The best ways to play it? Goldman’s 5 favorite trades are as follows:
1. Short $/CNY via 2yr NDFs currently 6.41, expected return 6%: The current account positions in the US and China remain at the core of the global imbalances debate. We remain of the view that $/CNY has an important role to play in the rebalancing process.
2. Long US Banks (BKX) – at 44.8, target of 57, expected return +25%: The improving US outlook, stronger loan growth, declines in credit losses and a gradually steeper yield curve should all be supportive.
3. Long US High Yield Corporate spreads (Selling protection on the CDX 15 index) – at 528, target of 450, expected return of 8.7%: Better macro conditions, improved fundamentals and a positive view of future defaults suggest that the current level of HY spreads is still elevated relative to fair value.
4. Long Nikkei 225 (NKY) – at 9988, target 12,000, expected return +20%: The Japanese equity market has underperformed other major markets. But, despite the disappointing ‘alpha’ of Japanese equities over the years, the market displays significant ‘beta’ to the improving global industrial cycle.
5. Long a Basket of Crude, Copper, Cotton/Soybeans and Platinum (‘CCCP’), expected return 28%: After a decade of high commodity prices, we are most positive on these markets as they exhibit the largest structural supply constraints.