Goldman Reveals Its Top Trade Recommendations For 2018
It's that time of the year again when with just a few weeks left in the year, Goldman unveils its top trade recommendations for the year ahead. And while Goldman's Top trades for 2016 was an abysmal disaster, with the bank getting stopped out with a loss on virtually all trade recos within weeks after the infamous China crash in early 2016, its 2017 "top trade" recos did far better. Which brings us to Thursday morning, when Goldman presented the first seven of its recommended Top Trades for 2018 which "represent some of the highest conviction market expressions of our economic outlook."
Without further ado, here they are:
- Top Trade #1: Position for more Fed hikes and a rebuild of term premium by shorting 10-year US Treasuries.
- Top Trade #2: Go long EUR/JPY for continued rotation around a flat Dollar.
- Top Trade #3: Go long the EM growth cycle via the MSCI EM stock market index.
- Top Trade #4: Go long inflation risk premium in the Euro area via EUR 5-year 5-year forward inflation.
- Top Trade #5: Position for ‘early vs. late’ cycle in EM vs the US by going long the EMBI Global Index against short the US High Yield iBoxx Index.
- Top Trade #6: Own diversifed Asian growth, and the hedge interest rate risk via FX relative value (Long INR, IDR, KRW vs. short SGD and JPY).
- Top Trade #7: Go long the global growth and non-oil commodity beta through long BRL, CLP, PEN vs. short USD.
As Goldman's Francesco Garzarelli writes, "these trades represent some of the highest conviction market expressions of the economic outlook we laid out in the latest Global Economics Analyst, as well as in our Top 10 Market Themes for 2018. Some of the key market themes reflected in our trade recommendations include:
Strong and synchronous global expansion. We forecast global n GDP growth of around 4% in both 2017 and 2018, suggesting that next year’s global economy will likely surprise on the upside of consensus expectations.
Relatively low recession risk. Given the low inflation and well-anchored inflation expectations across DM economies, we think central banks have little reason to risk ‘murdering’ this expansion with the kind of aggressive rate hikes that would have historically been warranted to fight the risk of inflation becoming entrenched.
But relatively high drawdown risk. Even if growth remains strong in the coming year, markets are still susceptible to temporary drawdowns, especially given the high level of valuations. We think the two most prominent risks to markets in 2018 are (1) pressures on US corporate margins from rising wages and 2) a swing in market psychology around the withdrawal of QE, which could lead to a faster re-pricing of interest rate markets than we assume.
More room to grow in EM.While most developed economies are currently growing well above potential, most emerging market economies still have room for growth to accelerate in 2018.
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