1. Long US equities, with focus on names which received a windfall from tax reform.
I hate Donald Trump, but that doesn't change the fact that many big companies are about to receive a windfall of cash. The US corporate tax code is Swiss cheese. Some companies like GE and Apple can structure themselves in ways to pay virtually no tax or defer taxes indefinitely. Financial firms, and companies like General Mills, have until 2018 paid virtually the full 35 percent corporate rate. That means many of these firms are about to see a big increase in their after tax earnings.
For example, after tax earnings for Wells Fargo will be 3-4 billion dollars higher per year because of the tax cut. That's worth at least a 10-15 bump in its share price. Some of that has been priced already, but markets still haven't fully grasped how much this means for the bottom line of many companies going forward.
As such, I expect a 'normal' return year for stocks, with equities returning 7-10 percent in 2018, and with companies receiving the biggest tax cuts outperforming.
2. Long Mexican 10 Year Government Bond
Mexican presidential elections will happen this July, with Andres Lopez Manuel Obrador being a slight favorite. The uncertainty of the electoral process will weigh on the Peso and Mexican stocks. Thus, the 7.6 percent guaranteed yield on the Mexican 10 year is attractive in peso asset space. Although the Bank of Mexico will likely raise rates 2-3 times more early this year, it will begin cutting rates in early 2019 once the effect of the removal of gas subsidies fully works its way through the economy. Overnight rates in Mexico will probably be in the 5-6 range by 2020, which will be supportive of bond prices.
Non-Mexican investors should wait until after the presidential elections to make this trade, because I believe the Peso will depreciate during the first half of the year before recovering after the outcome of the election is known.
3. Long ARS/TRY
Turkey's politics are a mess. Argentina's aren't much better. Inflation in both countries is still in double digits. That said, Argentina is slowly but surely bringing down inflation from nosebleed levels. Turkey's central bank on the other hand is under intense political to keep rates low despite high inflation.
Given the large interest rate differential between the Peso and Lira, a weird opportunity has arisen. The 28 percent paid on Pesos more than makes up for the 8 percent is costs to borrow Lira. Meanwhile, the exchange rate between the Peso and Lira has been remarkably stable since Argentina floated the Peso in late 2015. This is largely the result of the fact that both countries are highly vulnerable to shifts in over all risk sentiment. This means the two currencies tend to move in the same direction.
Given the 20 percent net carry, a low leverage 2-3x long ARS position looks very attractive indeed.
fazed
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