Goldman Sachs’ Global Markets Team just released its top trade recommendations for 2016.
They include both long and short positions in every financial asset class, and they span the world. In other words, it’s how Goldman Sachs recommends trading the world.
“The backdrop against which we launch these Top Trade recommendations is unusually uncertain,” Goldman Sachs’ Francesco Garzarelli writes.
“In the US, the Fed is now widely expected to start raising rates next month,” he continued. “What ‘flight path’ the FOMC will decide to communicate after ‘lift-off’ remains unclear. Similarly, in the Euro area, the ECB is widely anticipated to ease policy further next month in response to lower inflation than previously forecast. But there are many different ways in which the stimulus can be delivered (changes in the size, pace and composition of QE, further cuts to the deposit rate cuts, or fresh new measures), each with a different impact on relative asset price performance.”
He also pointed to volatility in the oil and metals markets as continuing to impact risk-taking behaviour.
Without further ado, here are the trades. They’re obviously not for everyone execute. But they certainly represent important investment stories that Goldman sees unfolding in 2016. We’ve summarized some of their rationales:
- Top Trade #1: Long USD vs short EUR and JPY: This is about the Federal Reserve, which is tightening monetary policy, as the European Central Bank and Bank of Japan continue to loosen monetary policy. It’s the theme of divergence in global monetary policy.
- Top Trade #2: Long US 10-year ‘Breakeven’ Inflation: Expectations for inflation remain low. Goldman sees this reversing as economic growth pushes wages and prices higher.
- Top Trade #3: Long MXN and RUB (equally-weighted) versus short ZAR and CLP (equally-weighted): This is about trading the unfolding global emerging market story, which includes further adjustment in current account balances in South Africa; stabilisation in oil prices, which should help Mexico and Russia; downside in metals prices, which is bad for Chile and South Africa; and depreciation in the Chinese currency.
- Top Trade #4: Long EM ‘External Demand’ vs. Banks stocks: Goldman’s house view is that growth in the emerging markets will continue to be pressured. As such, they think that emerging market stocks that are more exposed to the developed markets will do better than those that focus on growth at home. Specifically, they favour non-commodity exporters over banks.
- Top Trade #5: Tighter Spread between Italy and Germany Long Rates: Easy monetary policy from the ECB will bring down the yield in higher risk European countries like Italy.
- Top Trade #6: Long large-cap US Banks relative to the S&P500: US banks are reasonably cheap, pro-cyclical, and will benefit from higher rates.
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