How To Play Goldman Sach’s Top Trades For 2014

By Aaron Levitt | December 19, 2013 AAA

With 2013 winding down, a variety of investment banks, strategists and market pundits are beginning to make their forward looking predictions on just what will happen in the new year. For retail investors, following predictions can provide valuable insight to how the macroeconomic picture is evolving and ultimately lead to portfolio gains. Venerable investment bank Goldman Sachs (NYSE:GS) recently unveiled its top trades for 2014.

While Goldman is no stranger to controversy, it is pretty good at calling the shots when it comes to the market. While there are no guarantees that its predictions will come true, the odds are pretty good based on historical evidence. For investors, taking on some of Goldman’s ideas could do their portfolio a world of good.

Driven By The Taper

Through a series of research notes given out to top clients, investment bank Goldman Sachs unveiled its latest list of the six best trades for 2014. The bulk of Goldman’s latest list of recommendations plays off the idea that the Federal Reserve will begin winding its quantitative easing programs this year. The Fed has been buying bonds at an impressive clip over the past few years in an effort to drive down interest rates.

Using that fact as a framework, Goldman developed a series of pairs trades- going long and short- various asset classes in order to profit from various market situations caused by the resulting taper and the continuation of low real interest rates. While some of the recommendations are pretty technical at first blush, the recent boom in exchange traded funds gives investors the ability to tackle some of these ideas with relative ease. While they aren’t for everyone, the potential profits on these trades could be some of the biggest gains investors see throughout 2014. Here’s how to play some of the top ideas.

Long China & Short Copper

According to Goldman, Chinese equities are dirt cheap and are trading for pre-crisis prices. That makes them a value as growth returns to Asia’s Dragon economy. Meanwhile, shorting copper provides investors with a hedge if Chinese growth doesn’t pan out as planned. Copper prices are generally tied to China’s output as the metal is used in a variety of infrastructure and manufacturing uses. The added bonus is that Goldman predicts copper prices will face their own headwinds in 2014 as supplies will remain robust. That could boost this trade idea throughout the year.

The easiest way for investors to bet on this plan via ETFs is go long the SPDR S&P China (NYSE:GXC), while shorting the iPath DJ-UBS Copper ETN (NYSE: JJC). The GXC tracks a basket of 490 of China’s largest companies- including CNOOC (NYSE:CEO) and China Mobile (NYSE:CHL). The iPath Copper ETN follows a basket of copper futures and should fall as the surplus of supply takes hold. Overall, Goldman estimates that this trade should next investors around 25% in 2014.

Go Long European & U.S. Banks

U.S. and European banks could be a great trade throughout the year as Goldman predicts that several of the same forces that propelled the stocks higher this year will persist into the next. That includes stronger overall economic growth- which is good for loan volumes and deal making- as well as accommodative policies by the world’s central banks. Overall, GS predicts that European and U.S. banks could net investors 20% in 2014.

Playing that trade is possible via the iShares MSCI Europe Financials (NASDAQ:EUFN). The ETF follows 100 of Europe’s largest banking and financial institutions. Top holdings for EUFN include Banco Santander (NYSE:SAN) and British bank Lloyd’s (NYSE:LYG). Shares of the ETF yield nearly 2% and expenses are dirt cheap at 0.48%. For U.S. bank exposure, the SPDR S&P Bank ETF (NYSE:KBE) makes adding a swath of banking stocks easy.

Go Long The Greenback Against The Loonie

Goldman estimates that strong economic growth in the U.S. should have it beating our neighbors to the North in the returns department. Additionally, with the taper finally getting underway, the U.S. dollar should be a source of strength in 2014. Canada’s government still has room to ease more to stimulate growth- adding to its weakness. That means the Canadian currency- the Loonie- should continue to fall relative to the U.S. dollar.

Aside from opening up a forex account at a broker like FXCM (NASDAQ:FXCM), shorting the CurrencyShares Canadian Dollar Trust (NYSE:FXC) can provide the easiest way to play this trade idea. The CurrencyShares ETF is backed by physical Canadian currency and has already sunk close to a 52-week long as the “taper talk” begun. Goldman estimates that the short Loonie trade will net you about 8% in 2014.

The Bottom Line

With 2014 quickly approaching, Goldman Sach’s has unveiled its latest list of profitable trades for the new year. While they seem complex at first, the boom in exchange traded funds has made them available to every investor. Betting on them could mean big gains in the year ahead.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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