Hot on the heels of this morning's "Goldman Sachs: Here Are our First ‘Top Trades’ of 2011 (GS)" MarketBeat comes right back with a follow-up. And: a more in-depth look at GS2011.
But first, a note on how to read Goldy's pronouncements:
Mother: .....And remember, the Lord loves a working man.From MarketBeat:
Navin: ........Lord loves a working man.
Father: ......And son, don't never, ever trust whitey.
-The Jerk (1979)
Goldman Sachs is upbeat about financial stocks for the first time since 2008.
Stronger economic growth, higher equities prices and supportive interest rates are likely to lead financial stocks to outperform the broader market in 2011 and 2012, said analysts led by Richard Ramsden in a note to clients.
“With a better macro backdrop, the growth outlook for the sector improves significantly next year,” the note said. The analysts added “financials will deliver market-leading earnings growth” in each of the next two years.
Banks, brokerages, insurers and other financial companies have not kept pace with broader markets this year on a raft of issues including the drive for regulatory reform, pressure to adopt new capital requirements and the push for banks to buy back troubled mortgage-backed securities.From ZeroHedge:
Financial-sector stocks on the S&P 500 index gained just 1.5% over the past 12 months. That’s compared to a 9.1% rise for the broader index, according to FactSet....MORE
Goldman Reveals The First 5 Of Its Top Trades For 2011
Following yesterday's completely non-arbitrary release by Jan Hatzius of his about face economic upgrade at precisely 4 minutes ahead of the Fed data dump, Goldman has released the first 5 trades of its top 2011 trades. Hopefully these trades will perform far better than the basket of 2010 trades which left Goldman clients flat at best (especially the FX component which was a total disaster and which Thomas Stolper apologized for yesterday). On the basis of its suddenly rosy outlook for the economy (as always, Goldman by definition is buying whetever a client is selling and vice verse) here are the first five trades that Goldman believes will be the best money makets for the next year.
From Francesco U. Garzarelli et al
Our Top Trades for 2011
These market themes run through the first five of our recommended 2011 Top Trades. They have a clear procyclical tilt. But unlike 2010 we have looked for exposure in the developed world (US banks, high-yield bonds and Japanese equities), particularly places where tightening in response to better growth is least likely, alongside positioning for some of the pressures for normalisation and policy response (commodities and $/CNY).
1. Short $/CNY via 2yr NDFs, currently at about 6.4060, target of 5.9, expected potential return 6%
The trade and current account positions in the US and China remain at the core of the global imbalances debate. We remain of the view that the $/CNY exchange has an important role to play in the rebalancing process, and expect the recent trend of gradual CNY appreciation to continue for several reasons (mentioned below). Persistent FX reserve accumulation to prevent appreciation is an unsustainable policy in the long run. Rising external political pressure on the CNY from the US and other countries, as well as the threat of escalating trade tensions, expose China’s dependence on exports. More gradual CNY appreciation would help alleviate these tensions. Rising inflationary pressure has led to policy tightening in China already and more is in the pipeline. The Chinese authorities are pursuing a long-term goal of rebalancing the economy towards more domestic demand, which would also be consistent with a stronger CNY. To the extent that the Chinese authorities manage the CNY on a trade-weighted basket, broader USD weakness would translate into additional $/CNY downside pressure.
We also prefer going short $/CNY via long-dated forwards to benefit potentially from market expectations for further trend appreciation beyond the next 12 months. 2yr NDFs (expiry 4/12/2012) currently price about 2% annualised, compared with our expectations of 6% over the next 12 months. Should markets start to price in a similar speed of appreciation as we forecast, 2yr NDFs could start pricing a level of 5.90, which would translate into an expected potential return of about 6%.
2. Long US large-cap Commercial Banks (BKX), at 44.76, target of 57, expected potential return +25%
The improvement in the US economic outlook in 2011 and 2012 is one of the most important shifts in our global macro view. The combination of incrementally more growth acceleration, with still accommodative policy is a very friendly one for equities, underscored by the US Portfolio Strategy team’s 1,450 target for the SPX in 12 months’ time. Not only are top line GDP growth expectations more robust, but a faster-than-previously-expected repair of the US consumer balance sheet has also led to a more robust view of real consumer spending growth and domestic demand more broadly. We believe being long US banks via the BKX index (there is also an ETF, the KBE, for those so inclined) is an attractive way to gain exposure to a more constructive domestic US story.
After performing in line with the overall US equity market index for much of the past two years, the BKX has significantly lagged through most of the ‘QE2’ rally. On price action alone, the BKX stands apart from other potential implementations of our stronger US domestic demand view, such as consumer discretionary stocks, which outperformed the overall market in 2010. Our 57 target for the BKX suggests about 25% upside and would only bring the banks back to the levels of April earlier this year. Of course, the price action reflects in part sector-specific headwinds that cropped up repeatedly in 2010. But, apart from pricing at a significant discount, the macro backdrop looks increasingly favourable. First, a more robust real GDP growth profile and, critically, stronger consumer spending ought to help spur loan growth—year-on-year loan growth should turn positive early next year and grow steadily through 2012—as Richard Ramsden and the US banks team have recently highlighted. And the large cap banking sector is particularly geared towards consumer activity, with relatively less exposure to construction and commercial real estate activity. Second, the decline in the unemployment rate should lead to further declines in credit losses. And, third, although the front end of the yield curve will likely remain anchored for some time, we expect 10-year yields to gradually drift higher, with a steeper yield curve also benefiting these stocks.
The possibility of additional ‘headline risk’ is a clear challenge for this sector even if the macro outlook turns out to be correct. But many of these concerns are likely already priced-in to a degree and the sector does not seemto be ‘over-owned’ here. We believe it is reasonable to question if banks can generate the return on equity that they did in the recent past and if multiples can revert towards historical levels given the new regulatory backdrop. But we think a more robust US economic outlook should still provide support for earnings and book growth, even if the market pays a bit ‘less’ for these shifts than it has in the recent past....MORE