After a hectic year for all major investment dealers and banks, here are Goldman’s top trade ideas across various asset classes for 2021:
FX
- Long CAD and AUD vs USD with equal weights
- Long a roughly vol-weighted basket of MXN, ZAR, and INR vs USD
- Long CNY and Long 3Y CGBs combined
- Long SGD vs TWD
G10 Rates
- Long 3y1y forward US real yields
- Long (1.65:1) vol-weighted 1y forward 5s30s steepeners
- Long 2s30s Gilt curve steepeners
- Long 10y10y-2y2y HICP curve flatteners
Credit
- Long High Yield vs. Investment Grade in the USD cash market (1 to 1.15 notional)
- Long USD Investment Grade bonds vs. agency MBS
- Long EUR AT1 vs. High Yield bonds
- Long US AAA CLOs vs. AAA CMBX index
EM (Local Rates, Credit, and Equities)
- Long 6-year (R186) SAGBs, USD-hedged
- Long BRL DI Jan-2022 receivers
- Long INR 5Y bonds
- Long 2s10s IRS steepeners in EM LY (CZK, KRW and THB)
- Long EM HY credit
- Long EM bank stocks vs EM consumer staples
- Long Korea (and KRW) vs Taiwan (and TWD) equities
Here are the trades we at S&S found particularly interesting:
FX
Goldman continues to see risk/reward favoring Dollar shorts into 2021. Vaccine development appears to be making good progress, consistent with our base case of approval by year-end, and additional headway should further lift cyclical assets as markets price in stronger growth closer to their own expectations. The policy backdrop should also remain favorable for risky assets as central banks around the world keep rates on hold and continue QE programs, combined with likely additional fiscal stimulus in the US—albeit smaller than expected under a “blue wave” scenario. Moreover, our outlook should be supportive of commodities on boosts to demand and structural underinvestment (especially in non-energy commodity producing sectors), paving the way for a new bull cycle to emerge in 2021. Specifically, Goldman expects oil and copper prices to perform well—particularly the latter in the near term—which should, respectively, benefit CAD and AUD the most in G10 (Exhibit 1). The biggest risk to this trade is that broader and deeper lockdowns may temper optimism about the cyclical recovery. But given their baseline forecasts and our belief that markets have yet to fully price in our constructive outlook, we reiterate our open trade recommendation to short the Dollar against an equally-weighted basket of CAD and AUD.
Banks and Consumer Staples
Goldman had this to say,
Banks emerged as one of the worst-performing sectors throughout the virus-related pain in Q1 and so far have only recovered a quarter of the value lost. The underperformance has been driven by multiple factors, including rising non-performing loans and, in some cases, asset purchase programmes and deep rate-cutting cycles, flattening curves and eroding net interest margins. Goldman does not believe these headwinds will be sustained. The NPL cycle (non-performing loan) already appears to be significantly priced in across EM (emerging markets), with current valuations already accounting for a rise in bankruptcies.
Early indications from some of the more beleaguered markets, such as India, are also showing that policy safeguards have led to more-resilient-than-expected bank balance sheets. The deterioration in net interest margins does pose a problem for banks in markets such as Korea, Taiwan and Poland in which banks’ profits are heavily tied to the yield curve, but we have found that the earnings cycle of banks in high-yielding countries such as Brazil, India and Mexico are inversely correlated with the level of interest rates and are less impacted by the slope of the yield curve. We suspect that this observation reflects a ‘volume over margin’ factor: that it is overall credit growth which drives the earnings cycles, as prohibitively high interest rates in these EMs have historically disincentivised borrowing.
Central banks across EM have cut rates sharply since the start of the coronavirus crisis, and we would expect a credit growth rebound as activity recovers, with the potential for a vaccine serving as a major catalyst to unlock the current value in bank sectors. Goldman’s preferred countries for a positive banks expression are Brazil, Russia, India, Mexico and South Africa, where earnings appear more tied to credit growth than to net interest margins, and where a significant round of NPLs already appears to be factored into bank valuations. Structurally, they favor ‘growth’ sectors like Tech, and do not see an imminent catalyst for that sector to underperform. Consequently, Goldman prefer to implement the positive banks view relative to consumer staples companies, which should provide a cleaner pro-cyclical expression.
EM Equities (Long Korea and Taiwan):
Heading into 2021, Goldman’s macro forecasts points to an-above consensus recovery across most of EM, but less so in Mainland China, where the recovery has already been impressive. The equity markets in Taiwan (+18% YTD) and Korea (+13%) have been particularly resilient this year, benefiting from their proximity to Mainland China and from the combination of China’s strong policy response and successful domestic control of the virus. Both markets are closely tied to the global trade cycle (generally more geared to the DM [developed market] growth cycle than the rest of EM), but Korea’s equity market composition tends to be more closely tied to the global industrial cycle, whereas exports from Taiwan are heavily tied to sectors that have acted more defensively throughout the sell-off (semiconductor companies account for 57% of MSCI Taiwan). Consequently, the relative performance over Korea vs. Taiwan resembles a more ‘deep-cyclical’ thematic, similar to broad MSCI EM Industrials vs. Consumer Staples (as shown in Exhibit 34 below). Unlike a number of our other EM recommendations, the relative nature (long/short) of this trade may be attractive for investors who are cautious on the overall direction of risk after the very strong moves in early November, but who still expect cyclical leadership to persist as global activity rebounds. At current levels, valuation remains supportive for this trade, as the relative price to book ratio of MSCI Korea (1.04x) vs. MSCI Taiwan (2.26x) is back towards its lowest level since 2001; and note that the trade also embeds a long KRW versus TWD position. The trade has already gained close to 3% since implementation, and given the positive vaccine developments and risk-on move surrounding the US election we adjust our target and stop to 112 and 98, from 110 and 93, or a potential gain of 9.1% and potential loss of 4.6% from current levels.
Interesting to say the least, as despite the market having a great week, investors may look to Goldman’s advice and add a few more weapons to their arsenal.
Works Cited:
https://www.zerohedge.com/markets/here-are-goldmans-top-trades-2021