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Bloomberg: Here Are Goldman Sachs’ Top Trade Ideas For 2017
Wondering how to invest in a year marked by President-elect Donald Trump’s inauguration, China’s attempts to keep growth both high and sustainable, and the continued rise of populism in Europe?
Goldman Sachs Group has got you covered, with a team led by Co-Head of Global Macro and Markets Francesco Garzarelli releasing its first set of top trade recommendations for 2017 in a note to clients.
Some of these six trades* are a continuation of existing high conviction calls from the bank; others are fresh ideas.
A warning: the recent track record for Goldman’s year-ahead trade ideas has been less than stellar.
Amid the market turmoil that characterised the start of 2016, the bank was stopped out of five of its six recommended top trades before Valentine’s Day.
*We picked the four most relevant trades. You may read the original article by Bloomberg here.
1. US Dollar The Winner From Developed Market Populism
Remember the much-ballyhooed divergence trade that was among the most consensus calls of 2016? It’s back – but with a twist.
The rationale for this trade is now grounded in political considerations; chiefly, the populist tide sweeping the globe.
“In the US, events have moved in a US dollar-positive direction, between the rising likelihood of fiscal stimulus, more protectionism and immigration controls, all of which add up to a more inflationary mix and tighter-than-otherwise monetary policy setting,” the team writes. “In Europe, ongoing uncertainty over the Brexit process will likely weigh on the British pound, while the slew of elections, including the Italian political fallout after the constitutional referendum on 4 December and general elections in France, Germany and the Netherlands, will weigh on the euro.”
The strategists are targeting 10 percent upside in the US dollar relative to an equal-weighted basket of the euro and pound, and would exit the position if the trade went against them by five percent. This would entail the euro falling to parity against the greenback, and the pound sinking to 1.14 on a 12-month horizon.
The primary risks to the trade would be tapering from the European Central Bank and a delay in triggering Article 50 to begin the Brexit process.
2. Bet On Trump Getting More Upset About China’s Currency
Goldman sees Beijing’s policy of managed depreciation versus the US dollar continuing in 2017.
The strategists advise going long the 12-month non-deliverable forward contract, which calls for the US dollar to hit 7.07 Chinese yuan, looking for it to move to 7.30. The team would cut the position if the contract fell to 6.75.
Source: Bloomberg
The fundamental dilemma of China’s currency regime is that, in an environment of a rising dollar, keeping the China Foreign Exchange Trade System basket stable requires dollar/yuan to move higher meaningfully, which carries the risk that capital outflows re-escalate,” the team writes. “Our base case is one where the dollar/yuan fix continues to grind higher, driven by domestic pressures and in the context of a stronger dollar.”
The dollar has gained 7.5 percent against the yuan over the past year; the rate of appreciation required to hit 7.30 would actually imply a smaller move for the greenback over the next 12 months.
3. Keep Calm And Carry The Right EM Currencies
The strategists recommend going long an equal-weighted basket of the Brazilian real, Russian ruble, Indian rupee, and South African rand against the South Korean won and Singapore dollar, two currencies often used as proxies by investors looking for another way to get short exposure to China.
“The expected return, including approximately seven percent carry (on an annual basis) and seven percent price return, is around 14 percent,” writes Garzarelli.
In the aftermath of the US election, some of these relatively higher-yielding currencies have been indiscriminately battered amid the selloff of emerging market assets, making it a good time to initiate long positions.
“The countries represented on the long side of our forex basket also have more limited exposure to US trade/demand risks if the protectionist rhetoric from President-elect Trump is transformed into action,” the strategists add.
4. Long EM Stocks With “Insulated Exposure To Growth”
“Looking across the emerging markets (EM) equity spectrum, we find that Brazil, Poland and India offer an ‘insulated exposure’ to the EM growth recovery story, without being particularly exposed to China growth or US trade policy,” the team writes.
Goldman recommends buying an equal-weighted, currency unhedged basket composed of the Warsaw Stock Exchange Total Return Index, the Ibovespa Brasil Sao Paulo Stock Exchange Index, and the NSE Nifty 50 Index, looking for a gain of 20 percent and bowing out if the position falls 10 percent from current levels.
