GOLDMAN SACHS: Here’s how to make a killing on the 7 top trades of 2018


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trader happyReuters
/ John Gress

  • Goldman Sachs highlights seven of its most
    high-conviction trades heading into 2018.
  • The firm’s recommendations are based on four core
    tenets, most notably robust economic growth.

With both stocks and bonds enjoying lengthy bull markets, there’s been no
shortage of investment opportunities for traders over the past
year. But what about in 2018?

Goldman Sachs has some ideas.
In a recent note to clients, strategist Francesco Garzarelli and
his colleagues have laid out seven high-conviction trades it sees
paying off in a big way for investors next year.

But before we get into those, it’s worth diving into the core
tenets of Goldman’s overall market outlook. First and foremost,
the firm sees “strong and synchronous global expansion,” marked
by gross domestic product growth of
roughly 4% in 2018. It also says that the global economy is at
very low risk of recession, given the low likelihood that central
banks will aggressively hike interest rates. Further, Goldman
sees emerging markets offering great growth potential.

To contrast with those positive elements, Goldman does see
“relatively high” risk of temporary market sell offs, especially
given how extended valuations are across asset classes. The firm
highlights rising wages and a possible shift in investor
psychology around the unwinding of central bank balance sheets as
two particularly worrisome factors.

Got all that? Great, let’s dive into Goldman’s list of top

1) Short 10-year US Treasurys

Goldman sees this as a way to position for more rate hikes from
the Federal Reserve. The firm forecasts
that the yield on 10-year Treasurys will climb towards 3% in
2018, to a level not seen since 2014. It also says that the path
of the Fed’s policy change being priced in by markets is too
flat, relative to Goldman economist projections.

Screen Shot 2017 12 01 at 2.31.28 PMGoldman

2) Go long EUR/JPY with a target of 140 and a stop at 130

This trade, involving going long the euro versus the Japanese
yen, is built to profit from a continued rotation around a flat
US dollar. With most global
economies growing simultaneously, Goldman says this is a way to
still profit from a divergence in capital flows. And in the
firm’s mind, opposing moves in the euro and yen will make for a
nice opportunity.

Screen Shot 2017 12 01 at 2.37.27 PMGoldman

3) Go long the MSCI Emerging Markets stock index

Goldman sees this trade as a way to capitalize on the growth
cycle in emerging markets. It notes that EM growth is
“above-trend and rising” — and when it’s doing that, it generally
outperforms on a volatility-adjusted basis. Further, Goldman sees
great opportunity for EM-based countries to report earnings
growth that surprises to the upside.

Screen Shot 2017 12 01 at 2.40.16 PMGoldman

4) Go long euro area 5-year/5-year forward inflation with a
target of 2% and a stop at 1.5%

Goldman recommends doing this using euro-denominated inflation
swaps, because it sees the risk premium on euro area forward
inflation depressed at the moment, creating an ideal entry point
for a trade. The firm sees that premium increasing from here,
driven by continued monetary accommodation by the European Central Bank.

Screen Shot 2017 12 01 at 2.44.50 PMGoldman

5) Go long the Emerging Markets Global Bond Index, while shorting
the US High Yield Corporate Bond Index

Goldman recommends this trade in order to position for strength
in an EM credit cycle that’s “younger and friendlier” than its US
counterpart, which is getting long in the tooth. The firm notes
that unlike most EM-based trades, this particular one hasn’t
fully recovered from a post-US election sell off, creating

Screen Shot 2017 12 01 at 2.49.19 PMGoldman

6) Go long an equal-weighted basket of the Indian rupee,
Indonesian rupiah and South Korean won vs. an equal-weighted
basket of the Singapore dollar and Japanese yen

Goldman says that the long basket of Asian currencies provides
“diversified exposure to the strong global growth we forecast in
2018,” as well as a handful of bullish country-specific factors.
The recommendation also takes advantage of the low yields offered
by the currencies in the short basket, using them to fund the

Screen Shot 2017 12 01 at 2.56.00 PMGoldman

7) Go long a volatility-weighted basket of the Brazilian real,
Colombian peso and Peruvian sol vs. a short US dollar bet

Goldman recommends this due to continued global growth it sees
supporting a rally in industrial metals — and the three South
American countries included in the long basket offer exposure to

Screen Shot 2017 12 01 at 2.58.52 PMGoldman

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