When you’re an investor, beating the consensus Wall Street bubble can be tough. Nonetheless, there are ways that you can be different, although you can’t always be both different and profitable. Simple contrarian strategies can perform well at big macro turning points, although the rest of the time they underperform. Yet if your heart is still set on going against the mainstream, here are some ways that you can do that in 2016, taken from an article I found on Bloomberg:
From divergence to convergence: Over the course of 2015, Wall Street has been taken by the divergence trade, or the decoupling of the Federal Reserve from other major central banks. However, this theme could have been priced into financial markets too thoroughly in the US and EU, which could set the stage for a convergence trade in 2016. One of the big names in the upcoming convergence trade is Deutsche Bank, which recommends to buy 30-year US Treasuries and sell 30-year German bunds. While UBS and Bloomberg expect the value of the dollar and Euro to be relatively similar by the end of 2016, Goldman Sachs thinks the divergence trade has room to run in the foreign exchange market.
Ring 10 bells for the 10-year: Back in October, HSBC’s fixed-income research team made a call for the 10-year the lowest on Wall Street at 1.5 percent. The head of the team said that a soft global-growth environment, a Fed tightening cycle that will prove more gradual than the dot plot and spillovers from accommodative policy deployed abroad should all put a cap on longer-dated US yields. On the other side of the coin, economists at CIBC World Markets, RBC Capital Markets, Raymond James, High Frequency Economics and Amherst Pierpont, among others, expect the 10-year Treasury to be yielding more than 3 percent by the end of 2016.
Underweight health care: Health care’s tumultuous 2015 was focused around certain key figures, although Ian Scott of Barclays believes that in 2016 the reasons for tumult will be more linked to rising bond yields, inflation expectations and decent economic growth. For a global equity portfolio, he recommends exposure of just 3.1 percent to health care vs. the 12.2 percent benchmark weighting. David Blanco of Deutsche Bank concurs with that call, and expects 6 to 9 percent EPS growth.
Don’t eschew the steepener: The US Treasury curve flattened in the run-up and ultimate commencement of liftoff by the Federal Reserve, with yields on two-year sovereign debt rising. Historically, a curve tends to take shape before and amid tightening cycles. Yet BoA Merrill Lynch thinks it’s different this time, since the easing cycle that just ended was novel in that the central bank’s accommodative policy directly affected both the short and long ends of the yield curve, therefore the private market will have to absorb much more duration than during the previous cycle.
Dollar Fight: Sociéte Générale expects that the Canadian dollar could dethrone the US dollar in 2016. Global head of rates and FX strategy Vincent Chaigneau has predicted USDCAD at 1.31 by the time 2016 comes to an end. SocGen also sees oil recovering next year. Conversely, Citigroup warned that there’s a high risk of the USDCAD going well above 1.40 in the first half of 2016.
Growth > value redux: While it might seem unusual at first to suggest that a portfolio of high-flying growth stocks is a contrarian play, strategists across Wall Street have been bullish on value, looking for inexpensive stocks to outperform in 2016. According to proponents of value stocks, such a change in leadership will be grounded in firmer economic growth and a rising rate environment.