Goldman Sachs has released a number of their favorite trade for 2014. Some of them are pretty interesting ideas so here’s the rundown with a basic way for retail investors to play each trade (Via Goldman Sachs and the MoneyBeat Blog):
1. “Long 5-Year Eonia/Short 5-Year U.S. Treasurys.”
“The market reaction to the strengthening of ‘forward guidance’ could, contrary to our expectations, be associated with a flattening of the two-to-five year U.S. curve, at least initially.
“Currently, a very accommodative monetary policy stance is largely priced in in the U.S., while the market is underestimating the possibility that the European Central Bank can provide further easing, even by cutting the deposit rate below zero,”
Retail Play: Keep government bond duration short, consider shorting US government bonds. Short IEI (iShares 3-7 tear Treasury bond).
2. “Long S&P 500/Short AUD”
“This reflects what is perhaps the largest overarching theme of our market outlook – a belief that developed-market equities are well placed as long as US yields do not rise too quickly. The specific implementation of this trade recommendation that we will track is a long position in Dec 2014 S&P 500 futures, and a corresponding short position in Dec 2014 AUDUSD futures. Given our forecasts for both assets, with an S&P year-end target of 1900, and a year-end AUD target vs. the USD of 0.85, we see scope for both legs of the trade to generate potential returns.”
Retail play: pretty self explanatory (Long SPY/Short FXA).
3. “Sell the Canadian dollar”
“Over the past few quarters, capital inflows have slowed rapidly, pushing the broad balance of payments into deficit of about 1% of GDP currently. Slowing reserve diversification [into the Canadian dollar] has almost certainly contributed to this…
All told, there are a number of reasons why the Canadian dollar has scope to weaken. Some of these have been a factor for some time but the notable weakening in the external balance, the gradual shift in the BOC communication and the prospect of Fed tapering and the associated risks all suggest that 2014 may be the year when the CAD weakens more materially after many years in narrow trading ranges.”
Retail play: Sell FXC (CurrencyShare Canadian Dollar Trust).
4. “Long China equities/short copper”
“This long equity/short commodity trade is a way of isolating exposure to China equity risk via a long HSCEI position, which we think is underpriced by the market given our views of stable growth and ongoing rebalancing there, while the copper short hedges out exposure to China’s economic growth, which we think will be stable but not stellar,”
Retail Play: Long FXI (China Large Cap)/Short JJC).
5. “Long 7-Year CDX IG21 junior mezzanine tranche.”
“[this trade] reflects our view that 2014 is likely to remain a credit carry-friendly environment featuring better growth, low inflation, low volatility and accommodative monetary policy,”
Retail Play: buy corporate bonds (Long LQD).
6. Long Developed Market banks.
Goldman is looking for a pick-up in the developed economies which means more borrowing, more lending, steeper yield curve, higher net interest margins, etc.
Retail play: long KBE (domestic KBW bank index), long IPF (international financial sector).
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.