Best Contrarian Trades David Hauner, CFA Ezequiel Aguirre MLI (UK) MLPF&S [email protected] [email protected] Mark Cabana, CFA Rohit Garg MLPF&S Merrill Lynch (Singapore) [email protected] [email protected] Kamal Sharma MLI (UK) [email protected] What if populism is too popular? ¢ G10: Short inflation/long duration through US 3-year 0% US inflation floors as stimulus may falter. Short EUR/GBP as “sending the letter” may be the low point. ¢ EM: Short JPY/KRW, short BRL/MXN as US policies may hurt EM less than feared. Long Turkey Eurobonds as sentiment may improve by the referendum in spring. “Long populism” becoming consensus While we received a lot of pushback for pointing out the risks ahead of the US elections, now “long populism” is quickly becoming consensus. The naysayers may argue that the establishment could reassert itself: conservatives may constrain fiscal stimulus and protectionism, and central bankers may stay dovish (remember the ECB too). We suggest five trade ideas: 1) short inflation/long duration; 2} short EUR/GBP; 3) short JPY/KRW; 4) short BRL/MXN; and 5) long Turkey sovereign where populism may calm. Populism is getting popular 5y5y US inflation swaps have spiked 60bp since summer to about 2.5% — the biggest move since 2009. As a consequence, EM has sold off sharply. Our pre-election sentiment surveys partly explain the violence of the moves since 8 November: investors were long EM bonds and equities and neutral duration in the US (Chart 40). The latest CFTC data show a similar picture, with short GBP and long BRL, Crude, RUB and even MXN most extreme vs history; note also a short in US Treasuries. Purely statistically speaking, the shorts in GBP and US Treasuries are most vulnerable to a near-term reversal — though momentum may prevail for a while in Treasuries (Chart 41). When the dust settles, the contrarian may find opportunities in “short populism” trades. Chart 40: Our pre-election surveys show investors bearish GBP, duration