Top trades for 2016

It’s that time of the year again. Wall Street is busy coming up with its predictions for 2016, and Goldman Sachs is predicting more of the same for the next 13 months, a stronger dollar tighter sovereign credit spreads across Europe and an outperformance of large US banks.

Here are Goldman’s six top trades for 2016 in full.

See also: Goldman Makes 2016 Predictions, Targets Only 2100 on S&P, Says Fed More Hawkish Than Thought

Top trades for 2016 #1:Long USD vs. short EUR and JPY

Trade: Go long USD against an equally-weighted basket of EUR and JPY at 100, with a spot target of 110 and a stop loss of 95.

Thesis: According to Goldman, the divergence between the Fed and both the ECB and BoJ will continue on into 2016 as the ECB considers more easing and the Fed takes a more hawkish tone. The economic recovery in Europe and Japan is struggling to gain traction while US growth is picking up, the labor market is improving, and domestic demand remains robust. Currencies are particularly sensitive to this divergence pressure, and Goldman believes the dollar has further upside.

Top trades for 2016 #1: Long USD vs. short EUR and JPY

Top trades for 2016 #2: Long US 10-year ‘Breakeven’ Inflation

Trade: Stay long 10-year US break-even inflation (USGGBE10 Index), opened on 10 November 2015 at 1.60%, with an initial target of 2.0%.

Thesis: The inflation swap market prices that headline CPI will not reach 2% until around 2020 and the option market assigns a 40% probability to CPI averaging less than 1% over the next five years. However, Goldman believes that the market is overlooking wage and price pressures, which could drive inflation expectations higher during the coming months as the drag from the energy complex falls away.

Top trades for 2016 #3: Long MXN and RUB versus short ZAR and CLP

Trade: Go long an equally-weighted basket of MXN and RUB versus short an equally weighted basket of ZAR and CLP, with an entry level of 100, total return target of 110 and stops at 95.

Thesis: A play on Goldman’s key EM themes for 2016.

“This EM relative value trade speaks to a number of our key themes in EM in 2016. It positions for (i) currencies where external balances have adjusted in recent years (RUB) versus those where more progress is required (ZAR); (ii) currencies (MXN and, again, RUB) that are exposed to crude oil where we see limited further downside under our central forecasts versus commodities tied to capital expenditure, such as industrial metals, where we see further downside (CLP, ZAR); and (iii) the short side is relatively more exposed to a slowing in China and the risk of a CNY depreciation.”

Top trades for 2016 #4: Long EM ‘External Demand’ vs. Banks stocks

Trade: Go long a basket of 48 non-commodity exporters and short a basket of 50 EM banks stocks.

Thesis: Another EM play. Goldman expects EM growth to remain challenged through 2016 as stretched leverage ratios, slowing Chinese growth and low commodity prices weigh on equities. With this being the case, the bank advises buying a basket of non-commodity EM exporter stocks and selling a basket of the largest EM bank stocks. This trade reflects an improving external (DM) environment, helped by weaker EM currencies, versus slowing credit growth across EM as US interest rates rise.

Top trades for 2016 #4: Long EM ‘External Demand’ vs. Banks stocks

Top trades for 2016 #5: Tighter Spread between Italy and Germany Long Rates

Trade: Go long 5-year, 5-year forward Italian sovereign yields vs. short 5-year five year forward German yields, with an entry level of 160bp, target of 100bp and stop loss of 190bp.

Thesis: A combination of the extension of the ECB’s QE program into 2017, stronger Italian GDP growth and a cut to the deposit rate further into negative territory will encourage a compression of forward Italy-Germany spreads at least to where they were around the announcement of QE in March.

Top trades for 2016 #5: Tighter Spread between Italy and Germany Long Rates

Top trades for 2016 #6: Long large-cap US Banks relative to the overall S&P500

Trade: Go long large-cap US Banks through the BKX Index relative to the S&P500.

Thesis: US banks tend to be mildly pro-cyclical and will benefit from rising longer-dated yields. US banks are still relatively well-priced, trading just above book value and with a P/E below that of the overall market. What’s more, banks are trading at median P/E levels compared with past trades for the sector. There’s room for upside. Goldman sees a 10% upside for this trade throughout 2016.

Top trades for 2016 #6: Long large-cap US Banks relative to the overall S&P 500