Why Being Caught in Your Own Narrative Can Crush Your Company

Hubert Roslund:  Louis-Vincent, very happy to have you here for this discussion. You are the CEO of Gavekal and a very well-known member of the research and investment community. Could you tell our readers a little bit about Gavekal and its raison d’être?

Louis-Vincent Gave: Thank you for having me, Hubert. Gavekal is a financial services company organised around three key activities: financial research for institutional investors, funds and private wealth management, and portfolio construction tools. Our headquarters is in Hong Kong, we have a major office in Paris and our China research team is based in Beijing. The idea of having an active presence in Asia is of course that this continent is a very important factor in global growth, and one that is often badly understood by western investors, hence the need to provide ideas and context.

The Risk of being caught in one’s own narrative

Hubert Roslund:  Before entering into the realm of 2025 market themes, I’d like to discuss a very real and often observed risk, that of being caught in one’s own narrative. As I see it, a key risk for any company, or society at large, is the risk of not looking or – at least – not looking seriously. To allow yourself to let propaganda or – at the very least – sloppy, consensual political or financial news reporting drive the assumptions you rely on for your business strategy. The assumptions that are the difference between growth and decline, between success and bankruptcy. 

Louis-Vincent Gave: Yes, one could for instance argue that this is what happened when China leap-frogged the West in a number of industries, such as electric vehicles, industrial robots, solar panels, nuclear power plants, batteries and now, potentially, AI. For a number of years, westerners hardly visited China, first due to Covid, then due to China not being seen as investable as a result of the geopolitical tensions following the Russia-Ukraine war. Many analysts relied on headline figures and sub-standard remote reporting that focused narrowly on problems within the real estate industry and failed to see a shift that was obvious to a disciplined observer on the ground. 

Hubert Roslund: I unfortunately recognise that pattern, not only from many geopolitical conflicts over the past 30 years, but also from some steady, slow-moving trends that have just been ignored due to the recurring noise of everyday life.

Some questions are truly difficult to assess, and one has to be honest about that, but when the strategy fails due to not having looked properly or not having formulated a coherent strategy, that is simply not good enough.   

Louis-Vincent Gave: What do you see amongst the banking community? How can a bank avoid being caught in such a narrative?

Hubert Roslund:  First of all, a bank or a company tends to end up in that place either due to lack of ambition or a crowding out of that essential component of a company’s task due to other, urgent deliverables. To some extent, the two are inter-linked: if you are not ambitious enough to create an efficient machine to run your daily operations, there will be limited time to be ambitious about your horizon scanning and strategy setting. 

I am not saying it is easy, we are living in a time of rapid technological change, intense regulatory pressure and significant geopolitical tensions, so key decision makers will not have time for this crucial strategy formulation unless they specifically decide that it is important and that there is a need to make room for it. It’s tough work but I think both of us have seen companies getting crushed by events when they have ignored this.  

Louis-Vincent Gave: Absolutely. The investment community works a lot with setting up competing narratives and testing them against each other. How do you stimulate this approach within other parts of the financial industry and how do you make sure the organisation benefits from it?

Hubert Roslund: There are many ways of achieving this but first of all you have to ensure you all buy into this ambitious agenda and set yourself up for this as a part of the recurring business. 

The views don’t necessarily have to be contrarian all the time. They don’t even have to be what actually happens in the end. What matters is to formulate sharp, credible, coherent scenarios that could challenge your organisation. This will allow you to position yourself – or prepare yourself – for a range of credible scenarios, either to benefit from upsides or protect yourself against downsides. 

Louis-Vincent Gave: Yes, knowledge about geopolitics, the intricacies of how the international financial system works and…adaptability. I think as members of the investment community, we’re to a large extent paid to adapt to changing circumstances.  

Hubert Roslund: Exactly, and for an intelligent leader, this is also a way of testing your organisation. Can the organisation correctly drill into different portfolio segments as a matter of urgency? Do they understand the relevant levers and can they prepare and implement strategies in a way that ensures the organisation’s survival?   

To be really effective, one obviously has to have both a curious mindset and understand issues such as geopolitics and the overall plumbing of the financial industry. If you don’t fully have this capability inhouse – and few organisations do – there are external research companies and I would recommend people such as Louis-Vincent. If you are only using what you find in the daily business press, you are not being ambitious enough. At all.   

Important market themes for 2025

Hubert Roslund: On that note, Louis-Vincent, could you tell us about some of the important themes you believe a financial institution should consider in 2025?

Louis-Vincent Gave: Yes, the starting point is that it is hard to recall a time when we had to absorb, and make sense of, so many outliers. 

Outliers in 2024 included the extreme outperformance of US growth stocks, compared to almost anything else: European large-caps, small-caps and even US value stocks. This US growth stock outperformance was all the more noteworthy since, for the first time in modern history, US long-dated bonds delivered a fourth consecutive year of negative returns. 

Another outlier was gold’s impressive performance against all currencies and most commodities. Gold is now starting to look really expensive, or alternatively energy is just too cheap. 

But that was not all, the biggest outlier had to be China’s enormous USD 1 trillion trade surplus, even as the US, and to a lesser extent Europe, tried to remove China from its supply chain. 

Hubert Roslund: Plenty of geopolitics involved in some of these outliers, I assume, and then you have the fiscal and monetary policy…

Louis-Vincent Gave: Yes, the continued deterioration in public finances across G7 countries, four years into an economic recovery is not exactly a textbook event.

Hubert Roslund: So how do you bring all of this together?

Louis-Vincent Gave: At year-end, we formulated three narratives to try to explain what is currently driving financial markets. We named them “US exceptionalism on steroids”; “US goes full Turkish”; and “China confidence bounces back”?  

In short, the “US exceptionalism on steroids” narrative rests on two main pillars, that the US is better at growing its labour productivity than its peers; and that US companies have been leading the global digital economy. From there, the hope in recent months has been that Donald Trump will unleash a new wave of tax cuts, deregulation and other growth initiatives that will further widen the gap between the US and its competitors. This narrative explains the massive outperformance of US growth stocks, the outperformance of the US dollar, the rise in US bond yields and the weakness of the yen. 

However, it does not explain the size of the US budget deficit, gold’s impressive performance, China’s soaring trade surplus or the most recent sharp outperformance of US growth stocks over value stocks. 

Hubert Roslund: The “US goes full Turkish” scenario is based on that government’s effort to erase debt through inflation, I assume? 

Louis-Vincent Gave: Indeed. The adopted policy led to what we have chosen to refer to as the “de-facto euthanasia of the rentier”, that is a substantial loss of purchasing power for anyone placing their savings in bonds or savings accounts. Turkish bonds lost more than half of their value in US dollar terms, while the stock index soared. Turkish investors could hide savings in US dollars, euros or gold. For others, the option was to get out of bonds to at least maintain some semblance of purchasing power.  After four consecutive years of negative returns on long-dated US bonds, the obvious question is whether the US (and the broader OECD) is “turning Turkish”. That would explain many of the outliers, including gold’s strength, China’s soaring trade surplus and the widening US-China interest rate spread. What it does not explain, however, is the strength of the US dollar. 

Finally, the “China confidence bounces back” narrative starts with the largest macro outlier of them all, China’s gargantuan trade surplus. Rather than repatriating capital and investing in new factories, domestic real estate or local equities, entrepreneurs on the other side of China’s massive trade surplus seem to have redeployed them in Chinese Government bonds, gold or US equities due to a collapse in domestic confidence. In our scenario, Chinese entrepreneurs and consumers alter course and start buying more consumer goods or services at home, alternatively start investing in domestic risk assets. 

Hubert Roslund: So where does that leave us?

Louis-Vincent Gave: All of which leaves investors in a bit of a pickle. Not only must they decide which of the narrative makes the most sense, but once that decision has been made, they must then ponder if current trends will continue, amplify, or reverse. This leaves us with a decision tree with too many branches! 

Given this setup, I proposed falling back on Charles Gave’s sage advice that when things are complicated, often the best strategy is to look for an asset class offering a “heads I win, tails I don’t lose” proposition. 

There is obviously a more in-depth explanation to this, but in short, that lead us to highlight US treasuries as an asset class that would be negatively impacted by all of these scenarios, whereas energy and commodities as well as the Global Value stocks would do well or relatively well in all of these scenarios. The other main asset classes have a more mixed performance in the different scenarios. 

Hubert Roslund: Louis-Vincent, once again, many thanks for joining me in this discussion. We look forward to following your analysis going forward.

Louis-Vincent Gave – Founding Partner & Chief Executive Officer of Gavekal. He started his career with Paribas, where he worked as a financial analyst—first in Paris, then in Hong Kong.

Louis left Paribas in 2000 to launch Gavekal with his father Charles and Anatole Kaletsky. The idea at the time was that Asia was set to become an ever more important factor in global growth, and that consequently Gavekal needed to offer its clients more information, and more ideas, relating to Asia.

Louis has written seven books, the latest being Avoiding the Punch: Investing in Uncertain Times which reviews how to build a portfolio at a time of rising geostrategic strife, and when very low interest rates and stretched valuations on most assets announce constrained returns on most assets over the next decade.

Hubert Roslund – 24 years experience from both the Business and Risk Management side at sophisticated international financial institutions prior to joining Advisense.

He has significant experience of leadership in high profile cross-jurisdictional projects and places great emphasis on building organisational resilience. His experience covers the entire value chain, from research and analysis to origination, portfolio management and problem debt management in Europe, Asia-Pacific and the US.

Some of his previous roles include those of Global Head of Strategic Portfolio Management at RBS Non-Core Division and Head of Russian Desk at Nordea.