The Bull Case for China: The Best Opportunity Right Now? | Louis Gave
What this covers
Wilfred Frost is joined by Louis Gave, the founding partner and CEO of Gavekal, one of the world’s leading independent research firms. With a focus on the shifting geopolitical landscape, Gave outlines why traditional investment assumptions – from the safety of US Treasuries to the dominance of US tech & defence stocks – are being fundamentally upended, and why China is screamingly cheap.
The Middle East & The Inflationary "Air Pocket": Louis analyzes the ongoing conflict in the Middle East, noting that even a diplomatic resolution will leave a two-month "air pocket" in global supply chains. He argues that the resulting inflationary shock is definitely coming, and while it might be priced into commodities it isn’t priced into equities and bonds.
The US-China Reset: Amidst these dark clouds, Gave identifies a potential silver lining: the economic pressure of inflation may force a "positive reset" in US-China relations. He suggests that both nations are now "condemned to get along" to avoid simultaneous inflationary shocks. He also wonders whether it might force Europe to finally adopt sensible energy policies.
The Death of the "Capital-Light" Model: Louis offers a provocative take on the US market and the AI boom. He explains how the world’s most successful "platform companies" (like Microsoft and Amazon) are shifting from capital-light models to massive capital intensity, questioning if their 35x earnings valuations remain justified.
The Bull Case for China: Contrary to popular sentiment, Gave argues that China is structurally undervalued. “China has the lowest cost of capital, the lowest cost labour, the lowest cost of electricity, and has the world's cheapest currency and it's not even close. And that makes for a very powerful combination.” He also thinks they are the economy best prepared for the Iran War.
The Changing Face of Warfare: Louis explains his bearish stance on traditional defense stocks, arguing that the age of the "$275 million fighter jet" is being replaced by the age of the "$50,000 drone". He compares the current defense industry giants to IBM in the era of the personal computer.
Sovereign Vulnerabilities: A look at why the bond markets in the UK, France, and the US are uniquely vulnerable due to their reliance on "the kindness of strangers" (foreign investors) rather than domestic savings.
Finally he reflects on his overriding investment advice for listeners. "The first thing you have to know as an investor is to know yourself... making sure to not put yourself in the situation where you're going to make the wrong decisions."
Recorded 29th April 2026
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Louis Gave argues that geopolitical shocks (Middle East conflict, weakened US naval dominance) are forcing a structural reordering of global trade and reserves, making China—with its massive inventories, low costs, and policy commitment to self-sufficiency—the most attractive investment opportunity, while the US market risks a sharp correction if the AI capital intensity bet fails.
- The assumption that the US Navy controls seaways and that Treasuries/gold can be converted to commodities on demand has been broken by geopolitical events, forcing all nations to build domestic inventories and re-evaluate asset allocations
- China enters this crisis far better prepared than any other nation due to its 2018 pivot to self-sufficiency, and now offers the lowest cost of capital, labor, electricity, and currency while displaying emerging world-class companies
- US equity valuations at 30-35x earnings rest on a shift from capital-light to capital-intensive AI spending—a bet that may be overpriced if discipline has been lost or if not all tech leaders succeed simultaneously
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The assumption that Treasuries serve as a reliable liquid store of value that can be converted to commodities during crises was broken by the US seizure of Russian assets, demonstrating that Treasuries only retain value if the US permits it, causing central banks to pivot en masse to gold purchases.
“When we seized Russia's treasuries, we said, 'You only get access to treasuries if we say you do.' We being the Western world and really being the United States. So, that was the first assumption.”
China today has more oil in storage than the rest of the world combined, more natural gas in storage than the rest of Asia combined, and more fertilizer in storage than the rest of the world combined, primarily as a consequence of the US semiconductor restrictions imposed on China eight years ago that triggered a strategic pivot to national inventory accumulation.
“China today has more oil in storage than the rest of the world combined. It has more natural gas in storage than the rest of Asia combined. It has more fertilizer in storage than the rest of the world combined. The reason China has all this is because eight years ago the US told China no more semiconductors.”
The 2018 US semiconductor restrictions on China triggered a panic among Chinese policymakers that is evidenced in bank lending data, where lending to real estate and consumers plummeted starting in 2018 while all capital was redirected to building industrial self-sufficiency across every vertical.
“If you look at bank data, at bank lending to real estate and the consumer starting in 2018 it plummets. And all the money goes to to industry.”
The emergence of truly world-class Chinese companies represents a structural shift in China's investment appeal: money previously trapped in real estate and stock markets has been redirected into industrial capacity, allowing companies like BYD to leapfrog Western competitors and become global champions.
“what I now see in China for the first time is the emergence of truly world-class companies. Um companies as all that money has gone into industrial investment... you're now seeing companies emerge that you know are going to be world champions. The obvious example is a BYD.”
Investors must first understand themselves—knowing the situations where they are likely to make good or bad decisions—before constructing portfolios, as this self-knowledge prevents making catastrophic mistakes during market stress.
“the first thing you have to know as an investor is to know yourself, right?... I now know, having made a lot of mistakes along the way, I now know the situations I'm good in and the situations I'm bad in. And uh and so much of this game is making sure to not put yourself in the situation where you're going to make the the the wrong decisions.”
Businesses have begun transitioning from just-in-time to just-in-case inventory models following the COVID-19 and Russia-Ukraine crises, which means they entered the current Middle East crisis with larger safety stocks than they would have had otherwise, providing a buffer against immediate shortages.
“most businesses uh started already to move away from just-in-time inventories to to more just-in-case. Uh you'll remember that this was one of the big themes that the just-in-case was one of the big themes uh following the Russia's invasion of Ukraine. All of a sudden, everybody starts to say, 'Well, you know what? Maybe I should have a little more helium since Ukraine's a big helium producer.'”
Drone warfare has fundamentally inverted the military-financial equation, making it now possible for a $50,000 drone to sink a billion-dollar battleship, while taking down that drone requires a $2 million Patriot missile, rendering traditional expensive naval and air platforms economically unviable and obsolete.
“warfare has changed massively. I think Ukraine was a prime a first example of this. And then um uh the Red Sea and the Houthis was a second.”
China's growth coming out of this crisis will benefit all of Asia: a larger pie lifts all boats, and Asian markets have been struggling for 7-8 years due to weak Chinese growth from industrial redirection policies; renewed Chinese consumer and growth focus will create a rising tide for Vietnam, Indonesia, Thailand, and others.
“growth is good news, right? I I start off with that premise. Um a bigger pie uh a rising tide lifts all boats. A bigger pie is, you know, feeds everyone. Um it's Asia, I think the the broader Asian markets have struggled from the fact that Asian uh Chinese growth has been very lackluster for the past seven or eight years”
US equity growth over the past 30 years was premised on the success of capital-light platform business models (where design and sales occur domestically while manufacturing is outsourced) that delivered high and stable returns on invested capital, allowing companies like Microsoft, Apple, and Amazon to achieve massive outperformance through buybacks.
“the growth of the past 30 years in in the US equity markets was essentially premised on the idea of very capital light business models... the companies used to be vertically integrated with companies that designed the good, produced the good, and sold the good. But that the the model of the future was the company that designed the good and sold the good and let the manufacturing bid in the middle to somebody else, somebody in China, somebody in Poland, or in [snorts] Morocco or wherever else.”
The three countries with deep vulnerabilities in their bond markets—the UK, France, and the United States—are those that depend disproportionately on foreign ownership of their debt, a condition far more predictive of crisis risk than debt-to-GDP ratios because debt-to-GDP compares a stock to a flow and misses the key vulnerability of whether domestic savings are sufficient to fund government.
“What always matters is the percentage of bonds owned by foreigners. This is a guide of whether domestic savings are enough to essentially keep governments going along.”
We are living through an upending of both the financial and geopolitical infrastructure of the past 80 years, which was premised on three key assumptions: (1) US Treasuries are the safe haven asset, (2) the US Navy controls the world's seaways, and (3) the dollar-based global financial system is stable and unassailable.
“we are living through right now essentially an upending of both the financial and the I would say the the geopolitical infrastructure of the past 80 years.”
A well-diversified portfolio should include four major asset classes—equities, fixed income, energy, and metals—each with its own life cycle and varying correlations; allocating 25% to each provides a sound foundation, though active investors can improve returns by eliminating or underweighting 1-2 asset classes and concentrating on the best opportunities in the remaining two.
“there's four asset classes that each each have their own life cycle and each sort of sometimes are correlated with each other, sometimes are not for different reasons. And these four asset classes for me are of course equities, of course fixed income, but energy and metals. These are the four main asset classes in a diverse a well-diversified portfolio. So, if you want to rest at night, just say, you know what, I'll put a quarter in each, go to bed, and you'll actually do fine over time.”
China is able to borrow more cheaply than any country in the world because Chinese citizens have high savings rates and prefer to lend to their government via bonds, allowing China's government to borrow from domestic savers indefinitely at low rates without vulnerability to foreign capital flight.
“China has fairly low taxes, but has the lowest bond yield in the world because Chinese people save a lot, and all the savings go into government bonds. And so, Chinese government gets to borrow cheaper than anybody. And And as long as you borrow from your own citizens, you can keep that going forever.”
China produces more electricity than the US and Europe combined, and the cost of electricity in China is a fraction of what Europe or North America pay, making Chinese energy production a model that Europe will be forced to adopt.
“Today, China produces more electricity than the US and Europe combined. And the cost of electricity in China is a fraction of what we pay in Europe or even what North Americans pay.”
The Chinese currency (RMB) has the best momentum in the world, up 6.5% against the US dollar over the past 12 months, and unlike historical patterns where the Chinese Central Bank freezes the currency during global uncertainty, it is now grinding higher every single day, a shift that signals policy commitment to currency strength.
“the RMB is has the best momentum in the world. It's up 6 and 1/2% against the US dollar over the past 12 months. Um and in itself that's fascinating because historically the Chinese Central Bank each time there's global uncertainty, they would freeze the value of the RMB. Uh this time they're not doing it. It's literally grinding higher every single day.”
Investor positioning in China is heavily skewed toward underallocation: the second-largest economy (18% of global GDP) is held by most investors at less than 5% of portfolio, while the US at 25% of global GDP comprises roughly 2/3 of the MSCI World Index, implying the market is betting that 2/3 of global profits will accrue to American companies over the next decade.
“the second biggest economy in the world. It accounts for roughly 18% of GDP and you'll be hard pressed to find anyone that has more than 5% of of China in their portfolio. Meanwhile, you know, to compare and contrast with the US, the US is roughly 25% of global GDP and the US is roughly 2/3 of the world MSCI.”
Today's leading US tech companies are abandoning capital-light business models and pivoting to massive capital intensity—investing tens of billions in data centers, chips, and power plants—because they believe AI productivity gains will be so enormous that traditional capital discipline is no longer necessary.
“the new generation of leaders today are saying, 'Look, that was then. AI is going to be such a massive thing that we now have to embrace a massively capital intensive business model. We're going to become more capital intensive than a steel plant. We're going to become more capital intensive than the auto industry has ever been. We are going to plow so much money uh into data centers, into accumulating chips, into building our own power plants to feed our data centers.'”
Coming out of the current crisis, all nations will need to build up domestic inventories of commodities they depend on, and Europe specifically will need to radically shift energy policy to embrace all energy forms (solar, wind, nuclear, natural gas, oil, coal) rather than continue its current ideologically-driven restrictions.
“everybody's going to turn around and need to have much smarter energy policies. And here, this is perhaps another silver lining to this crisis is that our energy policies in Europe have been completely upside down.”
In contrast to other major bond markets (US, Europe, UK, Japan) where policy makers are 'robbing Peter to pay Paul' through currency debasement and bond debasement to support equities, China's bond market has delivered very adequate positive returns over the past 5 years.
“the bond market is the one of the only major bond markets that has delivered very adequate positive returns to investors for the past 5 years. Uh I think everywhere else in the world, you're essentially in most markets in the world, the US, Europe, UK, Japan, you're in a situation where essentially policy makers are robbing Peter to pay Paul. They keep taking they keep crushing the bonds and following policies that essentially mean currency debasement and bond debasement so that equity markets can stay up.”
At 30-35x earnings, tech companies cannot maintain the same margin of safety if they were capital-light, making the AI investment thesis a knife's-edge bet: if AI delivers as promised, the valuation is justified; if not, valuations will collapse sharply because capital-intensive businesses face higher downside and lower returns on capital.
“Do I still want to pay 30 times earnings, 35 times earnings for a capital intensive business? You have to come to one of uh several possible conclusions. The first is to say, 'You know what? They're right. AI is like it's going to be such a game changer. They're right to do this.'”
Europe and North America have overestimated their own economic strength and the resilience of their systems, assuming they could sustain completely idiotic energy policies without economic consequences, a delusion now shattered by geopolitical crisis.
“I think to the large extent in Europe and North America, we we over overestimated our strengths. We're like, 'You know what? We can ramp up our cost of electricity. We can afford to have completely idiotic energy policies and our system will cope.' Turns out it won't.”
The Chinese government intervenes in equity markets each time they fall 10-15% to provide support, which is a policy signal that differs markedly from Western laissez-faire approaches and reduces downside risk for investors.
“you also have a government that essentially each time the market's gone down 10, 15%, uh steps in to bring it back up.”
BYD is an example of a Chinese company producing world-class electric vehicles that are already present on UK streets and increasingly common across emerging markets.
“The obvious example is a BYD. I I you already have BYD cars on the streets of the UK. ... increasingly wherever you go, you see Chinese cars that are genuinely world-class cars.”
The inflationary shock from the Middle East supply chain disruption is now baked into the cake; even if the Strait of Hormuz reopens tomorrow, a 6-week to 2-month supply chain air pocket has already occurred, during which ships that should have been arriving are absent.
“I think the inflationary shock coming from this is pretty much now baked in the cake. And of course, the longer we stay closed, the the bigger the inflationary shock.”
The US cannot regain control of the Strait of Hormuz by military force, so the only path to reopening is through diplomatic settlement, which is why the US and its allies are pressuring resolution rather than escalation.
“the US can't regain the Strait of Hormuz by military force. And so the only way it's going to reopen is through some kind of diplomatic settlement.”
Gave wrote a book in 2004 called 'Our Brave New World' in which he highlighted that successful companies would be those that transitioned from vertically integrated manufacturing models to platform business models, where design and sales occur domestically while manufacturing is outsourced.
“I actually wrote a book about this back in 2004 called Our Brave New World wherein I I talked about platform companies... the company that designed the good and sold the good and let the manufacturing bid in the middle to somebody else, somebody in China, somebody in Poland, or in [snorts] Morocco or wherever else.”
If US tech companies are competing against each other in a race to build data centers and accumulate chips, then they cannot all be winners because you need winners and losers in competition, making it unlikely they will all achieve superior AI-based returns.
“Maybe AI is going to revolutionize the world and these guys are going to be right on uh all these investments, although the odds that they're all right at the same time seems low. Um because, you know, you need you still need winners and losers.”
The Middle East crisis paradoxically creates an opportunity for the US and China to reset their relationship because the crisis is so large that the US cannot simultaneously wage a trade war with China and manage the Iran situation, so Trump and Xi are scheduled to meet four times in the next 12 months.
“Trump and Xi are scheduled to meet four times in the next 12 months, which has never happened, by the way. We've never had a US president Chinese president scheduled to meet four times over a 12-month period. And I don't think they're going to meet to discuss the weather.”
The US Navy cannot operate within 1,000 miles of Iran, which raises fundamental questions about the strategic value of $6 billion aircraft carriers if they cannot operate in contested waters where drone threats exist.
“you're seeing this today in uh in the Gulf of in the Persian Gulf, where the US Navy can cannot be close within 1,000 mi of Iran. Um which then raises a whole question mark, it's like, what's the point of a navy if you can't get it close to where the battlefield is?”
Rather than attempt to resolve whether the AI capex bet will succeed, Gave positions himself to avoid the crowded AI trade entirely by moving capital into less-crowded market segments where the odds of outperformance are higher.
“perhaps I'm going to try to do something else. Uh perhaps I'm going to go into the parts of the market that that aren't quite as crowded. Um I I don't think I'm, you know, you said we we talked to the smartest people, etc. I really don't think I'm the smartest guy in the room... right now it feels to me like all the smartest guys in the AI room, and they talk to each other all day, and they debate all day, etc. So I I just feel like I need to go into a less crowded room because the odds of me winning in that room are too low.”
The topic of the 2018 US semiconductor ban on China and its importance to understanding China's current strategic posture cannot be overstated.
“It's hard to underestimate the trauma for the Chinese policy makers of the 2018 decision to block China from semiconductors.”
At Gavekal, investment analysis uses four prisms in order: fundamentals (policy tailwinds and economic sense), momentum (avoiding fighting the market), positioning (looking for crowding and opportunity), and finally valuation (the last consideration).
“at Gavekal when we look at markets, we'd like to look at them actually through four prisms. And valuation is only the last one. The the very first prism we look at is is the fundamentals. You want to make sure when you invest somewhere that A, you're not fighting policy makers, that you have policy tailwinds rather than policy headwinds.”
Fertilizer prices have risen by more than one-third and gasoline prices have risen by about 30% in the US and 40-50% in Europe as a result of the Middle East disruption.
“fertilizer prices are now up by more than a third and gasoline prices are up by about 30% in in the United States and by 40 and 50% in Europe.”
Despite Middle East disruptions, grain prices (wheat, corn, soybeans) have not yet moved upward, but at harvest time (September-October), Gave expects grain prices will spike significantly, triggering major farmer riots in France and potentially elsewhere.
“the other thing that the Middle East is extremely important for is fertilizer. And so far, I'm somewhat amazingly, but grain prices have not moved up. If you look at wheat, if you look at corn, if you look at soybeans... unless come unless come harvest time, uh wheat prices go up, I think you're going to get like massive food massive farmer riots in France.”
Gave's 30-year background in emerging markets has taught him that the transition from 'really really stupid to just plain stupid' is profitable and can drive massive asset re-ratings, whereas the US market risks the inverse transition from 'perfection to just a tiny bit stupid,' which would cause sharp valuation compression.
“if you go from being really really stupid to just plain stupid, that's like such an improvement that a lot of assets can get re-rated massively... By the same token and to your point of your question, if if things are priced more or less for perfection, if you go from perfection to just maybe just a tiny bit stupid, then then you have then you have a a big problem.”
India has approximately $700 billion in US Treasury reserves that it held for emergencies, but now that the crisis has occurred, India realizes it cannot convert these Treasuries into the fertilizer, food, natural gas, and energy it desperately needs.
“India has roughly 700 billion US dollars in treasuries that they kept for the rainy day. That was the the rainy day fund. Uh well, the rainy day just uh just occurred. And they're looking around saying, 'Okay, what I need is fertilizer. What I need is food. What I need is natural gas. What I need is energy. And I can't transform my US treasuries into the fertilizer that I need.'”
India called China asking to purchase fertilizer from its strategic reserves at any price, but China declined to sell, prioritizing its own domestic needs, showing that the crisis is creating a 'haves vs. have-nots' dynamic in commodity access.
“India called up China cuz China still has fertilizer. And China said and India said, 'Name your price. I know you have uh storage.' ... China's like, 'No, mate. Sorry. I'd love to help. I'm keeping in mind cuz I you know, got to take care of my own people first.'”
France is less vulnerable to energy disruptions from the Middle East than Germany because France has substantial hydroelectric and nuclear power capacity, whereas Germany's energy-intensive industrial economy depends more heavily on imported energy.
“France, we're actually not in that bad a uh spot because we do have a lot of hydro, and we do have a lot of nuclear uh for us to fall back on. And so, uh we're we're a lot less dependent on imported energies than than say a Germany. Uh Germany also happens to be quite an industrial economy, which is energy-intensive.”
Wilfred Frost is the host of the Master Investor podcast and conducted this interview with Louis Gave, introducing him as the founding partner and CEO of Gavekal.
“Welcome to the Master Investor podcast with me, Wilfrid Frost... My guest today is Louis Gave, the founding partner and CEO of Gavekal”
Gavekal was founded in 1998 with a particular focus on Asia, which was seen as under-covered at the time, but the firm now covers all markets globally.
“when they were founded in 1998, they had a particular tilt to try and focus on Asia, which they felt at the time was under covered but cover all markets globally now.”
European electricity price spikes following the Middle East conflict are nowhere near as severe as those during the Ukraine war, suggesting that Europe has built more resilient electricity storage and grid infrastructure.
“It's fascinating that today the electricity price spike in Europe is nowhere near as bad as what we had uh in the Ukraine war.”
Gave is in his mid-50s and has lived through multiple market cycles, which enables him to know his limitations and decision-making strengths.
“for a guy like me who's in his mid-50s, who's gone through a few cycle”
Gave has been in Asia since 1997 and lived in Beijing, Nanjing, and Hong Kong, giving him 25+ years of direct observation of Chinese economic and corporate development.
“Having been in China since '97, have lived having lived there in Beijing and Nanjing and in Hong Kong”
Gave plays (or played) rugby for 30 years, and his experience being smaller than opponents taught him not to fight stronger forces but instead to work within his limitations.
“I played for rugby for 30 years and fighting people who are much bigger than you is tough. It's a it's a hard way it's a hard way to make a living. It's it's tough day at the office when you get the guys on the other side are much much bigger than you.”
Gave suggests the most likely outcome of the Middle East crisis is that the US will claim some kind of victory and withdraw, even though tolls and costs exist.
“I think so. Look, let me let me kick off first with a disclaimer. I'm I'm not a specialist on the Middle East.”