades, US treasuries both offered a stream of positive real yields and provided an anti-fragile portfolio hedge in times of market turbulence. Now however, Louis argues that US treasuries are at risk of falling from the position of anti-fragile favor.

    18
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    Gavekal Dragonomics

    To Hold Back The Tide Of De-Industrialization

    China’s government is focusing on a new economic metric: the manufacturing share of GDP, which looks to feature in the next five-year plan. Rather than accept de-industrialization, it wants “stability” in manufacturing. In this piece, Andrew explains why China is worried about the fall in the manufacturing share, and whether it can be stopped.

    2
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    Gavekal Research

    No Exit

    “We are not here to close spreads,” proclaimed European Central Bank president Christine Lagarde last March. “This is not the function or the mission of the ECB.” After the market took her at her word, Lagarde hastily back-tracked, and the ECB duly spent the following months doing exactly what Lagarde had said it would not.

    3
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    Gavekal Research

    Can Covid Vaccines Cure The Pound?

    The British pound has been the strongest major currency so far this year, contrary to Anatole’s expectations at the end of 2020. In this piece he outlines three reasons for sterling’s outperformance, but maintains that in the long term the pound will be forced lower.

    5
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    Gavekal Research

    The Changing Composition Of US Inflation

    Investors are all in a tizz about US inflation as the economy begins to normalize and the effect of a huge fiscal stimulus is factored into calculations. Inflation expectations are above the Federal Reserve’s target at 2.2% and energy base effects mean the personal consumption expenditure reading is sure to rise from December’s 1.3%. So far, market action has been focused in the bond market (see A Discussion On Treasury Yields) but equity...

    2
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