It’s discouraging to be an emerging-markets investor right now.
No matter how you slice it, 2014 was a rough year: Stocks posted their second straight 5 percent annual decline; currencies sank to a 12-year low against the dollar; and developing nations’ borrowing costs climbed relative to benchmark U.S. Treasuries.
Don’t give up yet.
Some of the world’s biggest banks — names like Goldman Sachs Group Inc., Morgan Stanley and UBS AG — have cobbled together a handful of money-making trade ideas for the new year. A couple of them entail using the weakness in developing-nation economies to your advantage. Here’s a brief sampling of the recommendations:
* Invest in Brazilian interest-rate swaps and sell stocks.
The 12.6 percent yield on interest-rate swaps contracts due in 2017 is too high given how weak the economy is, according to UBS. Policy makers won’t raise rates as much as that yield suggests, the bank’s analysts said Dec. 18. Their recommendation: Pile into the swaps, collect those fat yields and get out of stocks, which will continue to falter as the economy sputters.
* Sell the South African rand and Hungarian forint.
In a rising dollar environment, the rand and forint look particularly vulnerable, according to Goldman Sachs. South Africa is struggling to contain an annual current-account deficit of $78 billion while Hungary is counting on a weaker forint to avoid deflation. Sell both currencies against the dollar, Goldman analysts said Jan. 5, reiterating a trade idea they had mentioned weeks earlier. It’s one of the bank’s top eight global trade recommendations for 2015. In 2014, Goldman unveiled six top investing ideas. Five of them proved profitable.
* Buy stocks in Taiwan, Turkey and India.
These are three of the developing nations that benefit the most from the plunge in oil prices. Each of them imports at least 80 percent of the crude they consume. Stocks in the three countries haven’t risen enough to fully account for the lift that their economies will get from the lower oil prices, according to Goldman analysts. They predicted in November that the markets will post average returns of 15 percent this year.
* Buy Indian bonds.
Prime Minister Narendra Modi is winning over analysts at Morgan Stanley less than two years after they put the country on their list of the most fragile emerging markets. Modi’s initiatives to strengthen the economy, including the implementation of more market-based energy pricing, will spark gains in local bonds after they returned 14 percent in dollar terms in 2014, the Morgan Stanley analysts said on Dec. 1.
* Buy Indonesia’s rupiah, India’s rupee, and Brazil’s real against the euro.
Borrowing money in euros and investing the proceeds in these higher-yielding emerging-market nations will provide good returns this year, according to Barclays Plc analysts. In a Dec. 10 note, they said that with the European Central Bank set to ease monetary policy further, the euro will extend its declines against major currencies, boosting returns from this investment strategy, known as the carry trade.
©2015 Bloomberg News