A veteran China hand contemplates investment opportunities in Asia and beyond.
Our guest this week is Louis-Vincent Gave. Louis is founding partner and CEO of Gavekal Group, a research and financial services firm based in Hong Kong. After graduating from Duke University and studying Mandarin at Nanjing University, Louis joined the French Army, then went on to become a financial analyst at Paribas, first in Paris, then in Hong Kong. In 1999, he launched Gavekal with his father, Charles, and Anatole Kaletsky. Louis is the author of seven books, the latest being, Avoiding the Punch: Investing in Uncertain Times.
Background
Avoiding the Punch: Investing in Uncertain Times
Clash of Empires: Currencies and Power in a Multipolar World
Simple Economic Concepts For Financial Markets
China
“China Enters the AI Chat (With Louis-Vincent Gave)” by Liz Ann Sonders and Kathy Jones, schwab.com, Feb. 14, 2025.
“China Has ‘Leapfrogged’ the West | Louis Vincent Gave,” Wealthion, youtube.com, Jan. 28, 2025.
“China Overtaking the US in Strategic Sectors, Says Louis-Vincent Gave,” Financial Sense, Oct. 22, 2024.
“Is DeepSeek China’s Sputnik Moment?” by John Cassidy, The New Yorker, Feb. 3, 2025.
“Xiaomi Automobile Super Factory, Producing One SU7 Every 76 Seconds,” Discover China Auto, youtube.com.
“The Evergrande Crisis Explained: Should Investors Worry?” by Lewis Jackson, Morningstar.com, Sept. 22, 2021
“China & the American Imperial Economy | Louis-Vincent Gave,” Hidden Forces podcast Episode 364, hiddenforces.io, May 14, 2024.
“The 3 Warren Buffett Stocks to Buy After Berkshire Hathaway’s New 13F Filing,” by Susan Dziubinski, Morningstar, Nov. 14, 2024
Tariffs
“Are US Tariffs A Tool Or A Goal?” by Louis-Vincent Gave, Evergreen Gavekal, Jan. 9, 2025.
Asia and Emerging Markets
“Louis-Vincent Gave—Prepare for a Boom in Emerging Markets,” by Robert Huebscher, Vettafi Advisor Perspectives, May, 8, 2023.
Twilight of the Gods: War in the Western Pacific, 1944-1945, by Ian W. Toll, W.W. Norton & Company, 2020.
Dan Lefkovitz: Hi, and welcome to The Long View. I’m Dan Lefkovitz, strategist for Morningstar Indexes.
Christine Benz: And I’m Christine Benz, director of personal finance and retirement planning for Morningstar.
Lefkovitz: Our guest this week is Louis-Vincent Gave. Louis is founding partner and CEO of Gavekal Group, a research and financial services firm based in Hong Kong. After graduating from Duke University and studying Mandarin at Nanjing University, Louis joined the French Army, then went on to become a financial analyst at Paribas, first in Paris, then in Hong Kong. In 1999, he launched Gavekal with his father, Charles, and Anatole Kaletsky. Louis is the author of seven books, the latest being, Avoiding the Punch: Investing in Uncertain Times.
Louis, thanks so much for joining us on The Long View.
Louis-Vincent Gave: Thanks a lot for having me.
Lefkovitz: Absolutely. So, first off, just so we can get to know you a little bit better: You have a very interesting background, which I mentioned in the intro. You’re French, you went to college in the States, you’ve studied in mainland China, you live and work in Hong Kong. How do you bring all these different perspectives to bear onto your work?
Gave: I would say that I’ve been extremely lucky in my career to have a front-row seat in what I think has been one of the more exciting macro stories, not just of recent decades, but frankly of the past few centuries, namely the rise of China out of what used to be pretty stringent poverty into what it is today, a modern economy. And so, I’ve been trying to understand what has been happening in China for 25 years and how that would impact the rest of the world. Now, I think the fact that I did spend some time in the US, the fact that I grew up in France, gives me perspective, of course, on those two areas of the world, Europe, the United States, and perhaps allows me to draw some parallels between all these different countries and try to put pieces together, try to figure out, OK, when this happens in China, what does it mean for Europe? What does it mean for the US? But also vice versa, when something happens in Europe, could it impact China and so on? But deep down, I think the main thing is I’ve been lucky to be in the right place at the right time.
Benz: We’re hoping you can talk about your firm, Gavekal. Maybe starting with what are the services that you offer and what’s the client base?
Gave: We’re a bit of a hybrid firm, somewhat unusual. We started as a pure research firm, essentially publishing macro research with quite a strong China slant. Initially, the idea, really starting in 2001, as China joined the WTO, was that China’s growth was going to have a massive impact on the rest of the world. And then most people, at least back then, remember this is back in 2001, perhaps weren’t paying enough attention to developments going on in Asia.
So we started as a research firm, mostly publishing research for institutional investors around the world. So, pretty typical business model. We publish reports every day, some shorter, some longer. And institutions get to access our work by paying an annual subscription. So, very, very plain-vanilla. In mid about 2005, we started to develop an institutional money management arm, initially starting with Asian equities. And then as China opened up its bond market to foreign investors starting in 2011—started to open up its fixed-income markets to foreign investors in 2011—we built up a bit of a fixed-income franchise and that grew very well for us. You may remember that there was quite a few years where interest rates were near zero in the Western world and they were quite high in China. So there was a relative attractiveness for Chinese fixed income. That, of course, has been turned on its head in recent years now that Western bond yields are higher than China’s. Anyway, we built an institutional money management arm. And then as our business evolved, in 2009, we bought initially a small stake in a private wealth manager based in Bellevue, Washington. And that was a terrific investment for us. The firm grew and grew, and it gave us a sort of opening and insights into the private wealth business. And we recently bought a couple of years ago another private wealth business, this time based in Mauritius.
So today, we really have three main businesses. We have an institutional research business and when people know us, it’s mostly for that business. We have an institutional money management business mostly focused on Asia, and we have a private wealth business with really two separate arms, one offshore in Mauritius and one onshore in Bellevue, Washington.
Lefkovitz: Louis, I’ve seen some of your research branded “Dragonomics.” What is that exactly?
Gave: This is our, if you really love your China, then our Dragonomics series goes further in-depth into what happens in China. And so we have a lot of clients for our Dragonomics product that actually aren’t financial market participants but are big companies for whom China is an important market. So the Dragonomics, while Gavekal research is quite financial-market-focused, our Dragonomics research is really for people who want to go in-depth about what’s happening in China socially, economically, politically, basically covering all the angles.
Lefkovitz: So you serve both capital markets investors as well as direct investors.
Gave: We do, and frankly, corporates for whom, again, companies for whom China is a big market and there’s increasingly, a lot of, most Fortune 500 companies by now have big presence in China or are thinking of how to develop big presence in China. So it’s been, like I said, we’ve been very lucky to be in the right place at the right time and China remains a fascinating place with rapid changes. It’s an always evolving economy, always evolving society. And it’s sometimes hard for people who are very far away to really understand what is going on on the ground. And that’s what we try to do.
Lefkovitz: Yeah, well, let’s dig into what’s happening in China. A lot of investors around the world these days think of China as sort of a troubled market with deep structural challenges. Few years back, some people even started saying that China is uninvestable. What do you say to these kind of views?
Gave: Oh, I think it wasn’t so far back that people were saying China is uninvestable. And to be honest, most people I meet with still believe that. And look, I think people believe China is uninvestable for lots of different reasons. But perhaps the number-one reason is that when China started to open up to the world 20 years ago or so, there was a lot of excitement because it is an exciting story, because there’s a lot happening. And a lot of people invested a lot of money in both Chinese equity and Chinese real estate. And frankly, while the GDP growth of China has been very impressive, the returns to investors have often been pedestrian. And so when you contrast the return stream of the past, say, two decades to all the work you had to do, the due diligence, the risk you took by going so far away. A lot of people have decided that, you know what, this wasn’t worth it. The returns just weren’t high enough. And perhaps to your point they started deciding that in the past 18 months, pretty much just in time for the Chinese equity markets to start rallying and to start outperforming all others.
But I guess that’s always the way things go, right? I was once told that in financial markets, if you can sell something, you probably don’t want to buy it. And, at least China has that going for it today, that if you try to sell it—even though, again, in the past 12 months, China has been the best performing major stock market in the world—you know, most people have very, very little interest as of right now.
Benz: Why have Chinese equities been such a difficult place to invest historically?
Gave: Oh, how much time do you have? I think—look, there’s a number of factors. I have a chart in one of my slide decks. And this number might blow your mind. But if you look at, since 2011, the Chinese stock market essentially, well, now it’s ripped a little higher in the past six months, but up until recently, it was basically flat from the period 2011 through mid-2024. Over the same period, the US stock markets went up three times. So obviously, you know, US stocks, they did great. Now, in 2011, the total market cap of China was 40% of the total market cap of the United States. Fast-forward to today. And remember, US stock markets went up 3x and China went nowhere. What do you think is the ratio of market cap? I’ll give away the answer. The answer is it’s still 40% because what’s happened—now, you can say, “How can that be? One tripled, the other went nowhere.” What’s happened in those 13 years is that, in the US, you had constant delistings, companies being taken private, you had share buybacks, you had a continuously shrinking share count. And in China, meanwhile, you had massive IPOs, constant right issues, companies tapping the market for capital, and an always growing share count. And so, at the end of the day, perhaps the simplest explanation is the one we all learned in Econ 101: that prices are the interaction of supply and demand. In the US, you’ve had an ever-shrinking pool of equity. And in China, we’ve had an ever-growing pool of equity. And the more the equity pool grew … the greater the supply, the lower the price. So that’s been the big story in China.
Obviously, it no longer is the case, at least for a little while. The government has been very clear, no more IPOs, no more rights issues. The focus of government right now, and that won’t last forever, of course, but the focus of the government right now is to crank up the stock market, which brings me to a side point. That if you look at China, it’s a super frustrating market for asset allocators, which perhaps helps explain why a lot of people have decided, you know what, it’s uninvestable and I’m walking away. It’s a super frustrating market for investors because it tends to do nothing for three or four years, then it spikes for 18 months to two years. And then you get a bunch of equity issuance and IPOs and whatever else. And the market rolls over again and you go through the cycle again. So today, we’ve started this upcycle. And in my experience, it keeps going until you start to see the very big IPOs. So perhaps we’re fine until we either see the ByteDance or the Alipay IPO or whatever other big IPO might be in the pipeline.
Lefkovitz: And why are those IPOs a negative catalyst?
Gave: Because they drain excess liquidity, right? Again, it’s the old supply-and-demand curves we learned in Econ 101. If you have a lot of new companies that come into the market, if today I own Alibaba and I own Tencent and tomorrow ByteDance comes for listing, and I think, “OK, ByteDance is an exciting business model. I should invest in it.” Obviously, I have to sell something else to buy this new ByteDance shares. If at the same time, and I’m not saying this is going to happen, by the way, but if at the same time Tencent and Alibaba themselves are doing rights issues, which has basically been the case in the previous cycles, then you’re flooding the markets with all this paper. And yeah, that weighs the market down.
Lefkovitz: You mentioned earlier that Chinese bond yields have fallen and are now below Western levels. I see that the Chinese bond market has produced very strong returns in recent years. For those of us who haven’t really been paying attention, what’s been going on?
Gave: Great question. And an important one. I think a lot of people, the few people who look at the Chinese bond market will look at it and conclude, “Oh dear, this looks just like Japan in the 1990s. Bond yields are now at 1.6%. This is a sign of a balance sheet recession, an economy imploding, and whatever else.” I actually think the collapse in Chinese bond yield finds its source somewhere else. Essentially, I think when you look at China today, your starting point has to be that China right now is probably the most competitive economy that the world has ever seen. And this is illustrated by the fact that China is running $1 trillion trade surplus. It’s actually more like $1.1 trillion. Up until recently, no country in the world had ever run trade surplus of over $300 billion. $1.1 trillion is enormous.
Now, all this money comes into China. Imagine you’re the guy who is making shoes for Nike, for the sake of argument. You’re making shoes for Nike. You’re making lots of money. This money’s coming in. Logically, what should happen is that because you’re productive, because you’re making all this money, you should be feeling pretty good about yourself. And you should be rewarding yourself by buying yourself a better house, a bigger house, or building yourself a stock portfolio or something. However, what’s happening in China today is that businessmen’s confidence has been crushed so badly by so many different things, including, of late, the threat of a trade war, the threat of 60% tariffs, whether from Europe, from the United States, that if you’re the entrepreneur making all this money, your default mode is just to take this money and leave it at the bank. And you’ve seen bank deposits go absolutely through the roof. And because on the other side, everybody is petrified, there is also no increase in demand for credit. And so the banks have all these deposits, and they have nothing to do with them. And so all they can do is buy bonds, and as a result, bond yields keep going lower and lower.
I think if you look at the fourth quarter, you had unprecedented 160-basis-point move, relative move, between US Treasuries and Chinese government-bonds yields, where Chinese government-bonds yields collapsed and US Treasury yields spiked. You never saw a move like this one. And I think that was also, to be honest, partly a reflection of, as Donald Trump won the presidency, Chinese institutions probably were fearful of keeping assets in the United States, decided to bring assets home, and hereby drive bond yields lower.
Now, that was then, this is how we got to the situation we are in now. What happens in the future? And here, of course, predicting the future is always very, very hard. But if you believe that China and the US both have large incentives to strike some kind of deal, to strike some kind of agreement, then if so, then you could see, all of a sudden, confidence in China bounces back very, very strongly. All this consumer confidence, businessman confidence that are today at record lows, could bounce back and instead of just accumulating money in the banks, Chinese people then either start to buy their local stock or buy local real estate—both asset classes, incidentally, that seem to be bottoming, well, real estate is bottoming and trying to claw its way back up, equities are starting to behave much, much more bullishly.
Benz: Maybe you can delve into tariffs and this trade war that we’re in the midst of between the US and China. Maybe you can talk about how you think it will play out.
Gave: Yeah. So I’m not sure we’re yet in the trade war, to be honest. I think we had a trade war in 2017-2018. In 2018, President Trump changed the trade war from a trade war to a tech war, when he said, “You know what, forget all this talk about the trade surplus. From now on, we’re just going to prevent China from growing technologically by forbidding anyone to sell high-end semiconductors to China.” So not only are US companies, the Nvidias or Intels of this world, no longer allowed to sell high-end chips to China, but ASML, the Dutch equipment maker, can’t sell high-end equipment to China. TSMC can’t sell the latest, and Taiwan can’t sell the latest chip and so on and so forth. So we started with a trade war, moved to a tech war. The tech war was amplified by Biden, who piled on even more sanctions. And then Trump comes in and says, “You know what, I’m putting 10% tariffs on China not to accomplish anything on trade, but because China isn’t doing enough to control the exporting of fentanyl to the United States.” So far, I think what we’ve seen, and same with the tariffs on Mexico and the tariffs on Canada, what we’ve seen so far is more a drug war than a trade war. It’s been, “I’m putting sanctions on you guys, for you guys to basically regain control of your borders and for the flow of drugs to stop in the United States.”
The fact that we haven’t had the trade war yet doesn’t mean we can’t look forward to it. And on this front, when President Trump was elected, he appointed three commissions, one at the US Trade Representative Office, one at the Commerce Department, one at the Treasury Department. All of the three commissions mandated to come out with recommendations for potential tariffs against China and against other countries by April 1. So my timeline on this, I tend to believe that April 1, these three different commissions will come out with their findings, and it seems pretty likely that April will be Bash China Month. President Trump will take these reports, and he’ll say “I’m going to put all these tariffs on China,” and he’ll try to essentially soften up China before meeting with Xi Jinping in May. The idea, again, it’s the “art of the deal.” You beat up the opponent before you sit down with them so that by the time you sit down with them, the opponent is very ready and willing to compromise on anything.
So that’s the “art of the deal” as reviewed in the book. And I think, again, it will be April 1, the month of April will be Bash China Month, and the month of May will be let’s sit down with China and see if we can get to some kind of agreement. And if we do get to some kind of agreement, I think this will be very, very bullish, of course, for China. It’ll be very bullish for a lot of assets around the world. It’ll be very bullish for commodities. It’ll be very bullish for a lot of assets.
Lefkovitz: And I’ve seen some of your research on the 2018 trade war. It sounds like you think it had some pretty serious implications in terms of Chinese industrial production.
Gave: Oh, absolutely. Look, I have some charts that illustrate how starting in 2018, bank loans to real estate absolutely collapsed. And bank loans to industry in China went parabolic. Essentially, what happened when the Western world told China, “You’re no longer allowed to buy our semiconductors,” China essentially panicked. The leaders in China thought, “Well, if it’s semiconductors today, tomorrow it could be auto parts, it could be chemical products, it could be industrial robots, it could be turbines, it could be, you name it, it could be anything that we need from the rest of the world leaves us vulnerable to potential sanctions going forward. We thus have no choice but to build our own industrial vertical in pretty much every single industry. We have to be self-sufficient in everything.”
So in 2018, the order is passed on to the banks: From now on, no more loans to real estate, and everything has to go to industry. And I think that most of the Western media and most of Western investors over that period of time focused disproportionately on the real estate bust. They focused disproportionately on the real estate bust because from roughly 2000 to 2018, most of the growth in China had been through real estate. Real estate was the big driver of growth. It was the big driver of employment. It was the big driver of commodity demand. And so everybody had become used to just focusing on this. Meanwhile, what everybody missed was that China was starting to grow by leaps and bounds in industry. And today we wake up to a new reality where China is the biggest auto producer in the world, the biggest industrial robot producer in the world, the biggest producer of tractors, of trains, of boats, of solar panels, of batteries, you name it.
And this matters tremendously because industry, having an industrial system, it’s an ecosystem where workers, you need to have highly specialized workers, trained workers, who train other workers, and who go off and create their own widget companies. And China now has that. And in most of the rest of the world, we’ve actually dismantled it. So I know that all across the Western world, there’s now a big political push to reindustrialize, but it’s going to be very hard. It’s going to be very hard because not only is China producing at a much, much cheaper cost than we are, not because China has cheap labor anymore, labor isn’t even that cheap anymore, but because it benefits from the economies of scale of this massive ecosystem. So not only does China have that, but it is actually now producing very often at a quality level that is now superior to the Western world. And where you see this very clearly, to be honest, is in the cars. The production of Chinese cars is now extremely impressive. The idea that you and I might want to own a Chinese car would have been laughable three or four years ago. And today, they just make better cars.
Lefkovitz: You hear a lot about BYD. Are there others that we should know about?
Gave: Oh, for sure. For your listeners who have a bit of time, there’s a lot of cool videos on Chinese cars on YouTube, a lot of cool videos. But you can check out XPENG. XPENG is another big car company—they’re actually making flying cars. I mean, no joke. They’re commercializing flying cars.
I always say this, but there’s two kinds of people in the world. There’s the people who visit China and come back and say, “The future is being built over there.” And then there’s the people who listen to the people who just come back from China saying the future is being built over there and who disparage those people as being CCP shills, Communist Party shills.
But the reality, another great car company that you might have heard of because of their phone is Xiaomi. Xiaomi produces—there’s a video online on YouTube of Xiaomi’s factory and how quickly the cars are produced there. It’s pretty mind-blowing stuff.
And then there’s lots of other brands, which is, incidentally, perhaps another explanation to the first question you asked me as to, if growth was so strong, why haven’t return on equities been better? The car industry is a perfect example of how hard it is to consistently make money in China. Today in China, you have 130 carmakers, 130 carmakers, all of which are, well, almost all of which are pretty well funded by local banks. And so what you end up having is a situation of really, “Hunger Games capitalism” is what I like to call it, where all these companies go at each other until you get to the point where there’s only three or four of them who survive. And while you go through the Hunger Games, of course, it’s pretty brutal, pretty painful. But for the end consumer, it’s good news. The end consumer ends up with cheaper cars and better-quality cars. And so the end consumer ends up being the winner, but the process typically also entails a fair amount of capital destruction.
Lefkovitz: You mentioned the Chinese property market downturn a few years back. That was a major topic. We heard a lot about Country Garden and Evergrande. But why do you think that the Chinese property market downturn did not cause a broader financial system meltdown, a financial crisis, like we saw in the US in 2008?
Gave: That’s a very good point. There were a lot of nightmare scenarios painted. I’m sure you remember all the stories about China’s shadow banking system. And to your point, we did go through some big bankruptcies. You highlight Country Garden, that was a massive one. Evergrande was by far the biggest one. Why didn’t it collapse the broader system? I think the first thing we have to acknowledge is that China is an economy that runs capital controls, step number one. Step number two, China is an economy that is highly, highly productive and has large trade surpluses. And so when you have a country with capital controls and trade surpluses, that means you always have money coming in, money that allows you to paper over cracks, to sweep things under the rug. It buys you time when there are difficulties. So that’s the first point.
The second point we have to acknowledge is that the entire Chinese financial system is pretty much a closed-loop system where the big banks are all state-owned enterprises. That means they’re not 100% owned by the government, but they’re very often majority-owned by the government. The smaller banks are almost always owned by local authorities, provincial governments, and so on. And that means that when you have problems in the banks, regulators tend to turn a blind eye. Regulators will not come into the bank and tell the bank, “Oh, you’re marking your debt at 100, but this debt, really you should mark it at 50.” That doesn’t happen in China. So instead, banks are basically given a lot of regulatory lenience to work out the bad credit over time.
Now, the third thing I think we have to acknowledge, which also separates China from the United States, when you look at the reason Lehman Brothers, Bear Stearns, and others went bust in 2008, was that essentially, of course, they’d become massively overlevered. I think Lehman was something like 40 times geared. And they had become dependent on short-term funding in the money markets. Lehman, Bear Stearns, all these guys' business models was essentially borrow money from money markets, use it to buy these mortgages, repackage these mortgages, and then pass them on to pension funds with guarantees that if these things go back, they can punt them back to us, which is exactly what happened. And then when that happened, they could no longer go to the market to fund themselves. Now, when you look at China, banks fund themselves overwhelmingly and almost entirely on bank deposits. It’s moms and pops keeping their money at the local bank. And for any bank, this is by far the best way to fund yourself because it’s extremely, extremely stable. The old joke is that people change spouses more often than they change banks. People never change banks. And this is amazing. Even when you have massive banking failures, if you look at Greece as an example, when Greece was hitting the wall in 2012, 2013, they only had about 12% of the assets that left the Greek banks. Most people just keep their money at the bank and leave it there. And this is true for all countries and China in that respect is no exception.
All this to say that when Evergrande went bust, when Vanke went bust, when all these guys started hitting the wall, you didn’t have run on the banks. You didn’t have regulators coming in and saying, “Hey, you’re not marking all these loans at the right price.” And so, by and large, the financial system continued to function. This meant that, concretely, if you’d moved to Shanghai and you wanted to buy an apartment, you could walk into the local bank and say, “Hey, I want to own an apartment. I want to buy an apartment. Can you lend me money?” And the banks were open for business. And they were especially open for business if you were looking to borrow money for industrial investments, because meanwhile, they’d been told by the government, you’re going to be judged on your ability to do industrial loans. And the more industrial loans you do, the happier we, the government, will be. So that’s basically what happened.
Benz: We wanted to ask about Taiwan, which is another risk factor on investors' minds, especially with respect to investing in China. Warren Buffett famously sold his stake in Taiwan Semiconductor, citing geopolitics. How do you think investors should think about Taiwan?
Gave: To be honest, I think they shouldn’t. I think it’s an overblown risk. And I say this in all modesty because, obviously, Warren Buffett is a legendary investor and he’s been right about way, way more things than I could even dream of being myself. Having said this, on Taiwan, the risk of a Taiwan invasion I think is overblown in the media. Media loves scare stories, wars, famines, epidemics, that’s what sells newspapers. And when it comes to Taiwan, you have to acknowledge that there are so many logistical but also institutional reasons against the current status quo changing.
So first of all, I’ll start off with the status quo. China has been pretty clear that China has two red lines, two things that would immediately trigger a military response. The first red line is should Taiwan declare independence. Now, for Taiwan to declare independence, you need two thirds of parliament. Today, the independentist party, the DPP, controls one third of parliament. Two thirds of parliament is actually against independence. So the odds of this happening in the next four years, which is the life of the parliament. is essentially zero. The second thing that is a red line that China has been very clear on is should Taiwan start to develop a nuclear bomb. Now, there’s absolutely no reason to think that this is happening. There’s absolutely no sign. So I think we can leave that one aside.
So at least for the next four years, there really are no reasons to think that the status quo is going to change. Now, you get to the second reason as to why this beyond the institutional hurdles, as to why this isn’t going to change, and that’s the logistical problems of a Taiwanese invasion. I know most people, probably very few of your listeners have visited Taiwan, but Taiwan is essentially a chain of mountain that falls into the sea. Mountains that go up to 12,000 feet. I mean, it’s proper mountains. And there’s only really three beaches on which you could conceptually launch an invasion. In fact, the US military during World War II, when the US Navy was trying to roll up Japan, wanted to invade Taiwan and use Taiwan as their Air Force base, sort of an unsinkable aircraft carrier from which they could send raids on to Japan. And the US military looked at it through every single angle. There’s a great book about it called Twilight of the Gods for people who are really interested in this topic. They looked at it from every angle and concluded that actually they couldn’t invade it.
That’s why the US essentially bypassed Taiwan and went straight to Okinawa. Not that Okinawa was a walk in the park, of course. Okinawa was also a very hard invasion, but Okinawa was much easier to pull off than trying to invade Taiwan. And this was US military at the peak of its power, and so for a Chinese army that is untested, that has not had any conflict, not been involved in any conflict since the late ‘70s—and that was a very tiny conflict, a border skirmish with Vietnam—it’d be madness. It’d be absolute madness and could very well turn out to be an absolute disaster. Because again, militarily, it’s a very, very hard thing to do. Now, granted, what China could do is destroy Taiwan if it wanted to do that. You know, it could nuke Taiwan, it could bomb the hell out of it, it could absolutely destroy it. But what’s the point of that? What do you gain by doing this?
And that brings me to perhaps the more important point is that today, there really isn’t any true bad blood between Taiwan and China. It’s very different from the situation in Ukraine where, if you looked at the Donbas between 2014 and 2022, you’d had more than 10,000 people killed in the skirmishes between the various factions. And so every day Putin was waking up and being told, “Oh, you know, such and such school was shelled. And, you know, so many people died. And, you know, the Russian language is being forbidden in the Donbas. And Russian churches are being closed. What are you going to do about this, etc.” So Putin was feeling pressure, I think, from a lot of his right wing in Russia to act on this.
Today, nobody wakes up Xi Jinping with the news that speaking Chinese is forbidden in Taiwan, or that Confucian temples are being closed, or anything of the sort. So there is really no genuine, fundamental bad blood. Nobody being killed, of course, between China and Taiwan. And I think in China’s view, they have time on their side, which, frankly, they do. They do have time on their side because, as time evolves, Taiwan and China become ever more economically integrated. Something like 20% of male Taiwanese passport holders now work on the mainland. I think, over time, the integration will just naturally happen. And that’s the card that China is playing.
Lefkovitz: Very interesting. I wanted to ask you about India, because for a lot of investors now, especially in the West, that is the exciting emerging market. And part of the story is business is diversifying away from China, that whole “China Plus One” phrase. How are you and your research colleagues thinking about the India investment opportunity?
Gave: Look, India is a super exciting story. First, even, leaving aside the whole China thing, India is one of the few major markets with a positive demographic structure today. So, if you believe that demographic is destiny, the destiny for Europe, the destiny for East Asia, yeah, it doesn’t look that great when you look at the birth rates. India, again, is one of the few major markets that does have positive demographics. So, you can start off with that.
Secondly, I think the reason people have been very excited about India in recent years is that, historically, the big hurdle for India, well, there were many hurdles, but one of them was frankly the lack of domestic infrastructure, poor roads, poor railroads, which led to very little economic integration across the land. India is, of course, one country, but to some extent, it almost felt like it could be dozens of different countries, given how little trade there was in between the various parts of India. This is now rapidly changing, and—credit where credit is due—the Modi years have seen a fairly dramatic improvement in roads, airports, railroads, electricity distribution, all the basic infrastructure that you need to have a credible modern economy. And so all that has improved in India.
And so, I think that’s what’s gotten people so very excited. Because as you build the roads, you get rid of inefficiencies, you get higher growth, and there’s no doubt that there’s been a lot of that happening in India. But I think, to your point, in a world in which there weren’t that many exciting stories, India stood out as a beacon for a lot of investors, especially emerging-markets investors. I think if you’re an emerging-markets investor in recent years, obviously you couldn’t invest in Russia anymore. A lot of people felt that China was uninvestable, as per your point. So, it starts to narrow down pretty quickly. And so, by default, India shone. So all that was very true.
Now, as we look forward, there’s still hurdles, of course, but also opportunities. The obvious hurdle for India, I think, is the same that it’s always been, and that is that India continues to be a very large energy importer. It’s the second-biggest importer now of energy after China. But unlike China, India doesn’t run a trade surplus. India runs a trade deficit. This means that whenever energy prices go up, the rupee tends to go down, and the central bank has typically no choice but to tighten monetary policy rather aggressively. Asset prices derate, and you just don’t want to be in India during those periods. Now, to be very clear, I’m not saying that energy prices are about to shoot up, therefore sell India. I’m saying that the risk for India remains the same that it’s ever been, which is higher energy prices. So it’s something to keep in mind.
Against that, I think there’s an interesting development that most people have missed, and that came out of the BRICS’ meeting last October. Now, you probably know that India and China have a very contentious border up in the northwest of India and in the southwest of China. You might have read that they’ve had soldiers and border guards throwing rocks at each other or sometimes fighting with bare hands or with clubs. And in 2021, they had a pretty big battle. Again, no weapons. They’ve agreed to never have weapons, but it was a battle that left anywhere from 40 to 60 dead. So still pretty bad.
So there’s been this contentious relationship, and at the BRICS summit, Xi Jinping said, “OK, fine, I’ll pull back my troops”--I can’t remember how many miles, but--“I’ll pull my troops back,” and essentially giving Modi a massive win, big political win for Modi, which of course begs the question of why did Xi Jinping do that? Because he’s a nice guy, because he wants to do a favor to his friend Modi, because generosity of spirit—or because he got something on the other side? I think the latter option is more likely---he got something on the other side. But if he got something on the other side, what did he get? And the most likely answer is perhaps more economic trade, more economic integration with China. And that brings me to what I think is the massive opportunity for the world, not just for India. But when you look at a map of Asia, there’s an anomaly, because Russia and China have been very good friends for the past couple of decades now, and Russia and India have been very good friends for more than 70 years.
Meanwhile, it’s not true that the friend of my friend is also my friend when it comes to international relations. So China and India have had a contentious relationship, even though both have a great relationship with Russia. But imagine if the China-India relationship now heals, which it looks like it is. It looks like it is healing. Two weeks ago, they just announced that they would restart direct flights that had been interrupted. So you’re now going to have Beijing to Delhi flights, you’re going to have Shanghai to Mumbai flights. So imagine if all of a sudden you start to see more trade and more investments and more business opportunities between China and India. The reality is that those three economies are massively complementary. Russia produces the commodities, China produces the capital goods, and India provides the low-end cheap workers that frankly China no longer has. And so China can come in, build the factories, and then from the Indian factories goods can be sold all over the world, perhaps with less tariffs and less duties than the ones that would have prevailed if the goods had been made in China. So a greater economic integration between China, Russia, India could unleash a pretty impressive wave of growth and potentially exciting returns for investors.
Benz: I wanted to follow up on your point about energy. Oil prices fell pretty significantly last year. President Trump is saying “drill, baby drill,” which could mean more supply and put further downward pressure on oil prices. Are you bearish?
Gave: No, I’m not. I’m actually pretty bullish on energy prices. And I take your points on the “drill, baby drill.” But of course, President Trump is not the King of Saudi Arabia, right? He doesn’t control the US energy industry. Now, if MBS in Saudi Arabia came out and said, “We’re going to drill and massively increase production,” then you could expect that that’s what would happen. But in the United States, those decisions are made by private sector companies. And today, private sector companies—the reality is that most energy companies are not incentivized to drill, baby drill. They’re just, today, the incentive structure of the management—whether you’re Occidental Petroleums or your Chevrons or your Exxons or you name it—their incentive structure is return capital to shareholders either through share buybacks, either through dividends. The days when energy stocks were rewarded for digging a bunch of holes and buying or hiring a bunch of equipment are now long gone. Capital discipline is what now gets energy stocks rerated.
I don’t think we’ll be seeing an explosion of production in the United States. In fact, you know, US is essentially producing 13.5, 14 million barrels per day. I think that’s probably going to be around a plateau. And the idea that you can get another two, three million barrels out of the United States—you can, I don’t think you can get it at $75. I think you can get it at $100, $110, $120. Then companies will happily drill, baby drill. But today I don’t think they’re going to do that. So, then you’re left with a question: OK, well, maybe we don’t get that extra two or three million barrels out of the US. Maybe we get it out of Saudi Arabia. Maybe we get it out of Russia. But here, what is the incentive structure for these countries to all of a sudden flood the market with oil and crush their own price?
Bottom line, I tend to think that the oil price bottom that we had last year will be a bottom for quite a while. And we’re most likely grinding our way up. Now, I’m not saying we’re going to shoot up to $120, but, look, for the really almost a year now we’ve hovered roughly around $70, give or take $10, at around that price point, most people are decently happy. The oil companies make money, but there’s no new excess capacity being put on. Saudi makes enough money, UAE makes enough money. And at $70, you don’t crush growth. So, I think there’s sort of a happy consensus around the $70, $75 mark that will essentially keep the prices in that range.
Lefkovitz: We also wanted to get your view on the US dollar, or currencies more generally. For US investors, the dollar’s long run of strength has really diminished returns for investments outside of the US if they’re unhedged. How are you thinking about the dollar going forward? Can it continue its run of strength?
Gave: Yeah, look, that’s always one of the most important questions. And the reality is there were many things underpinning the strength of the US dollar, but one of them was rising yields on long-dated US Treasuries and essentially growing interest-rate differential with a lot of places around the world. Now, I think when I look at the Trump administration today, what I’m hearing increasingly from whether Scott Bessent or Howard Lutnick or Michael Phelan or all the financiers within the Trump administration is a pretty clear desire to prevent long-term bond yields from rising any further, which makes sense. US has a highly leveraged economy. The government itself has a fair amount of debt to roll over. You could see why they wouldn’t want higher yields. So if we start off with the premise that one of the main focus of the Trump administration is prevent yields from going up, from there you get to the question—OK, do they manage to do that or do they not? I think they’ll manage to do that. And I think the whole DOGE thing is part of that exercise. If they manage to cap the bond yield, then I think essentially they’ve also capped the dollar. If bond yields go down from here, I think the dollar follows.
And so, you go from 108 to 106 and 106 to 104 and then 104 to 102 on the DXY. And I think this is all the more so since, when you look outside of the United States, the stories actually start to sound and look a little bit better. So in Japan, you now have a more hawkish Bank of Japan. And so the yen is most likely bottomed, and the yen is now sort of grinding its way higher. In China, we have an economy that is starting to feel, look better with improving data and more importantly, a roaring stock market, which eventually will end up attracting capital. So, there as well, you’re probably on a path toward a stronger renminbi. In Europe, we have the German election in a couple, not even in a couple weeks, in like 10 days. We have the German election. And that German election will likely lead to a coalition government whose main purpose will be to spend a lot of money and prevent the rise of AfD to power. So, they’re just going to spend money like crazy. And that will lead to both stronger short-term growth in Europe and potentially a somewhat more hawkish ECB. When I look at Canada, I think that the main consequence of this whole 48-hour tariff war is that Canada now realizes that, if you only have one client, actually you have a boss, you don’t have a client. And so Canada is going to now make the necessary infrastructure investments, the pipelines through BC, the LNG gas terminals in Eastern Canada, to essentially sell its commodities elsewhere but to the US dollar at a discount. And so, with this, you’ll get also stronger growth in Canada with that infrastructure spending, potentially capital moving back all these big pension funds, having to fund these infrastructure spending, will be selling some of these US assets.
So I think the US dollar, I think we’ve seen the highs in the US dollar. Incidentally, if you look at Trump’s first term, in his first term, the US dollar peaked literally on the day of his inauguration. Right now, it looks like it might have peaked on the day of his inauguration again. It might be funny if history repeats.
Lefkovitz: Last question. You mentioned the European economy and the German elections. It’s your home continent. Europe seems kind of troubled these days politically, economically, certainly a diminished share of global equity market capitalization. Do you see any prospects for a comeback for Europe?
Gave: So yeah, I do. And, well, OK, let me back up. I think there’s a cyclical case for Europe, which explains why the European stock markets are starting to outperform US stock markets this year, while you’re seeing European banks outperform banks pretty much everywhere else in the world and pretty much any other sector. Most people don’t realize this but since the bottom in October 2022, European banks have actually outperformed the Mag 7. It’s been on an absolute tear. So there’s a cyclical case for Europe, which really revolves around what I just described, the fiscal stimulus that is about to be unleashed on Europe for the next couple years. More structurally, I think the real challenge for Europe, a much bigger structural challenge, is the competition coming from China, and that a lot of European industry, the auto industry, the industrial robots, the batteries, all the stuff that Europe used to be very good in, the reality is now China is better and doing it at a much lower price. At that one, I’m not quite sure how you solve, but can Europe do well over the next couple years? Absolutely.
Lefkovitz: I think we’re out of time, unfortunately. Louis, thank you so much for joining us on The Long View. We really appreciate it.
Gave: Pleasure, guys. Nice to meet you.
Benz: Thanks so much, Louis.
Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify or wherever you get your podcasts. You can follow me on social media @Christine_Benz on X or at Christine Benz on LinkedIn.
Lefkovitz: And Dan Lefkowitz on LinkedIn.
Benz: George Castady is our engineer for the podcast, and Kari Greczek produces the show notes each week. Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at thelongview@morningstar.com. Until next time, thanks for joining us.