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Barclays' top 10 macro trade ideas

From shorting gold to playing policy divergence between central banks, we highlight Barclays' top 10 macro trades for the year ahead.

Global growth acceleration to continue: long EM equities, European materials equities, and copper and aluminum

‘Despite the upswing, some cyclical assets, such as EM equities, materials stocks and most base metals (eg, copper and aluminum), have lagged the early pickup in the global business cycle. This partly reflects excessive pessimism about China’s growth outlook, worries about the end of QE, and commodity supply growth. We believe these worries are overblown and, together with our constructive view on global growth, make long positions in these assets an attractive proposition.’

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Japan – position for a potentially large shift in asset allocation: long Nikkei, long USD/JPY

‘Through 20 years of deflation, overweighting JGBs relative to equities has been by far the best allocation for Japanese investors. But with inflation rising, even modestly, the optimal allocation will naturally shift more in favour of equities. And if Japanese investors shift away from domestic fixed income and toward riskier assets, the market effect could be huge.

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Fed policy normalisation

‘The anchoring of US front end rates by the Fed underpins our overweight equity exposure versus fixed income. But we know this equilibrium is fragile: we expect higher US inflation (2.1% y/y on core PCE) to challenge the front end of the curve in the months to come. We believe it makes sense to position for this event via options.’

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ECB-Fed policy divergence

‘We see a reasonably strong case for policy divergence to play a more important role in asset allocation in 2014. As we expressed in our latest global outlook, in core fixed income we would continue to underweight US against core Europe. A relative USD versus EUR yield curve belly flattener (box trade) is a reasonable way to position for potential policy divergence.’

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Exploit BoE vs Fed asymmetries

‘Forward guidance was worked well in the US but not in the UK. In particular, we believe the back up in UK yields is largely responsible for the recent strength of GBP/USD and the underperformance of UK equities versus US equities. We think the main reason is inflation. In the US, core PCE inflation has been below the Fed’s 2% reference level for five years, but in the UK, inflation has been significantly above target for the past four years. Nonetheless, UK inflation has been falling since 2011 and is now 2.0% (CPI measure), right on the BoE target.’

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Long euro area banks credit vs US IG credit

‘We think the regulatory backdrop suggests a constructive outlook for European banks from a credit perspective. In contrast to the US, where the focus has been to eliminate proprietary trading activity by banks, European bank regulation has focused on balance sheet improvement. As a result, European bank capital ratios stand at record highs and look set to trend even higher.’

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Global recovery and higher US yields should hurt gold vs copper

‘According to our commodities analysts, gold is likely to struggle in the context of a stronger USD, rising real rates, reduced global tail risks and, consequently, ETP outflows. By contrast, copper prices face upside risks from a combination of stronger global growth, higher grid investment in China and a slowdown in investment that should put a lid on supply growth.’

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Long EM FX with falling current account deficits and high carry

‘Markets are differentiating EM assets even among the so called ‘fragile five’ (Indonesia, India, Turkey, Brazil and South Africa). In EM FX in particular, INR and BRL have been more stable than the rest. We believe policy responses and the potential for current account adjustment will continue supporting Indonesia rupiah and Brazilian real more so than Indian rupee, Turkish lira and South African rand in the coming months.’

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Long European equities

‘Our equity strategists expect European equities to generate total returns of 27% in 2014, the highest returns globally. There are several factors underpinning this view. First, the euro area recovery and improved sentiment should support earnings growth, which typically picks up with a lag to the growth cycle. Second, valuations are still reasonable on various metrics, notably the CAPE measure. Third, our expectation that the ECB will keep monetary policy very loose and potentially ease further should provide a fertile ground for equity investments.’

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Long periphery vs core

‘We expect prospects for peripheral Europe to continue to improve versus the core. In particular, we recommend going long Spain and Italy (in bonds and equities) versus France, where we see more risks to growth than in Germany. In equities, our analysts have repeatedly argued that historically cheap valuations in Spain and Italy offer a secular buying opportunity.’

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