RBC recently released their 20 favorite trades for 2010. As we previously mentioned, RBC is relatively bullish though they are viewing the upcoming year as two different investment environments. They see overall fundamentals improving and the first half of 2010 serving as a period of “catch-up” for investors. That should change heading into the back half of the year as investors become more defensive. Based on this macro outlook RBC provides their 10 favorite trades for 2010:
- Argentina external debt steepeners (Long Boden 2012’s / Short US$ 2033 Discounts)
Actionable only for sophisticated investors with foreign access. The Argentine holdout debt restructuring is likely to conclude in 2010. The holdout-debt-swap is likely to result in underperformance of the long end of the curve, given that most of the resulting debt is expected to be issued in discounts.
- Long Brazil / Short Venezuela 5yr CDS
Similar to Goldman’s Ireland/Spain trade. RBC believes Brazil is priced for perfection and investors are too bearish on Venezuela.
- Mexico TIIE 2s-10s flattener
The Mexican Central Bank is likely to hike rates by Q210 as inflation fears increase.
- Long MXN/COP
As Mexico recovers their lagging currency is likely to outperform in 2010. Valuation and weak economic outlook in Columbia makes it a nice pairing.
- Short EUR/PLN
Poland now looks cheap compared to the Euro. Proactive rate action and better than expected economic growth should help the rally in PLN continue.
- Short USD/RUB
Strong oil demand, better than expected economic growth and valuation make RUB attractive.
- Short USD/ZAR
The rand looks attractive for similar reasons mentioned in other EM currencies. Proactive rate action, better than expected economic growth and attention on South Africa during the 2010 World Cup make this an attractive play.
- Sell 12-month USD/CNY NDFs
Yuan revaluation is only a matter of time….
- Short USD/KRW
The rebound in China and Asia should help boost Korea. RBC sees rates rising 150 bps in 2010. This pairs works favorably with the dollar.
- Long EM high-yield vs. high-grade corporate debt
As the global economic recovery gains momentum, risks in the high yield corporate segment will decline driven by rising revenues and cash flows, which will help ease refinancing needs. Rather than pairing EM high yielders with sovereigns which offer a similar scope for spread compression, we elected to pair them with high grade corporates because this pairing offers a better hedge against sell-offs, and we believe it is possible that we could witness other Dubai like-events in 2010.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.