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Goldman Sachs highlights seven of its most high-conviction trades heading into 2018.
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The firm's recommendations are based on four core tenets, most notably robust economic growth.
With both stocks and bonds enjoying lengthy bull markets, there's been no shortage of investment opportunities for traders over the past year. But what about in 2018?
Goldman Sachs has some ideas. In a recent note to clients, strategist Francesco Garzarelli and his colleagues have laid out seven high-conviction trades it sees paying off in a big way for investors next year.
But before we get into those, it's worth diving into the core tenets of Goldman's overall market outlook. First and foremost, the firm sees "strong and synchronous global expansion," marked by gross domestic product growth of roughly 4% in 2018. It also says that the global economy is at very low risk of recession, given the low likelihood that central banks will aggressively hike interest rates. Further, Goldman sees emerging markets offering great growth potential.
To contrast with those positive elements, Goldman does see "relatively high" risk of temporary market sell offs, especially given how extended valuations are across asset classes. The firm highlights rising wages and a possible shift in investor psychology around the unwinding of central bank balance sheets as two particularly worrisome factors.
Got all that? Great, let's dive into Goldman's list of top trades:
1) Short 10-year US Treasurys
Goldman sees this as a way to position for more rate hikes from the Federal Reserve. The firm forecasts that the yield on 10-year Treasurys will climb towards 3% in 2018, to a level not seen since 2014. It also says that the path of the Fed's policy change being priced in by markets is too flat, relative to Goldman economist projections.
Goldman Sachs
2) Go long EUR/JPY with a target of 140 and a stop at 130
This trade, involving going long the euro versus the Japanese yen, is built to profit from a continued rotation around a flat US dollar. With most global economies growing simultaneously, Goldman says this is a way to still profit from a divergence in capital flows. And in the firm's mind, opposing moves in the euro and yen will make for a nice opportunity.
Goldman Sachs
3) Go long the MSCI Emerging Markets stock index
Goldman sees this trade as a way to capitalize on the growth cycle in emerging markets. It notes that EM growth is "above-trend and rising" — and when it's doing that, it generally outperforms on a volatility-adjusted basis. Further, Goldman sees great opportunity for EM-based countries to report earnings growth that surprises to the upside.