The end of 2015 is just around the corner, and its once again that time of year to start thinking about how to position portfolios for 2016. In a new report, Goldman Sachs analyst Francesco Garzerelli unveiled six top trade ideas heading into 2016.
1. Long USD vs short EUR and JPY
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Goldman predicts that the Feds tightening cycle will be more hawkish than the markets are currently anticipating. Conversely, relative economic fragility in Europe and Japan will likely result in dovish policies and weaker currencies. Garzerelli adds that traders shouldnt be scared or discouraged by the dollars prior gains.
2. Long U.S. 10-year breakeven inflation
Goldman initiated a long stance on the USGGBE10 Index on Nov. 10 at 1.60 percent. The firm is targeting 2.0 percent with a stop set at a close of 1.40 percent. The inflation swap market is currently pricing in expectations that headline CPI will not reach 2.0 percent until around 2020, a view which Goldman believes is overly pessimistic.
3. Long MXN and RUB/short ZAR and CLP
These two pair trades reflect several of Goldmans key global economic themes for 2016, including external currency rebalancing, lower for longer oil price environment and the risk of a CNY depreciation in China.
4. Long non-commodity EM exporters vs. EM banks stocks
This trade represents Goldmans belief in an improving developed market environment versus weaker emerging market currencies in 2016.
5. Long 5-year, 5-year forward Italian sovereign yields vs. short 5-year 5-year forward German yields
Goldman is predicting a tighter spread between Italian and German long rates.
6. Long large-cap U.S. banks relative to the S&P 500
U.S. banks tend to be mildly pro-cyclical and also benefit from a rising longer-dated yield environment (we forecast steeper U.S. term structure than the forwards discount) as the Fed tightening will lead to a progressive upward revision of expectations on terminal rates, Garzerelli explains.
U.S. investors looking to play large-cap U.S. banks should consider the market-cap weighted PowerShares KBW Bank Portfolio ETF (NYSE: KBWB).
Disclosure: the author holds no position in the stocks mentioned.
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