Here Are The Goldman Sachs Recommended Trades That Have Done Horribly This Year

poland yen

Earlier we linked to the Bloomberg piece about Goldman’s top trades for 2010, and how almost all of them have done horribly for clients.

Seven of the investment bank’s nine “recommended top trades for 2010” have been money losers for investors who adopted the New York-based firm’s advice, according to data compiled by Bloomberg from a Goldman Sachs research note sent yesterday. Clients who used the tips lost 14 per cent buying the Polish zloty versus the Japanese yen, 9.4 per cent buying Chinese stocks in Hong Kong and 9.8 per cent trading the British pound against the New Zealand dollar.

It just so happens we published the top trades last year.

So, without further ado, we present Goldman’s horrible top trades for 2010.

(Note: these were published in December, 2010)

Bet on moderating S&P volatility

Goldman writes:

Short S&P 500 Dec10/Dec11 Forward
Starting Variance Swap, at 28.20, Target 21

At current levels, forward variance suggests that the
coming years will be as volatile as 2009. But this past
year was the 8th most volatile year on record (2008 ranks
as number three), and our recent work on the 2004-
template suggests that even in a sluggish recovery and a
range-bound equity market, as macro-driven uncertainty
declines, volatility can continue to moderate.

realised 1-
month S&P 500 volatility is currently at 16, towards the
low end of Buzz Gregory and team's near-term macro
driven forecast range of 15-19, and front-month VIX is at
about 25.50. And the upward-sloping term structure has
kept forward variance higher still.

Source: Goldman Sachs: Unveiling Our Top 10 Trades For 2010

Go Russia!

Go Britain, and forget the Kiwis

The pain in the UK pound, and the strength of the New Zealand Dollar have both been overdone. So, time to reverse that trade.

Top Trade #3: Long GBP/NZD at 2.29, target 2.60
In the context of our 'growth differentiation' investment
theme, our FX research has been highlighting the need to
look for strong out-of-consensus views. One currency
cross that stands out in this respect is short NZD/GBP.
We are considerably more bullish on Sterling, linked to
stronger cyclical momentum in response to a large easing
in financial conditions. At the same time we expect rates
to rise a lot more slowly in New Zealand than the
consensus.

Beyond the cyclical differentiation relative to consensus,
we think there are additional factors arguing for the NZD
to underperform. Firstly, the positive terms-of-trade
impact on New Zealand has only been about half as large
as in Australia due to the different commodity mix. But
both currencies have performed similarly this year and, in
fact, NZD is at least 5% more overvalued than the AUD.
Secondly, in order to re-balance the economy, the
authorities in New Zealand appear to be considering
dampening domestic demand through tighter fiscal policy
with the explicit aim of weakening the currency.

Source: Goldman Sachs: Unveiling Our Top 10 Trades For 2010

Bet on UK/Australia convergence

Another similar theme as the UK/Kiwi trade.

Top Trade #4: Pay 2-yr UK Rates vs Australia 1-yr
Forward at -268.5bp, Target -150bp. The UK has
been far closer to the epicentre of the credit crisis than
Australia. But markets expect this macro divergence to
extend and the forwards price policy rates to rise much
faster in Australia than in the UK. This looks too
aggressive to us. Overall financial conditions have eased
far more in the UK than in Australia, the damage to UK
house prices has been smaller than initially feared and
our forecasts envisage a steep acceleration of UK GDP
growth into 2011. We see cumulative tightening of
300bp in the UK by end-2011, starting in mid-2010,
compared with just 125bp in Australia.
updated on a monthly basis.

Source: Goldman Sachs: Unveiling Our Top 10 Trades For 2010

Here comes a Turkish recovery

Get ready for strong growth and higher interest rates in Turkey:

Top Trade #5: Pay 2y Rates in Turkey at 8.77%,
Target 12%. Real policy rates in emerging markets are
at record-low levels. This is particularly true in Turkey,
where the market is pricing that real policy rates will
decline from about 1.5% currently (ex-post) to about
1.0% in 12 months. Turkish growth should continue to
recover strongly, while inflation normalises to about 7%
next year. We expect the CBRT to hike by 250bp in the
second half of 2010 from 6.5% currently, more than the
forwards. As tightening begins, we expect the forward
premium to increase. There is a large negative carry and
roll-over cost of 375bp, but we are confident that the
switch in monetary policy will occur in the next few
quarters.

Source: Goldman Sachs: Unveiling Our Top 10 Trades For 2010

Short Spain, Long Ireland

Credit default swaps on Irish sovereign debt are still wider than Spain's. This will coverge.

Source: Goldman Sachs: Unveiling Our Top 10 Trades For 2010

Growth will diverge all around the world

The basic idea: bet on growth rates being wildly different all around the world.

This theme can be implemented in the form of our
Growth Current (Bloomberg ticker: GSCUGROW). As a
reminder, the Currents are tradable long-short baskets of
currencies that aim to capture certain macro themes in the
FX markets. The Growth Current specifically makes its
selection of currencies based essentially on how fast
countries are closing their output gaps. The FX Growth
Current currently contains long positions in INR, IDR,
CNY, AUD, PLN, PHP and short positions in MXN,
RUB, TRY, TWD, HUF, MYR, but given the dynamic
nature of the basket the composition will change
frequently. Currencies currently included in the short
basket could easily appear on the long side later in the
year (see the Global Viewpoint dated July 20, 2009 for
more details on our FX Currents).

Source: Goldman Sachs: Unveiling Our Top 10 Trades For 2010

Go long Poland vs. Japan

The final one is another odd pair trade:

Polish growth is currently accelerating strongly, running
at a forecast sequential rate of more than 4%qoq
annualised in the current quarter after 2% qoq annualised
in Q3. Poland has only experienced one single quarter of
negative growth during the crisis. The Polish Zloty is
undervalued to the tune of 14% against the EUR,
according to our GSDEER model. Strong export demand
partly linked to the cheap currency but also linked to the
recovery in Germany has kept the trade account close to
zero despite the strong pick-up in domestic demand.
In sharp contrast, the Japanese Yen is significantly
overvalued. The resulting exceptionally tight financial
conditions in Japan have raised the downside risks to
growth from an already anaemic starting point. Moreover,
the new government appears to focus increasingly in the
negative growth impact from Yen overvaluation, as
signalled by recent MoF communications. We also think
there is reasonable chance that the Bank of Japan
proceeds to quantitative easing measures soon in order to
alleviate economic pressures. This could serve as a
catalyst for JPY weakness.

Now, see what Morgan Stanley says about 2010 >>

Source: Goldman Sachs: Unveiling Our Top 10 Trades For 2010

Buy Hong Kong

(Unfortunately we don't have the exact call ont his one, and are relying on Bloomberg's report to indicate that it was 9th of the firm's recommendations.)

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