How well did Goldman's top trades do in 2012?

Every December, the analysts at Goldman Sachs publish their top macro trades for the coming year – an event that attracts much hype among the investment community. But how did the bank's trades for 2012 pan out?

If you slavishly followed Goldman Sachs trade recommendations of 2012, and allocated an equal weighting of your portfolio to each trade, you would have returned 1.6% over the 12 months since November 30, 2011, excluding transaction costs. In comparison, the Barclays Global Macro Index increased just 0.01% over the past year.

This return is an improvement on 2011, when Goldman Sachs’s top trades returned 0.3% accumulatively.

All the recommended trades began on November 30, 2011, and were closed at various points throughout the year due to changing market conditions.

Financial News looked at the top trades Goldman Sachs recommended to its clients for 2012 and how they fared.

Goldman Sachs declined to comment.

1) Short European high-yield credit - Buying protection on the iTraxx Crossover index, opened at 770bp

Goldman expected a potential return of 4.5%
Trade made one-month potential loss of 3.4%

A bearish trade on Europe kicked off Goldmans' 2012 recommendations. The Wall Street bank said the credit quality of European non-financial firms had not recovered to pre-crisis levels, a fact exacerbated by the improving credit quality of US firms over 2011.

Goldman Sachs recommended that clients buy protection on the iTraxx Crossover index, a benchmark for high-yield European corporate debt, as predicted tightening credit conditions in Europe would damage high-yield borrowers. Goldman Sachs also noted that European companies tended to rely much more bank loans than bond debt to finance operations.

Goldman Sachs said: “In short, we think the direction in European high-yield spreads is still wider, not tighter.”

Unfortunately for this trade, on December 21, 2011, the European Central Bank launched the first wave of its Long-term Refinancing Operation, pushing down bond yields. Protection on the iTraxx Crossover index therefore decreased. Goldman closed the trade in under one month for a potential loss of 3.4%.

2) Short 10-yr German bunds

Goldman expected a potential return of 4.5%
Trade made one-month potential loss of 3.5%

Late last year, Goldman Sachs’s “long-held central view” was that funding pressures and the deterioration of the economic outlook in Europe would lead to “an agreement on a deeper fiscal integration of the euro area, possibly in stages”. It said this would in turn spark a “one-off transfer of credit risk to the ‘core’ countries”.

Goldman wasn't wrong. In recent weeks, European politicians have moved closer to EU banking supervision, opening the door further to fiscal integration.

The problem, however, was that back in January, German bunds continued to be seen as one of the few safe haven asset classes. By March, 10-year German bund yields had fallen to 1.76%, a new low for the year.

However, Goldman Sachs moved fast, and recommended clients cut the trade after just one month. By July, yields had fallen to 1.16%, an all-time low.

3) Long EUR/CHF for a target of Sfr1.35 (opened at roughly Sfr1.2260)

Goldman expected a potential return of 11%
Trade made seven-month potential loss of 1.7%

In September 2011, the Swiss National Bank announced that it was pegging the Swiss franc at Sfr1.20 against the euro. This was an attempt to wrestle control of the surging franc, which was increasingly being seen one of the only safe-haven currencies left, despite the negative prospects for the Swiss economy.

Goldman was essentially betting on a deepening of the eurozone crisis, forcing the SNB to raise its intervention rate to Sfr1.30. The trade would also have benefited from a resolution of the eurozone crisis, leading to a reversal of safe-haven flows, and an appreciation of the Swiss franc

Unfortunately for Goldman, the SNB remained committed to keeping the Swiss franc at Sfr1.20, and there it hovered for most of the year. Goldman recommended clients close the potential trade between June and July for a loss of 1.7%.

4) Long Canadian equities (S&P TSX) vs Japanese equities (Nikkei), FX unhedged

Goldman expected a potential return of 20%
Trade made 11-month potential profit of 4.7%

In its first equities prediction for 2012, Goldman Sachs recommended clients trade Canadian equities against Japanese equities. One of the attractions of this trade was the low correlation of both Canadian and Japanese stocks to European financials, a proxy for the eurozone crisis.

Goldman was also bullish on commodity and energy prices, a sector prominent in Canadian equities. In contrast, Japanese equities have a low weighting to commodities.

However, the commodity surge failed to materialise, and Goldman recommended clients close the trade between October and November.

The S&P TSX increased 1.42% from November 30, 2011, to October 31, 2012. The Nikkei 225 increased 8.4% over the same time period.

However, the recommended trade was also long the Canadian dollar versus the Japanese yen. Over the same time period, the Canadian dollar strengthened 5% against the yen.

5) Long global rebalancing basket (CNY, MYR vs. GBP, USD),

Goldman expected a potential return of 7%
Trade made 11-month potential profit of 1.98%

A relatively simple trade that the Chinese yuan and the Malaysian ringgit would appreciate against the pound and the dollar.

This was an extension of a top trade of 2011, where Goldman expected the 2010 trend of Chinese Yuan appreciation to continue against the US dollar. This recommended bet resulted in a loss of 0.3%.

Goldman fared better in 2012, with a potential profit on 1.98%. The yuan has appreciated around 2.4% against the dollar since July, while the US Federal Reserve has continued its plan of quantitative easing – all positive for the Goldman trade.

6) Long July 2012 Ice Brent crude oil futures for a target of $120/barrel (opened at $107/bbl)

Goldman expected a potential return of 12%
Trade made a four-month potential profit of 11.6%

This was the only trade that came close to meeting Goldman's rather high expectations. Goldman closed the bet on oil between February and March, for a potential return of 11.6%.

Analysing petroleum inventories in 2011, Goldman predicted that demand exceeded supply, and that decreasing inventories meant that “oil demand must be restrained either through the feared sharp decline in world economic growth, or higher crude oil prices”.

The price of Brent hit a 2012 high of $128 in March, primarily due to fears of an Iranian supply disruption due to allegations by the UN that Iran was making headway in developing nuclear weapons.