We could say that 2016 has been a rather eventful year for business, finance and global markets. Starting from Brexit becoming a Black Swan event in no time, Donald Trump becoming the 45th President of the United States, India’s demonetization of currency and China’s continuous attempt to keep growth both high and sustainable, this year has seen a lot of ups and downs with people wondering where should their next investments go. But with 2017 approaching in 5 weeks, Goldman Sachs has shared their top trade ideas for 2017.
Some of these six trades are a continuation of existing high conviction calls from the bank; others are fresh ideas.
Here are the top 6 trade ideas by Goldman Sachs:
1) U.S. dollar the winner from developed market populism:
Any changes made between economic fortunes on either side of America or Britain/Europe are likely to mean further gains for US dollar relative to the pound and Euro. Goldman sees the euro at parity with the dollar in late fourth quarter of 2017. And in this span of time, the bank expects the GBP to trade between 1.20 (start of the year) to 1.140 by the end of the final quarter in 2017. And as far as The Street reports, investors could earn an interest carry of 1.3%.
As far as the United States is concerned, events have moved in a “USD-positive direction after the rising likelihood of fiscal stimulus, strengthening of protectionism and immigration controls which all adds up to more inflationary mix and a tighter monetary policy setting”, Zerohedge reports. In Europe, it is very likely that the “ongoing uncertainty” over Brexit will make a huge difference to the pound. Also, with the Italian fallout and upcoming elections in France, Germany and Netherlands, the Euro could be affected and should depreciate. Bloomberg reported that Goldman strategists are targeting “10% upside in the USD relatively to an equally-weighted basket of the Euro and Pound,” and they plan on taking an exit if “trade goes against them by 5%”. In this situation, the Euro will be in parity with the dollar and the GBP will sink to 1.14/$ on a 12 month horizon.
2) Bet on Trump getting more upset about China’s currency:
Goldman expects Beijing’s policy of managed depreciation against the dollar to continue in 2017 as well due to “capital outflows resulting from trade-fight” with President-elect Trump, whose election has added to the dollar becoming even more stronger. This has led Goldman analysts to anticipate a further decline of the Yuan relative to the dollar. They forecast that the dollar-renminbi pair will rise from 6.87 at the end of 2016 to 7.30 by the close of 2017.
Goldman’s prefers to trade via the 12-month non-deliverable-forward. “The fundamental dilemma of China’s currency regime is that, in an environment of a rising dollar, keeping the CFETS basket stable requires $/CNY to move higher meaningfully, which carries the risk that capital outflows re-escalate,” the team writes.” Our base case is one where the $/CNY fix continues to grind higher, driven by domestic pressures and in the context of a stronger dollar.
3) Earning the ‘good carry’ in EM, hedging the risk:
The third Top Trade recommended by Goldman Sachs is to exploit and invest in the ‘good carry’ stocks that are present in the emerging markets foreign exchange space: BRL, RUB, INR and ZAR. The mentioned currencies have increased their exports exponentially, inflation has declined following trajectory, the ‘carry’ is very generous and the prospects of stronger growth lie in the year ahead, “at the same time as getting short an equally-weighted basket of Korean Won and Singapore dollars”. The bank’s analysts forecast a return of 14% from the trade. But, following the US election, some of these currencies were sweepingly affected and weakened amid the selloff of EM assets, which could make this a good time to enter into long positions.
4) Long EM stocks with “insulated exposure” to growth:
For the fourth top trade, Goldman recommends buying an “equally-weighted, currency unhedged basket of Warsaw Stock Exchange Total Return Index, Ibovespa Brasil Sao Paulo Stock Exchange Index, and the NSE Nifty 50 Index” which may yield about 20% gain or leave if the position “falls 10% from current levels”. “Looking across the 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. While Brazil is often characterised as a “China-growth proxy”, the country’s equity market has shifted meaningfully in its composition in recent years.
5) The ‘reflation’ theme extends and broadens:
This is one of the key recommendations that Goldman had last year too which was quite a big failure. But, strategists are once again advising investors to go long on 10-year US break-even inflation. This year again the team expects the spread between nominal and inflation-protected Treasury yields to rise to 230 basis points, and would exit the position if it fell to 160 basis points. This time, they’re also recommending a version of the same trade for inflation in Europe, using swaps. The main reason they like the US leg of the trade is because of expansionary fiscal policies in an economy already operating close to full capacity and will most likely push up domestic price and wage inflation. The team favors going long on 10-year US TIPS, entering with break-even inflation at 1.9% and targeting a rise to 2.3%.
6) Long European Dividend growth:
Goldman’s final top trade recommendation for the year ahead: go long on European dividend growth by way of the Euro Stoxx 50 2018 dividend futures in a currency-hedged position. “Dividend swaps, as a hybrid between credit and equities, currently appear attractive in a cross-asset context,” writes Garzarelli. “We forecast a high ‘carry’ compared with other assets, which reflect both fundamental risks and supply/demand imbalances from structured products issuance.”
European dividends are also a hot favorite, that could offer as much as a 12% return, for the year ahead. The bank advocates buying the EURO STOXX 50 2018 Dividends Index for what it calls an ‘equity-like carry’, with a target of 125.0. “Shorter-dated dividends are less driven by changes in equity valuations and more closely linked to underlying earnings and cash flows,” the strategists explain. “Despite little earnings growth in 2016, EURO STOXX 50 2017 dividends delivered a return of 6 percent with a volatility of 7 percent year-to-date.”
Stay prepared with Call Levels
These were a few ideas that were presented by Goldman Sachs for 2017 regarding trade and investments. But, 2016 was a year full of unexpectations that came and rumbled the market in no time. If 2017 has even one of such events in store, there can be major variations to all these assumptions. So, just before 2017 kicks in, be sure to set your prices with Call Levels right now and make the most out of these trade ideas.
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