It has been an uncommonly volatile year across an uncommon spread of markets. From stocks in developed or emerging markets and major currencies or minor currencies; to the exotics – sovereign or high-grade debt, junk bonds, commodities, energy, precious, softs, metals and ores – 2015 has been a wild year.
With the Fed tightening into what many traders think is a weaker US economy and with China, Europe and the rest of the world’s slowdown looking set to continue, 2016 looks set to be another year of wild market movements.
That’s as true here in Australia as it is of global financial markets. So last night I asked 5 of Australia’s top strategists what was their best trade for 2016.
They had an hour’s notice.
The trades are as varied as the markets these strategists cover, interest rate credit, forex, stocks, and bonds. Of course these don’t constitute advice, but they are still instructive of the current currently driving strategists thinking.
Here we go.
Annette Beacher, TD Securities head of Asia-Pacific macro strategy and research has what you might consider a contrarian play on the health of Australia’s states for the interest rate portfolio managers out there.
Beacher is looking at a semi-government bond switch between Australia’s current economic superpower, New South Wales, and the now rust bucket Western Australia.
“Sell NSWTCorp (expensive) top buy WATC (cheap),” she said.
Her rationale is that “Western Australia will be the next state to slash costs and sell assets in 2016… add in the fact that GST distribution will eventually return in their favour, and Western Australia is at the bottom of the cycle now.”
Peter Jolly, NAB’s global head of research also has one for the interest rate traders and portfolio managers. Jolly looks like he’s in the camp that says the says the Fed will be true to their word and raise rates by 1% in 2016 – because his trade is to sell US 10-year Treasuries.
But not immediately: because the “chances are bonds rally towards 2% in next month or so.”
Jolly said that US 10’s “normally rally at the start of a fed hike cycle because 1) this fed is talking up cautiousness and 2) the positive carry on offer is still good.”
“But if the Fed eventually deliver on their 2016 dots then UST10’s will need to grind higher as tightening progesses. This is what happened in the 1999 tightening,” he said.
“I favour ust10’s making a multi-year high around mid next year at 2.75%-3%,” he said. No doubt, given correlations that means Australian 10-year bond rates will be rising as well.
Rob Rennie, Westpac’s head of market strategy says the Australian dollar is going to continue to “frustrate” the bears and remain “in a sticky range into next year.”
That’s despite the fact that “weaker commodity prices, especially LNG prices are a factor we will be talking more about in Q1.”
The frustration for the bears will, “as RBA Governor Stevens mentioned in his end of year interview this week, come from foreign investors considerable appetite for Australian assets,” Rennie said.
Rennie’s list of potential deals attracting Aussie dollar buying includes “Ausgrid, Endeavour and a number of Ports including Port Melbourne.” That means there is potentially considerable appetite for Australian dollars which will make it “sticky through Q1.”
Balancing that out, Rennie says, is the US economy which is likely to provide the Fed with the cover to raise rates the four times as planned, but discounted by the market, in 2016.
That would put downward pressure on the Aussie toward 68 cents, perhaps 66 cents, but he’s not “convinced we see an aggressive push sub 0.68.”
The trade? Rennie suggests structures that give opportunity to profit from Aussie dollar downside in a rangebound world.
(My take on this is: buy the dip.)
Ric Spooner, CMC’s chief market analyst and daily contributor to 6 things traders will be talking about has one for the oil traders and stock pickers.
Spooner says buying Woodside on weakness is the trade for him. That’s because even though, “oil prices could get worse before they get better” Spooner thinks that of all the “beaten up commodities, it (oil) looks to have the best chance of a relatively speedy recovery.”
That means Woodside could perform well. That’s because the company has “having a strong balance sheet that will allow it to make a game-changing acquisition while oil prices are low.” Spooner says Woodside’s management is conservative and respected and that “when Woodside does eventually move, the market is going to like it.”
In this fractious market for oil there is a caveat, however. Like Jolly on bonds, Spooner favours delaying this trade. There is a possibility the stock and oil could still get beaten up.
If that happens, “it could be my contrarian trade of the year,” he says.
While the outlook will develop as the year unfolds Spooner has “$23 on the watch list being a harmonic AB=CD level and long term channel support as shown on the chart.”
Chris Weston, IG’s chief market strategist has a big macro stock trade as his favourite for the year. Weston said he likes the “idea of leveraging the trade to liquidity conditions.”
That is: he wants to be long Europe, and short the US stock markets.
Weston said, “The Fed tightening is a very gradual affair. While that will benefit parts of the market, on the whole we have seen time and time again that traders love liquidity and as the ECB expands their balance sheet at E60 billion a month this should support European equities.”
He also says Europe is attractive because it is a “region that is seeing signs of economic improvements through credit growth (M3 money supply, manufacturing, ECB lending survey)” and it’s also a region where the “valuation is less demanding” and the red line shows the ratio of the “ECB’s balance sheet as a ratio of the Fed’s” is still supporting.
There are many ways to achieve a long Europe, short US stock trade but Weston favours “being long Europe through the HEDJ (Wisdomtree Hedged ETF).” The other side of the trade he says he’d institute by being “long SH (Proshares short S&P 500 ETF), which is effectively the same as being short SPY.”